As filed with the Securities and Exchange Commission on February 9, 2007
Registration No. __________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PEDIATRIC PROSTHETICS, INC.
-------------------------------------------------------------------------
(Name of small business issuer in its charter)
Idaho 3842 68-0566694
--------------------- ---------------- ---------------
(State or jurisdiction (Primary Standard (IRS Employer
of incorporation or Industrial Identification
organization) Classification No.)
Code Number)
12926 Willowchase Drive
Houston, TX 77070
(281) 897-1108
- -------------------------------------------------------------------------------
(Address and telephone number of principal executive offices and principal place
of business or intended principal place of business)
Linda Putback-Bean
Chief Executive Officer
12926 Willowchase Drive
Houston, TX 77070
(281) 897-1108
---------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
David M. Loev, John S. Gillies,
The Loev Law Firm, PC The Loev Law Firm, PC
6300 West Loop South, Suite 280 & 6300 West Loop South, Suite 280
Bellaire, Texas 77401 Bellaire, Texas 77401
Phone: (713) 524-4110 Phone: (713) 524-4110
Fax: (713) 524-4122 Fax: (713) 456-7908
Approximate date of proposed sale to the public: as soon as practicable after
the effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. (X)
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of earlier effective
registration statement for the same offering. ( )
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( )
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( )
If delivery of the Prospectus is expected to be made pursuant to Rule 434, check
the following box. ( ).
CALCULATION OF REGISTRATION FEE
Title of Each Amount Being Proposed Maximum Proposed Maximum Amount of
Class of Securities Being Price Per Share(1) Aggregate Price(2) Registration
To be Registered Registered Fee
- -----------------------------------------------------------------------------------------------------
Common Stock 75,000,000(3) $0.04 $3,000,000.00 $ 321.00
$0.001 par value
Common Stock
$0.001 par value 2,857,142(4) $0.04 $114,285.68 $ 12.23
Common Stock
$0.001 par value 2,000,000(5) $0.04 $ 80,000.00 $ 8.56
Common Stock
$0.001 par value 3,000,000(6) $0.04 $ 120,000.00 $ 12.84
Common Stock
$0.001 par value 446,427(7) $0.04 $ 17,857.08 $ 1.91
- -------------------------------------------------------------------------------------------------------
Total 83,303,569 $0.04 $3,332,142.76 $ 356.54
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and Rule 457(h)(1) under the Securities Act of 1933, as
amended and based on the average of the high and low sales prices of our common
stock reported on the Pink Sheets on February 5, 2006.
(2) This amount has been calculated based upon Rule 457 and the amount is only
for purposes of determining the registration fee, the actual amount received by
a selling shareholder will be based upon fluctuating market prices once the
securities are quoted on the OTC Bulletin Board.
(3) Represents shares of common stock issuable in connection with the
conversion of Callable Secured Convertible Notes. The registrant agreed to sell
an aggregate of $1,500,000 in Callable Secured Convertible Notes to certain
purchasers, of which $600,000 of such notes have been sold to date. The notes
are convertible into shares of our common stock at a 50% discount to the then
trading price of our common stock.
(4) Represents an aggregate of 1,428,571 shares of common stock issuable to
Peter Kertes in connection with the conversion of an outstanding loan owed by
the registrant to Mr. Kertes, which loan is convertible into shares of the
registrant's common stock at a rate of one share for each $0.035 of debt owed,
and an additional 1,428,571 warrants held by Mr. Kertes to purchase shares of
the registrant's common stock at an exercise price of $0.045 per share.
(5) Represents an aggregate of 2,000,000 shares of common stock issuable to
Lionheart Associates, LLC, doing business as Fairhills Capital, in connection
with the exercise of 2,000,000 warrants to purchase shares of the registrant's
common stock at an exercise price of $0.10 per share. The warrants expire if
unexercised on May 30, 2015.
(6) Represents an aggregate of 3,000,000 shares of common stock issuable to
National Financial Communications Corp., doing business as OTC Financial
Network, in connection with the exercise of 3,000,000 warrants to purchase
shares of the registrant's common stock. One third of the 3,000,000 warrants,
or 1,000,000 warrants are exercisable at $0.10 per share, one third are
exercisable at $0.20 per share, and one third are exercisable at $0.30 per
share. The warrants expire if unexercised on May 8, 2010.
(7) Represents shares issued to Global Media Fund Inc. in consideration for
services rendered to the registrant by Global Media Fund Inc. in connection with
a Service Agreement, described below.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
PEDIATRIC PROSTHETICS, INC.
RESALE OF 83,303,569 SHARES OF COMMON STOCK
The selling shareholders listed on page 62 may offer and sell up to
83,303,569 shares of our common stock under this Prospectus for their own
account.
Our common stock currently trades on the Pink Sheets under the symbol
"PDPR" however, our securities are currently highly illiquid, and subject to
large swings in trading price, and are only traded on a sporadic and limited
basis. Selling shareholders will sell at prevailing market prices or privately
negotiated prices on the Pink Sheets, or on the OTC Bulletin Board, where we
hope to list our shares subsequent to this filing.
A current Prospectus must be in effect at the time of the sale of the
shares of common stock discussed above. The selling shareholders will be
responsible for any commissions or discounts due to brokers or dealers. We will
pay all of the other offering expenses.
Each selling stockholder or dealer selling the common stock is required to
deliver a current Prospectus upon the sale. In addition, for the purposes of the
Securities Act of 1933, selling shareholders may be deemed underwriters.
The information in this Prospectus is not complete and may be changed. This
Prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is nor
permitted.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS. WE URGE YOU TO READ THE "RISK FACTORS"
SECTION BEGINNING ON PAGE 12, ALONG WITH THE REST OF THIS PROSPECTUS BEFORE YOU
MAKE YOUR INVESTMENT DECISION.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ___, 2007
TABLE OF CONTENTS
Prospectus Summary 6
Summary Financial Data 9
Forward Looking Statements 11
Risk Factors 12
Use of Proceeds 25
Dividend Policy 25
Legal Proceedings 25
Directors, Executive Officers, Promoters and Control Persons 26
Security Ownership of Certain Beneficial Owners and Management 28
Interest of Named Experts and Counsel 29
Indemnification of Directors and Officers 30
Description of Business 31
Management's Discussion and Analysis of Financial Condition and Results of
Operations 43
Controls and Procedures 54
Description of Property 55
Certain Relationships and Related Transactions 56
Executive Compensation 56
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 59
Descriptions of Capital Stock 59
Shares Available for Future Sale 60
Plan of Distribution and Selling shareholders 62
Market for Common Equity and Related Stockholder Matters 66
Additional Information 66
Legal Matters 66
Financial Statements F-1
Part II 68
PART I - INFORMATION REQUIRED IN PROSPECTUS
PROSPECTUS SUMMARY
The following summary highlights material information found in more detail
elsewhere in the Prospectus. It does not contain all of the information you
should consider. As such, before you decide to buy our common stock, in
addition to the following summary, we urge you to carefully read the entire
Prospectus, especially the risks of investing in our common stock as discussed
under "Risk Factors." In this Prospectus, the terms "we," "us," "our,"
"Company," and "Pediatric" refer to Pediatric Prosthetics, Inc., an Idaho
corporation, "Common Stock" refers to the common stock, par value $0.001 per
share, of Pediatric Prosthetics, Inc.
We are engaged in the custom fitting and fabrication of custom made prosthetic
limbs for both upper and lower extremities to infants and children throughout
the United States. We buy manufactured components from a number of
manufacturers and combine those components to fabricate custom measured, fitted
and designed prosthetic limbs for our patients. We also create "anatomically
form-fitted suspension sockets" that allow the prosthetic limbs to fit
comfortably and securely with each patient's unique residual limb. These
suspension sockets must be hand crafted to mirror the surface contours of a
patient's residual limb, and must be dynamically compatible with the underlying
bone, tendon, ligament, and muscle structures in the residual limb. We
currently employ five employees, including three licensed prosthetists and have
fourteen (14) consulting contracts with our host prosthetic providers ("Host
Affiliates"), which have facilities in various locations in nineteen states.
These consulting agreements allow us to utilize the Host Affiliate's
patient-care facilities and billing personnel to aid us in fitting and
fabricating custom-made artificial limbs and provide related care and training
in multiple geographic locations.
We generate an average of approximately $8,000 of gross profit per fitting of
the prosthetics devices, however, the exact amount of gross profit we will
receive for each fitting, will depend on the exact mix of arms versus legs
fitted and the number of re-fittings versus new fittings. We are accredited by
the Texas Department of Health as a fully accredited prosthetics provider. We
began operations as a fully accredited prosthetic facility on March 18, 2004.
We have a website at www.kidscanplay.com, which contains information which we do
not desire to be incorporated by reference into this filing.
In April 2006, we borrowed $50,000 from a shareholder, Peter Kertes, and issued
a promissory note and warrants in connection with such loan. The promissory note
bears interest at the rate of 12% per annum, and was due and payable on
September 29, 2006. The promissory note was renewed for an additional six
months, at the option of the holder, through March 2007. This loan is also
convertible into an aggregate of 1,428,571 shares of common stock at the rate of
one share for each $0.035 owed. Mr. Kertes also received as consideration for
the $50,000 promissory note, 1,428,571 warrants, which are exercisable for
shares of common stock at an exercise price of $0.045 per share, and which
expire if unexercised on May 22, 2008.
On May 30, 2006, we entered into a Securities Purchase Agreement, with various
third parties (the "Purchasers") to sell an aggregate of $1,500,000 in Callable
Secured Convertible Notes, which bear interest at the rate of 6% per annum (the
"Debentures"), of which an aggregate of $600,000 in Debentures was sold to the
Purchasers on May 30, 2006, and the remaining $900,000 is to be sold in two
separate tranches, $400,000 on or around the date we file this registration
-6-
statement to register the shares of common stock the Debentures are convertible
into, and $500,000 upon the date this registration statement is declared
effective by the SEC, assuming such Registration Statement is declared effective
with the SEC. In connection with the sale of the Debentures, we issued the
various third party Purchasers, Stock Purchase Warrants to purchase an aggregate
of 50,000,000 shares of our common stock at an exercise price of $0.10 per
share, which warrants expire if unexercised on May 30, 2013.
We also agreed to issue a finder, Lionheart Associates, LLC doing business as
Fairhills Capital ("Lionheart"), a finder's fee in connection with the funding
which included warrants to purchase up to 2,000,000 shares of our common stock
at an exercise price of $0.10 per share. The Lionheart warrants expire if
unexercised on May 30, 2013. Additionally, in connection with the closing of
the sale of the Debentures, described above, we agreed to issue OTC Financial
Network, as a finder's fee in connection with the funding, 3,000,000 warrants to
purchase shares of our common stock. The 3,000,000 warrants are exercisable
into shares of our common stock as follows, 1,000,000 warrants are exercisable
at $0.10 per share, 1,000,000 warrants are exercisable at $0.20 per share, and
1,000,000 warrants are exercisable at $0.30 per share. The warrants granted to
OTC Financial Network expire if unexercised on May 8, 2010.
In February 2006, we entered into a service agreement (the "Service Agreement")
with Global Media Fund Inc. ("Global"), whereby Global agreed to distribute
certain newspaper features, which Global has guaranteed will be placed in at
least 100 newspapers and radio features regarding the Company, which Global has
guaranteed will be placed in at least 400 radio stations. In consideration for
executing the Service Agreement, the Company issued Global 250,000 restricted
shares of common stock in March 2006. The terms of the agreement called for us
to issue Global a remaining value of shares equal to $125,000, which will to be
paid by issuances of common stock on May 1, 2006, August 1, 2006, November 1,
2006 and February 1, 2007. In June 2006, we issued 446,427 shares of common
stock to Global pursuant to our Service Agreement with Global, as described
above, and anticipate issuing the additional shares of common stock required by
the Service Agreement once we are able to increase our authorized shares of
common stock.
This Registration Statement relates to the registration of 83,303,569 shares of
common stock, which represents 75,000,000 shares of common stock issuable upon
conversion of the Debentures; 1,428,571 shares of common stock issuable upon
conversion of a $50,000 convertible note which is convertible into shares of our
common stock at the rate of one share for each $0.35 of debt owed; 6,428,571
shares exercisable in connection with three separate warrant agreements with
separate individuals and entities, which provide for the issuance of 1,428,571
shares in connection with warrants to purchase shares of common stock at an
exercise price of $0.045 per share, 2,000,000 warrants to purchase shares of
common stock at an exercise price of $0.10 per share, and warrants to purchase
3,000,000 shares of common stock, with 1,000,000 warrants exercisable at $0.10
per share, 1,000,000 shares exercisable at $0.20 per share and 1,000,000
warrants exercisable at $0.30 per share; and 446,427 shares of common stock
which have been previously been issued to Global Media.
-7-
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. The securities offered
hereby are speculative and involve a high degree of risk. See "Risk Factors."
SUMMARY OF THE OFFERING:
------------------------
COMMON STOCK OFFERED: 83,303,569 shares by selling shareholders
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING: 98,274,889 shares
COMMON STOCK OUTSTANDING
AFTER THE OFFERING: 181,132,031 shares (assuming the full conversion
of all Debenture shares and convertible
note shares registered herein, as well as the full
exercise of all the shares issuable in connection
with the warrants, which are registered herein,
and assuming that we are able to successfully
increase our authorized shares of common stock to
allow for such additional issuances).
USE OF PROCEEDS: We will not receive any proceeds from the
sale of the shares of common stock offered by the
selling shareholders in connection with the common
stock issuable upon conversion of the Debentures
and/or the shares of common stock previously
issued, however, we may receive up to $864,286 in
connection with the exercise of the 6,428,571
shares of common stock underlying the warrants
which we are registering herein. See "Use of
Proceeds."
LIMITED MARKET: Our common stock is quoted on the Pink Sheets
trading market under the symbol "PDPR." The market
for our common stock is highly volatile, sporadic
and illiquid as discussed in more detail below,
under the heading "Risk Factors." We can provide
no assurance that there will be a market for our
securities in the future. If in the future a
market does exist for our securities, it is likely
to be highly illiquid and sporadic.
PRINCIPAL OFFICES: 12926 Willowchase Drive
Houston, TX 77070
TELEPHONE NUMBER: (281) 897-1108
WEBSITE: www.kidscanplay.com (which includes
information that we do not desire to be
incorporated by reference into this Prospectus).
[Remainder of page left intentionally blank.]
-8-
SUMMARY FINANCIAL DATA
You should read the summary financial information presented below for the
years ended June 30, 2006 and 2005, and the three months ended September 30,
2006 and 2005. We derived the summary financial information from our audited
financial statements for the period from June 30, 2006 and 2005, and our
unaudited financial statements for the three months ended September 30, 2006 and
2005, appearing elsewhere in this Prospectus. You should read this summary
financial information in conjunction with our plan of operation, financial
statements and related notes to the financial statements, each appearing
elsewhere in this Prospectus.
Summary Statement of Operations
Three Months Ended Year ended
September 30, June 30, 2006
2006
------------------ ---------------
Revenue $ 195,230 $ 716,107
------------------ ---------------
Operating expenses:
Cost of sales, except for
items stated separately below 76,001 219,272
Selling, general and
administrative expenses 543,239 1,373,939
Depreciation expense 5,959 20,231
------------------ ---------------
Total operating expenses 625,199 1,613,442
------------------ ---------------
Loss from operations (429,969) (897,335)
Other income and (expense):
Interest income 1 8
Interest expense (90,492) (81,873)
Change in value of derivative
financial instruments 1,202,540 (3,742,205)
Gain on extinguishment of debt - 310,799
Other expenses - (2,811)
------------------ ---------------
Total other income (expense) 1,112,049 (3,516,082)
------------------ ---------------
Net income (loss) $ 682,080 $ (4,413,417)
================== ===============
-9-
Summary Balance Sheet
September 30, June 30,
2006 2006
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 54,466 $ 274,641
Trade accounts receivable, net 309,379 268,642
Prepaid expenses and other
current assets 11,825 13,396
Current portion of deferred
financing cost, net 119,665 109,693
------------- ------------
Total current assets 495,335 666,372
Furniture and equipment, net 64,992 59,138
Deferred financing cost 199,446 239,334
------------- ------------
Total assets $ 759,773 $ 964,844
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable $ 123,361 $ 143,167
Accrued liabilities 284,230 257,680
Current portion of convertible debt,
net of discount of $0 and $25,000
at September 30, 2006 and
June 30, 2006, respectively 85,000 60,000
Due to related party 500 500
Derivative financial instruments 3,916,825 5,119,365
------------- ------------
Total current liabilities 4,409,916 5,580,712
Convertible debt, net of discount of
$569,486 and $592,716 at
September 30, 2006 and
June 30, 2006, respectively 30,514 7,284
Deferred rent 11,871 12,575
------------- ------------
Total liabilities 4,452,301 5,600,571
------------- ------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, par value $0.001;
authorized 10,000,000 shares;
issued and outstanding 1,000,000 shares
at September 30, 2006 and June 30, 2006 1,000 1,000
Common stock, par value $0.001; authorized
100,000,000 shares; issued and outstanding
98,274,889 at September 30, 2006 and
June 30, 2006 98,275 98,275
Additional paid-in capital 8,025,446 7,764,327
Accumulated deficit (11,817,249) (12,499,329)
------------- ------------
Total stockholders' deficit (3,692,528) (4,635,727)
------------- ------------
Total liabilities and
stockholders' deficit $ 759,773 $ 964,844
============= ============
-10-
FORWARD-LOOKING STATEMENTS
Statements contained in this registration statement on Form SB-2 may be
forward-looking statements.
Forward-looking statements can be identified by the use of forward-looking
terminology such as, but not limited to, "may," "expect," "anticipate,"
"estimate," "would be," "believe," or "continue" or the negative or other
variations of comparable terminology. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties are set forth below. Our expectations,
beliefs and projections are expressed in good faith and are believed to have a
reasonable basis, including without limitation, our examination of historical
operating trends, data contained in our records and other data available from
third parties. There can be no assurance, however, that our expectations,
beliefs or projections will result, be achieved, or be accomplished. Such
statements (none of which is intended as a guarantee of performance) are subject
to certain assumptions, risks and uncertainties, which could cause our actual
future results, achievements or transactions to differ materially from those
projected or anticipated. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date this
registration statement is filed with the SEC. These forward looking-statements
are subject to a number of risks and uncertainties, certain of which are beyond
our control.
Additional factors that could cause actual results to differ materially from
those indicated in the forward-looking statements are discussed under the
caption "Risk Factors". Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date hereof. We
undertake no duty to update these forward-looking statements. Readers are urged
to carefully review and consider the various disclosures made by us which
attempt to advise interested parties of the additional factors which may affect
our business, including the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
-11-
RISK FACTORS
Any investment in shares of our common stock involves a high degree of risk. If
any of the following risks actually occur, our business would likely suffer. In
such circumstances, the market price of our common stock could decline, and any
investment in us could become worthless.
WE HAVE EXPERIENCED SUBSTANTIAL OPERATING LOSSES AND MAY INCUR ADDITIONAL
OPERATING LOSSES IN THE FUTURE.
During the fiscal years ended June 30, 2006 and 2005, we incurred net losses of
$4,413,417 and $4,356,519, respectively, and experienced negative cash flows
from operations of $436,226 and $298,454, respectively. During the three months
ended September 30, 2006, we had net income of $682,080, which net income was
the result of changes in the value of our derivative financial instruments and
not the result of our core operations, and negative cash flows from operations
of $208,362. Additionally, we had negative working capital of $3,914,581 as of
September 30, 2006. Our historical losses have been related to two primary
factors as follows: 1) we are not currently generating sufficient revenue to
cover our fixed costs and we believe that the break-even point from a cash flow
standpoint may require that we fit as many as 100 clients, up from 79 fitted in
fiscal 2006; 2) we have issued a significant number of our shares of common
stock to compensate employees and consultants and those stock issuances have
resulted in charges to income of $482,360 and $4,020,264 during the years ended
June 30, 2006 and 2005, costs that we believe will not be recurring in future
periods. In the event we are unable to increase our gross margins, reduce our
costs and/or generate sufficient additional revenues, we may continue to sustain
losses and our business plan and financial condition will be materially and
adversely affected.
WE WILL NEED ADDITIONAL FINANCING TO REPAY THE $1,500,000 IN CONVERTIBLE
DEBENTURES WHICH WE AGREED TO SELL IN MAY 2006, AND GROW OUR OPERATIONS.
We have limited financial resources. In May 2006, we sold certain third party
investors an aggregate of $600,000 in Convertible Debentures and agreed to sell
them an additional $900,000 in Convertible Debentures. These Convertible
Debentures and interest may be converted into shares of our common stock at a
discount to market. However, if such Convertible Debentures are not converted
into shares of our common stock, we will need to obtain outside financing to
fund our business operations and to repay the Convertible Debentures. If we are
forced to raise additional debt or equity financing, such financing may be
dilutive to our shareholders. The sale of equity securities, including the
conversion of outstanding amounts under the Convertible Debentures, could dilute
our existing stockholders' interest, and borrowings from third parties could
result in our assets being pledged as collateral and loan terms that would
increase our debt service requirements and/or restrict our operations. There is
no assurance that capital will be available from any of these sources, or, if
available, upon terms and conditions acceptable to us. If we are unable to
repay the Convertible Debentures and/or raise additional capital, we may be
forced to curtail or abandon our business operations.
-12-
WE DEPEND SUBSTANTIALLY UPON OUR PRESIDENT TO IMPLEMENT OUR BUSINESS PLAN, AND
LOSING HER SERVICES WOULD BE INJURIOUS TO OUR BUSINESS.
Our success is substantially dependent upon the time, talent, and experience of
Linda Putback-Bean, our President and Chief Executive Officer. Mrs. Putback-Bean
possesses a comprehensive knowledge of our business and has built numerous
relationships with industry representatives. We have no employment agreement
with Ms. Putback-Bean. While Mrs. Putback-Bean has no present plans to leave or
retire, her loss would have a negative effect on our operating, marketing and
financial performance if we are unable to find an adequate replacement with
similar knowledge and experience within our industry. We maintain key-man life
insurance in the amount of $1,000,000 with respect to Mrs. Putback-Bean. If we
were to lose the services of Mrs. Putback-Bean, our operations may suffer and we
may be forced to curtail or abandon our business plan.
Additionally, in order for us to expand, we must continue to improve and expand
the level of expertise of our personnel and we must attract, train and manage
qualified managers and employees to oversee and manage our operations. As
demand for qualified personnel is high, there is no assurance that we will be in
a position to offer competitive compensation packages to attract or retain such
qualified personnel in the future. If we are not able to obtain qualified
personnel in the future, if our operations grow, of which there can be no
assurance, we may be forced to curtail or abandon our plans for future growth.
OUR BUSINESS DEPENDS UPON OUR ABILITY TO MARKET OUR SERVICES TO AND SUCCESSFULLY
FIT CHILDREN BORN WITH A LIMB-LOSS.
Our growth prospects depend upon our ability to identify and subsequently fit
the small minority of children born with a limb-loss. The LLR&SP Report
(referred to in our "Description of Business" section herein) indicates that
approximately 26 out of every 100,000 live births in the United States result in
a possible need for prosthetic rehabilitation. In addition, our business model
demands that we continue to successfully fit these widely dispersed infants and
children each year as they outgrow their prostheses. Because of the relatively
small number of these children born each year and the fact that each child is
different, there can be no assurance that we will be able to identify and market
our services to such children (or the parents or doctors of such children)
and/or that we will be able to successfully fit such children with prosthetic's
devices if retained. If we are unable to successfully market our services to
the small number of children born with a limb-loss each year and/or successfully
fit such children if marketed to, our results of operations and revenues could
be adversely affected and/or may not grow.
DUE TO IMPROVED HEALTHCARE, THERE COULD BE FEWER AND FEWER CHILDREN EACH YEAR
WITH PRE-NATAL LIMB-LOSS.
Since the majority of our first-time prospective fittings are assumed to be with
children with a pre-natal limb-loss, breakthroughs in pre-natal safety regimens
and treatment could end the need for the vast majority of future fittings of
-13-
pediatric prosthetics. As such, there can be no assurance that the number of
children requiring our services will continue to grow in the future, and in fact
the number of such children may decline as breakthroughs occur.
CHANGES IN GOVERNMENT REIMBURSEMENT LEVELS COULD ADVERSELY AFFECT OUR NET SALES,
CASH FLOWS AND PROFITABILITY.
We derived a significant percentage of our net sales for the years ended June
30, 2005 and 2006, from reimbursements for prosthetic services and products from
programs administered by Medicare, or Medicaid. Each of these programs sets
maximum reimbursement levels for prosthetic services and products. If these
agencies reduce reimbursement levels for prosthetic services and products in the
future, our net sales could substantially decline. Additionally, reduced
government reimbursement levels could result in reduced private payor
reimbursement levels because fee schedules of certain third-party payors are
indexed to Medicare. Furthermore, the healthcare industry is experiencing a
trend towards cost containment as government and other third-party payors seek
to impose lower reimbursement rates and negotiate reduced contract rates with
service providers. This trend could adversely affect our net sales. Medicare
provides for reimbursement for prosthetic products and services based on prices
set forth in fee schedules for ten regional service areas. Additionally, if the
U.S. Congress were to legislate modifications to the Medicare fee schedules, our
net sales from Medicare and other payors could be adversely and materially
affected. We cannot predict whether any such modifications to the fee schedules
will be enacted or what the final form of any modifications might be. As such,
modifications to government reimbursement levels could reduce our revenues
and/or cause individuals who would have otherwise retained our services to look
for cheaper alternatives.
OUR INDEPENDENT AUDITOR HAS EXPRESSED DOUBT REGARDING OUR ABILITY TO CONTINUE AS
A GOING CONCERN.
Since our inception, we have suffered significant net losses. During the years
ended June 30, 2006 and 2005 we had net losses of $4,413,417 and $4,356,519,
respectively and net cash flows used in operating activities of $436,226 and
$298,454, respectively. During the three months ended September 30, 2006, we
had net income of $682,080, which net income was the result of changes in the
value of our derivative financial instruments and not the result of our core
operations, and we had a working capital deficit of $3,914,581 as of September
30, 2006. Furthermore, we had an accumulated deficit of $11,817,249 at
September 30, 2006. Due to our negative financial results and our current
financial position, our independent auditor has raised substantial doubt about
our ability to continue as a going concern.
IF WE CANNOT COLLECT OUR ACCOUNTS RECEIVABLE OUR BUSINESS, RESULTS OF
OPERATIONS, AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
As of September 30, 2006, our accounts receivable over 120 days old represented
more than 50% of total accounts receivable outstanding. If we cannot collect our
accounts receivable, our business, results of operations, and financial
condition could be adversely affected.
-14-
IF WE ARE UNABLE TO MAINTAIN GOOD RELATIONS WITH OUR SUPPLIERS, OUR EXISTING
PURCHASING COSTS MAY BE JEOPARDIZED, WHICH COULD ADVERSELY AFFECT OUR GROSS
MARGINS.
Our gross margins have been, and will continue to be, dependent, in part, on our
ability to continue to obtain favorable terms from our suppliers. These terms
may be subject to changes in suppliers' strategies from time to time, which
could adversely affect our gross margins over time. The profitability of our
business depends, in part, upon our ability to maintain good relations with
these suppliers, of which there can be no assurance.
WE DEPEND ON THE CONTINUED EMPLOYMENT OF OUR TWO PROSTHETISTS WHO WORK AT OUR
HOUSTON PATIENT-CARE FACILITY AND THEIR RELATIONSHIPS WITH REFERRAL SOURCES AND
PATIENTS. OUR ABILITY TO PROVIDE PEDIATRIC PROSTHETIC SERVICES AT OUR
PATIENT-CARE FACILITY WOULD BE IMPAIRED AND OUR NET SALES REDUCED IF WE WERE
UNABLE TO MAINTAIN THESE EMPLOYMENT AND REFERRAL RELATIONSHIPS.
Our net sales would be reduced if either of our two (2) practitioners leaves us.
In addition, any failure of these practitioners to maintain the quality of care
provided or to otherwise adhere to certain general operating procedures at our
facility, or among our Host Affiliates, or any damage to the reputation of any
of our practitioners could damage our reputation, subject us to liability and/or
significantly reduce our net sales.
WE FACE REVIEWS, AUDITS AND INVESTIGATIONS UNDER OUR CONTRACTS WITH FEDERAL AND
STATE GOVERNMENT AGENCIES, AND THESE AUDITS COULD HAVE ADVERSE FINDINGS THAT MAY
NEGATIVELY IMPACT OUR BUSINESS.
We contract with various federal and state governmental agencies to provide
prosthetic services. Pursuant to these contracts, we are subject to various
governmental reviews, audits and investigations to verify our compliance with
the contracts and applicable laws and regulations, including reviews from
Medicare and Texas Medicaid, in connection with rules and regulations we are
required to follow and comply with as a result of our position as a Medicare and
Texas Medicaid approved provider. Any adverse review, audit or investigation
could result in:
o refunding of amounts we have been paid pursuant to our government
contracts;
o imposition of fines, penalties and other sanctions on us;
o loss of our right to participate in various federal programs;
o damage to our reputation in various markets; or
o material and/or adverse effects on the business, financial condition
and results of operations.
WE CURRENTLY ONLY HAVE A LIMITED NUMBER OF AUTHORIZED BUT UNISSUED SHARES, WHICH
MAY CAUSE US TO FACE PENALTIES IN CONNECTION WITH OUR INABILITY TO CONVERT OUR
DEBENTURES INTO
-15-
COMMON STOCK AT THE OPTION OF THE DEBENTURE HOLDERS AND/OR TO ISSUE SHARES OF
COMMON STOCK IN CONNECTION WITH THE EXERCISE OF OUR OUTSTANDING WARRANTS.
As of February 5, 2007, we had 98,274,889 shares of common stock issued and
outstanding out of a total of 100,000,000 shares of common stock authorized,
leaving us the ability to issue only approximately 1,725,111 shares of our
common stock. As a result, we do not have a sufficient number of authorized but
unissued shares to allow for the conversion of our outstanding Debentures by the
Debenture holders and/or the exercise of the Warrants. As a result, we may face
penalties in connection with such conversions and/or exercises and/or be forced
to repay such Debentures in cash, which cash may not be available on favorable
terms, if at all. We are currently taking steps to obtain shareholder approval
and increase our authorized common stock. If we do not increase our authorized
shares in the future, we could face penalties in connection with our inability
to allow the Debenture holders to convert their Debentures into shares of common
stock and/or to allow them to exercise their Warrants. These penalties and/or
the requirement that we repay the Debentures in cash could have a material
adverse effect on our results of operations, working capital and ability to pay
our current liabilities. If we are unable to increase our authorized shares in
the future, we could be forced to curtail and/or abandon our business plan.
WE HAVE NEVER PAID A CASH DIVIDEND AND IT IS LIKELY THAT THE ONLY WAY OUR
SHAREHOLDERS WILL REALIZE A RETURN ON THEIR INVESTMENT IS BY SELLING THEIR
SHARES.
We have never paid cash dividends on any of our securities. Our Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
We currently intend to retain future earnings to finance our growth. As a
result, the ability of our investors to generate a profit our common stock will
likely depend on their ability to sell our stock at a profit, of which there can
be no assurance.
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE
DILUTION TO OUR THEN EXISTING SHAREHOLDERS.
We may seek to raise additional equity capital in the future. Any issuance of
additional shares of our common stock will dilute the percentage ownership
interest of all our then shareholders and may dilute the book value per share of
our common stock, which would likely cause a decrease in value of our common
stock.
WE MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK WHICH PREFERRED STOCK MAY HAVE
RIGHTS AND PREFERENCES GREATER THAN OUR COMMON STOCK.
The Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock. As of February 5, 2007, 1,000,000 shares of the Series A
Convertible Preferred Shares have been issued. Additional shares of preferred
stock, if issued, could be entitled to preferences over our outstanding common
stock. The shares of preferred stock, when and if issued, could adversely affect
the rights of the holders of common stock, and could prevent holders of common
stock from receiving a premium for their common stock. An issuance of preferred
-16-
stock could result in a class of securities outstanding that could have
preferences with respect to voting rights and dividends and in liquidation over
the common stock, and could (upon conversion or otherwise) enjoy all of the
rights of holders of common stock. Additionally, we may issue a series of
preferred stock in the future, which may convert into common stock, which
conversion would cause immediate dilution to our then shareholders. The Board of
Directors' authority to issue preferred stock could discourage potential
takeover attempts and could delay or prevent a change in control through merger,
tender offer, proxy contest or otherwise by making such attempts more difficult
to achieve or more costly and/or otherwise cause the value of our common stock
to decrease in value.
OUR MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CURRENTLY OUTSTANDING
COMMON STOCK AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR SHAREHOLDERS.
As of February 5, 2007, our President and Chief Executive Officer, Linda
Putback-Bean beneficially owned 30,210,251 shares of common stock or
approximately 31% of our outstanding common stock. Additionally, Ms.
Putback-Bean owns 900,000 shares of our Series A Convertible Preferred Stock
which represents 90% of the issued and outstanding shares of preferred stock.
Dan Morgan, our Vice President/Chief Prosthetist owns 9,198,861 shares of our
common stock as well as the remaining 100,000 shares of our Series A Convertible
Preferred Stock which represents 10% of the Series A Convertible Preferred
Stock. Thus, management owns 100% of our Series A Convertible Preferred Stock.
The Series A Convertible Preferred Stock is convertible on a one-to-one basis
for our common stock but has voting rights of 20-to-1, giving our management the
right to vote a total of 59,409,112 shares of our voting shares, representing
the 30,210,251 shares held by Ms. Putback-Bean, the 900,000 shares of Series A
Convertible Preferred Stock which has the right to vote 18,000,000 shares of
common stock, the 9,198,861 shares of common stock held by Mr. Morgan, and the
100,000 shares of Series A Convertible Preferred Stock which has the right to
vote 2,000,000 shares of common stock, for a total of a total of approximately
50.2% of our total voting power based on 118,274,889 voting shares, which
includes the 98,274,889 shares of common stock outstanding and the 20,000,000
shares which our Series A Convertible Preferred Stock are able to vote. This
concentration of a significant percentage of voting power provides our
management substantial influence over any matters that require a shareholder
vote, including, without limitation, the election of Directors and/or approving
or preventing a merger or acquisition, even if their interests may conflict with
those of other shareholders. Such control could also have the effect of delaying
or preventing a change in control or otherwise discouraging a potential acquirer
from attempting to obtain control of the Company. Such control could have a
material adverse effect on the market price of our common stock or prevent our
shareholders from realizing a premium over the then prevailing market prices for
their shares of common stock.
-17-
WE MAY BE REQUIRED TO IMMEDIATELY PAY THE $1,500,000 IN OUTSTANDING DEBENTURES
OF WHICH $600,000 IS CURRENTLY OUTSTANDING AND/OR BE FORCED TO PAY SUBSTANTIAL
PENALTIES TO THE DEBENTURE HOLDERS UPON THE OCCURRENCE OF AND DURING THE
CONTINUANCE OF AN EVENT OF DEFAULT.
Upon the occurrence of and during the continuance of any Event of Default under
the Debentures, which includes the following events:
o Our failure to pay any principal or interest on the Debentures when
due;
o Our failure to issue shares of common stock to the Purchasers in
connection with any conversion as provided in the Debentures;
o Our failure to obtain effectiveness of this Registration
Statement by April 16, 2007, or if such Registration Statement once
effective, ceases to be effective for more than ten (10) consecutive
days or more than twenty (20) days in any twelve (12) month period;
o Our entry into bankruptcy or the appointment of a receiver or trustee;
o Our breach of any covenants in the Debentures or Purchase
Agreement, or our breach of any representations or warranties included
in any of the other agreements entered into in connection with the
Closing;
o If any judgment is entered against us or our property for more
than $100,000; or
o If we fail to maintain the listing of our common stock on the
OTCBB or an equivalent replacement exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
the American Stock Exchange within 180 days from the date of Closing,
which has not occurred to date;
the Purchasers can make the Debentures immediately due and payable, and can make
us pay the greater of (a) 130% of the total remaining outstanding principal
amount of the Debentures, plus accrued and unpaid interest thereunder, or (b)
the total dollar value of the number of shares of common stock which the funds
referenced in section (a) would be convertible into (as calculated in the
Debentures), multiplied by the highest closing price for our common stock during
the period we are in default. As we do not currently have sufficient cash on
hand to repay the debentures, if an Event of Default occurs under the
Debentures, we could be forced to curtail or abandon our operations and/or sell
substantially all of our assets in order to repay all or a part of the
Debentures.
THE DEBENTURES ARE CONVERTIBLE INTO SHARES OF OUR COMMON STOCK AT A DISCOUNT TO
MARKET.
The conversion price of the Debentures is equal to 50% of the trading price of
our common stock, which will likely cause the value of our common stock, if any,
to decline in value as subsequent conversions are made, as described in greater
detail under the Risk Factors below.
-18-
THE ISSUANCE AND SALE OF COMMON STOCK UPON CONVERSION OF THE CONVERTIBLE NOTES
AND EXERCISE OF THE WARRANTS MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As sequential conversions of the Debentures and sales of such converted shares
take place, the price of our common stock may decline, and as a result, the
holders of the Debentures will be entitled to receive an increasing number of
shares in connection with their conversions, which shares could then be sold in
the market, triggering further price declines and conversions for even larger
numbers of shares, to the detriment of our investors. Upon the successful
registration of the shares of common stock which the Debentures are convertible
into and the Warrants are exercisable for, all of the shares issuable upon
conversion of the Debentures and upon exercise of the Warrants, may be sold
without restriction. The sale of these shares may adversely affect the market
price, if any, of our common stock.
In addition, the common stock issuable upon conversion of the Debentures and
exercise of the Warrants may represent overhang that may also adversely affect
the market price of our common stock. Overhang occurs when there is a greater
supply of a company's stock in the market than there is demand for that stock.
When this happens the price of the company's stock will decrease, and any
additional shares which shareholders attempt to sell in the market will only
further decrease the share price. The Debentures may be converted into common
stock at a discount to the market price of our common stock of 50% of the then
trading value of our common stock, and such discount to market, provides the
holders with the ability to sell their common stock at or below market and still
make a profit. In the event of such overhang, holders will have an incentive to
sell their common stock as quickly as possible. If the share volume of our
common stock cannot absorb the discounted shares, the value of our common stock
will likely decrease.
THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE DEBENTURES AND UPON EXERCISE
OF THE WARRANTS WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION.
The issuance of common stock upon conversion of the Debentures and exercise of
the Warrants will result in immediate and substantial dilution to the interests
of other stockholders since the Debenture holders may ultimately receive and
sell the full amount issuable on conversion or exercise. Although the Debenture
holders may not convert the Debentures and/or exercise their Warrants if such
conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent the Debenture
holders from converting and/or exercising some of their holdings, selling those
shares, and then converting the rest of their holdings, while still staying
below the 4.99% limit. In this way, the Debenture holders could sell more than
this limit while never actually holding more shares than this limit allows. If
the Debenture holders choose to do this it will cause substantial dilution to
the then holders of our common stock.
-19-
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR DEBENTURES COULD
REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH MAY
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND CAUSE DILUTION TO OUR
EXISTING STOCKHOLDERS.
Our existing stockholders will experience substantial dilution of their
investment upon conversion of the Debentures and exercise of the Warrants. The
Debentures will be convertible into shares of our common stock at a discount to
market of 50% of the trading value of our common stock. As a result, the number
of shares issuable could prove to be significantly greater in the event of a
decrease in the trading price of our common stock, which decrease would cause
substantial dilution to our existing stockholders. As sequential conversions and
sales take place, the price of our common stock may decline and if so, the
holders of the Debentures would be entitled to receive an increasing number of
shares, which could then be sold, triggering further price declines and
conversions for even larger numbers of shares, which would cause additional
dilution to our existing stockholders and would likely cause the value of our
common stock to decline.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR DEBENTURES MAY
ENCOURAGE INVESTORS TO SELL SHORT OUR COMMON STOCK, WHICH COULD HAVE A
DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The Debentures will be convertible into shares of our common stock at a discount
to market of 50%. The significant downward pressure on the price of our common
stock as the Debenture holders convert and sell material amounts of our common
stock could encourage investors to short sell our common stock. This could place
further downward pressure on the price of our common stock. In addition, not
only the sale of shares issued upon conversion of the Debentures or exercise of
the Warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of our common stock.
WE MUST SATISFY CERTAIN CONDITIONS BEFORE THE SELLING SECURITY HOLDERS ARE
OBLIGATED TO PURCHASE THE REMAINING $900,000 OF DEBENTURES.
We sold $600,000 of Debentures in May 2006. We also received a commitment to
purchase an additional $400,000 of Debentures upon our filing of a Registration
Statement to register the shares convertible into common stock in connection
with the Debentures, and $500,000 of Debentures, upon the effectiveness of such
Registration Statement. If the Registration Statement is not declared effective
or an Event of Default occurs under the Debentures, as defined herein, the
Debenture holders will have no obligation to purchase the remaining tranches of
Debentures. If the Debenture holders do not purchase the remaining Debentures,
we will not raise the additional $500,000. This could force us to curtail or
abandon our business plan, which would decrease the value of our securities.
THE TRADING PRICE OF OUR COMMON STOCK ENTAILS ADDITIONAL REGULATORY
REQUIREMENTS, WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE.
-20-
Our common stock is currently listed on the Pink Sheets, an over-the-counter
electronic quotation service, which stock currently trades below $4.00 per
share. We anticipate the trading price of our common stock will continue to be
below $4.00 per share. As a result of this price level, trading in our common
stock would be subject to the requirements of certain rules promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
rules require additional disclosure by broker-dealers in connection with any
trades generally involving any non-NASDAQ equity security that has a market
price of less than $4.00 per share, subject to certain exceptions. Such rules
require the delivery, before any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must determine the suitability of the penny stock for the purchaser and receive
the purchaser's written consent to the transaction before sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our common stock. As a
consequence, the market liquidity of our common stock could be severely affected
or limited by these regulatory requirements.
IN THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF
OPERATING AS A FULLY REPORTING COMPANY UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE SUBSTANTIAL TIME
TO NEW COMPLIANCE INITIATIVES.
Moving forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, and as a result of the filing of our Form 10-SB to become a publicly
reporting company, our management and other personnel will need to devote a
substantial amount of time to these new compliance initiatives. Moreover, these
rules and regulations will increase our legal and financial compliance costs and
will make some activities more time-consuming and costly. For example, we expect
these new rules and regulations to make it more difficult and more expensive for
us to obtain director and officer liability insurance, and we may be required to
incur substantial costs to maintain the same or similar coverage. In addition,
the Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure of controls and
procedures. In particular, commencing in fiscal 2008, we must perform system and
process evaluation and testing of our internal controls over financial reporting
to allow management and our independent registered public accounting firm to
report on the effectiveness of our internal controls over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require
-21-
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
GOVERNMENT REGULATION
We are subject to a variety of federal, state and local governmental
regulations. We make every effort to comply with all applicable regulations
through compliance programs, manuals and personnel training. Despite these
efforts, we cannot guarantee that we will be in absolute compliance with all
regulations at all times. Failure to comply with applicable governmental
regulations may result in significant penalties, including exclusion from the
Medicare and Medicaid programs, which could have a material adverse effect on
our business. In November 2003, Congress initiated a three-year freeze on
reimbursement levels for all orthotic and prosthetic services starting January
1, 2004. The effect of this legislation has been a downward pressure on our
gross profit; however, we have initiated certain purchasing and efficiency
programs which we believe will minimize such effects. The most important
efficiency program we have instituted to date was entering into contracts with
our Host affiliates. By acquiring laboratory access from such Host Affiliates,
and acquiring the Host Affiliates help in billing and collections from third
party payers such as insurance companies and their respective state-centered
Medicaid programs, we have also cut down our travel costs, and our costs of
added staff to invoice and collect receivables. Additionally, in an attempt to
maximize our efficiency, we modified our "just in time" inventorying of
components for prosthetic devices to allow sufficient time for us to send such
components via less expensive ground freight instead of higher priced overnight
delivery. Finally, we have instituted a ten day lead-time policy on our airline
reservations to achieve lower air-fares to our patients, when we are required to
travel across the country, except in cases of emergencies.
HIPAA Violations. The Health Insurance Portability and Accountability Act
("HIPAA") provides for criminal penalties for, among other offenses, healthcare
fraud, theft or embezzlement in connection with healthcare, false statements
related to healthcare matters, and obstruction of criminal investigation of
healthcare offenses. Unlike the federal anti-kickback laws, these offenses are
not limited to federal healthcare programs. In addition, HIPAA authorizes the
imposition of civil monetary penalties where a person offers or pays
remuneration to any individual eligible for benefits under a federal healthcare
program that such person knows or should know is likely to influence the
individual to order or receive covered items or services from a particular
provider, practitioner or supplier. Excluded from the definition of
"remuneration" are incentives given to individuals to promote the delivery of
preventive care (excluding cash or cash equivalents), incentives of nominal
value and certain differentials in or waivers of coinsurance and deductible
amounts. These laws may apply to certain of our operations. Our billing
practices could be subject to scrutiny and challenge under HIPAA.
-22-
Physician Self-Referral Laws. We are also subject to federal and state physician
self-referral laws. With certain exceptions, the federal Medicare/Medicaid
physician self-referral law (the "Stark II" law) (Section 1877 of the Social
Security Act) prohibits a physician from referring Medicare and Medicaid
beneficiaries to an entity for "designated health services" - including
prosthetic and orthotic devices and supplies - if the physician or the
physician's immediate family member has a financial relationship with the
entity. A financial relationship includes both ownership or investment interests
and compensation arrangements. A violation occurs when any person presents or
causes to be presented to the Medicare or Medicaid program a claim for payment
in violation of Stark II. With respect to ownership/investment interests, there
is an exception under Stark II for referrals made to a publicly traded entity in
which the physician has an investment interest if the entity's shares are traded
on certain exchanges, including the New York Stock Exchange, and had
shareholders' equity exceeding $75.0 million for its most recent fiscal year, or
an average of $75.0 million during the three previous fiscal years.
With respect to compensation arrangements, there are exceptions under Stark II
that permit physicians to maintain certain business arrangements, such as
personal service contracts and equipment or space leases, with healthcare
entities to which they refer. We believe that our compensation arrangements
comply with Stark II, either because the physician's relationship fits within a
regulatory exception or does not generate prohibited referrals. Because we have
financial arrangements with physicians and possibly their immediate family
members, and because we may not be aware of all those financial arrangements, we
must rely on physicians and their immediate family members to avoid making
referrals to us in violation of Stark II or similar state laws. If, however, we
receive a prohibited referral without knowing that the referral was prohibited,
our submission of a bill for services rendered pursuant to a referral could
subject us to sanctions under Stark II and applicable state laws.
Certification and Licensure. Most states do not require separate licensure for
practitioners. However, several states currently require practitioners to be
certified by an organization such as the American Board for Certification
("ABC"). Our Prosthetists are certified by the State of Texas and by the ABC.
When we fit children in other States which have state licensure laws, we work,
under the supervision of licensed Prosthetists in those states.
The American Board for Certification Orthotics and Prosthetics conducts a
certification program for practitioners and an accreditation program for
patient-care centers. The minimum requirements for a certified practitioner are
a college degree, completion of an accredited academic program, one to four
years of residency at a patient-care center under the supervision of a certified
practitioner and successful completion of certain examinations. Minimum
requirements for an accredited patient-care center include the presence of a
certified practitioner and specific plant and equipment requirements. While we
endeavor to comply with all state licensure requirements, we cannot assure that
we will be in compliance at all times with these requirements. Failure to comply
with state licensure requirements could result in civil penalties, termination
of our Medicare agreements, and repayment of amounts received from Medicare for
services and supplies furnished by an unlicensed individual or entity.
-23-
Confidentiality and Privacy Laws. The Administrative Simplification Provisions
of HIPAA, and their implementing regulations, set forth privacy standards and
implementation specifications concerning the use and disclosure of individually
identifiable health information (referred to as "protected health information")
by health plans, healthcare clearinghouses and healthcare providers that
transmit health information electronically in connection with certain standard
transactions ("Covered Entities"). HIPAA further requires Covered Entities to
protect the confidentiality of health information by meeting certain security
standards and implementation specifications. In addition, under HIPAA, Covered
Entities that electronically transmit certain administrative and financial
transactions must utilize standardized formats and data elements ("the
transactions/code sets standards"). HIPAA imposes civil monetary penalties for
non-compliance, and, with respect to knowing violations of the privacy
standards, or violations of such standards committed under false pretenses or
with the intent to sell, transfer or use individually identifiable health
information for commercial advantage, criminal penalties. The privacy standards
and transactions/code sets standards went into effect on April 16, 2003 and
required compliance by April 21, 2005. We believe that we are subject to the
Administrative Simplification Provisions of HIPAA and have taken steps necessary
to meet applicable standards and implementation specifications; however, these
requirements have had a significant effect on the manner in which we handle
health data and communicate with payors. Our added costs of complying with the
HIPPA requirements relate primarily to attaining the on-going educational
credits needed for our Prosthetists to remain current with the professional
standards of practice. These credits are achieved by attending work-shops and
seminars in various locations throughout North America. During fiscal year
ended June 30, 2006 we spent approximately $5,000 complying with these on-going
educational needs. However, since our original formation, we have been aware of
impending HIPPA regulations, and have set up our systems and procedures to
comply with HIPPA requirements in view of such regulations. As a result, added
costs due to compliance with HIPPA guidelines have been minimal and immaterial.
In addition, state confidentiality and privacy laws may impose civil and/or
criminal penalties for certain unauthorized or other uses or disclosures of
individually identifiable health information. We are also subject to these laws.
While we endeavor to assure that our operations comply with applicable laws
governing the confidentiality and privacy of health information, we could face
liability in the event of a use or disclosure of health information in violation
of one or more of these laws.
-24-
USE OF PROCEEDS
We will not receive any proceeds from the resale of common stock being
registered in connection with the Debentures, but will receive up to
approximately $864,286 in proceeds in connection with the exercise of the
warrants held by the Selling shareholders, which funds we anticipate spending
(assuming such Warrants are exercised, of which there can be no assurance) as
follows:
Assuming 1/2
of the warrants Assuming all Percentage of
Use of Proceeds are sold warrants are sold Total Funds Raised(1)
- --------------------------------------- ----------------- ---------------------- ---------------------
Auditor, Accounting and Attorneys Fees $ 50,000* $100,000* 11.6%
Inventory $ 75,000* $150,000* 17.4%
Equipment and Building Improvements $ 50,000* $100,000* 11.6%
Promotional, Marketing and
Travel Costs $200,000* $400,000* 46.3%
Working Capital $ 57,143* $114,286* 13.2%
======================================= ================= ====================== =====================
Totals $432,143 $864,286 100.0%
* Estimates.
(1) Assuming the full exercise of all the shares of shares of common stock
issuable in connection with the exercise of warrants, which are being registered
herein, of which there can be no assurance.
DIVIDEND POLICY
To date, we have not declared or paid any dividends on our outstanding shares.
We currently do not anticipate paying any cash dividends in the foreseeable
future on our common stock. Although we intend to retain our earnings to
finance our operations and future growth, our Board of Directors will have
discretion to declare and pay dividends in the future. Payment of dividends in
the future will depend upon our earnings, capital requirements and other
factors, which our Board of Directors may deem relevant.
LEGAL PROCEEDINGS
From time to time, we may become party to litigation or other legal proceedings
that we consider to be a part of the ordinary course of our business. We are
not currently involved in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations. We may become involved in material legal proceedings
in the future.
-25-
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
NAME AGE POSITION
- ---- --- --------
Linda Putback-Bean 60 Chairman and President
Dan Morgan 58 Vice President/Chief Prosthetist
Kenneth Bean 61 Director, Vice President and
Secretary
Jean Gonzalez 55 Prosthetist
LINDA PUTBACK-BEAN
- ------------------
Linda Putback-Bean (age 60), has served as a Director and President/CEO since
our inception in October 2003. Ms. Putback-Bean is licensed by the State of
Texas as a Prosthetist's Assistant. Ms. Putback-Bean served as a Partner in
"Myoelectric Arms of The Americas" from June 2000 through September of 2003
through which Ms. Putback-Bean subcontracted pediatric prosthetic fittings for
upper extremity patients. Ms. Putback-Bean also served as "National Pediatric
Upper Extremity Specialist" for Hanger Corporation from October 2000 to October
2003. Prior to her contract positions, she was employed as an upper extremity
specialist with two prosthetics providers in Houston, Texas from 1986 onward.
Ms. Bean received her Bachelors degree from Eureka College in Education, in
1970.
DAN MORGAN
- -----------
Dan Morgan (age 58) has served as our Vice President/Chief Prosthetist since
our inception in October 2003. Mr. Morgan served as our director from October
2003 to June 2005. Mr. Morgan previously owned and operated his own prosthetics
firm from 1984 to 1998. In 1998, Mr. Morgan sold his firm to Hanger Orthotics
and Prosthetics. From 1998 to 2003, Mr. Morgan served as Manager of the firm
sold to Hanger. Mr. Morgan is an ABC certified prosthetist and is certified by
the State of Texas. Mr. Morgan received a BS in Physical Therapy from the
University of Texas Medical Branch in 1970 (UTMB). Additionally, he received a
certificate in Orthotics and Prosthetics, from UCLA in 1971.
KENNETH BEAN
- -------------
Kenneth W. Bean (age 61) has served as a Director and Vice President of
Operations since our inception in October 2003. From April 2000 to October
2003, Mr. Bean served as Ms. Putback-Bean's partner and pilot fitting pediatric
patients with upper extremity prosthetics in "Myoelectric Arms of The Americas."
Prior to marrying Linda Putback-Bean in April 2000, Mr. Bean performed business
consulting and authored several books, including "Bean's About Baseball," which
he also published. Mr. Bean previously served as Chief Executive Officer of the
U.S. branch of the Japanese-based Far East Trading Company from 1973 to 1976 and
chief executive (Saudi Arabia) of the Singapore-based Robin Group of companies.
-26-
JEAN GONZALEZ
- --------------
Jean Gonzalez (age 55) has been employed by us as a Prothetist since January
2004. From March 1990 to December 2004, she was employed as a Prothetist
Orthotist at Hanger Prosthetics and Orthotics in southern California. From
September 1988 to August 1989, she served as a Prothetic Assistant at California
State University, Dominguez Hills in Dominguez Hills, California. From July
1985 to August 1989, she served as an Orthotist with various service providers
in the State of California. Mrs. Gonzalez obtained a Bachelor of Music degree
from the University of Alabama in 1975. She has been licensed as a
Prothetist-Orthotist in Texas since June 2004. Mrs. Gonzalez is a member of the
American Board of Certification for Orthotists and Prosthetists, a member of the
American Academy of Orthotists and Prosthetists, and a member of the Association
of Children's Prosthetists and Orthotists Clinics.
TERM OF OFFICE OF DIRECTORS
Our Directors are elected annually and hold office until our annual meeting of
the shareholders and until their successors are elected and qualified. Officers
will hold their positions at the pleasure of the Board of Directors, absent any
employment agreement. Our officers and Directors may receive compensation as
determined by us from time to time by vote of the Board of Directors. Such
compensation may be in the form of cash, restricted stock, or stock options.
Vacancies in the Board are filled by majority vote of the remaining Directors.
Directors may be reimbursed by us for expenses incurred in attending meetings of
the Board of Directors.
SIGNIFICANT EMPLOYEE. Jean Gonzalez is certified as a prosthetist by the
- ---------------------
American Board of Certified Prosthetists and by the State of Texas. She has 19
years of experience and travels extensively to fit children on behalf of the
Company.
FAMILY RELATIONSHIPS. Linda Putback-Bean, our President and CEO, is married to
- ---------------------
Kenneth Bean, our Vice President of Operations.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. There have been no events under any
- -------------------------------------------
bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or
decrees material to the evaluation of the ability and integrity of any director,
executive officer, promoter or control person of Registrant during the past five
years.
AUDIT COMMITTEE. Due to the Company's size, the Board of Directors does not
- -----------------
have an Audit Committee.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors, executive officers and persons who own more than 10% of a class of
our equity securities which are registered under the Exchange Act to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes of ownership of such registered securities. Such executive officers,
directors and greater than 10% beneficial owners are required by Commission
regulation to furnish us with copies of all Section 16(a) forms filed by such
reporting persons.
-27-
To our knowledge, based solely on a review of the copies of such reports
furnished to us and on representations that no other reports were required, we
are of the opinion that, Linda Putback-Bean, Kenneth W. Bean and Dan Morgan are
subject to Section 16(a) filing requirements and all such individuals have made
all required Section 16(a) filings with the SEC as of the date of this
Registration Statement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information at February 5, 2007, with
respect to the beneficial ownership of shares of common stock by (i) each person
known to us who owns beneficially more than 5% of the outstanding shares of
common stock, (ii) each of our Directors, (iii) each of our Executive Officers
and (iv) all of our Executive Officers and Directors as a group. Unless
otherwise indicated, each stockholder has sole voting and investment power with
respect to the shares shown. As of February 5, 2007, we had 98,274,889 shares of
common stock issued and outstanding.
Title of class Name and address of Number of Shares of Percentage of Voting
beneficial owner Voting Stock(1) Stock (5)
- -------------- ------------------- ------------------- --------------------
Common Stock Linda Putback-Bean 48,210,251 (2) 40.8%
Director, President and Secretary
12926 Willowchase Drive
Houston, Texas 77070
Common Stock Dan Morgan 11,198,861 (3) 9.5% (3)
Vice President/Chief Prosthetist
12926 Willowchase Drive
Houston, Texas 77070
Common Stock Kenneth Bean 48,210,251 (4) 40.8%
Vice President, Principal
Financial Officer and Director
12926 Willowchase Drive
Houston, Texas 77070
Common Stock All Officers and Directors as a
group (total of 2) 59,408,351 (2)(3) 50.2%
(1) Under Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes the
power to vote, or to direct the voting of shares; and (ii) investment power,
which includes the power to dispose or direct the disposition of shares. Certain
shares may be deemed to be beneficially owned by more than one person (if, for
example, persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares is deemed
to include the amount of shares beneficially owned by such person (and only such
person) by reason of these acquisition rights. As a result, the percentage of
outstanding shares of any person as shown in this table does not necessarily
-28-
reflect the person's actual ownership or voting power with respect to the number
of shares of common stock actually outstanding on February 5, 2007. As of
February 5, 2007, there were 98,274,889 shares of our common stock issued and
outstanding.
(2) This number specifically excludes 4,000,000 shares of common stock that
were originally issued as part of the initial capitalization of the Company that
were surrendered to the Company in September 2005, which the Company plans to
reissue once it is able to increase its authorized but unissued shares of common
stock. This number includes 30,210,251 shares of common stock and 900,000
shares of our Series A Convertible Preferred Stock (which can vote in aggregate
18,000,000 shares of our common stock, with each Series A Preferred share being
able to vote a number of shares equal to 20 common shares) held by Ms.
Putback-Bean. Ms. Putback-Bean's ownership of 900,000 shares of our Series A
Convertible Preferred Stock represents 90% of our issued and outstanding shares
of Series A Convertible Preferred Stock. The Series A Convertible Preferred
Stock is convertible on a one-to-one basis for our common stock.
(3) This number includes 9,198,100 shares of our common stock and 100,000
shares of our Series A Convertible Preferred Stock (which can vote in aggregate
2,000,000 shares of our common stock, with each Series A Preferred share being
able to vote a number of shares equal to 20 common shares) held by Mr. Morgan.
The 9,198,100 shares of common stock held by Mr. Morgan, as well as the
2,000,000 shares of stock which Mr. Morgan is able to vote due to his ownership
of 100,000 shares of preferred stock, give him the right to vote in aggregate
11,198,000 shares of stock, representing 9.5% of our outstanding stock based on
an aggregate of 118,274,889 voting shares outstanding, which number includes
98,274,889 shares of common stock outstanding and 1,000,000 shares of preferred
stock outstanding, which preferred stock can vote in aggregate 20,000,000
shares, Mr. Morgan's ownership of 100,000 shares of our Series A Convertible
Preferred Stock represents 10% of our issued and outstanding shares of Series A
Convertible Preferred Stock. The Series A Convertible Preferred Stock is
convertible on a one-to-one basis for our common stock.
(4) This number represents 48,210,251 shares of common stock beneficially owned
by Mr. Bean's spouse, Linda Putback-Bean, which shares Mr. Bean is deemed to
beneficially own through his wife.
(5) Using 118,274,889 voting shares, which includes 98,274,889 shares of common
stock outstanding and the voting rights associated with the 1,000,000
outstanding shares of Series A Preferred Stock, which are able to vote in
aggregate an amount equal to 20,000,000 common shares.
We are not aware of any conditions that would result in a change of control.
INTEREST OF NAMED EXPERTS AND COUNSEL
This Form SB-2 Registration Statement was prepared by our counsel, The Loev
Law Firm, PC, which does not beneficially own any shares of our common or
preferred stock.
EXPERTS
The consolidated balance sheet of Pediatric Prosthetics, Inc., as of June
30, 2006 and 2005, and the related statements of operations, changes in
stockholders' deficit and cash flows for the years then ended, included in this
Prospectus have been audited by Malone & Bailey, PC, our independent registered
public accounting firm, as stated in its report appearing herein and have been
so included in reliance upon the report of such firm given upon its authority as
experts in accounting and auditing.
-29-
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Idaho Business Corporation Act and our Articles of Incorporation, as
amended, allow us to indemnify our officers and Directors from certain
liabilities and our Bylaws state that we shall indemnify every (i) present or
former Director, advisory Director or officer of us, (ii) any person who while
serving in any of the capacities referred to in clause (i) served at the our
request as a Director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, and (iii) any person nominated or designated by (or pursuant to
authority granted by) the Board of Directors or any committee thereof to serve
in any of the capacities referred to in clauses (i) or (ii) (each an
"Indemnitee").
Our Bylaws provide that we shall indemnify an Indemnitee against all judgments,
penalties (including excise and similar taxes), fines, amounts paid in
settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any proceeding in which he was, is or is threatened to be named
as defendant or respondent, or in which he was or is a witness without being
named a defendant or respondent, by reason, in whole or in part, of his serving
or having served, or having been nominated or designated to serve, if it is
determined that the Indemnitee (a) conducted himself in good faith, (b)
reasonably believed, in the case of conduct in his official capacity, that his
conduct was in our best interest and, in all other cases, that his conduct was
at least not opposed to our best interest, and (c) in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful;
provided, however, that in the event that an Indemnitee is found liable to us or
is found liable on the basis that personal benefit was improperly received by
the Indemnitee, the indemnification (i) is limited to reasonable expenses
actually incurred by the Indemnitee in connection with the Proceeding and (ii)
shall not be made in respect of any Proceeding in which the Indemnitee shall
have been found liable for willful or intentional misconduct in the performance
of his duty to us.
Except as provided above, the Bylaws also provide that no indemnification shall
be made in respect to any proceeding in which such Indemnitee has been (a) found
liable on the basis that personal benefit was improperly received by him,
whether or not the benefit resulted from an action taken in the Indemnitee's
official capacity, or (b) found liable to us. The termination of any proceeding
by judgment, order, settlement or conviction, or on a plea of nolo contendere or
its equivalent, is not of itself determinative that the Indemnitee did not meet
the requirements set forth in clauses (a) or (b) above. An Indemnitee shall be
deemed to have been found liable in respect of any claim, issue or matter only
after the Indemnitee shall have been so adjudged by a court of competent
jurisdiction after exhaustion of all appeals therefrom. Reasonable expenses
shall, include, without limitation, all court costs and all fees and
disbursements of attorneys for the Indemnitee. The indemnification provided
shall be applicable whether or not negligence or gross negligence of the
Indemnitee is alleged or proven.
Additionally, our Articles of Incorporation provide, as permitted by governing
Idaho law, that our directors and officers shall not be personally liable to us
or any of our stockholders for monetary damages for breach of fiduciary duty as
a director, with certain exceptions. The Articles further provide that we will
-30-
indemnify our directors and officers against expenses and liabilities they incur
to defend, settle, or satisfy any civil litigation or criminal action brought
against them on account of their being or having been our directors or officers
unless, in such action, they are adjudged to have acted with gross negligence or
willful misconduct.
The inclusion of these provisions in the Articles and the Bylaws may have the
effect of reducing the likelihood of derivative litigation against directors,
and may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited us and our stockholders.
DESCRIPTION OF BUSINESS
Pediatric Prosthetics, Inc. (the "Company," "we," and "us") is engaged in the
custom fitting and fabrication of custom made prosthetic limbs for both upper
and lower extremities to infants and children throughout the United States. We
also provide our services to families from the international community when the
parents can bring the child to the United States for fitting. We buy
manufactured components from a number of manufacturers and combine those
components to fabricate custom measured, fitted and designed prosthetic limbs
for our patients. We also create "anatomically form-fitted suspension sockets"
that allow the prosthetic limbs to fit comfortably and securely with each
patient's unique residual limb. These suspension sockets must be hand crafted
to mirror the surface contours of a patient's residual limb, and must be
dynamically compatible with the underlying bone, tendon, ligament, and muscle
structures in the residual limb.
We are accredited by the Texas Department of Health as a fully accredited
prosthetics provider. We began operations as a fully accredited prosthetic
facility on March 18, 2004.
We have a website at www.kidscanplay.com, which contains information which we do
not desire to be incorporated by reference into this filing.
We generate an average of approximately $8,000 of gross profit per fitting of
the prosthetics devices, however, the exact amount of gross profit we will
receive for each fitting, will depend on the exact mix of arms versus legs
fitted and the number of re-fittings versus new fittings. From July 1, 2005,
until December 31, 2005, we made approximately twenty-seven fittings and from
January 1, 2006, until June 30, 2006, we made approximately thirty-six fittings,
and from July 1, 2006 until January 25, 2007, we made approximately twenty-seven
fittings, two of which were pro bono. We averaged approximately four or five
fittings per month through December 2005 and have averaged approximately five to
six fittings per month since January 2006.
-31-
HISTORY OF THE COMPANY
We were formed as an Idaho corporation on January 29, 1954, under the name
Uranium Mines, Inc. From January 1954 onward, we experienced various
restructurings and name changes, including a name change effective March 9,
2001, to Grant Douglas Acquisition Corp. On October 10, 2003, a separate Texas
corporation Pediatric Prosthetics, Inc. ("Pediatric Texas"), entered into an
acquisition agreement with us, whereby Pediatric Texas agreed to exchange 100%
of its outstanding stock for 8,011,390 shares of our common stock and 1,000,000
shares of our Series A Convertible Preferred Stock (the "Exchange"). We remained
as the surviving accounting entity following the Exchange and Grant Douglas
Acquisition Corp., the surviving legal entity, adopted a name change to
Pediatric Prosthetics, Inc. on October 31, 2003 in connection with the Exchange.
In connection with the Exchange, the shareholders of Pediatric Texas (who became
our shareholders subsequent to the Exchange) agreed to assume $443,632 in
liabilities related to the assumption of a $350,000 convertible note and $93,632
of accrued interest on such note that was held by us prior to the Exchange. From
November 2003 through June of 2005 we repaid $148,955 of note principal through
the issuance of common stock with a fair market value of $2,688,734 and
recognized a $2,539,779 loss on extinguishment of debt. During the year ended
June 30, 2006, we negotiated the extinguishment of the remaining convertible
note of $201,045 and accrued interest of $139,754 for a one time cash payment of
$30,000 and recognized a gain on extinguishment of debt of $310,799.
We had been a non-operating, non-reporting, corporate shell, without assets or
operations since February 6, 2001, but had traded our common stock on the
Pinksheets under the symbol "GDRG," prior to the Exchange, and had limited
operations, consisting solely of hiring Dan Morgan, our current Vice President
and Chief Prosthestist, and seeking a merger and/or acquisition candidate, and
had no sales and made no fittings, prior to February 6, 2001. We had not been a
reporting company prior to the share exchange. We entered into the Exchange to
acquire an operating business, Pediatric, and the shareholders of Pediatric
entered into the Exchange to trade Pediatric's common stock on the Pinksheets.
Pediatric, the Texas corporation had limited operations prior to the share
exchange with us through a partnership solely controlled by the owners of
Pediatric. Upon the initial funding following the share exchange, in November of
2003 we began start-up activities associated with establishing a prosthetics
"patient-care facility" according to the regulations set forth by the Texas
Department of Health. We also began recruiting our core team of employees,
equipping our prosthesis manufacturing laboratory, and building out and
furnishing our facility at 12926 Willowchase Drive in Houston, Texas, in
compliance with the Texas Board of Health and local occupancy permit
requirements. Our "patient-care facility" was approved and accredited by the
Texas Board of Health on March 18, 2004. We were approved at that time for the
clinical fitting of and fabrication of prosthetic devices for the general
public, and for the billing of third party payors, such as health insurance
companies for those services.
-32-
WARRANTIES
We provide an unlimited one-year warranty on each of our prostheses, which
covers both materials and workmanship. Our sub-component suppliers also provide
us a one-year warranty on all components, whether electrical or structural, as a
result, we are in effect only responsible for the cost of the re-installation of
failed sub-components. To date, warranty repair costs borne by us have been
insignificant, and totaled approximately $500 and approximately 30 hours of time
during the fiscal year ended June 30, 2006.
PRINCIPAL SUPPLIERS
We obtain the materials which we use to fabricate and fit our prosthetic limbs
from various suppliers including, ARTech Laboratory in Midlothian, Texas;
Liberating Technologies, Inc. in Holliston, Massachusetts; Otto Bock Health Care
in Minneapolis, Minnesota; Ross Prosthetics in Hartsdale, New York; Southern
Prosthetic Supply in Alpharetta, Georgia; Hosmer Dorrance in Campbell,
California; P.V.A. Sleeves Co. in Houston, Texas; Daw Industries in Atlanta,
Georgia; and American Plastics in Arlington, Texas.
SIGNIFICANT EVENTS
SERVICE AGREEMENT WITH GLOBAL MEDIA
In February 2006, the Company entered into a service agreement (the "Service
Agreement") with Global Media Fund Inc. ("Global"), whereby Global agreed to
distribute certain newspaper features, which Global has guaranteed will be
placed in at least 100 newspapers and radio features regarding the Company,
which Global has guaranteed will be placed in at least 400 radio stations. In
consideration for executing the Service Agreement, the Company issued Global
250,000 restricted shares of common stock in March 2006. The terms of the
agreement call for the Company to issue Global a remaining value of shares equal
to $125,000, which will to be paid by issuances of common stock on May 1, 2006,
August 1, 2006, November 1, 2006 and February 1, 2007, which shares we
anticipate issuing once we are able to increase our authorized but unissued
shares of common stock, as described herein. The Service Agreement provides that
the Company will issue shares based on the contract payments of $28,125 per
payment; however the agreement contains a stock valuation provision that will
provide Global with shares that are discounted by 10% of the five day average
quoted market prices prior to the issuance dates, therefore Global will receive
common stock valued at $31,250 per installment. We also granted Global piggyback
registration rights in connection with the shares issued to Global pursuant to
the Service Agreement. If we fail to issue Global any consideration owed
pursuant to the Service Agreement when due, Global may terminate the Service
Agreement with thirty (30) days written notice to us at which time Global will
keep all consideration issued as of that date. We have the right to cancel the
Service Agreement at anytime with thirty (30) days written notice to Global, at
which time Global will keep all consideration issued as of that date.
On or about June 2, 2006, we issued Global 446,427 shares of common stock valued
at $31,250, in connection with the May 1, 2006, payment of $28,125 on the
Service Agreement. The value of our common stock in connection with the issuance
-33-
of the additional shares to Global shall be equal to the value of the common
stock to be issued divided by 90% of the average of the closing value of the
common stock on the five trading days prior to the date such stock is to be
issued on the Pinksheets trading market, or Over-The-Counter Bulletin Board,
wherever our common stock is then traded. For example, the average of the
closing price of our common stock for the five trading days prior to the May 1,
2006 payment on the Pinksheets was $0.07 per share. Therefore, the amount of
shares we issued Global for such May 1, 2006 payment was $28,125 divided by
$0.063 ($0.07 x 0.90), which was equal to approximately 446,427 shares of common
stock which had a fair market value of $31,250.
On March 1, 2006, and March 21, 2006, we entered into two separate loans for
$17,500, with two shareholders to provide us with an aggregate of $35,000 in
funding. The loans bear interest at the rate of 12% per annum until paid. Both
loans became due in May, but have since been extended. In December 2006, $10,000
was repaid on one of the loans, leaving $25,000 outstanding under the loans as
of the date of this report. Additionally, the remaining $25,000 owed pursuant
to the loans are convertible into an aggregate of 714,286 shares of our common
stock, with each $0.035 of each outstanding loan being able to convert into one
share of our common stock.
In April 2006, we borrowed $50,000 from a shareholder of the Company and issued
a promissory note and warrants in connection with such loan. The promissory note
bears interest at the rate of 12% per annum, and was due and payable on
September 29, 2006. The promissory note was renewed for an additional six
months, at the option of the holder, through March 2007. This loan is also
convertible into an aggregate of 1,428,571 shares of common stock at the rate of
one share for each $0.035 owed. The shareholder also received as consideration
for the $50,000 promissory note, 1,428,571 warrants, which are exercisable for
shares of common stock at an exercise price of $0.045 per share, and which
expire on May 22, 2008.
In May 2006, we entered into a services agreement with Stock Enterprises, a
privately held financial and investor relations services firm ("Stock"), whereby
Stock agreed to provide us investor relations services on a non-exclusive basis
for the period of one (1) year, and we agreed to issue Stock 2,000,000
restricted shares of our common stock, which shares have not been issued to
Stock to date.
MAY 2006 SECURITIES PURCHASE AGREEMENT
On May 30, 2006 (the "Closing"), we entered into a Securities Purchase Agreement
("Purchase Agreement") with AJW Partners, LLC; AJW Offshore, Ltd.; AJW Qualified
Partners, LLC; and New Millennium Capital Partners II, LLC (each a "Purchaser"
and collectively the "Purchasers"), pursuant to which the Purchasers agreed to
purchase $1,500,000 in convertible debt financing from us. Pursuant to the
Securities Purchase Agreement, we agreed to sell the investors $1,500,000 in
Callable Secured Convertible Notes (the "Debentures"), which are to be payable
in three tranches, $600,000 of which was received by the Company on or around
-34-
May 31, 2006, in connection with the entry into the Securities Purchase
Agreement; $400,000 upon the filing of a registration statement to register
shares of common stock which the Debentures are convertible into as well as the
shares of common stock issuable in connection with the exercise of the Warrants
(defined below); and $500,000 upon the effectiveness of such registration
statement. The Debentures are convertible into our common stock at a discount to
the then trading value of our common stock as described in greater detail below.
Additionally, in connection with the Securities Purchase Agreement, we agreed to
issue the Purchasers warrants to purchase an aggregate of 50,000,000 shares of
our common stock at an exercise price of $0.10 per share (the "Warrants"). We
agreed to register the shares of common stock which the Debentures are
convertible into and the shares of common stock which the Warrants are
exercisable for on this Form SB-2 registration statement of which a portion are
being registered herein. We secured the Debentures pursuant to the Security
Agreement and Intellectual Property Security Agreement, described below.
We also agreed in the Purchase Agreement to use our best efforts to increase our
key man life insurance on our President and Director, Linda Putback-Bean and our
Vice President and Director Kenneth W. Bean on or before fifteen (15) business
days from the Closing. In June 2006, we submitted applications and had physical
exams to increase our key man life insurance through the agent the Purchasers
recommended to us, but so far have not received the policies or paid any
premiums in connection with the increased key man life insurance to date.
The $600,000 we received from the Purchasers at the Closing, in connection with
the sales of the Debentures was distributed as follows:
o $100,000 to Lionheart Associates, LLC doing business as Fairhills
Capital ("Lionheart" or "Fairhills"), as a finder's fee in connection
with the funding (we also have agreed to pay Lionheart an additional
$50,000 upon the payment of the next tranche of the funding by the
Purchasers);
o $18,000 to OTC Financial Network, as a finder's fee in connection
with the funding (we also have agreed to pay OTC Financial Network an
additional $27,000 upon the payment of additional tranches of funding
by the Purchasers);
o $75,000 in legal fees and closing payments to our counsel, the
Purchaser's counsel and certain companies working on the Purchaser's
behalf;
o $10,000 to be held in escrow for the payment of additional key
man life insurance on Linda Putback-Bean and Kenneth W. Bean; and
o $370,000 to us, which we spent on legal and accounting fees in
connection with the filing of our amended Form 10-SB, outstanding
reports on Form 10-QSB, and Form SB-2 registration statement, as well
as marketing and promotional fees and inventory costs, as well as
other general working capital purposes.
-35-
We plan to use the $900,000 in proceeds from the sale of the additional
Convertible Debentures (assuming all $900,000 of the additional debentures are
sold) as follows:
o $67,000 - Accounting, auditing and attorney's fees in connection
with our periodic reports, this Form 10-SB registration statement and
a to be filed Form SB-2 registration statement to register the shares
underlying the Convertible Debentures;
o $266,000 - Inventory for our prosthetics operations;
o $67,000 - Equipment and building improvements;
o $333,000 - Promotional, marketing and travel costs associated
with our increased marketing campaign;
o $100,000 - Closing costs and finders fees in connection with the
funding; and
o $67,000 - General working capital, including certain amounts for
officers and directors salaries, rent and office expenses.
CALLABLE SECURED CONVERTIBLE NOTES
Pursuant to the Purchase Agreement, we agreed to sell the Purchasers an
aggregate of $1,500,000 in Debentures, which Debentures have a three year term
and bear interest at the rate of six percent (6%) per annum, payable quarterly
in arrears, provided that no interest shall be due and payable for any month in
which the trading value of our common stock is greater than $0.10375 for each
day that our common stock trades. Any amounts not paid under the Debentures when
due bear interest at the rate of fifteen percent (15%) per annum until paid. The
conversion price of the Debentures is equal to 50% of the trading price of our
common stock on any trading day, during which we receive a notice of conversion
from the Purchasers (the "Conversion Price").
Furthermore, the Purchasers have agreed to limit their conversions of the
Debentures to no more than the greater of (1) $80,000 per calendar month; or (2)
the average daily volume calculated during the ten business days prior to a
conversion, per conversion.
Pursuant to the Debentures, the Conversion Price is automatically adjusted if,
while the Debentures are outstanding, we issue or sell, any shares of common
stock for no consideration or for a consideration per share (before deduction of
reasonable expenses or commissions or underwriting discounts or allowances in
connection therewith) less than the Conversion Price then in effect, with the
consideration paid per share, if any being equal to the new Conversion Price;
provided however, that each Purchaser has agreed to not convert any amount of
principal or interest into shares of common stock, if, as a result of such
conversion, such Purchaser and affiliates of such Purchaser will hold more than
4.99% of our outstanding common stock.
-36-
"Events of Default" under the Debentures include:
1. Our failure to pay any principal or interest when due;
2. Our failure to issue shares of common stock to the Purchasers in
connection with any conversion as provided in the Debentures;
3. Our failure to file a Registration Statement covering the shares
of common stock which the Debentures are convertible into within sixty
(60) days of the Closing (July 31, 2006), or obtain effectiveness of
such Registration Statement within one hundred and forty-five (145)
days of the Closing (October 22, 2006), which dates have been amended
to January 15, 2007 and April 16, 2007, respectively in connection
with the Waiver of Rights Agreement, described in greater detail
below, or if such Registration Statement once effective, ceases to be
effective for more than ten (10) consecutive days or more than twenty
(20) days in any twelve (12) month period;
4. Our entry into bankruptcy or the appointment of a receiver or trustee;
5. Our breach of any covenants in the Debentures or Purchase
Agreement, if such breach continues for a period of ten (10) days
after written notice thereof by the Purchasers, or our breach of any
representations or warranties included in any of the other agreements
entered into in connection with the Closing;
6. If any judgment is entered against us or our property for more
than $100,000, and such judgment is unvacated, unbonded or unstayed
for a period of twenty (20) days, unless otherwise consented to by the
Purchasers, which consent will not be unreasonably withheld; or
7. If we fail to maintain the listing of our common stock on the
OTCBB or an equivalent replacement exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
the American Stock Exchange within 180 days from the date of Closing.
Upon the occurrence of and during the continuance of an Event of Default, the
Purchasers can make the Debentures immediately due and payable, and can make us
pay the greater of (a) 130% of the total remaining outstanding principal amount
of the Debentures, plus accrued and unpaid interest thereunder, or (b) the total
dollar value of the number of shares of common stock which the funds referenced
in section (a) would be convertible into (as calculated in the Debentures),
multiplied by the highest closing price for our common stock during the period
we are in default. If we fail to pay the Purchasers such amount within five (5)
days of the date such amount is due, the Purchasers can require us to pay them
in shares of common stock at the greater of the amount of shares of common stock
which (a) or (b) is convertible into, at the Conversion Rate then in effect.
-37-
Pursuant to the Debentures, we have the right, assuming (a) no Event of Default
has occurred or is continuing, (b) that we have a sufficient number of
authorized but unissued shares of common stock, (c) that our common stock is
trading at or below $0.20 per share, and (d) that we are then able to prepay the
Debentures as provided in the Debentures, to make an optional prepayment of the
outstanding amount of the Debentures equal to 120% of the amount outstanding
under the Debentures (plus any accrued and unpaid interest thereunder) during
the first 180 days after the Closing, 130% of the outstanding amount of the
Debentures (plus any accrued and unpaid interest thereunder) between 181 and 360
days after the Closing, and 140% thereafter, after giving ten (10) days written
notice to the Purchasers.
Additionally, pursuant to the Debentures, we have the right, in the event the
average daily price of our common stock for each day of any month the Debentures
are outstanding is below $0.20 per share, to prepay a portion of the outstanding
principal amount of the Debentures equal to 101% of the principal amount of the
Debentures divided by thirty-six (36) plus one month's interest. Additionally,
the Purchasers have agreed in the Debentures to not convert any principal or
interest into shares of common stock in the event we exercise such prepayment
right.
At the Closing, we entered into a Security Agreement and an Intellectual
Property Security Agreement (collectively, the "Security Agreements"), with the
Purchasers, whereby we granted the Purchasers a security interest in, among
other things, all of our goods, equipment, machinery, inventory, computers,
furniture, contract rights, receivables, software, copyrights, licenses,
warranties, service contracts and intellectual property to secure the repayment
of the Debentures.
STOCK PURCHASE WARRANTS
In connection with the Closing, we sold an aggregate of 50,000,000 Warrants to
the Purchasers, which warrants are exercisable for shares of our common stock at
an exercise price of $0.10 per share (the "Exercise Price"). Each Purchaser,
however, has agreed not to exercise any of the Warrants into shares of common
stock, if, as a result of such exercise, such Purchaser and affiliates of such
Purchaser will hold more than 4.99% of our outstanding common stock.
The Warrants expire, if unexercised at 6:00 p.m., Eastern Standard Time on May
30, 2013. The Warrants also include reset rights, which provide for the Exercise
Price of the Warrants to be reset to a lower price if we (a) issue any warrants
or options (other than in connection with our Stock Option Plans), which have an
exercise price of less than the then market price of the common stock, as
calculated in the Warrants, at which time the Exercise Price of the Warrants
will be equal to the exercise price of the warrants or options granted, as
calculated in the Warrants; or (b) issue any convertible securities, which have
a conversion price of less than the then market price of the common stock, as
calculated in the Warrants, at which time the Exercise Price of the Warrants
will be equal to the conversion price of the convertible securities, as
calculated in the Warrants.
Pursuant to the Warrants, until we register the shares of common stock which the
Warrants are exercisable for, the Warrants have a cashless exercise feature,
-38-
where the Purchasers can exercise the Warrants and pay for such exercise in
shares of common stock, in lieu of paying the exercise price of such Warrants in
cash.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into at the Closing, we
agreed to file a registration statement on Form SB-2, to register two (2) times
the shares of common stock which the Debentures are convertible into (to account
for changes in the Conversion Rate and the conversion of interest on the
Debentures) as well as the shares of common stock issuable in connection with
the exercise of the Warrants, within sixty (60) days of the Closing which we
were not able to accomplish, but which date was amended from sixty (60) days
from the Closing until January 15, 2007 in connection with the Waiver of Rights
Agreement (described below), which date this Registration Statement was not
filed by, and use our best efforts to obtain effectiveness of such registration
statement as soon thereafter as possible. However, we do not currently have
enough authorized but unissued shares to allow for such conversion and/or
exercise by the Purchasers and therefore have filed an information statement
with the SEC to allow for shareholder approval to affect an increase in our
authorized shares in connection with such registration statement filing.
If we do not obtain effectiveness of this registration statement with the SEC by
April 16, 2007, or if after the registration statement has been declared
effective by the SEC, sales of common stock cannot be made pursuant to the
registration statement, or our common stock ceases to be traded on the
Over-the-Counter Bulletin Board (the "OTCBB") or any equivalent replacement
exchange, then we are required to make payments to the Purchasers in connection
with their inability and/or delay to sell their securities. The payments are to
be equal to the then outstanding amount of the principal amount of the
Debentures, multiplied by $0.02, multiplied by the number of months after April
16, 2007 and/or the date sales are not able to be effected under the
registration statement, pro rated for partial months. For example, for each
month that passes in which we fail to obtain effectiveness of our registration
statement, after April 16, 2007, we would owe the Purchasers an aggregate of
$20,000 in penalty payments, based on $1,000,000 then outstanding under the
Debentures ($600,000 in debentures sold to the Purchasers at the Closing, plus
$400,000 in Debentures sold to the Purchasers upon filing the registration
statement).
RECENT EVENTS
On October 25, 2006, with an effective date of July 31, 2006, we entered into a
Waiver of Rights Agreement with the Purchasers, whereby the Purchasers agreed to
waive our prior defaults under the Securities Purchase Agreement and
Registration Rights Agreement. In connection with the Waiver of Rights
Agreement, the Purchasers agreed to amend the Securities Purchase Agreement to
state that we are required to use our best efforts to timely file our periodic
reports with the Commission, which amendment waived the previous default caused
by our failure to timely file our annual report on Form 10-KSB with the
Commission. The Waiver of Rights Agreement also amended the Securities Purchase
Agreement to provide for us to use our best efforts to obtain shareholder
-39-
approval to increase our authorized shares of common stock as was required by
the Securities Purchase Agreement, which amendment waived our failure to obtain
shareholder approval to increase our authorized shares of common stock by August
15, 2006. Finally, the Waiver of Rights Agreement amended the dates we were
required to file this registration statement from July 31, 2006 to January 15,
2007, which filing date was not met, and the date this registration statement
was required to be effective with the Commission from October 22, 2006 to April
16, 2007.
THE MARKET PLACE
According to the Limb Loss Research and Statistics Program ("LLR&SP"), a
multi-year statistical study done by the American Amputee Coalition in 2001, in
concert with the Johns Hopkins Medical School, and the United States Center of
Disease Control, approximately 1,000 children are born each year with a
limb-loss in the United States. The LLR&SP can be found at
www.amputee-coalition.org. During their high growth years, ages 1 through age
12, these children will be candidates for re-fitting once per year as they grow.
We calculate that there are presently approximately up to 12,000 pre-adolescent
(younger than age 12) children in the United States in need of prosthetic
rehabilitation, based on the fact that there are approximately 1,000 children
born each year with a limb-loss in the United States.
COMPETITION
Although there are many prosthetic provider companies in the United States, to
the best of our knowledge, there is no other private sector prosthetics provider
in the country specializing in fitting infants and children. The delivery of
prosthetic care in the United States is extremely fragmented and is based upon a
local practitioner "paradigm." Generally, a local practitioner obtains referrals
for treatment from orthopedic physicians in their local hospitals based on
geographic considerations. Management believes the inherent limitation of this
model for pediatric fittings is that the local practitioner may never encounter
more than a very few small children with a limb loss, even during an entire
career. The result is that the local practice is a "general practice", and in
prosthetics that is considered an "adult practice" because of the overwhelming
percentage of adult patients. In any given year, according to The American
Amputee Coalition, over 150,000 new amputations are performed, suggesting the
need for prosthetic rehabilitation. The overwhelming majority of those
amputations are performed upon adults. For children ages 1-14, there will be
approximately 1,200 limb losses per year due primarily to illness, vascular
problems, and congenital accidents. Children, especially small children, cannot
provide practitioners the critical verbal feedback they usually receive from
their adult patients.
Management believes the challenge to effectively treat children with a limb-loss
in the United States is compounded by the time constraints of local
practitioners working primarily with their adult patients and a limited overall
number of board certified prosthetists. To engage in the intensive
patient-family focus required to fit the occasional infant or small child puts
enormous time pressure on local practitioners trying to care for their adult
patients.
-40-
Though not competitors in a business sense, the Shriner's Hospital system, a
non-profit organization with 22 orthopedic hospitals throughout North America,
has historically extended free prosthetic rehabilitation in addition to
providing medical and surgical services to children at no charge. The free care
offered by Shriner's may put downward pressure on the prices we charge for our
services and/or lower the number of potential clients in the marketplace, which
may in turn lower our revenues.
EMPLOYEES
As of February 5, 2007, we had five employees, three of which are in management
positions. We also use the services of outside consultants as necessary to
provide therapy, public relations and business and financial services. Our
employees include the following individuals:
o Linda Putback-Bean, our President and upper extremity fabricating
specialist, who works for us full time. Her Texas certification and
licensure is that of a "Prosthetist's Assistant", (PA).
o Dan Morgan is Our Vice President/Chief Prosthetist, he is an ABC and Texas
certified Prosthetist licensed to perform "critical care events" in all of
our prosthetic fittings. He is on call full-time.
o Jean Gonzalez is an ABC and Texas certified Prosthetist, also licensed to
perform "critical care events" in all of our prosthetic fittings, full
time.
o Kenneth W. Bean is our Vice President of Operations, and works for us full
time. He is in charge of the non-patient care side of the business.
o Kim Hardberger is our office manager/ bookkeeper, and third party payer
liaison in charge of coding and billing and accounts receivable, who works
for us full time.
CONSULTANTS
- -----------
Occupational Therapists
1. Nancy Conte-Fisher
2. JoAnne Liberatore
Physical Therapist
Kim Ramey
Other Consultants
1. James Stock, Investor Relations Consultant.
2. Joe Gordon, Business Consultant.
3. Mark Santos, Marketing Consultant.
4. George Boomer, Marketing Consultant.
5. John Beagan, Marketing Consultant.
6. Global Media Funding, Feature article Placement Consultants.
7. OTC Financial Network, Geoffery Eiten.
-41-
AGREEMENTS WITH HOST AFFILIATES
We have entered into consulting contracts with fourteen (14) host prosthetic
providers ("Host Affiliates") with facilities at various locations in 19 states.
These consulting agreements allow us to utilize the Host Affiliate's
patient-care facilities and billing personnel to aid us in fitting and
fabricating custom-made artificial limbs and provide related care and training
in multiple geographic locations. We receive a consulting fee from the Host
Affiliate on a case-by-case basis but generally we receive 70% of the net cash
after components costs for the fitting and fabrication, and the Host receives
30% of the net cash for billing services and use of their lab-facilities. These
contracts generally have automatic renewals every six months unless either party
provides notice of termination.
We have incorporated by reference a sample of one of our Host Affiliates
contracts to this filing as Exhibit 10.2.
As of February 5, 2007, our Host Affiliate companies were:
1. Restorative Health Services, Nashville, TN
2. Mandelbaum O&P, Port Jefferson, NY (covers New England as well)
3. Douglass Orthotics & Prosthetics, Seattle, WA
4. Union Prosthetics, Pittsburgh, PA
5. Advanced O&P, Springfield, MO (operates in MO, AR, KS, and OK)
6. AZ Prosthetics, Scottsdale, AZ (also operates in CA, and NC)
7. Orthotic Solutions, Fairfax, VA (also operates in MD)
8. Temecula Valley O&P, Temecula, CA
9. Hemet O&P Los Angeles, CA
10. Michigan Orthotics & Prosthetics, Saganaw, MI
11. American Orthopedics, Columbus, OH
12. Harlingen O&P, Harlingen, TX
13. Land of Lakes O&P Minneapolis, MN, and St. Paul, WI
14. O&P Clinical Technologies, Gainesville, FL
REGULATIONS
We are accredited by the Texas Department of Health and are subject to certain
state and federal regulations related to the certification of our prosthetists,
patient-care facility and billing practices with insurance companies and various
state and federal health programs including Medicare and Medicaid.
-42-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements.
PLAN OF OPERATIONS
During October 2005, management contracted with three (3) consultants to
commence a national multi-media publicity campaign based upon the success
stories of the children for which we have provided services. Management's goal
is to provide awareness of our commitment to provide superior pediatric
prosthetic care on a national level. We paid the consultants an aggregate of
7,000,000 shares of our common stock in connection with such contracts.
We have established working relationships with fourteen Host Affiliates
operating in approximately 19 states. In establishing the relationships with the
fourteen Host Affiliates, we also provided one-on-one pediatric training to
twelve prosthetists who are employed by those Host Affiliates. We currently plan
to hire one more certified prosthetist and two additional support personnel
during the next twelve months, funding permitting, of which there can be no
assurance.
As of December 2006, based on our current monthly gross profits generated in
connection with fitting prosthetic limbs, which approximately totals our monthly
overhead of $54,000, we believe we will be able to continue our operations
throughout fiscal 2007, assuming we sell an additional $900,000 in Convertible
Debentures to the Purchasers pursuant to the Securities Purchase Agreement
subsequent to the filing of this Registration Statement. However, if we are
unable to file or gain effectiveness of a Registration Statement to register the
shares of common stock underlying the Convertible Debentures and are therefore
unable to sell the additional tranches of Convertible Debentures, we anticipate
only being able to continue our business operations for three to four months,
without raising additional financing. If we are required to raise additional
funding other than through the sale of the additional tranches of Convertible
Debentures, we anticipate such funds to be raised through the sale of debt
and/or equity securities. We received $600,000 on May 30, 2006 (less closing
costs and structuring fees), from the sale of certain Convertible Debentures
described above. Assuming we receive and are able to sell the additional
tranches of Convertible Debentures, we expect to increase our fiscal 2007 cash
advertising and marketing budget five fold over our fiscal 2006 advertising
budget. We believe the five fold increase in our advertising and marketing
budget will generate a substantial ramp-up of our monthly prosthetic fittings
rate and resulting gross profits due to a growing national awareness of our
specialization in personalized pediatric services, combined with the re-fitting
of the growing number of clients we have already fitted.
The increases in our advertising and marketing budget have already allowed us to
undertake the following advertising and marketing activities:
-43-
o The composition of and distribution of certain feature newspaper
articles through our agreement with Global, pursuant to which we
agreed to pay Global an aggregate of $150,000 worth of our common
stock, based on the trading value of our common stock on certain
payment dates, as described in greater detail above under "Recent
Events," of which $48,750 in common stock has been issued to date; and
o Publicity and marketing campaign, pursuant to which we previously
issued 7,000,000 shares of common stock to certain consultants.
Additionally, we believe the increases in our advertising and marketing budget
will allow us to undertake the following activities during the next twelve (12)
months, assuming the Purchasers purchase the $900,000 in additional Convertible
Debentures:
o The production, filming, editing and narration of informational
videos on the value of modern prosthetic options for children, which
videos describe the success stories we have had in helping children
overcome limb loss by fitting such children with artificial limbs, as
well as the distribution of such videos to fellow pediatric
professionals such as nurses, physical therapists, doctors and
hospital-based family counselors nationally, at a cost of
approximately $300,000;
o Costs associated with publicizing and scholarships for our four
day "whole family summer get-together" for children with a limb-loss
and their families, at a cost of approximately $50,000;
o Travel and associated costs involved with appearances on
television shows, medical conventions and nursing schools at a cost of
approximately $20,000; and
o Sponsorship costs of non-profit organizations such as the
"Amputee Coalition of American" and the Para-Olympics, at a cost of
approximately $50,000.
As stated above, we anticipate receiving approximately $900,000 in subsequent
tranches in connection with the funding agreement described above, however,
investors should keep in mind that any amounts of funding we receive pursuant to
the funding will be reduced by fees paid to the lending source in connection
with closing costs and legal and accounting costs associated with our need to
file amendments and obtain effectiveness of this Form SB-2 Registration
Statement.
Moving forward, we plan to work towards becoming traded on the Over-The-Counter
Bulletin Board ("OTCBB") by responding to the Commission's comments to this Form
SB-2 registration statement, obtaining shareholder approval to increase our
authorized shares of common stock to allow for sufficient authorized but
unissued shares of common stock for the holders of the Convertible Debentures
and Warrants to convert such Debentures and exercise such Warrants. Furthermore,
we hope to request and/or encourage a broker-dealer to act as a market maker for
our common stock so that we can gain approval to quote our common stock on the
-44-
OTCBB during fiscal 2007, which we believe will increase the liquidity of our
common stock, of which there can be no assurance. As of the filing of this
Registration Statement, we have not engaged any specific market makers regarding
the quoting of our common stock on the OTCBB.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
U.S. GAAP. Preparing financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for us relate
primarily to revenue recognition.
REVENUE RECOGNITION
We recognize revenues from the sale of prosthetic devices and related services
generated through the billing departments of the Host-Affiliates upon the
performance of services by that Host-Affiliate.
When we directly bill customers or bill customers through our Host-Affiliates,
the revenue from the sale of prosthetic devices and related services to
patients, are recorded when the device is accepted by the patient, provided that
(i) there are no uncertainties regarding customer acceptance; (ii) persuasive
evidence of an arrangement exists; (iii) the sales price is fixed and
determinable; and (iv) collection is deemed probable. We require each patient to
sign a standard acknowledgement of delivery of device form in connection with
each sale at the time of sale, which provides that the patient has 1) received
the device and 2) is satisfied with the device. Our patients normally accept our
products upon delivery.
When we directly bill customers or bill customers through our Host-Affiliates,
revenue is recorded at "usual and customary" rates, expressed as a percentage
above Medicare procedure billing codes. Billing codes are frequently updated and
as soon as we receive updates we reflect the change in our billing system. There
is generally a "co-payment" component of each billing for which the
patient-family is responsible. When the final appeals process to the third party
payors is completed, we bill the patient family for the remaining portion of the
"usual and customary" rate. As part of our preauthorization process with
third-party payors, we validate our ability to bill the payor, if applicable,
for the service provided before we deliver the device. Subsequent to billing for
devices and services, problems may arise with pre-authorization or with other
insurance issues with payors. If there has been a lapse in coverage, or an
outstanding "co-payment" component, the patient is financially responsible for
the charges related to the devices and services received. If we are unable to
collect from the patient, a bad debt expense is recognized.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standard Board (FASB) issued a
revision to Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123R). SFAS 123R eliminates our ability to use
the intrinsic value method of accounting under APB 25, and generally requires us
to reflect in our income statement, instead of pro forma disclosures in our
financial footnotes, the cost of employee services received in exchange for an
-45-
award of equity instruments based on the grant-date fair value of the award. We
will estimate the grant-date fair value using option-pricing models adjusted for
the unique characteristics of those equity instruments. Among other things, SFAS
123R requires us to estimate the number of instruments for which the requisite
service is expected to be rendered, and if the terms or conditions of an equity
award are modified after the grant date, to recognize incremental compensation
cost for such a modification by comparing the fair value of the modified award
with the fair value of the award immediately before the modification. In
addition, SFAS 123R amends FASB Statement No. 95, "Statement of Cash Flows," to
require that we treat excess tax benefits as a financing cash inflow rather than
as a reduction of taxes paid in our statement of cash flows. SFAS 123R was
effective for us beginning July 1, 2005. The Company had no outstanding warrants
or options at the date of adoption of SFAS 123R and, accordingly, the adoption
had no impact on us.
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
Statement No. 154 ("SFAS 154"), Accounting Changes and Error Corrections. SFAS
154 requires that, when a company changes its accounting policies, the change
must be applied retrospectively to all prior periods presented instead of a
cumulative effect adjustment in the period of the change. SFAS 154 may also
apply when the FASB issues new rules requiring changes in accounting. If the new
rule allows cumulative effect treatment, it will take precedence over SFAS 154.
This statement is effective for fiscal years beginning after December 15, 2005.
The adoption of SFAS 154 is not expected to have a significant impact on the
Company's financial position or its results of operations.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income taxes ("FIN 48").
FIN 48, which is an interpretation of SFAS No. 109, "Accounting for Income
Taxes," provides guidance on the manner in which tax positions taken or to be
taken on tax returns should be reflected in an entity's financial statements
prior to their resolution with taxing authorities. The Company is required to
adopt FIN 48 during the first quarter of fiscal 2008. The Company is currently
evaluating the requirements of FIN 48 and has not yet determined the impact, if
any; this interpretation may have on its consolidated financial statements.
COMPARISON OF OPERATING RESULTS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2005
We had revenue of $195,230 for the three months ended September 30, 2006,
compared to revenue of $104,048 for the three months ended September 30, 2005,
an increase in revenue of $91,182 or 87.6% from the prior period. The increase
in revenue for the three months ended September 30, 2006, compared to the three
months ended September 30, 2005, was mainly due to increased fees received from
our Host Affiliates in connection with increased fittings due to our national
awareness and marketing program, which we began during the fiscal year ended
2006 (described above), as well as a significant number of re-fittings of
existing patients due to such patient's physical growth.
-46-
We had total operating expenses of $625,199 for the three months ended September
30, 2006, compared to total operating expenses of $210,014 for the three months
ended September 30, 2005, an increase in total operating expenses of $415,185 or
198% from the previous year's period. The increase in total operating expenses
was mainly due to a $375,129 or 223% increase in selling, general and
administrative expenses for the three months ended September 30, 2006, compared
to the three months ended September 30, 2005, which increase was due to
increased marketing expenses in connection with our advertising and marketing
campaign (described above), and increases in our legal and accounting expenses
in connection with our amended Form 10-SB registration statement filings and the
preparation of our public filings, which expenses were not present during the
three months ended September 30, 2005, as we were not a public reporting company
at that time, as well as an increase of $1,271 in depreciation expense, to
$5,959 for the three months ended September 30, 2006, compared to $4,688 for the
three months ended September 30, 2005, in connection with an increase in our
depreciable asset base during the year ended June 30, 2006, and a $38,785 or
104% increase in cost of sales, to $76,001 for the three months ended September
30, 2006, compared to $37,216 for the three months ended September 30, 2005,
which increase in cost of sales was directly attributable to increased purchases
of parts and components in connection with our increased sales for the three
months ended September 30, 2006, compared to the prior period.
Selling, general and administrative expenses as a percentage of revenue for the
three months ended September 30, 2006 were 278%, compared to selling, general
and administrative expenses as a percentage of revenue of 162% for the three
months ended September 30, 2005, which represented an increase in selling,
general and administrative expenses as a percentage of revenue of 116% from the
prior period. This increase was mainly due to the 223% increase in selling,
general and administrative expenses for the three months ended September 30,
2006, which was not sufficiently offset by the 87.6% increase in revenue for
September 30, 2006. We expect our selling, general and administrative expenses
as a percentage of revenue to initially be higher than future percentages due to
early stage startup costs associated with building an administrative
infrastructure.
We had a total loss from operations of $429,969 for the three months ended
September 30, 2006, compared to a total loss from operations of $105,966 for the
three months ended September 30, 2005, an increase of $324,003 or 306% from the
prior period. The increase in loss from operations was mainly caused by the
$415,185 or 198% increase in total operating expenses (which was mainly due to
the 223% increase in selling, general and administrative expenses) for the three
months ended September 30, 2006, compared to the three months ended September
30, 2005, which was not sufficiently offset by the 87.6% increase in revenue for
the three months ended September 30, 2006, compared to the prior period.
We had total other income of $1,112,049 for the three months ended September 30,
2006, compared to total other expense of $6,031 for the three months ended
September 30, 2005, which represented an increase in other income of $1,118,080
from the prior period. The increase in net other income was mainly due to the
$1,202,540 increase in change in value of derivative financial instruments,
-47-
which accounting income totaled $1,202,540 for the three months ended September
30, 2006, and was not represented for the three months ended September 30, 2005,
in connection with the change in value of our outstanding Convertible
Debentures, which was offset by an increase of $84,461 of interest expense also
in connection with our outstanding Convertible Debentures, to interest expense
of $90,492 for the three months ended September 30, 2006, compared to interest
expense of $6,031 for the three months ended September 30, 2005.
We had total net income of $682,080 for the three months ended September 30,
2006, compared to a total net loss of $111,997 for the three months ended
September 30, 2005, an increase in net income of $794,077 or 682% from the
previous period. The increase in net income was mainly due to the $1,118,080
increase in total other income, which was mainly due to the $1,202,540 of change
in the value of derivative financial instruments in connection with the fair
value of our Convertible Debentures and our $91,182 or 87.6% increase in
revenues, which was offset by our $375,129 or 223% increase in general and
administrative expenses for the three months ended September 30, 2006, compared
to the three months ended September 30, 2005. Investors should keep in mind
that our net income for the three months ended September 30, 2006, was the
result of changes in the value of our derivative financial instruments and not
the result of our core operations.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2006 COMPARED TO THE YEAR
ENDED JUNE 30, 2005
We had revenue of $716,107 for the year ended June 30, 2006, compared to revenue
of $566,001 for the year ended June 30, 2005, an increase in revenue of $150,106
or 26.5% from the prior period. The increase in revenue for the year ended June
30, 2006, compared to the year ended June 30, 2005, was mainly due to increased
fees received from our Host Affiliates in connection with increased fittings due
to our national awareness and marketing program, as well as a significant number
of re-fittings of existing patients due to such patient's physical growth.
We had total operating expenses of $1,613,442 for the year ended June 30, 2006,
compared to total operating expenses of $4,897,329 for the year ended June 30,
2005, a decrease in total operating expenses of $3,283,887 or 67.0% from the
previous year. The decrease in total operating expenses was mainly due to the
$3,299,352 or 70.61% decrease in selling, general and administrative expenses,
which amount included a significant decrease in share-based compensation of
$482,360 for the year ended June 30, 2006, from $4,020,264 for the year ended
June 30, 2005. Also included in total operating expenses for the year ended June
30, 2006 were depreciation expenses of $20,231 and $16,388 for the year ended
June 30, 2005, which was an increase of $3,843 or 23.5% from the prior period.
Additionally, our cost of sales, except for separately stated items increased to
$219,272 for the year ended June 30, 2006, compared to $207,650 for the year
ended June 30, 2005, an increase of $11,622 or 5.6% from the prior period. Costs
of sales increased for the year ended June 30, 2006, compared to the year ended
June 30, 2005 due to increased purchases of parts and components during the year
ended June 30, 2006 in connection with our increased sales.
-48-
Selling, general and administrative expenses as a percentage of revenue for the
year ended June 30, 2006 were 191.9%, compared to selling, general and
administrative expenses as a percentage of revenue of 825.7% for the year ended
June 30, 2005, which represented a decrease in selling, general and
administrative expenses as a percentage of revenue of 633.8% from the prior
period. This decrease was mainly due to the 26.5% increase in revenue for the
year ended June 30, 2006 and the 67.0% decrease in total operating expenses for
the year ended June 30, 2006, compared to the year ended June 30, 2005. We
expect our selling, general and administrative expenses as a percentage of
revenue to initially be higher than future percentages due to early stage
startup costs associated with building an administrative infrastructure.
We had a total loss from operations of $897,335 for the year ended June 30,
2006, compared to a total loss from operations of $4,331,328 for the year ended
June 30, 2005, a decrease of $3,433,993 or 79.3% from the prior period. The
decrease in loss from operations was mainly caused by the $3,537,904 or 88.0%
decrease in share-based compensation from the year ended June 30, 2006, compared
to the year ended June 30, 2005.
We had total other expense of $3,516,082 for the year ended June 30, 2006,
compared to total other expense of $25,191 for the year ended June 30, 2005,
which represented an increase in other expenses of $3,490,891 for the year ended
June 30, 2006, compared to the year ended June 30, 2005. The increase in net
other expenses was mainly due to the $3,742,205 increase in change in value of
derivative financial instruments in connection with the value of our outstanding
Convertible Debentures, and $81,873 of interest expense also in connection with
our outstanding Convertible Debentures, which was offset by $310,799 of gain on
extinguishment of debt for the year ended June 30, 2006. In November 2005, we
entered into a Settlement Agreement and Release with Secured Releases, LLC
("Secured" and the "Release"). Pursuant to the Release, we and Secured agreed to
settle our claims against each other in connection with a convertible promissory
note issued in February 2001. In connection with the Release, we agreed to pay
Secured $30,000, which has been paid to date and we and Secured agreed to
release each other, our officers, directors, shareholders, members, agents,
employees, representatives and assigns from any and all causes of action, suits,
claims, demands, obligations, liabilities, damages of any nature, whatsoever,
known or unknown in connection with the promissory note or any other dealings,
negotiations or transactions between us and Secured. Under the settlement
agreement, we paid $30,000 for the complete discharge of $201,045 of convertible
debt and $139,754 of related accrued interest, resulting in a gain on
extinguishment of debt of $310,799 for the year ended June 30, 2006.
We had a total net loss of $4,413,417 for the year ended June 30, 2006, compared
to a total net loss of $4,356,519 for the year ended June 30, 2005, an increase
in net loss of $56,898 or 1.3% from the previous year. The increase in net loss
was mainly due to the $3,490,891 or 13,857.7% increase in total other expenses,
which was mainly due to the $3,742,205 of change in the value of derivative
financial instruments in connection with the fair value of our Convertible
Debentures, which expense was not sufficiently offset by our $3,283,887 or 67.0%
decrease in total operating expenses and our $150,106 or 26.5% increase in sales
for the year ended June 30, 2006, compared to the year ended June 30, 2005.
-49-
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $759,773 as of September 30, 2006, compared with total
assets of $964,844 as of June 30, 2006, which represented a $205,071 or 21.3%
decrease in total assets from the prior period.
Total assets as of September 30, 2006, included current assets of $495,335,
furniture and equipment, net of accumulated depreciation, of $64,992, and
deferred financing cost of $199,446. Current assets included cash and cash
equivalents of $54,466, trade and accounts receivable, net of $309,379, and
prepaid expenses and other current assets of $11,825, and current portion of
deferred financing cost, net of $119,665.
We had total liabilities of $4,452,301 as of September 30, 2006, compared to
total liabilities of $5,600,571 at June 30, 2006, representing a decrease in
total liabilities of $1,148,270 or 20.5%.
Total liabilities as of September 30, 2006 included current liabilities of
$4,409,916, consisting of trade accounts payable of $123,361; accrued
liabilities of $284,230, which included deferred salary payable to our officers;
current portion of convertible debt of $85,000 which includes the loans entered
into in March 2006 and April 2006, as described in greater detail below; amounts
due to related party of $500, which amounts were owed to our Chief Executive
Officer, Linda Putback-Bean, in connection with the initial funding of our
corporate bank account, which amounts have not been repaid to date; and
derivative financial instruments of $3,916,825, in connection with our
Convertible Debentures and Warrants (explained in greater detail above); and
non-current liabilities consisting of deferred rent of $11,871 and long term
portion of convertible debt of $30,514.
We had a working capital deficit of $3,914,581 and an accumulated deficit of
$11,817,249 as of September 30, 2006.
We had total net cash used by operating activities of $208,362 for the three
months ended September 30, 2006, which was mainly due to $1,202,540 of change in
value of derivative liability, offset by $682,080 of net income and $261,116 of
stock-based compensation, which included amounts amortized in connection with
shares of common stock issued in connection with our agreement with Global
Media, described above, as well as approximately 7,000,000 shares of common
stock issued in connection with twelve month consulting agreements entered into
in October 2005 for investor relations and consulting services.
We had net cash used in investing activities of $11,813 for the three months
ended September 30, 2006, which was used solely in connection with the purchase
of furniture and equipment.
-50-
We did not have net cash provided by financing activities for the three months
ended September 30, 2006.
In April 2006, we borrowed $50,000 from a shareholder of the Company, and issued
that individual a promissory note and warrants in connection with such loan. The
promissory note bears interest at the rate of 12% per annum, and is due and
payable on September 29, 2006. The promissory note was renewed for an additional
six months, at the option of the holder, through March 2007. The shareholder has
the option to convert this loan into 1,428,571 shares of our common stock at the
rate of one share for each $0.035 then owed. The shareholder also has 1,428,571
outstanding warrants to purchase shares of our common stock at an exercise price
of $0.045 per share, which warrants expire if unexercised on May 22, 2008.
On March 1, 2006, and March 21, 2006, we entered into two separate loans for
$17,500, with two separate shareholders to provide us with an aggregate of
$35,000 in funding. The loans bear interest at the rate of 12% per annum until
paid. Both loans became due in May, but have since been extended. In December
2006, $10,000 was repaid on one of the loans, leaving $25,000 outstanding under
the loans as of the date of this report. Additionally, the remaining $25,000
owed pursuant to the loans are convertible into an aggregate of 714,286 shares
of our common stock, with each $0.035 of each outstanding loan being able to
convert into one share of our common stock.
ANALYSIS OF TRADE ACCOUNTS RECEIVABLE TRENDS
THREE MONTHS THREE MONTHS YEAR YEAR INCEPTION
ENDED ENDED ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30, JUNE 30,
2006 2005 2006 2005 2004
-------------- ------------- ---------- --------- -----------
Trade accounts receivable, net $ 309,379 $ 115,630 $ 268,642 $ 107,851 $ 53,704
Revenue $ 195,230 $ 104,048 $ 716,107 $ 566,001 $ 157,530
Annualized $ 780,920 $ 416,192 $ 716,107 $ 566,001 $ 218,625
Annualized increase in sales $ 64,813 $ (149,809) $ 150,106 $ 347,376
Percentage increase in
annualized sales 9.05% -26.47% 26.52% 158.89%
Increase in net accounts
receivable $ 40,737 $ 7,779 $ 160,791 $ 54,147
Percentage increase in net
accounts receivable 15.16% 7.21% 149.09% 100.82%
Days sales in net receivables 145 101 137 47
-51-
The above is an analysis of trade accounts receivable and revenue and our how
our trade accounts receivables are increasing in relation to our revenues. The
analysis shows that since we began business, our trade accounts receivable
balance has consistently risen over time. The primary reason for this constant
increase in receivables is that our trade accounts receivable are often for
substantial amounts that can generate challenges by insurance companies and, in
certain cases, the need to pursue collections directly from the patients. These
challenges have continually increased our days in receivables because our sales
have continually increased. We believe that our trade accounts receivable
balances will continue to increase at a greater rate than revenue growth until
such revenue growth subsides. Management constantly reviews receivables for
collectibility issues and has recognized a provision for bad debts of
approximately 16% of revenue in 2006. The growth in trade accounts receivable is
expected to present liquidity issues in future periods if we do not
substantially increase sales and/or raise funds from other sources.
ANALYSIS OF TRADE ACCOUNTS PAYABLE TRENDS
SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
2006 2005 2006 2005
------------ ------------ -------- ----------
Trade accounts payable $ 123,361 $ 92,292 $143,167 $ 89,280
Accrued liabilities $ 284,230 $ 179,630 $257,680 $ 183,791
Accounts payable have grown with the increase in our business and include a
substantial amount of professional fees related to our SEC filings. Accrued
liabilities include accrued salaries and accrued stock based compensation, and
as with accounts payable, the balance of accrued liabilities has increased based
on the growth of our business. Timely payment of accounts payable and accrued
liabilities will require that we raise additional debt or equity funding in the
near term.
--------------------------------------------------------------
In April 2006, we borrowed $50,000 from a shareholder of the Company, and issued
that individual a promissory note and warrants in connection with such loan. The
promissory note bears interest at the rate of 12% per annum, and is due and
payable on September 29, 2006. The promissory note was renewed for an additional
six months, at the option of the holder, through March 2007.
-52-
In May 2006, we entered into a Securities Purchase Agreement with certain third
parties to provide us $1,500,000 in convertible debt financing (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, we agreed to sell the investors
an aggregate of $1,500,000 in Convertible Debentures, which are to be payable in
three tranches, $600,000 upon signing the definitive agreements on May 30, 2006,
which are due May 30, 2009, $400,000 upon the filing of this Registration
Statement to register shares of common stock which the Convertible Debentures
are convertible into (defined and described in greater detail above), and
$500,000 upon the effectiveness of this registration statement. The Convertible
Debentures are to be convertible into shares of our common stock at a discount
to the then trading value of our common stock. Additionally, in connection with
the Securities Purchase Agreement, we agreed to issue the third parties warrants
to purchase an aggregate of 50,000,000 shares of our common stock at an exercise
price of $0.10 per share (the "Warrants").
We received $600,000 from the sale of Convertible Debentures in May 2006, and
anticipate using the $900,000 in proceeds from the sale of the additional
Convertible Debentures (assuming all $900,000 of the additional debentures are
sold) as follows:
o $67,000 - Accounting, auditing and attorney's fees in connection
with our periodic reports, this Form 10-SB registration statement and
a to be filed Form SB-2 registration statement to register the shares
underlying the Convertible Debentures;
o $266,000 - Inventory for our prosthetics operations;
o $67,000 - Equipment and building improvements;
o $333,000 - Promotional, marketing and travel costs associated
with our increased marketing campaign;
o $100,000 - Closing costs and finders fees in connection with the
funding; and
o $67,000 - General working capital, including certain amounts for
officers and directors salaries, rent and office expenses.
We have historically been dependent upon the sale of common stock for funding
our operations. In connection with such funding, we issued 4,700,000 shares of
common stock at prices ranging from $0.035 to $0.05 per share during the year
ended June 30, 2006, for aggregate net proceeds of $220,000. Additionally, we
issued 8,696,437 shares of common stock to consultants ranging from $0.08 and
$0.11 per share during the year ended June 30, 2006 and recognized compensation
expense of $482,360.
As of December 2006, we believe we can operate for approximately the next twelve
(12) months assuming we sell an additional $900,000 in Convertible Debentures
subsequent to the filing of this report, based on our current approximate
overhead of $54,000 per month, and monthly gross profits of approximately
$50,000 per month we receive in connection with fittings of our prosthetic
limbs. However, we believe that we will need to raise additional financing in
-53-
the next three to four months if we are unable to obtain effectiveness of a
registration statement with the Commission, which filing and effectiveness
trigger the additional sales of the $900,000 in additional Convertible
Debentures. If we are required to raise additional funding, we will likely do so
through the sale of debt or equity securities.
We also plan to increase our yearly advertising and marketing budget
approximately five fold, for the fiscal year ending June 30, 2007, compared to
the fiscal year ending June 30, 2006, by utilizing a large portion of the
$900,000 which we plan to receive pursuant to the subsequent funding tranches,
assuming such funds are received, which we believe will allow us to increase our
monthly sales and gross profits substantially over the next fiscal year, due to
our increased advertising and marketing of our services, explained above.
However, investors should keep in mind that any amounts of funding we receive
pursuant to the Convertible Debentures will be reduced by fees paid to the
lending source and legal and accounting costs associated with our need to file
and obtain effectiveness of this Form SB-2 Registration Statement.
Other than the funding transaction described above, no additional financing has
been secured. The Company has no commitments from officers, directors or
affiliates to provide funding. However, management does not see the need for any
additional financing in the foreseeable future, other than the money the Company
will receive from the sale of the Debentures. We currently anticipate that our
operations will continue to grow as a result of our increased advertising and
marketing expenditures, which has allowed a greater number of potential clients
to become aware of our operations and services, as we have already seen a higher
volume of sales due to such advertising over the past several months.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Principal Financial Officer, after evaluating the effectiveness of
our "disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of our September 30,
2006 quarterly period (the "Evaluation Date"), have concluded that as of the
Evaluation Date, our disclosure controls and procedures were not effective to
provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Our controls were not effective, as we failed to timely
file our Quarterly Reports on Form 10-QSB for the quarters ended December 31,
2005, March 31, 2006, and September 30, 2006 and we failed to timely file our
Annual Report on Form 10-KSB for the period ending June 30, 2006. Moving
forward, our management believes that as we become more familiar and gain more
experience in completing our periodic filings and providing our outside auditors
with the required financial information on a timely basis, we will be able to
file our periodic reports within the time periods set forth by the Securities
and Exchange Commission.
-54-
(b) Changes in internal control over financial reporting. Subsequent to the
year ended June 30, 2006, and during the quarter ended September 30, 2006, our
management has undertaken a concerted effort to spend the appropriate time and
resources to complete our financial statements and disclosures in our periodic
and annual reports within the time periods set forth by the Commission. Our
management hopes to accomplish this goal by putting in place stricter controls
and procedures and beginning management's dialogue with our inside and outside
accountants regarding our periodic filings at an earlier stage in the review
and/or audit process, which our management believes will allow us to timely file
our periodic reports moving forward.
DESCRIPTION OF PROPERTY
We lease approximately 3,220 square feet of space that includes our fabrication
laboratory, six offices, three fitting/therapy rooms and a playroom/waiting area
at 12926 Willowchase Drive in Houston, Texas. We have a five year and four
month lease that expires in April 2008 for which we currently pay approximately
$3,891 per month in rent and approximately $900 per month in additional charges
in connection with operating costs on the building and real estate taxes in
connection with such lease. We have an option to renew the lease for an
additional five years upon the expiration date of the original lease term. The
monthly rental charges for the original term of the lease and the five year
extension, should we choose to renew the lease for an additional five year term,
are set forth below:
Lease year: Monthly Rent:
---------------- ---------------------
1 $3,488
2 $3,623
3 $3,757
4 $3,891
5 $4,025
option year 1 $4,159
option year 2 $4,293
option year 3 $4,428
option year 4 $4,562
option year 5 $4,696
-55-
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
None of the following persons have any direct or indirect material interest in
any transaction to which we were or are a party during the past three years, or
in any proposed transaction to which the Company proposes to be a party:
a. any of our directors or executive officers;
b. any nominee for election as one of our directors;
c. any person who is known by us to beneficially own, directly or
indirectly, shares carrying more than 5% of the voting rights attached
to our common stock; or
d. any member of the immediate family (including spouse, parents,
children, siblings and in-laws) of any of the foregoing persons named
in paragraph (a), (b) or (c) above.
DIVIDEND POLICY
We have paid no dividends to date on our common stock. We reserve the right to
declare a dividend when operations merit. However, payments of any cash
dividends in the future will depend on our financial condition, results of
operations, and capital requirements as well as other factors deemed relevant by
our board of directors.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
following individuals (our "named executive officers") for the fiscal years
ended June 30, 2006, 2005 and 2004. None of our executive officers received
compensation over $100,000 during the fiscal years listed below.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
Fiscal AWARDS PAYOUTS
Year Other ---------------------- ------------
ended Annual Restricted
Name and June Comp- Stock Options/ LTIP payouts All Other
Principal Position Title 30 Salary Bouns ensation Awarded SARs(#) ($) Compensation
- ------------------ ----------- ------ ------- ------- -------- ----------- --------- ------------ ------------
Linda Putback- Chairman of the 2006 $84,000 $0 0 0 0 0 0
Bean Board, President 2005 $84,000 $0 0 0 0 0 $2,700,000(2)
2004 $56,000(1) $0 0 0 0 0 0
Dan Morgan Vice 2006 $37,000 $0 0 0 0 0 0
President/Chief 2005 $48,000 $0 0 0 0 0 $ 919,886(3)
Prosthetist 2004 $20,000(4) $0 0 0 0 0 0
Kenneth W. Bean Vice President, 2006 $47,000 $0 0 0 0 0 0
Chief Financial
Officer
-56-
(1) Ms. Putback-Bean was paid $10,000 as contract labor during our start-up
phase (3 months). $17,500 of her salary was accrued rather than paid during
fiscal years 2005, and 2004 and $10,500 of that amount remains in accrued
liabilities at September 30, 2006.
(2) Ms. Putback-Bean received 27,000,000 shares which were valued at $0.10
per share as compensation during the fiscal year ended June 30, 2005. In 2006,
Ms. Putback-Bean returned 4,000,000 shares to us for cancellation, which shares
we plan to reissue to Ms. Putback-Bean when we are able to increase our
authorized shares of common stock.
(3) Mr. Morgan received 9,198,861 shares which were valued at $0.10 per
share as compensation during the fiscal year ended June 30, 2005.
(4) Mr. Morgan was paid $4,000 as contract labor during our start-up phase
(3 months). $22,500 of his salary was accrued rather than paid during the fiscal
years ended 2005, and 2004 and remains in accrued liabilities at September 30,
2006.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
TO EXECUTIVE EMPLOYEES AND DIRECTORS
------------------------------------
(Individual Grants)
Potential Realizable Value at Alternative to (f)
Number of Assumed Annual Rates of and (g): Grant
Securities Percent of Total Stock Price Appreciation for Date Value
Underlying Options/SARs Exercise Options Term
Options/ Granted to of Base
SARS Granted Employees in Price Expiration Grant Date Present
Name (#) Fiscal Year (%) ($/Sh) Date 5%($) 10%($) Value ($)
(a) (b) (c) (d) (e) (f) (g) (h)
- --------------- ------------ --------------- -------- ---------- ----------------------------- ------------------
Linda Putback-
Bean, Chairman
and President -0- -0- -0- -0- -0- -0- -0-
Dan Morgan,
Vice President
and Chief
Prosthetist -0- -0- -0- -0- -0- -0- -0-
TOTAL -0- -0- -0- -0- -0- -0- -0-
The Company currently has no outstanding options or warrants held by any of its
employees or Directors.
-57-
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
---------------------------------------------
Number of Value of
Unexercised Unexercised In-
Underlying The-Money
Options/SARs at FY Options/SARs at
Shares end (#); FY end ($);
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- --------------------------- ------------ -------------- ------------------ --------------
Linda Putback-Bean,
Chairman and President -0- $-0- -0-/-0- $-0-
Dan Morgan, Vice
President and Chief
Prosthetist -0- $-0- -0-/-0- $-0-
Long-Term Incentive Plans
- -------------------------
None.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation
outstanding options, warrants price of outstanding options, plans (excluding securities
and rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
Equity compensation plans
approved by security holders -0- -0- -0-
Equity compensation plans
not approved by security holders -0- $-0- -0-
Total -0- $-0- -0-
STOCK OPTION GRANTS
None of our officers, Directors or employees have any outstanding stock option
grants.
Director Compensation
- ----------------------
We do not currently pay any compensation to our directors for their services.
In the future, we may pay directors' expenses related to the attendance of board
meetings.
Employment Contracts, Termination of Employment and Change-in-Control
- ---------------------------------------------------------------------------
Arrangements
- ------------
None.
-58-
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
DESCRIPTION OF CAPITAL STOCK
Common Stock
- ------------
We are currently authorized to issue 100,000,000 shares, $0.001 per share par
value common stock, however we are currently taking steps to obtain shareholder
approval to increase our authorized shares to 950,000,000 shares of common
stock. The following description of our common stock and certain provisions of
our Articles of Incorporation, as amended (the "Articles") is a summary, does
not purport to be complete, and is subject to the detailed provisions of, and is
qualified in its entirety by reference to, the Articles and Bylaws, copies of
which have been filed as exhibits to this Registration Statement.
The holders of common stock have the right to vote for the election of directors
and for all other purposes. Each share of common stock is entitled to one vote
in any matter presented to shareholders for a vote. The common stock does not
have any cumulative voting, preemptive, subscription or conversion rights.
Election of directors and other general stockholder action requires the
affirmative vote of a majority of shares represented at a meeting in which a
quorum is represented. The outstanding shares of common stock are validly
issued, fully paid and non-assessable. In the event of liquidation, dissolution
or winding up of our affairs, the holders of common stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
or provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding.
Preferred Stock
- ----------------
Our Articles of Incorporation authorize the issuance of up to 10,000,000 shares
of preferred stock, par value $0.001 per share, with characteristics to be
determined by the Board of Directors. On October 31, 2003, Articles of
Amendment to the Articles of Incorporation provided for a series of preferred
stock consisting of 1,000,000 shares, par value $0.001 per share, and designated
as Series A Convertible Preferred Stock. Each share of Series A Convertible
Preferred Stock is convertible, at the option of the holder, into one fully paid
and nonassesable share of common stock but includes voting privileges of 20 to
1. The holders of Series A Convertible Preferred Stock have the right to vote
for the election of directors and for all other purposes. It is non-cumulative
but participates in any declared distributions on an equal basis with common
stock. The holders of Series A Convertible Preferred Shares are entitled to
receive dividends when declared by the Board of Directors and have the same
liquidation preference as the common stock. As of February 5, 2007, 1,000,000
shares of Series A Convertible Preferred Stock have been issued.
-59-
SHARES AVAILABLE FOR FUTURE SALE
Upon the date of this Prospectus, there are 98,274,889 shares of common stock
issued and outstanding. Upon the effectiveness of this Registration Statement a
total of 83,303,569 shares of common stock, which shares represent 75,000,000
shares of common stock issuable upon conversion of the Debentures; 1,428,571
shares of common stock issuable upon conversion of a $50,000 convertible note
which is convertible into shares of our common stock at the rate of one share
for each $0.035 of debt owed; 6,428,571 shares exercisable in connection with
three separate warrant agreements with separate individuals and entities, which
provide for the issuance of 1,428,571 shares in connection with warrants to
purchase 1,428,571 shares of common stock at an exercise price of $0.045 per
share, 2,000,000 warrants to purchase shares of common stock at an exercise
price of $0.10 per share, and warrants to purchase 3,000,000 shares of common
stock, with 1,000,000 warrants exercisable at $0.10 per share, 1,000,000 shares
exercisable at $0.20 per share and 1,000,000 warrants exercisable at $0.30 per
share; and 446,427 shares of common stock which have been previously issued to
Global Media, will be eligible for immediate resale in the public market,
subject to the Purchasers' exercise of their Warrants and conversion of their
Debentures, and Mr. Kertes', Fairhills', and OTC Financial's exercise of their
warrants, and Mr. Kertes conversion of his note, and subject to none of the
selling shareholders holding a sufficient number of shares of our common stock
at any one time as to cause them to be an affiliate and subject to the volume
limitation provisions of Rule 144 of the Securities Act of 1933, as amended.
There currently exists only a limited and sporadic market for the Company's
common stock on the Pink Sheets.
Upon the effectiveness of this Registration Statement, there will be
approximately 38,579,575 shares of our common stock which will be subject to the
resale provisions of Rule 144, assuming that no additional shares are sold
utilizing Rule 144 and assuming that the Purchasers never convert an amount of
the Debentures and/or exercise an amount of the Warrants, which would result in
any such Purchaser being deemed an affiliate of us, and therefore subject to the
volume limitations described below. Sales of shares of common stock in the
public markets may have an adverse effect on prevailing market prices for the
common stock.
Rule 144 governs resale of "restricted securities" for the account of any person
(other than an issuer), and restricted and unrestricted securities for the
account of an "affiliate" of the issuer. Restricted securities generally include
any securities acquired directly or indirectly from an issuer or its affiliates
which were not issued or sold in connection with a public offering registered
under the Securities Act. An affiliate of the issuer is any person who directly
or indirectly controls, is controlled by, or is under common control with, the
issuer. Affiliates of the Company may include its directors, executive officers,
and persons directly or indirectly owning 10% or more of the outstanding common
stock. Under Rule 144, unregistered resales of restricted common stock cannot be
made until such stock has been held for one year from the later of its
acquisition from the Company or an affiliate of the Company.
Thereafter, shares of common stock may be resold without registration subject to
Rule 144's volume limitation, aggregation, broker transaction, notice filing
requirements, and requirements concerning publicly available information about
the Company ("Applicable Requirements"). Resales by the Company's affiliates of
restricted and unrestricted common stock are subject to the Applicable
-60-
Requirements. The volume limitations provide that a person (or persons who must
aggregate their sales) cannot, within any three-month period, sell more than the
greater of one percent of the then outstanding shares, or the average weekly
reported trading volume during the four calendar weeks preceding each such sale.
A non-affiliate may resell restricted common stock which has been held for two
years free of the Applicable Requirements.
-61-
PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS
This Prospectus relates to the resale of 83,303,569 shares of common stock
by the selling shareholders. The table below sets forth information with
respect to the resale of shares of common stock by the selling shareholders. We
will not receive any proceeds from the resale of common stock by the selling
shareholders for shares currently outstanding or in connection with the resale
of the shares of common stock issuable upon conversion of the Dentures or
convertible note or for previous outstanding shares of common stock being
registered herein, however, we will receive approximately $864,286 in connection
with the exercise of warrants to purchase 6,428,571 shares registered herein,
assuming such warrants are exercised. None of the selling shareholders are
broker-dealers or affiliates of broker-dealers. None of the selling
shareholders have had a material relationship with us since our inception.
SELLING SHAREHOLDERS
Common Percentage Common Common
Stock beneficially Stock Stock
beneficially owned included in beneficially Percentage
owned prior before this owned after owned after
to offering offering prospectus offering (1) offering (1)
------------ ------------- ------------- ------------ --------------
AJW Partners 5,165,000 4.99% 7,650,000 5,165,000 4.99%
LLC (2) (9) (9)(14) (20) (21) (9)
AJW Offshore 5,165,000 4.99% 45,450,000 5,165,000 4.99%
Ltd. (3) (9) (9)(14) (20) (21) (9)
AJW Qualified 5,165,000 4.99% 20,925,000 5,165,000 4.99%
Partners, LLC (4) (9) (9)(14) (20) (21) (9)
New Millennium 1,625,000 1.6% 975,000 650,000 *%
Capital Partners II, (10) (15) (20) (22) (23)
LLC (5) 3,857,142 1.0% 2,857,142 1.0%
(11) (16) (11) 1,000,000 (17)
Peter Kertes
Lionheart
Associates, LLC,
dba Fairhills 2,000,000 0.0% 2,000,000
Capital (6) (12) (17) (12) 0 0.0%
OTC Financial 3,000,000 0.0% 3,000,000
Network (7) (13) (18) (13) 0 0.0%
Global Media 0.7%
Fund Inc. (8) 696,427 (19) 446,427 250,000 *%
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
-62-
the selling security holder has sole or shared voting power or investment power
and also any shares, which the selling security holder has the right to acquire
within 60 days.
No Selling Security Holder has held any position or office, or had any material
relationship with us or any of our affiliates within the past three (3) years.
* less than 1%.
(1) Assumes that all common stock listed in the column, "beneficially owned
prior to the offering," for each selling shareholder will be sold.
(2) AJW Qualified Partners, LLC is a private investment fund that is owned
by its investors and managed by AJW Manager, LLC, of which Corey S. Ribotsky and
Lloyd A. Groveman are the fund managers and have voting and investment control
over the shares offered by AJW Qualified Partners, LLC.
(3) AJW Offshore, Ltd is a private investment fund that is owned by its
investors and managed by First Street Manager II, LLC., of which Corey S.
Ribotsky is the fund manager and has voting and investment control over the
shares offered by AJW Offshore, Ltd.
(4) AJW Qualified Partners, LLC is a private investment fund that is owned
by its investors and managed by AJW Manager, LLC, of which Corey S. Ribotsky and
Lloyd A. Groveman are the fund managers and have voting and investment control
over the shares offered by AJW Qualified Partners, LLC.
(5) New Millennium Capital Partners II, LLC is a private investment fund
that is owned by its investors and managed by First Street Manager II, LLP., of
which Corey S. Ribotsky is the fund manager and has voting and investment
control over the shares offered by New Millennium Capital Partners II, LLC.
(6) Lionheart Associates, LLC, doing business as Fairhills Capital is
beneficially owned by Edward Bronson its Managing Partner.
(7) OTC Financial Network is beneficially owned by Geoff Eiten its
President.
(8) Global Media Fund is beneficially owned by Don Rose its President.
(9) Represents an amount of shares of common stock equal to 4.99% of our
outstanding common stock. Each of the Purchasers have agreed not to not convert
any portion of the outstanding Debentures and/or exercise any portion of the
Warrants into shares of our common stock, if after such conversion and/or
exercise they would own more than 4.99% of our outstanding common stock;
however, this limitation shall not apply in the event that an Event of Default
(as defined in the Debentures) occurs and is continuing. If the 4.99% ownership
limitation was not in place, based on a conversion of the outstanding Debentures
on February 5, 2007, AJW Partners LLC ("Partners") would have the ability to
convert its $153,000 in Debentures into 7,650,000 shares, AJW Offshore, Ltd.
("Offshore") would have the ability to convert its $909,000 in Debentures into
45,450,000 shares of common stock; AJW Qualified Partners, LLC ("Qualified")
would have the ability to convert its $418,500 in Debentures into 20,925,000
shares of common stock and New Millennium Capital Partners II, LLC ("New
Millennium") would have the ability to convert its $19,500 in Debentures into
650,000 shares of common stock, at a conversion price of $0.020 per share (equal
to a 50% discount to the trading price of our common stock on the Pink Sheets as
of that date), assuming each of the Purchasers continued to purchase the same
pro rata amount of Debentures as they did at the first closing. Additionally,
Partners holds 5,100,000 Warrants to purchase shares of our common stock,
Offshore holds 30,300,000 Warrants to purchase shares of our common stock,
Qualified holds 13,950,000 Warrants to purchase shares of our common stock, and
New Millennium holds 650,000 Warrants to purchase shares of our common stock,
which Warrants are exercisable at an exercise price of $0.10 per share.
-63-
(10) Represents 975,000 shares of common stock issuable in connection with the
conversion of $7,800 in Debentures currently outstanding and held by New
Millennium, as well as an additional $11,700 in Debentures which we have agreed
to sell to New Millennium (which amount assumes the same pro rata purchase of
Debentures by the Purchasers during the second and third tranches of the sale of
the Debentures), at the conversion price in effect as of February 5, 2007 as
well as 650,000 Warrants to purchase shares of our common stock, which Warrants
are exercisable at an exercise price of $0.10 per share.
(11) Represents 1,428,571 shares of common stock issuable upon conversion of
a $50,000 convertible promissory note, convertible at the rate of one share for
each $0.035 of debt outstanding, and 1,428,571 shares of common stock issuable
in connection with the exercise of warrants to purchase shares of common stock
at an exercise price of $0.045 per share.
(12) Represents 2,000,000 warrants to purchase shares of our common stock at
an exercise price of $0.10 per share.
(13) Represents 3,000,000 warrants to purchase shares of our common stock,
with one third of such warrants exercisable at $0.10 per share, one-third
exercisable at $0.20 per share, and one-third exercisable at $0.30 per share.
(14) Based on 103,439,889 shares of common stock outstanding, which amount
assumes the conversion of 5,165,000 shares of common stock in connection with
the purchaser's outstanding Debentures and/or exercise of the purchaser's
outstanding warrants.
(15) Based on 99,899,889 shares of common stock outstanding, which amount
assumes the conversion of 1,625,000 shares of common stock in connection with
the purchaser's Debentures (and the Debentures the purchaser will anticipate
receiving pursuant to the second and third tranche of Debentures) and the
exercise of the purchaser's outstanding warrants.
(16) Based on 102,132,031 shares of common stock outstanding, which amount
assumes the conversion of 1,428,571 shares of common stock in connection with
the Selling Shareholder's outstanding convertible note and the exercise of
1,428,571 shares in connection with the Selling Shareholder's outstanding
warrants.
(17) Based on 100,274,889 shares of common stock outstanding, which amount
assumes the exercise of 2,000,000 shares in connection with the Selling
Shareholder's outstanding warrants.
(18) Based on 101,274,889 shares of common stock outstanding, which amount
assumes the exercise of 3,000,000 shares in connection with the Selling
Shareholder's outstanding warrants.
(19) Based on 98,274,889 shares of common stock outstanding as of February
5, 2007.
(20) Represents a portion of the shares of common stock issuable in
connection with the conversion of the Selling Shareholder's Debentures.
(21) Approximate amount of shares of common stock subject to the 4.99%
ownership limit described above under (9), and dependent on the exact amount of
shares converted and/or exercised and sold by the named Selling Shareholder as
well as the other Selling Shareholders, which amount of converted or exercised
shares will affect the 4.99% ownership limit.
(22) Assumes the sale of all shares of common stock issuable upon conversion
of the Debentures registered in this offering.
(23) Based on 101,132,031 shares of common stock outstanding, which assumes
the exercise and conversion of all of the shares of common stock underlying the
warrant and convertible note, which the Selling Shareholder holds.
-64-
Upon the effectiveness of this registration statement the 83,303,569 shares
offered by the Selling Shareholders pursuant to this Prospectus may be sold by
one or more of the following methods, without limitation:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the Selling Security Holders to
sell a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Security Holders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this Prospectus.
The Selling Security Holders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a Selling Security Holder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The Selling Security Holders may sell their shares of common stock short and
redeliver our common stock to close out such short positions; however, the
Selling Security Holders may not use shares of our common stock being registered
in the Registration Statement to which this Prospectus is a part to cover any
short positions entered into prior to the effectiveness of such Registration
Statement. If the Selling Security Holders or others engage in short selling it
may adversely affect the market price of our common stock.
Broker-dealers engaged by the Selling Security Holders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Security Holders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. It is not expected that these commissions and discounts will exceed
what is customary in the types of transactions involved.
-65-
We plan to advise the Selling Security Holders that the anti-manipulation
provisions of Regulation M under the Securities Exchange Act of 1934 will apply
to purchases and sales of shares of common stock by the Selling Security
Holders. Additionally, there are restrictions on market-making activities by
persons engaged in the distribution of the shares. The Selling Security Holders
have agreed that neither them nor their agents will bid for, purchase, or
attempt to induce any person to bid for or purchase, shares of our common stock
while they are distributing shares covered by this prospectus.
Accordingly, the Selling Security Holders are not permitted to cover short sales
by purchasing shares while the distribution is taking place. We will advise the
Selling Security Holders that if a particular offer of common stock is to be
made on terms materially different from the information set forth in this Plan
of Distribution, then a post-effective amendment to the accompanying
Registration Statement must be filed with the Securities and Exchange
Commission.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the Selling Security
Holders, but excluding brokerage commissions or underwriter discounts. The
Selling Security Holders and we have agreed to indemnify each other against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
On November 11, 2003, the common stock of the Company commenced trading on the
"pink sheets" published by the National Quotation Bureau under the symbol
"PDPR". However, the fact that our securities have limited and sporadic trading
on the pink sheets does not by itself constitute a public market, and as such,
historical price quotations relating to trades in our stock on the pink sheets
have not been included in this registration statement. In the future, we plan
to apply for quotation on the Over-The-Counter Bulletin Board.
As of February 5, 2007, there were 98,274,889 shares of common stock outstanding
held by approximately 450 stockholders of record. As of February 5, 2007, of the
total number of 39,026,002 restricted shares which were outstanding,
approximately 35,454,575 shares of restricted common stock had been held for at
least one year and were eligible to be sold pursuant to Rule 144, assuming the
other requirements of Rule 144 are met in connection with such sales.
ADDITIONAL INFORMATION
Our fiscal year ends on June 30. We plan to furnish our shareholders annual
reports containing audited financial statements and other appropriate reports,
where applicable. We are a reporting company, and as such, plan to continue to
file annual, quarterly and current reports, and other information with the SEC,
where applicable. You may read and copy any reports, statements, or other
-66-
information we file at the SEC's public reference room at 100 F. Street, N.E.,
Washington D.C. 20549. You can request copies of these documents, upon payment
of a duplicating fee by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings are also available to the public on the SEC's Internet
site at http\\www.sec.gov.
LEGAL MATTERS
Certain legal matters with respect to the issuance of shares of common stock
offered hereby will be passed upon by The Loev Law Firm, PC of Bellaire, Texas.
-67-
FINANCIAL STATEMENTS
The Financial Statements required by Item 310 of Regulation S-B are stated in
U.S. dollars and are prepared in accordance with U.S. Generally Accepted
Accounting Principles. The following financial statements pertaining to
Pediatric Prosthetics, Inc. are filed as part of this Prospectus.
PEDIATRIC PROSTHETICS, INC.
TABLE OF CONTENTS
PAGE
Unaudited Financial Statements For the Three Months Ended
September 30, 2006 and 2005:
Unaudited Balance Sheets as of September 30, 2006
and June 30, 2006 F-1
Unaudited Statements of Operations for the Three Months Ended
September 30, 2006 and 2005 F-2
Unaudited Statement of changes in Stockholders' Deficit for the
Three Months Ended September 30, 2006 F-3
Unaudited Statements of Cash Flows for the Three Months Ended
September 30, 2006 and 2005 F-4
Notes to Financial Statements F-5
Audited Financial Statements For the Years Ended
June 30, 2006 and 2005:
Report of Independent Registered Public Accounting Firm
Balance Sheets as of June 30, 2006 and 2005
F-8
Statements of Operations for the Years Ended
June 30, 2006 and 2005 F-9
Statement of changes in Stockholders' Deficit for the
Years Ended June 30, 2006 and 2005 F-10
Statements of Cash Flows for the Years Ended
June 30, 2006 and 2005 F-12
Notes to Financial Statements F-13
PEDIATRIC PROSTHETICS, INC.
UNAUDITED BALANCE SHEETS
September 30, 2006 and June 30, 2006
September 30, June 30,
2006 2006
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 54,466 $ 274,641
Trade accounts receivable, net 309,379 268,642
Prepaid expenses and other current assets 11,825 13,396
Current portion of deferred financing cost, net 119,665 109,693
------------- -----------
Total current assets 495,335 666,372
Furniture and equipment, net 64,992 59,138
Deferred financing cost 199,446 239,334
------------- -----------
Total assets $ 759,773 $ 964,844
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable $ 123,361 $ 143,167
Accrued liabilities 284,230 257,680
Current portion of convertible debt, net of discount of $0 and $25,000
at September 30, 2006 and June 30, 2006, respectively 85,000 60,000
Due to related party 500 500
Derivative financial instruments 3,916,825 5,119,365
------------- -----------
Total current liabilities 4,409,916 5,580,712
Convertible debt, net of discount of $569,486 and $592,716 at September
September 30, 2006 and June 30, 2006, respectively 30,514 7,284
Deferred rent 11,871 12,575
------------- -----------
Total liabilities 4,452,301 5,600,571
------------- -----------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, par value $0.001; authorized 10,000,000
shares; issued and outstanding 1,000,000 shares 1,000 1,000
at September 30, 2006 and June 30, 2006
Common stock, par value $0.001; authorized 100,000,000
shares; issued and outstanding 98,274,889 98,275 98,275
at September 30, 2006 and June 30, 2006
Additional paid-in capital 8,025,446 7,764,327
Accumulated deficit (11,817,249) (12,499,329)
------------- -----------
Total stockholders' deficit (3,692,528) (4,635,727)
------------- -----------
Total liabilities and stockholders' deficit $ 759,773 $ 964,844
============= ===========
The accompanying notes are an integral part of these financial statements
- F-1 -
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2006 and 2005
2005
2006 (Restated)
----------- ------------
Revenue $ 195,230 $ 104,048
----------- ------------
Operating expenses:
Cost of sales, except for items stated separately below 76,001 37,216
Selling, general and administrative expenses 543,239 168,110
Depreciation expense 5,959 4,688
----------- ------------
Total operating expenses 625,199 210,014
----------- ------------
Loss from operations (429,969) (105,966)
Other income and (expense):
Interest income 1 -
Interest expense (90,492) (6,031)
Change in value of derivative financial instruments 1,202,540 -
----------- ------------
Total other income (expense) 1,112,049 (6,031)
----------- ------------
Net income (loss) $ 682,080 $ (111,997)
=========== ============
Net income (loss) per common share - basic and diluted $ 0.01 $ (0.00)
=========== ============
Weighted average common shares outstanding - basic and diluted 98,274,889 91,758,887
The accompanying notes are an integral part of these financial statements
- F-2 -
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Three Months Ended September 30, 2006
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ---------- ---------- ---------- ---------- ----------- ----------
Balance at June 30, 2006 1,000,000 $ 1,000 98,274,889 $ 98,275 7,764,327 $(12,499,329) $(4,635,727)
Amortization of stock-based
compensation - - - - 261,119 - 261,119
Net income - - - - - 682,080 682,080
--------- --------- ---------- --------- --------- ----------- ----------
Balance at September 30, 2006 1,000,000 $ 1,000 98,274,889 $ 98,275 8,025,446 $(11,817,249) $(3,692,528)
========= ========= ========== ========= ========= =========== ==========
The accompanying notes are an integral part of these financial statements.
- F-3 -
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 2006 and 2005
2005
2006 (Restated)
--------------- --------------
Cash Flows From Operating Activities
Net income (loss) $ 682,080 $ (111,997)
Adjustments to reconcile net income (loss) to net cash used by
operating activities
Depreciation expense 5,959 4,688
Provision for doubtful accounts 9,784 7,933
Stock-based compensation 261,116 2,350
Amortization of debt issue costs 78,147 -
Change in value of derivative financial instruments (1,202,540) -
Deferred rent (704) -
Changes in operating assets and liabilities:
Accounts receivable (50,521) (7,586)
Prepaid expenses and other current assets 1,571 924
Accounts payable (19,804) 3,012
Accrued liabilities and other 26,550 (4,164)
--------------- --------------
Net cash used by operating activities (208,362) (104,840)
--------------- --------------
Cash Flows From Investing Activities
Purchase of furniture and equipment (11,813) -
--------------- --------------
Net cash used by investing activities (11,813) -
--------------- --------------
Cash Flows From Financing Activities:
Proceeds from sale of common stock - 175,000
--------------- --------------
Net cash provided by financing activities - 175,000
--------------- --------------
Net increase in cash and cash equivalents (220,175) 70,160
Cash and cash equivalents, beginning of period 274,641 29,818
--------------- --------------
Cash and cash equivalents, end of period $ 54,466 $ 99,978
=============== ==============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest expense $ 78,942 $ 6,031
Cash paid for income taxes - -
The accompanying notes are an integral part of these financial statements
- F-4 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES
------------------------------------------------------
GENERAL
Pediatric Prosthetics, Inc. ("Pediatric") is a company involved in
the design, fabrication and fitting of custom-made artificial limbs.
Pediatric's focus is infants and children and the comprehensive care and
training needed by those infants and children and their parents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The unaudited condensed financial statements included herein have been
prepared by Pediatric pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly
present such information. All such adjustments are of a normal recurring
nature. Although Pediatric believes that the disclosures are adequate to
make the information presented not misleading, certain information and
footnote disclosures, including a description of significant accounting
policies normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America (US GAAP), have been condensed or omitted pursuant to such rules
and regulations. These financial statements should be read in conjunction
with the financial statements and the notes thereto included in
Pediatric's 2006 Annual Report. The results of operations for interim
periods are not necessarily indicative of the results for any subsequent
quarter or the entire fiscal year ending June 30, 2007.
2. GOING CONCERN CONSIDERATIONS
----------------------------
Since its inception, Pediatric has suffered significant net losses and
has been dependent on outside investors to provide the cash resources to
sustain its operations. During the years ended June 30, 2006 and 2005,
Pediatric reported net losses of $4,413,417 and $4,356,519, respectively,
and negative cash flows from operations of $436,226 and $298,454,
respectively. For the three months ended September 30, 2006 Pediatric
reported net income of $682,080 and negative cash flows from operations of
$208,362.
Although, Pediatric has net income of $682,080 for the three months
ended September 30, 2006, such net income was the result of changes in the
value of derivative financial instruments and not the result of core
operations. Negative operating results have produced a working capital
deficit of $3,914,581 and a stockholders' deficit of $3,692,528 at
September 30, 2006. Pediatric's negative financial results and its current
financial position raise substantial doubt about Pediatric's ability to
continue as a going concern. The financial statements do not reflect any
adjustments relating to the recoverability and classification of recorded
asset amounts or liability amounts that might be necessary should Pediatric
be unable to continue in existence.
- F-5 -
PEDIATRIC PROSTHETICS, INC.
- ---------------------------
NOTES TO FINANCIAL STATEMENTS
2. GOING CONCERN CONSIDERATIONS, CONTINUED
------------------------------------------
Pediatric is currently implementing it plans to deal with going
concern issues. The first step in that plan was its recapitalization into a
public shell on October 10, 2003. Management believes that the
recapitalization and its current plan to become a fully reporting public
company will allow Pediatric, through private placements of its common
stock, to raise the capital to expand operations to a level that will
ultimately produce positive cash flows from operations.
Pediatric's long-term viability as a going concern is dependent on
certain key factors, as follows:
- Pediatric's ability to obtain adequate sources of outside
financing to support near term operations and to allow
Pediatric to continue forward with current strategic plans.
- Pediatric's ability to increase its customer base and
broaden its service capabilities.
- Pediatric's ability to ultimately achieve adequate
profitability and cash flows to sustain continuing operations.
3. RESTATEMENT
-----------
The accompanying September 30, 2005 financial statements have been
restated to properly recognize revenue and cost of services for services
provided by Host Affiliates and to properly amortize the cost of services
provided for stock-based payments over the service period. The effect of
these restatements on the accompanying financial statements is as follows:
BALANCE SHEET
-------------
Current assets, as previously reported $ 196,788
Change in current assets related to
Receivables from host affiliates 71,146
Increase in allowance for doubtful
accounts (44,885)
------------
Current assets, as restated $ 223,049
============
Stockholders' deficit, as previously reported $ (784,326)
Change in stockholders' deficit related to
change in net loss 559,486
Prior period adjustment for increase in
allowance for doubtful accounts 36,775
------------
Stockholders' deficit, as restated $ (188,065)
============
F-6
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
3. RESTATEMENT, CONTINUED
----------------------
STATEMENT OF OPERATIONS
Revenue, as previously reported $ 112,215
Change in revenue related to billings by
Host affiliates (8,167)
------------
Revenue, as restated $ 104,048
============
Operating expenses, as previously reported $ 777,667
Change in operating expenses related to
reduction of stock-based
compensation for amounts not yet
earned by the service providers (567,653)
------------
Operating expenses, as restated $ 210,014
============
Loss from operations, as previously reported $ (665,452)
============
Loss from operations, as restated (105,966)
============
Net loss, as previously reported $ (671,483)
============
Net loss, as restated $ (111,997)
============
The restatement's impact on the reported net loss per share for the three months
ended September 30, 2005 was $0.01.
- F-7 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Stockholders
Pediatric Prosthetics, Inc.
We have audited the accompanying balance sheets of Pediatric Prosthetics, Inc.
(the "Company") as of June 30, 2006 and 2005, and the related statements of
operations, stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at June 30, 2006
and 2005, and the results of its operations and its cash flows for the for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations and has negative working capital and a net capital
deficiency at June 30, 2006 that raise substantial doubt about its ability to
continue as a going concern. Management's plans with regard to this matter are
also discussed in Note 2. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 3, the June 30, 2005 financial statements have been
restated to properly reflect revenues received from Host Affiliates.
/s/ Malone & Bailey, PC
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
September 21, 2006
- F-8 -
PEDIATRIC PROSTHETICS, INC.
BALANCE SHEETS
JUNE 30, 2006 AND 2005
- ----------------------------------------------------------------------------------------------
2005
2006 (RESTATED)
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 274,641 $ 29,818
Trade accounts receivable, net 268,642 107,851
Prepaid expenses and other current assets 13,396 16,492
Current portion of deferred financing cost, net 109,693 -
------------- ---------------
Total current assets 666,372 154,161
Furniture and equipment, net 59,138 81,229
Deferred financing cost 239,334 -
------------- ---------------
Total assets $ 964,844 $ 235,390
============= ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable $ 143,167 $ 89,280
Accrued liabilities 257,680 183,791
Current portion of convertible debt, net of
discount of $25,000 60,000 201,045
Due to related party 500 500
Derivative financial instruments 5,119,365 -
------------- ---------------
Total current liabilities 5,580,712 474,616
Convertible debt, net of discount of $592,716 7,284 -
Deferred rent 12,575 14,188
------------- ---------------
Total liabilities 5,600,571 488,804
------------- ---------------
Commitments and Contingencies (See Note 9) - -
Stockholders' deficit:
Preferred stock, par value $0.001; authorized 10,000,000
shares; issued and outstanding 1,000,000 shares 1,000 1,000
Common stock, par value $0.001; authorized 100,000,000
shares; issued and outstanding 98,274,889 and 88,878,452
shares at June 30, 2006 and 2005, respectively 98,275 88,878
Additional paid-in capital 7,764,327 7,742,620
Accumulated deficit (12,499,329) (8,085,912)
------------- ---------------
Total stockholders' deficit (4,635,727) (253,414)
------------- ---------------
Total liabilities and stockholders' deficit $ 964,844 $ 235,390
============= ===============
The accompanying notes are an integral part of these financial statements
- F-9 -
PEDIATRIC PROSTHETICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
- ------------------------------------------------------------------------------------------------
2005
2006 (RESTATED)
-------------- --------------
Revenue $ 716,107 $ 566,001
Operating expenses:
Cost of sales, except for items stated separately below 219,272 207,650
Selling, general and administrative expenses 1,373,939 4,673,291
Depreciation expense 20,231 16,388
-------------- --------------
Total operating expenses 1,613,442 4,897,329
-------------- --------------
Loss from operations (897,335) (4,331,328)
-------------- --------------
Other income and (expense):
Interest income 8 83
Interest expense (81,873) (25,274)
Change in value of derivative financial instruments (3,742,205) -
Gain on extinguishment of debt 310,799 -
Other expenses (2,811) -
-------------- --------------
Total other expense, net (3,516,082) (25,191)
-------------- --------------
Net loss $ (4,413,417) $ (4,356,519)
============== ==============
Net loss per common share - basic and diluted $ (0.05) $ (0.07)
============== ==============
Weighted average common shares outstanding - basic and diluted 95,998,042 66,593,932
============== ==============
The accompanying notes are an integral part of these financial statements
- F-10 -
PEDIATRIC PROSTHETICS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended June 30, 2006 and 2005
- ----------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ---------- ------------ ---------- ----------- ------------- ----------
Balance at June 30, 2004 1,000,000 $ 1,000 37,435,892 $ 37,436 $ 3,452,298 $ (3,729,393) $ (238,659)
Common stock issued for cash - - 9,210,000 9,210 312,290 - 321,500
Common stock issued for
services to non-employees - - 5,588,699 5,589 349,539 - 355,128
Common stock issued for
services to employees - - 36,643,861 36,643 3,628,493 - 3,665,136
Net loss, as restated - - - - - (4,356,519) (4,356,519)
------------ ---------- ------------ ---------- ----------- ------------- ----------
Balance at June 30, 2005,
as restated 1,000,000 $ 1,000 88,878,452 $ 88,878 $ 7,742,620 $ (8,085,912) $ (253,414)
The accompanying notes are an integral part of these financial statements
- F-11 -
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ---------- ----------- ------------ ----------
Balance at June 30, 2005,
as restated 1,000,000 $ 1,000 88,878,452 $ 88,878 $ 7,742,620 $ (8,085,912) $ (253,414)
Common stock issued for cash - - 4,700,000 4,700 215,300 - 220,000
Common stock issued for
services to non- employees - - 10,696,437 10,697 471,663 - 482,360
Accrued share-based compensation
for unissued shares - - - - (145,096) - (145,096)
Common stock surrendered to
treasury by officer/director - - (4,000,000) (4,000) 4,000 - -
Common stock surrendered to
treasury by consultant - - (2,000,000) (2,000) 2,000 - -
Value of warrants issued to
consultants for financing cost - - - - 166,000 - 166,000
Value of beneficial conversion
feature and warrants issued to
originate debt - - - - 85,000 - 85,000
Reclassification of value of warrants
and value of beneficial conversion
feature to derivative liabilities - - - - (777,160) - (777,160)
Net loss - - - - - (4,413,417) (4,413,417)
----------- ---------- ------------ ---------- ----------- ------------- -----------
Balance at June 30, 2006 1,000,000 $ 1,000 98,274,889 $ 98,275 $ 7,764,327 $ (12,499,329) $(4,635,727)
=========== ========== ============ ========== =========== ============= ===========
The accompanying notes are an integral part of these financial statements
- F-12 -
PEDIATRIC PROSTHETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
- ----------------------------------------------------------------------------------------------
2005
2006 (RESTATED)
------------- ---------------
Cash Flows From Operating Activities
Net loss $ (4,413,417) $ (4,356,519)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation expense 20,231 16,388
Provision for doubtful accounts 70,324 71,964
Stock-based compensation 482,360 4,020,264
Amortization of deferred financing cost 9,972 -
Amortization of debt discount 67,284 -
Change in value of derivative financial instruments 3,742,205 -
Gain on extinguishment of debt (310,799) -
Deferred rent (1,613) -
Changes in operating assets and liabilities:
Accounts receivable (231,116) (126,110)
Prepaid expenses and other current assets 3,096 (6,230)
Accounts payable 53,889 25,327
Accrued liabilities and other 71,358 56,462
------------- ---------------
Net cash used by operating activities (436,226) (298,454)
------------- ---------------
Cash Flows From Investing Activities
Purchase of furniture and equipment (951) (2,338)
------------- ---------------
Net cash used by investing activities (951) (2,338)
------------- ---------------
Cash Flows From Financing Activities:
Proceeds from sale of common stock 220,000 321,500
Proceeds from convertible debt 685,000 -
Payment of convertible debt (30,000) -
Payment of debt origination costs (193,000) -
------------- ---------------
Net cash provided by financing activities 682,000 321,500
------------- ---------------
Net increase in cash and cash equivalents 244,823 20,708
Cash and cash equivalents, beginning of period 29,818 9,110
------------- ---------------
Cash and cash equivalents, end of period $ 274,641 $ 29,818
============= ===============
Supplemental disclosure of cash flow information
Interest expense $ 9,839 $ 4,833
Income taxes $ - $ -
Non-cash disclosures
Net value of beneficial conversion feature and warrants to
originate debt $ 284,919 $ -
Fair value of warrants issued for financing cost $ 166,000 -
The accompanying notes are an integral part of these financial statements
- F-13 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------
GENERAL
Pediatric Prosthetics, Inc. (the "Company", "we", or "us") is involved
in the design, fabrication and fitting of custom-made artificial limbs. The
Company's focus is infants and children and the comprehensive care and
training needed by those infants and children and their parents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Cash and cash equivalents and accounts receivable are the primary
financial instruments that subject the Company to concentrations of credit
risk. The Company maintains its cash deposits with major financial
institutions selected based upon management's assessment of the financial
stability. Balances periodically exceed the $100,000 federal depository
insurance limit; however, the Company has not experienced any losses on
deposits.
Accounts receivable arise from sales of orthopedic and prosthetic
devices and related services to individual customers located primarily in
the United States. The Company receives payment for sales and services from
individual patients, third-party insurers, private donors and
governmentally funded health insurance programs. The Company does not
require collateral for credit granted, but periodically reviews accounts
receivable for collection issues and provides an allowance for doubtful
accounts based on those reviews.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. The cost and related
accumulated depreciation of assets sold, retired or otherwise disposed of
are removed from the respective accounts, and any resulting gains or losses
are included in the results of operations. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets (See Note 6). Repairs and maintenance costs are expensed as
incurred.
- F-14 -
PEDIATRIC PROSTHETICS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
--------------------------------------------------------------------------
INCOME TAXES
The Company uses the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based
on differences between financial reporting and income tax carrying amounts
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. A
valuation allowance, if necessary, is provided against deferred tax assets,
based upon management's assessment as to their realization.
REVENUE RECOGNITION
When the Company directly bills the customer and when the customer is
billed through our host affiliates, the revenues on the sale of prosthetic
devices and related services to patients, are recorded when the device is
accepted by the patient, provided that (i) there are no uncertainties
regarding customer acceptance; (ii) persuasive evidence of an arrangement
exists; (iii) the sales price is fixed and determinable; and (iv)
collection is deemed probable.
Revenues from the sale of prosthetic devices and related services
generated through the billing departments of the Host-Affiliates are
recorded at the Company's contracted portion of the total amounts billed by
that Host-Affiliate.
Sales billed directly by the Company and its host affiliates are
recorded at "usual and customary" rates, expressed as a percentage above
Medicare procedure billing codes. Billing codes are frequently updated. As
soon as updates are received, the Company reflects the change in its
billing system. There is generally a "co-payment" component of each billing
for which the patient-family is responsible. When the final appeals process
to the third party payors is completed, the patient family is billed for
the remaining portion of the "usual and customary" rate. As part of the
Company's preauthorization process with payors, it validates its ability to
bill the payor, if applicable, for the service provided before the delivery
of the device. Subsequent to billing for devices and services, there may be
problems with pre-authorization or with other insurance issues with payors.
If there has been a lapse in coverage, or an outstanding "co-payment"
component, the patient is financially responsible for the charges related
to the devices and services received. If the Company is unable to collect
from the patient, a bad debt expense is recognized.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative instruments to hedge exposures to
cash flow, market, or foreign currency risks.
We review the terms of convertible debt and equity instruments issued
to determine whether there are embedded derivative instruments, including
embedded conversion options that are required to be bifurcated and
accounted for separately as a derivative financial instrument. In
circumstances where the convertible instrument contains more than one
embedded derivative instrument, including the conversion option that is
required to be bifurcated, the bifurcated derivative instruments are
accounted for as a single, compound derivative instrument. Also, in
connection with the sale of convertible debt and equity instruments, the
Company may issue freestanding options or warrants that may, depending on
their terms, be accounted for as derivative instrument liabilities, rather
than as equity. The Company may also issue options or warrants to
non-employees in connection with consulting or other services they provide.
- F-15 -
PEDIATRIC PROSTHETICS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
-------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS, CONTINUED
Certain instruments, including convertible debt and equity instruments
and the freestanding options and warrants issued in connection with those
convertible instruments, may be subject to registration rights agreements,
which impose penalties for failure to register the underlying common stock
by a defined date. These potential cash penalties may require the Company
to account for the debt or equity instruments or the freestanding options
and warrants as derivative financial instrument liabilities, rather than as
equity. In addition, when the ability to physically or net-share settle the
conversion option or the exercise of the freestanding options or warrants
is deemed to be not within the control of the company, the embedded
conversion option or freestanding options or warrants may be required to be
accounted for as a derivative financial instrument liability.
Derivative financial instruments are initially measured at their fair
value. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair
value using the Black-Scholes option pricing model and is then re-valued at
each reporting date, with changes in the fair value reported as charges or
credits to income. For option-based derivative financial instruments, the
Company also uses the Black-Scholes option pricing model to value the
derivative instruments. To the extent that the initial fair values of the
freestanding and/or bifurcated derivative instrument liabilities exceed the
total proceeds received, an immediate charge to income is recognized, in
order to initially record the derivative instrument liabilities at their
fair value.
The discount from the face value of the convertible debt or equity
instruments resulting from allocating some or all of the proceeds to the
derivative instruments, together with the stated interest on the
instrument, is amortized over the life of the instrument through periodic
charges to income, using the effective interest method. When the instrument
is convertible preferred stock, the dividends payable are recognized as
they accrue and, together with the periodic amortization of the discount,
are charged directly to retained earnings.
The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is re-assessed
periodically, including at the end of each reporting period. If
re-classification is required, the fair value of the derivative instrument,
as of the determination date, is re-classified. Any previous charges or
credits to income for changes in the fair value of the derivative
instrument is not reversed. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required
within twelve months of the balance sheet date.
- F-16 -
PEDIATRIC PROSTHETICS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
-------------------------------------------------------------------------
STOCK BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payments" ("FAS 123R"). The Company adopted the requirements of FAS 123R as
of July 1, 2005 using the modified prospective transition method approach
as allowed under FAS 123R. FAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services. FAS 123R focuses primarily on accounting
for transactions in which an entity obtains employee services in
share-based payment transactions. FAS 123R requires that the fair value of
such equity instruments be recognized as expense in the historical
financial statements as services are performed. The Company had no
outstanding warrants or options at the date of adoption SFAS 123R and,
accordingly, the adoption had no impact on us. However, it may have a
significant impact in the future to the extent that Company issues options
for employee compensation.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued
SFAS Statement No. 154 ("SFAS 154"), Accounting Changes and Error
Corrections. SFAS 154 requires that, when a company changes its accounting
policies, the change must be applied retrospectively to all prior periods
presented instead of a cumulative effect adjustment in the period of the
change. SFAS 154 may also apply when the FASB issues new rules requiring
changes in accounting. If the new rule allows cumulative effect treatment,
it will take precedence over SFAS 154. This statement is effective for
fiscal years beginning after December 15, 2005. The adoption of SFAS 154 is
not expected to have a significant impact on the Company's financial
position or its results of operations.
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income taxes
("FIN 48"). FIN 48, which is an interpretation of SFAS No. 109, "Accounting
for Income Taxes," provides guidance on the manner in which tax positions
taken or to be taken on tax returns should be reflected in an entity's
financial statements prior to their resolution with taxing authorities. The
Company is required to adopt FIN 48 during the first quarter of fiscal
2008. The Company is currently evaluating the requirements of FIN 48 and
has not yet determined the impact, if any; this interpretation may have on
its financial statements.
- F-17 -
PEDIATRIC PROSTHETICS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
2. GOING CONCERN CONSIDERATIONS
----------------------------
Since its inception, the Company has suffered significant net losses
and has been dependent on outside investors to provide the cash resources
to sustain its operations. During the years ended June 30, 2006 and 2005,
the Company had net losses of $4,413,417 and $4,356,519, respectively, and
negative cash flows from operations of $436,226 and $298,454, respectively.
Negative operating results have produced a working capital deficit of
$4,914,340 and a stockholders' deficit of $4,635,727, at June 30, 2006. The
Company's negative financial results and its current financial position
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company is currently implementing it plans to deal with going
concern issues. The first step in that plan was its recapitalization into a
public shell on October 10, 2003. Management believes that the
recapitalization and its current plan to become a fully reporting public
company will allow the Company, through private placements of its common
stock, to raise the capital to expand operations to a level that will
ultimately produce positive cash flows from operations.
The Company's long-term viability as a going concern is dependent on
certain key factors, as follows:
- The Company's ability to obtain adequate sources of outside
financing to support near term operations and to allow the
Company to continue forward with current strategic plans.
- The Company's ability to increase its customer base and
broaden its service capabilities.
- The Company's ability to ultimately achieve adequate
profitability and cash flows to sustain continuing operations.
3. RESTATEMENT
-----------
The accompanying June 30, 2005 financial statements have been restated
to properly recognize revenue and cost of services for services provided by
Host Affiliates. The effects of this restatement on the accompanying
financial statements are as follows:
BALANCE SHEET
-------------
Current assets, as previously reported $ 119,732
Change in current assets related to
receivables from host affiliates 34,429
-------------
Current assets, as restated $ 154,161
=============
Stockholders' equity, as previously reported $ (287,843)
Change in stockholders' equity related to
change in net loss 34,429
-------------
Stockholders' equity, as restated $ (253,414)
=============
- F-18 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. RESTATEMENT, CONTINUED
----------------------
STATEMENT OF OPERATIONS
Revenue, as previously reported $ 416,459
Change in revenue related to billings by
host affiliates 149,542
-------------
Revenue, as restated $ 566,001
=============
Operating expenses, as previously reported $ 4,782,219
Change in operating expenses related to
change in cost of sales for costs
incurred by Host Affiliates 115,110
-------------
Operating expenses, as restated $ 4,897,329
=============
Loss from operations, as previously reported $ (4,365,757)
=============
Loss from operations, as restated $ (4,331,328)
=============
Net loss, as previously reported $ (4,390,948)
=============
Net loss, as restated $ (4,356,519)
=============
The restatement had no impact on the reported net loss per share for the year
ended June 30, 2005.
4. RECAPITALIZATION
----------------
On October 10, 2003, Pediatric Prosthetics, Inc., entered into an
acquisition agreement (the "Agreement") with Grant Douglas Acquisition
Corp. ("GDAC") whereby the Company agreed to exchange 100% of its
outstanding stock for 8,011,390 shares or 53% of GDAC common stock and
1,000,000 shares or 100% of GDAC Series A Convertible Preferred Stock. The
Agreement represented a re-capitalization of Pediatric Prosthetics, Inc.,
with accounting treatment similar to that used in a reverse acquisition,
except that no goodwill or intangibles are recorded. A re-capitalization is
characterized by the merger of a private operating company into a
non-operating public shell corporation with nominal net assets and
typically results in the owners and managers of the private company having
effective or operating control after the transaction. Pediatric
Prosthetics, Inc., the private operating company, emerged as the surviving
financial reporting entity under the Agreement, but GDAC remained as the
legal reporting entity and adopted a name change to Pediatric Prosthetics,
Inc. The accompanying financial statements present the historical financial
results of the previously private Pediatric Prosthetics, Inc.
- F-19 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. RECAPITALIZATION, CONTINUED
----------------------------
The consideration given by the Company in the re-capitalization was
$443,632 related to the assumption of a $350,000 convertible note and
$93,632 of accrued interest on such note that was held in the public shell.
In November through June of 2005 the Company repaid $148,955 of note
principal through issuance of common stock with a fair value of $2,688,734
and recognized a $2,539,779 loss on extinguishment of debt.
During the year ended June 30, 2006, the Company negotiated the
extinguishment of the remaining convertible debt of $201,045 and accrued
interest of $139,754 for a cash payment of $30,000 and recognized a gain on
extinguishment of debt of $310,799.
5. ACCOUNTS RECEIVABLE
--------------------
Accounts receivable, at June 30, 2006 and 2005, consisted of the
following:
2006 2005
============= ==============
Accounts receivable $ 410,930 $ 179,814
Less allowance for doubtful accounts 142,288 71,963
------------- --------------
Total $ 268,642 $ 107,851
============= ==============
6. FURNITURE AND EQUIPMENT
-----------------------
Property and equipment, at June 30, 2006 and 2005, consisted of the
following:
LIFE 2006 2005
============ ============= =============
Furniture and fixtures 1-5 years $ 17,295 $ 17,295
Machinery and equipment 2- 7 years 25,942 25,848
Leasehold improvements 5 years 63,793 62,937
------------- -------------
107,030 106,080
Less accumulated depreciation (47,892) (24,851)
------------- -------------
$ 59,138 $ 81,229
============= =============
7. CONVERTIBLE DEBT
----------------
Following is a summary of convertible debt at June 30, 2006 and 2005
(Details of the loan agreements follow the summary):
- F-20 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. CONVERTIBLE DEBT, CONTINUED
---------------------------
2006 2005
Notes payable under Securities Purchase Agreement $ 600,000 $ -
Convertible debt to individuals 85,000 -
Convertible note settled in 2006 - 201,045
--------- --------
Total convertible debt at contractual amount 685,000 201,045
Less unamortized discount and loan costs 617,716 -
--------- --------
$ 67,284 $201,045
========= ========
NOTES PAYABLE UNDER SECURITIES PURCHASE AGREEMENT
In May 2006, we entered into a Securities Purchase Agreement with
certain third parties to provide us $1,500,000 in convertible debt
financing (the "Securities Purchase Agreement"). Pursuant to the Securities
Purchase Agreement, we agreed to sell the investors $1,500,000 in
convertible debentures (the "Notes"), which have been paid or are payable
in three tranches as follows:
- $600,000 upon signing the definitive agreements on May 30,
2006, due May 30, 2009
- $400,000 upon the filing of a registration statement to
register shares of common stock which the Convertible Debentures
are convertible into as well as the shares of common stock
issuable in connection with the Warrants (defined below), and
- $500,000 upon the effectiveness of such registration
statement.
The Notes are convertible into our common stock at a discount to the
then trading value of our common stock. Additionally, in connection with
the Securities Purchase Agreement, we issue the third parties warrants to
purchase an aggregate of 50,000,000 shares of our common stock at an
exercise price of $0.10 per share (the "Warrants"). As of June 30, 2006 the
warrants had a value of $4,000,000 using the Black-Scholes option pricing
model.
We also agreed to issue to the finder, Lionheart Associates, LLC doing
business as Fairhills Capital ("Lionheart"), a finder's fee in connection
with the funding of $100,000 and warrants to purchase up to 2,000,000
shares of our common stock at an exercise price of $0.10 per share. The
Lionheart warrants, which had a fair value of $166,000 on the grant date,
were recorded as deferred financing cost, and expire if unexercised on or
before May 30, 2013.
- F-21 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. CONVERTIBLE DEBT, CONTINUED
---------------------------
The proceeds from the Securities Purchase Agreement were allocated to
the debt features and to the warrants based upon their fair values. After
the latter allocations, the remaining value, if any, is allocated to the
other Notes in the financial statements.
The debt discount is being accreted using the effective interest
method over the term of the note. For the year ended June 30, 2006 the
Company accreted $7,284 of debt discount. The accretion of debt discount is
adjusted in direct proportion to the conversions of debt to stock during
the period. Accretion of the debt discount for the other current
convertible notes was $60,000, resulting in total accretion of debt
discount for the year ended June 30, 2006 of $67,284.
WARRANTS ISSUED
The estimated fair value of the 50,000,000 warrants was $4,150,000 at
the date of issue. These amounts have been classified as derivative
financial instruments and recorded as a liability on the Company's balance
sheet in accordance with current authoritative guidance. The estimated fair
value of the warrants was determined using the Black-Scholes option-pricing
model. The model uses several assumptions including: historical stock price
volatility, risk-free interest rate, remaining time till maturity, and the
closing price of the Company's common stock to determine estimated fair
value of the derivative liability. During the year ended June 30, 2006, due
in part to a decrease in the market value of the Company's common stock,
the Company recorded as "other income" on the statement of operations the
change in fair value of the Warrants of approximately $150,000. These
warrants make up $4,000,000 of the derivative liability balance of
$5,119,365 as of June 30, 2006.
In accordance with the provisions of SFAS No. 133, Accounting for
Derivative Instruments, the Company is required to adjust the carrying
value of the instrument to its fair value at each balance sheet date and
recognize any change since the prior balance sheet date as a component of
other income (expense). The recorded value of such warrants can fluctuate
significantly based on fluctuations in the market value of the underlying
securities of the issuer of the warrants, as well as in the volatility of
the stock price during the term used for observation and the term remaining
for the warrants.
The other warrants issued to Lionheart, Geoff Eiten and Kertes in
connection with the convertible debt to individuals described below had an
estimated fair value of $503,163 at the date of issue or at the date of
change to derivative accounting. During the year ended June 30, 2006, due
in part to a decrease in the market value of the Company's common stock,
the Company recorded as "other income" on the statement of operations the
change in fair value of the Warrants of approximately $20,425. These
warrants make up $482,738 of the derivative liability balance of $5,119,365
as of June 30, 2006.
- F-22 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. CONVERTIBLE DEBT, CONTINUED
---------------------------
DEBT FEATURES
In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
amended ("SFAS 133"), the debt conversion feature provision ( the "Debt
Feature") contained in the terms of the Notes is not clearly and closely
related to the characteristics of the Note. Accordingly, the Debt Feature
qualified as embedded derivative instruments at issuance and, because it
does not qualify for any scope exception within SFAS 133, it was required
by SFAS 133 to be accounted for separately from the debt instrument and
recorded as a derivative financial instrument.
Pursuant to the terms of the Notes, these notes are convertible at the
option of the holder, at anytime on or prior to maturity. The Debt Feature
represents an embedded derivative that is required to be accounted for
apart from the underlying Notes. At issuance of the Notes, the Debt Feature
had an estimated initial fair value of $513,044.
In subsequent periods, if the price of the security changes, the
embedded derivative financial instrument related to the Debt Feature will
be adjusted to the fair value with the corresponding charge or credit to
other expense or income. The estimated fair value of the debt features was
determined using the probability weighted average expected cash flows /
Lattice Model with the closing price on original date of issuance, a
conversion price based on the terms of the respective contract, a period
based on the terms of the notes, and a volatility factor on the date of
issuance. During the year ended June 30, 2006, due in part to a decrease in
the market value of the Company's common stock, the Company recorded as
"other income" on the statement of operations the change in fair value of
the Debt Features of approximately $139,601. The Debt Feature makes up
$373,443 of the derivative liability balance of $5,119,365 as of June 30,
2006.
The recorded value of the debt features related to the Notes can
fluctuate significantly based on fluctuations in the fair value of the
Company's common stock, as well as in the volatility of the stock price
during the term used for observation and the term remaining for the
warrants.
The significant fluctuations can create significant income and expense
items on the financial statements of the company.
Because the terms of the convertible notes ("notes") require such
classification, the accounting rules required additional convertible notes
and non-employee warrants to also be classified as liabilities, regardless
of the terms of the new notes and / or warrants. This presumption has been
made due to the company no longer having the control to physical or net
share settle subsequent convertible instruments because it is tainted by
the terms of the notes. Whether or not the notes had contained those terms
or even if the transactions were not entered into, it could have altered
the treatment of the other notes and the conversion features of the latter
agreement may have resulted in a different accounting treatment from the
liability classification. The notes and warrants, as well as any subsequent
convertible notes or warrants, will be treated as derivative liabilities
until all such provisions are settled.
- F-23 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. CONVERTIBLE DEBT, CONTINUED
---------------------------
CONVERTIBLE NOTE SETTLED IN 2006
Convertible debt at June 30, 2005 represents remaining amounts due
under a $350,000 convertible note agreement (The "Note") dated February 27,
2001, and bearing interest at the Bank of America prime rate plus 5% per
year (Interest rate of 11.25% at June 30, 2006). The Company assumed the
Note in connection with the re-capitalization described in Note 3. Under
the original terms of the Note, the holder was entitled, at any time after
April 25, 2001, to convert the principal amount of this Note or any portion
of the principal amount into shares of the Company's common stock at a
conversion price equal (at the holder's discretion) to the lesser of (i)
the opening bid price on the first trading day immediately following the
date that GDAC began trading or (ii) the 5 day average closing bid price
immediately preceding the date of notice of conversion. In no event,
however, was the conversion price to be lower than $0.005 per share.
Subsequent to the re-capitalization, the Company allowed the holder to
convert $148,955 of the Note principal into 14,895,470 shares of the
Company's common stock using a price of $0.01 per share. The conversions
were not in accordance with the original convertible note agreement and the
shares issued had a fair value of $2,688,734 on the dates of conversion.
Accordingly, the Company recognized a $2,539,779 loss on extinguishment of
debt as of June 30, 2004.
In November 2005, the Company entered into a settlement agreement
regarding its convertible debt. Under the settlement agreement the Company
paid $30,000 for complete discharge of $201,045 of convertible debt and
$139,754 of related accrued interest. The Company recognized a $310,799
gain on extinguishment of debt in connection with the settlement.
CONVERTIBLE DEBT TO INDIVIDUALS
On March 1, 2006, and March 21, 2006, we entered into two separate
loans for $17,500, with two shareholders to provide us with an aggregate of
$35,000 in funding. The loans bear interest at the rate of 12% per annum,
and are were due sixty (60) days from the date the money was loaned, both
loans were extended through November 2006. Additionally, both loans are
convertible into 1,000,000 shares of our common stock at the rate of one
share for each $0.035 owed.
In April 2006, the Company borrowed $50,000 from a shareholder of the
Company, and issued that individual a promissory note in connection with
such loan. The promissory note bears interest at the rate of 12% per year,
and is due and payable on September 29, 2006. This promissory note may also
be renewed for additional thirty-day periods at the option of the holder.
This loan is convertible into an aggregate of 1,428,571 shares of common
stock at the rate of one share for each $0.035 owed. The shareholders also
have 1,428,571 outstanding warrants with the Company, which are exercisable
for shares of common stock at an exercise price of $0.045 per share, and
which expire on May 22, 2008.
The value of the beneficial conversion features associated with
convertible debt to individuals originated during March 2006 was estimated
to be $35,000 and that value was originally included in additional paid-in
capital, treated as a loan cost and was being amortized to interest expense
over the term of the debt using the effective yield method. However, the
convertible debt issued under the Securities Purchase Agreement in May 2006
caused the Company to have an inadequate number of authorized shares to
satisfy the conversion of all convertible debt and exercise of all
outstanding warrants and caused the Company to adopt liability treatment of
the conversion feature as a derivative financial instrument. At the date
the conversion features qualified as embedded derivative instruments and
liability treatment was adopted, the fair value of the embedded derivatives
was estimated to be $273,997. During the year ended June 30, 2006, due in
part to a decrease in the market value of the Company's common stock, the
Company recorded as "other income" on the statement of operations, the
change in fair value of the embedded derivative of $10,813. The embedded
derivative makes up $263,184 of the derivative liability balance of
$5,119,365 as of June 30, 2006.
The warrants issued with the $50,000 convertible note issued on April
2006, were originally afforded equity treatment as a loan cost valued at
$50,000 and were being amortized to interest expense over the term of the
debt using the effective yield method. However, as with the beneficial
conversion feature, an inadequate number of authorized shares caused the
Company to adopt liability treatment of the warrants as derivative
financial instruments in May 2006.
- F-24 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. INCOME TAXES
-------------
At June 30, 2006 the Company has a net operating loss carry-forward
("NOL") of approximately $974,000 expiring through 2025. The Company has a
deferred tax asset of approximately $384,000 resulting from this NOL. The
loss carry-forwards related to GDAC prior to the re-capitalization are
insignificant and are subject to certain limitations under the Internal
Revenue Code, including Section 382 of the Tax Reform Act of 1986.
Accordingly, such losses are not considered in the calculation of deferred
tax assets. The ultimate realization of the Company's deferred tax asset is
dependent upon generating sufficient taxable income prior to expiration of
the NOL. Due to the nature of this NOL and because realization is not
assured, management has established a valuation allowance relating to the
deferred tax asset at both June 30, 2006 and 2005, in an amount equal to
the deferred tax asset.
The composition of deferred tax assets and the related tax effects at
June 30, 2006 and 2005 are as follows:
2006 2005
-------------- --------------
Net operating losses $ 331,388 $ 218,122
Deferred rent 4,275 4,824
Allowance for doubtful accounts 48,378 9,207
--------------- --------------
Total deferred tax assets 384,041 232,153
Valuation allowance (384,041) (232,153)
--------------- --------------
Net deferred tax asset $ - $ -
=============== ==============
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S.
federal statutory rate of 34% were applied to pre-tax loss for the years
ended June 30, 2006 and 2005, is as follows:
2006 2005
================= ==================
AMOUNT % AMOUNT %
========= ====== ========= ======
Benefit for income tax at federal $1,500,562 34.0% $1,481,216 34.0%
statutory rate
Gain on debt extinguishments 105,672 2.3 - -
Non-deductible interest expense (22,876) (0.5) (10,173) (0.2)
Gain from derivatives (1,272,350) (28.8) - -
Non-deductible stock-based
compensation (164,002) (3.7) (1,366,890) (31.4)
Other (238) - 9,682 0.2
Change in valuation allowance (146,767) (3.3) (113,835) (2.6)
---------- ----------
Effective rate $ - -% $ - -%
========== ==========
- F-25 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
OPERATING LEASE
The Company leases office facilities under a long-term operating
lease. The lease provides for one, five- year renewal option and includes
provisions for the Company to pay certain maintenance and operating costs
of the landlord, that increase if the costs to the landlord increase. The
lease agreement includes scheduled base rent increases over the term of the
lease; however, rent expense is being recognized on a straight-line basis
over the term of the lease. Accordingly, at June 30, 2006 and 2005, the
balance sheet reflects $12,575 and $14,188, respectively, of deferred lease
expense.
Rent expense under operating leases was $54,001 and $62,032 during the
years ended June 30, 2006 and 2005, respectively.
Minimum lease payments due under leases with original lease terms of
greater than one year and expiration dates subsequent to June 30, 2006, are
summarized as follows:
YEAR ENDING
JUNE 30, AMOUNT
==============
2007 45,616
2008 47,226
2009 32,200
--------------
$ 125,042
==============
Included in other current assets at June 30, 2006 and 2005 is a
security deposit of $3,488, related to the Company's office lease.
CONSULTING CONTRACTS
The Company has entered into consulting contracts with fourteen host
companies with facilities at various locations in the United States. These
consulting agreements allow the Company to use the host facilities to
provide fitting of custom-made artificial limbs and related care and
training in exchange for a split of revenues of 30% to the Company and 70%
to the host company if the host company provides the patient and 70% to the
Company and 30% to the host company if the Company provides the patient.
These contracts generally have automatic renewals every six months unless
either party gives a termination notice.
CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability, if any, with respect to these actions will
not have a materially adverse effect on the financial position, liquidity
or results of operations of the Company.
- F-26 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. STOCKHOLDERS' EQUITY
--------------------
PREFERRED STOCK
The Company has 10,000,000 authorized shares of preferred stock, par
value $0.001 per share in addition to its authorized common stock. To date
the Company has issued 1,000,000 shares of Series A Convertible Preferred
Stock ("Series A") to the founders of Pediatric Prosthetics, Inc. The
Series A is convertible into common stock on a share for share basis but
includes voting privileges of 20 to 1. It is non-cumulative but
participates in any declared distributions on an equal basis with common
stock.
COMMON STOCK ISSUED FOR CASH
From time to time, in order to fund operating activities of the
Company, common stock is issued for cash. Depending on the nature of the
offering and restrictions imposed on the shares being sold, the sales price
of the common stock may be below the fair market value of the underlying
common stock on the date of issuance. During the year ended June 30, 2006,
the Company issued 4,700,000 shares of common stock at prices ranging from
$0.05 to $0.035, for net cash proceeds of $220,000. During the year ended
June 30, 2005 the Company issued 9,210,000 shares of common stock at prices
ranging from $0.04 to $0.15, for net cash proceeds of $321,500.
COMMON STOCK ISSUED FOR SERVICES
The Company has issued shares of common stock for services to both
employees/directors and outside consultants. During the year ended June 30,
2006 the Company issued 8,696,437 net shares of common stock to outside
consultants at market values ranging from $0.08 to $0.11 and recognized
compensation expense of $482,360. During the year ended June 30, 2005 the
Company issued 36,643,861 shares of common to employee/directors stock at
market values ranging from $0.10 to $0.138 and recognized compensation
expense of $3,665,136. During such period, the Company also issued
5,588,699 shares of common stock to outside consultants at market values
ranging from $0.053 to $0.145 and recognized compensation expense of
$355,128.
Additionally, we granted Geoff Eiten, 3,000,000 options in connection
with a consulting agreement entered into May 9, 2006. The 3,000,000 options
are exercisable into shares of our common stock as follows, 1,000,000
options are exercisable at $0.10 per share, 1,000,000 options are
exercisable at $0.20 per share, and 1,000,000 options are exercisable at
$0.30 per share. The options granted to Mr. Eiten were valued at $241,241
using the Black-Scholes pricing model and will be expensed as share-based
compensation over the 12 month term of the contract ending May 8, 2007. The
options carry a three year term and expire on May 8, 2010.
GLOBAL MEDIA FUND, INC. AGREEMENT
In February 2006, we entered into a service agreement (the "Service
Agreement") with Global Media Fund Inc. ("Global"), whereby Global agreed
to distribute certain newspaper features, which Global has guaranteed will
be placed in at least 100 newspapers and radio features regarding the
Company, which Global has guaranteed will be placed in at least 400 radio
stations. In consideration for the Service Agreement, we agreed to issue
Global 250,000 restricted shares of our common stock, which were issued in
March 2006. The terms of the agreement call for the Company to issue Global
a remaining value of shares equal to $125,000, which will be paid by
issuances of common stock on May 1, 2006, August 1, 2006, November 1, 2006
and February 1, 2007. The Service Agreement provides that we will issue
shares valued at $28,125 per payment; however the agreement contains a
provision that provides Global with shares that are at a 10% discount to
the quoted market price, therefore Global will receive common stock valued
at $31,250 for each of the remaining installment payments.
- F-27 -
PEDIATRIC PROSTHETICS, INC.
- ---------------------------
NOTES TO FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY, CONTINUED
-------------------------------
GLOBAL MEDIA FUND, INC. AGREEMENT, CONTINUED
If we fail to issue Global any consideration owed pursuant to the
Service Agreement when due, Global may terminate the Service Agreement with
thirty (30) days written notice to us at which time Global will keep all
consideration issued as of that date. We have the right to cancel the
Service Agreement at anytime with thirty (30) days written notice to
Global, at which time Global will keep all consideration issued as of that
date.
STOCK OPTIONS AND WARRANTS
In connection with the origination of various convertible debt
agreements the Company issued warrants for shares of its common stock
during the year ended June 30, 2006 (See Note 6). Following is a summary of
option and warrant activity:
NUMBER OF WEIGHTED
COMMON EXERCISE AVERAGE
STOCK PRICE EXERCISE
EQUIVALENTS RANGE PRICE
------------ -------------- ----------
Outstanding at June 30, 2004 and 2005 - $ - $ -
Warrants issued to Note Holders Under Securities
Purchase Agreement 50,000,000 0.10 0.10
Warrants issued as finders fee Under Securities
Purchase Agreement 2,000,000 0.10 0.10
Warrants issued to originate convertible debt
to Individuals 1,428,571 0.045 0.045
Options issued for consulting services 3,000,000 0.10 - 0.30 0.16
----------- -------------- ----------
Outstanding at June 30, 2006 56,428,571 $ 0.045 - 0.30 $ 0.14
=========== ============== ==========
Following is a summary of outstanding stock options and warrants at June 30,
2006:
REMAINING WEIGHTED
CONTRACTED AVERAGE
LIFE EXERCISE EXERCISE
EXPIRATION DATE (YEARS) SHARES PRICE PRICE
=============== ========== ========= ========= ==========
May 2008 1.9 1,428,571 0.045 0.045
May 2010 3.9 1,000,000 0.10 0.10
May 2010 3.9 1,000,000 0.20 0.20
May 2010 3.9 1,000,000 0.30 0.30
May 2013 6.9 52,000,000 0.10 0.10
----------
Outstanding at June 30, 2006 56,428,571
==========
- F-28 -
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. 401(K) SALARY DEFERRAL PLAN
------------------------------
The Company has a 401(k) salary deferral plan (the "Plan") which
became effective on January 1, 1998, for eligible employees who have met
certain service requirements. The Plan provides for discretionary Company
matching contributions; however the Company made no contributions and
recognized no expense during the years ended June 30, 2006 or 2005.
- F-29 -
DEALER PROSPECTUS DELIVERY OBLIGATION
Until ninety (90) Days after the later of (1) the effective date of the
registration statement or (2) the first date on which the securities are offered
publicly, all dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
-68-
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
See Indemnification of Directors and Officers above.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with this
registration statement. All of such expenses are estimates, other than the
filing fees payable to the Securities and Exchange Commission.
Description Amount to be Paid
----------------------------------------------- -----------------
Filing Fee - Securities and Exchange Commission $ 356.56
Attorney's fees and expenses 35,000.00*
Accountant's fees and expenses 10,000.00*
Transfer agent's and registrar fees and expenses 1,500.00*
Printing and engraving expenses 1,500.00*
Miscellaneous expenses 5,000.00*
------------------
Total $ 53,356.56*
==================
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the period from inception until June 30, 2005, we effected the
following transactions in reliance upon exemptions from registration under
the Securities Act of 1933 as amended (the "Act") as provided in Section 4(2)
thereof or, upon exemptions from registration under the Act as provided in
Regulation D thereof. No underwriter participated in, nor did we pay
any commissions or fees to any underwriter in connection with any of
these transactions. None of the transactions involved a public offering. We
believe that each person had knowledge and experience in financial and business
matters, which allowed them to evaluate the merits and risk of the receipt of
our securities. We believe that each person was knowledgeable about our
operations and financial condition.
COMMON STOCK ISSUED FOR CASH DURING THE FISCAL YEARS ENDED JUNE 30, 2004 AND
2005
During the period from inception, October 10, 2003, to June 30, 2004, the
Company sold 4,200,000 shares of common stock at prices ranging from $0.10 to
$0.125, for net cash proceeds of $425,000, as follows:
-69-
Date Shares sold Price per share Cash Proceeds
- -------------- ------------------ ---------------------- ---------------
December 2003 500,000 $0.100 $50,000
December 2003 200,000 $0.125 $25,000
December 2003 750,000 $0.100 $75,000
January 2004 400,000 $0.100 $40,000
February 2004 1,500,000 $0.100 $150,000
March 2004 350,000 $0.100 $35,000
June 2004 500,000 $0.100 $50,000
================== ===============
Totals 4,200,000 $425,000
We claim an exemption from registration for the above issuances of shares, which
shares were issued free of restrictive legend, pursuant to Rule 504 of
Regulation D of the Securities Act of 1933 (the "Act"). We believe we qualified
for an exemption from registration pursuant to Rule 504, because i) at the time
of such sales, we were not subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act of 1934, we were not (and are still not) an
investment company, and we were not (and are still not) a development stage
company with no specific business plan or purpose or which has indicated that
its business plan is to engage in a merger or acquisition; ii) we complied with
the terms and conditions of Rule 501 and Rule 502 of the Act; iii) such sales
were made in a state which specifically provided for such Rule 504 exemptions
and we complied with the rules and regulations of such state in connection with
such issuances; and iv) because the aggregate offering price for the offering of
our securities issued pursuant to Rule 504 did not exceed $1,000,000 for all
securities sold within the twelve months before the start of and during the
offering of such securities.
During the year ended June 30, 2005 the Company sold 9,210,000 shares of common
stock at prices ranging from $0.014 to $0.10, for net cash proceeds of $321,500,
as follows:
Date Shares sold Price per share Cash Proceeds
- ------------ --------------- ------------------ ----------------
July 2004 350,000 $0.100 $35,000
September 2004 2,500,000 $0.010 $25,000
October 2004 1,750,000 $0.014 $25,000
December 2004 1,000,000 $0.050 $50,000
January 2005 500,000 $0.050 $25,000
February 2005 1,000,000 $0.050 $50,000
March 2005 810,000 $0.050 $40,500
March 2005 300,000 $0.070 $21,000
April 2005 1,000,000 $0.050 $50,000
=============== ================
Totals 9,210,000 $321,500
-70-
We claim an exemption from registration for the above issuances of shares, which
shares were issued free of restricted legend, pursuant to Rule 504 of the Act.
We believe we qualified for an exemption from registration pursuant to Rule 504,
because i) at the time of such sales, we were not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act of 1934, we were not
(and are still not) an investment company, and we were not (and are still not) a
development stage company with no specific business plan or purpose or which has
indicated that its business plan is to engage in a merger or acquisition; ii) we
complied with the terms and conditions of Rule 501 and Rule 502 of the Act; iii)
such sales were made in a state which specifically provided for such Rule 504
exemptions and we complied with the rules and regulations of such state in
connection with such issuances; and iv) because the aggregate offering price for
the offering of our securities issued pursuant to Rule 504 did not exceed
$1,000,000 for all securities sold within the twelve months before the start of
and during the offering of such securities.
COMMON STOCK ISSUED FOR SERVICES DURING THE FISCAL YEARS ENDED JUNE 30, 2004 AND
2005
During the period from inception, October 10, 2003, to June 30, 2004, we issued
3,750,000 shares of common stock at market values ranging from $0.110 to $0.184
and recognized share-based compensation expense of $454,000, as follows:
Date Shares issued Share value Consideration
- ----------------- --------------- ------------ ---------------
January 2004 500,000 (1) $78,000 Services rendered by
a consultant in
connection with our state
reporting requirements
and certain filings
required to maintain and
update our trading
profile on the
Pinksheets.com
March 2004 3,000,000(2) $330,000 Investor relations and
consultation in connection
with press releases
June 2004 250,000(2) $46,000 Administrative assistance
services rendered
(1) We claim an exemption from registration for the above issuances of shares,
which shares were issued free of restricted legend, pursuant to Rule 504 of the
Act. We believe we qualified for an exemption from registration pursuant to Rule
504, because i) at the time of such sales, we were not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act of 1934, we were not
(and are still not) an investment company, and we were not (and are still not) a
development stage company with no specific business plan or purpose or which has
-71-
indicated that its business plan is to engage in a merger or acquisition; ii) we
complied with the terms and conditions of Rule 501 and Rule 502 of the Act; iii)
such sales were made in a state which specifically provided for such Rule 504
exemptions and we complied with the rules and regulations of such state in
connection with such issuances; and iv) because the aggregate offering price for
the offering of our securities issued pursuant to Rule 504 did not exceed
$1,000,000 for all securities sold within the twelve months before the start of
and during the offering of such securities.
(2) We claim an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 for the above restricted share issuances, since the
foregoing issuances did not involve a public offering, the recipients took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuances and we paid no underwriting discounts or commissions.
During the year ended June 30, 2005 we issued 36,643,861 restricted shares of
common stock to employee/directors at market values ranging from $0.100 to
$0.138 and recognized compensation expense of $3,665,136, as follows:
Employee Date Shares issued Services Rendered
- --------------- -------- ----------------- ---------------------
Dan Morgan December 2004 9,198,861 Services as the
Company's Chief
Prosthetist
Linda Putback-Bean December 2004 27,000,000 Services as the
Company's President
Gordon Cooley December 2004 25,000 Bonus for services
Rendered as our
then lab manager
Jean Gonzalez December 2004 275,000 Bonus for services
rendered as one of
our employee
prosthetist's
Kimberly Harberger December 2004 125,000 Bonus for services
rendered
Nancy Conte Fisher April 2005 20,000 Occupational therapy
services
================
Totals 36,643,861
-72-
We claim an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 for the above issuances, since the foregoing issuances
did not involve a public offering, the recipients took the shares for
investment and not resale and we took appropriate measures to restrict
transfer. No underwriters or agents were involved in the foregoing issuances
and we paid no underwriting discounts or commissions.
During the year ended June 30, 2005, we also issued 5,588,699 shares of common
stock to outside consultants at market values ranging from $0.053 to $0.145 and
recognized compensation expense of $355,128, as follows:
Value attributed
Date Shares issued to Shares Compensation
- ------------ ----------------- ----------------------------- -----------------
August 2004 3,013,699(1) $165,753 ($0.055 per share) Investor relations
services rendered
August 2004 2,000,000(1) $106,000 ($0.053 per share) Investor relations
services rendered
January 2005 75,000(1) $10,875 ($0.145 per share) Marketing services
January 2005 500,000(2) $72,500 ($0.145 per share) Investor relations
services rendered
including the drafting of
press releases and
assistance with a
national distribution and
marking campaign for the
Company
============ ================= =============================
Totals 5,588,699 $355,128
(1) We claim an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 for the above restricted share issuances, since the
foregoing issuances did not involve a public offering, the recipients took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuances and we paid no underwriting discounts or commissions.
(2) We claim an exemption from registration for the above issuances of shares,
which shares were issued free of restrictive legend, pursuant to Rule 504 of the
Act. We believe we qualified for an exemption from registration pursuant to
Rule 504, because i) at the time of such sales, we were not subject to the
reporting requirements of Section 13 or
-73-
15(d) of the Exchange Act of 1934, we were not (and are still not) an investment
company, and we were not (and are still not) a development stage company with no
specific business plan or purpose or which has indicated that its business plan
is to engage in a merger or acquisition; ii) we complied with the terms and
conditions of Rule 501 and Rule 502 of the Act; iii) such sales were made in a
state which specifically provided for such Rule 504 exemptions and we complied
with the rules and regulations of such state in connection with such issuances;
and iv) because the aggregate offering price for the offering of our securities
issued pursuant to Rule 504 did not exceed $1,000,000 for all securities sold
within the twelve months before the start of and during the offering of such
securities.
COMMON STOCK ISSUED FOR CONVERSION OF DEBT AND PAYMENT OF ACCRUED INTEREST
DURING THE FISCAL YEARS ENDED JUNE 30, 2004 AND 2005
During the period from inception, October 10, 2003, to June 30, 2004, we issued
14,895,470 shares of common stock for the conversion of convertible debt and
accrued interest on convertible debt notes totaling $148,955, as follows:
Date Shares issued Debt forgiven
- -------------- ------------------ -------------------------------------
November 2003 7,839,470 $78,395 in connection with
the forgiveness of debt assumed
from the operations of the Company
prior to the Exchange discussed
above under "History of the Company"
December 2003 1,456,000 $14,560 in connection with the
further forgiveness of debt assumed
from the Company prior the Exchange
January 2004 2,600,000 $26,000 in connection with the
further forgiveness of debt assumed
from the Company prior the Exchange
June 2004 3,000,000 $30,000 in connection with the
further forgiveness of debt assumed
from the Company prior the Exchange
================== =====================================
Totals 14,895,470 $148,955
-74-
We claim an exemption from registration for the above issuances of shares, which
shares were issued free of restrictive legend, pursuant to Rule 504 the Act. We
believe we qualified for an exemption from registration pursuant to Rule 504,
because i) at the time of such sales, we were not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act of 1934, we were not
(and are still not) an investment company, and we were not (and are still not) a
development stage company with no specific business plan or purpose or which has
indicated that its business plan is to engage in a merger or acquisition; ii) we
complied with the terms and conditions of Rule 501 and Rule 502 of the Act; iii)
such sales were made in a state which specifically provided for such Rule 504
exemptions and we complied with the rules and regulations of such state in
connection with such issuances; and iv) because the aggregate offering price for
the offering of our securities issued pursuant to Rule 504 did not exceed
$1,000,000 for all securities sold within the twelve months before the start of
and during the offering of such securities.
COMMON STOCK ISSUED DURING THE FISCAL YEAR ENDED JUNE 30, 2006
In July 2005, we sold an aggregate of 2,500,000 shares of common stock to three
individuals for aggregate consideration of $125,000 or $0.05 per share. We
claim an exemption from registration for the above issuances pursuant to Rule
504 of the Securities Act of 1933.
In August 2005, we sold 1,000,000 shares of common stock to one individual for
$50,000 or $0.05 per share. We claim an exemption from registration for the
above issuance pursuant to Rule 504 of the Securities Act of 1933.
In September 2005, we issued an aggregate of 10,000,000 restricted shares of
common stock to four consultants (which included 2,000,000 shares which were
later cancelled) in connection with their entry into marketing agreements,
whereby they agreed to market our prosthetics services. We claim an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 for
the above issuances, since the foregoing issuances did not involve a public
offering, the recipients took the shares for investment and not resale and we
took appropriate measures to restrict transfer. No underwriters or agents
were involved in the foregoing issuances and we paid no underwriting
discounts or commissions.
In September 2005, our Chief Executive Officer and Director, Linda Putback-Bean
cancelled 4,000,000 of the shares which she held, which shares were previously
issued to Mrs. Putback-Bean for services in 2005, so that we would have a
sufficient number of shares of authorized but unissued common stock to pay
consultants in shares of our common stock. It is anticipated that once we
increase our authorized shares of common stock, Mrs. Putback-Bean will be
reissued the 4,000,000 shares of common stock which she previously agreed to
cancel.
In December 2005, we sold 1,000,000 shares of common stock to one individual for
$35,000 or $0.035 per share. We claim an exemption from registration afforded by
-75-
Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipients took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
In January 2006, we sold 200,000 shares of common stock to one individual for
$10,000 or $0.05 per share. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipients took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
In March 2006, we issued 250,000 shares of common stock to Global in connection
and in consideration for Global's entry into the Service Agreement. We claim an
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 for the above issuance, since the foregoing issuance did not involve a
public offering, the recipient took the shares for investment and not resale
and we took appropriate measures to restrict transfer. No underwriters or
agents were involved in the foregoing issuance and we paid no underwriting
discounts or commissions.
In May 2006, we entered into a services agreement with Stock Enterprises, a
privately held financial and investor relations services firm ("Stock"), whereby
Stock agreed to provide us investor relations services on a non-exclusive basis
for the period of one (1) year, and we agree to pay Stock 2,000,000 restricted
shares of our common stock, which shares have not been issued to Stock to date.
We claim an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 for the above issuance, since the foregoing issuance did
not involve a public offering, the recipient took the shares for investment and
not resale and we took appropriate measures to restrict transfer. No
underwriters or agents were involved in the foregoing issuance and we paid
no underwriting discounts or commissions.
On May 30, 2006, we entered into a Securities Purchase Agreement, with various
third parties (the "Purchasers") to sell an aggregate of $1,500,000 in Callable
Secured Convertible Notes, which bear interest at the rate of 6% per annum (the
"Debentures"), of which an aggregate of $600,000 in Debentures was sold to the
Purchasers on May 30, 2006, and the remaining $900,000 is to be sold in two
separate tranches, $400,000 on or around the date we file a registration
statement to register the shares of common stock the Debentures are convertible
into, and $500,000 upon the date such registration statement is declared
effective by the SEC. We claim an exemption from registration provided by Rule
506 of Regulation D for the above issuances.
In connection with the sale of the Debentures, we granted the various third
party Purchasers Stock Purchase Warrants to purchase an aggregate of 50,000,000
shares of our common stock at an exercise price of $0.10 per share, which
-76-
warrants expire if unexercised on May 30, 2013. We claim an exemption from
registration provided by Rule 506 of Regulation D for the grant of the warrants.
We also agreed to grant a finder, Lionheart Associates, LLC doing business as
Fairhills Capital ("Lionheart"), a finder's fee in connection with the funding
which included warrants to purchase up to 2,000,000 shares of our common stock
at an exercise price of $0.10 per share. The Lionheart warrants expire if
unexercised on May 30, 2013. We claim an exemption from registration afforded
by Section 4(2) of the Securities Act of 1933, since the foregoing transaction
did not involve a public offering, the recipient had access to information that
would be included in a registration statement, took the grant for investment and
not resale and we took appropriate measures to restrict transfer.
Additionally, in connection with the closing of the sale of the Debentures,
described above, we agreed to grant OTC Financial, as a finder's fee in
connection with the funding, 3,000,000 warrants to purchase shares of our common
stock. The 3,000,000 warrants are exercisable into shares of our common stock
as follows, 1,000,000 warrants are exercisable at $0.10 per share, 1,000,000
warrants are exercisable at $0.20 per share, and 1,000,000 warrants are
exercisable at $0.30 per share. The warrants granted to OTC Financial expire if
unexercised on May 8, 2010. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, since the foregoing transaction did
not involve a public offering, the recipient had access to information that
would be included in a registration statement, took the grant for investment and
not resale and we took appropriate measures to restrict transfer.
In June 2006, we issued 446,427 shares of common stock to Global pursuant to our
Service Agreement with Global, as described above. We claim an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 for the
above issuance, since the foregoing issuance did not involve a public offering,
the recipient took the shares for investment and not resale and we took
appropriate measures to restrict transfer. No underwriters or agents were
involved in the foregoing issuance and we paid no underwriting discounts
or commissions.
We have not issued any shares of common or preferred stock subsequent to the
year ended June 30, 2006.
-77-
ITEM 27. EXHIBITS
Exhibits Description
- ---------- ----------------
Exhibit 3.1(1) Articles of Incorporation
(Pediatric Prosthetics, Inc.-Texas) dated September 15, 2003
Exhibit 3.2(4) Restated Articles of Incorporation of the Company
(March 9, 2001)
Exhibit 3.3(4) Reinstatement (June 29, 2003)
Exhibit 3.4(1) Amendment to Articles of Incorporation
of the Company (October 31, 2003)
Exhibit 3.5(1) Amendment to Articles of Incorporation
of the Company (November 7, 2003)
(Series A Convertible Preferred Stock Designation of Rights
Exhibit 3.6(4) Bylaws of the Company
Exhibit 4.1(1) Shareholder Voting Agreement dated October 31, 2003
Exhibit 5.1* Opinion and consent of The Loev Law Firm, PC
re: the legality of the shares being registered
Exhibit 10.1(1) Acquisition Agreement between Grant Douglas Acquisition
Corp. and Pediatric Prosthetics, Inc. dated October 10, 2003
Exhibit 10.2(4) Sample Host Affiliate Agreement
Exhibit 10.3(2) Settlement Agreement with Secured Releases, LLC
Exhibit 10.3(3) Securities Purchase Agreement
Exhibit 10.4(3) Callable Secured Convertible Note with AJW Offshore,
Ltd.
Exhibit 10.5(3) Callable Secured Convertible Note with AJW Partners,
LLC
Exhibit 10.6(3) Callable Secured Convertible Note with AJW Qualified
Partners, LLC
Exhibit 10.7(3) Callable Secured Convertible Note with New Millennium
Capital Partners II, LLC
-78-
Exhibit 10.8(3) Stock Purchase Warrant with AJW Offshore, Ltd.
Exhibit 10.9(3) Stock Purchase Warrant with AJW Partners, LLC
Exhibit 10.10(3) Stock Purchase Warrant with AJW Qualified Partners,
LLC
Exhibit 10.11(3) Stock Purchase Warrant with New Millennium Capital
Partners II, LLC
Exhibit 10.12(3) Security Agreement
Exhibit 10.13(3) Intellectual Property Security Agreement
Exhibit 10.14(3) Registration Rights Agreement
Exhibit 10.15(4) Consulting Agreement with National Financial
Communications Corp.
Exhibit 10.16(4) Warrant Agreement with Lionheart Associates, LLC doing
business as Fairhills Capital
Exhibit 10.17(4) Investor Relations Consulting Agreement with Joe Gordon
Exhibit 10.18(5) Waiver of Rights Agreement
Exhibit 10.20* Kertes Convertible Note and Warrant
Exhibit 10.21* Global Media Agreement
Exhibit 23.1* Consent of Malone & Bailey, PC
Exhibit 23.2* Consent of The Loev Law Firm, PC
(included in Exhibit 5.1)
(1) Filed as exhibits to our Form 10-SB, filed with the Commission on February
13, 2006, and incorporated herein by reference.
(2) Filed as an exhibit to our quarterly report on Form 10-QSB, filed with the
Commission on July 5, 2006, and incorporated herein by reference.
(3) Filed as exhibits to our report on Form 8-K, filed with the Commission on
June 2, 2006, and incorporated herein by reference.
(4) Filed as exhibits to our Form 10-SB, filed with the Commission on July 14,
2006, and incorporated herein by reference.
-79-
(5) Filed as an exhibit to our Form 10-KSB filed with the Commission on October
27, 2006, and incorporated herein by reference.
* Filed as an exhibit to this SB-2 Registration Statement.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(b) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the
volume and rise represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
(c) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material changes to such information in the
Registration Statement.
2. For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
3. To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
4. For determining liability of the undersigned small business
issuer under the Securities Act to any purchaser in the initial
distribution of the securities, the undersigned small business issuer
undertakes that in a primary offering of securities of the undersigned
small business issuer pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser
by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be
considered to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be
filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer
or used or referred to by the undersigned small business issuer;
-80-
iii. The portion of any other free writing prospectus relating to
the offering containing material information about the
undersigned small business issuer or its securities provided by
or on behalf of the undersigned small business issuer; and
iv. Any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchaser.
5. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer of controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
6. For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant under Rule 424(b)(1) or (4)
or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
7. For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
8. That, for the purpose of determining liability under the
Securities Act to any purchaser:
a). If the small business issuer is relying on Rule 430B:
1. Each prospectus filed by the undersigned small business
issuer pursuant to Rule 424(b)(3) shall be deemed to be part of
the registration statement as of the date the filed prospectus
was deemed part of and included in the registration statement;
and
2. Each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) as part of a registration statement
in reliance on Rule 430B relating to an offering made pursuant to
Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the
information required by section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration
statement as of the earlier of the date such form of prospectus
is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of
the issuer and any person that is at that date an underwriter,
-81-
such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the
registration statement to which that prospectus relates, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. Provided, however, that
no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made
in any such document immediately prior to such effective date; or
b). If the small business issuer is subject to Rule 430C:
Each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to
be part of and included in the registration statement as of the
date it is first used after effectiveness. Provided, however,
that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or
prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Houston,
Texas, February 9, 2007.
PEDIATRIC PROSTHETICS, INC.
Date: February 9, 2007 By:/s/ Linda Putback-Bean
----------------------
Linda Putback-Bean
President
Date: February 9, 2007 By:/s/ Kenneth Bean
-----------------------
Kenneth Bean
Principal Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
-82-
Date: February 9, 2007 By:/s/ Linda Putback-Bean
-----------------------
Linda Putback-Bean
President and Chairman
Date: February 9, 2007 By:/s/ Kenneth Bean
-----------------------
Kenneth Bean
Vice President, Treasurer,
Secretary, Principal Financial
Officer and Director
-83-