ITEM
1. 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; from January 1, 2006,
until June 30, 2006, we made approximately thirty-six fittings; from July 1,
2006 to June 30, 2007, we made approximately fifty-nine fittings, and from
July
1, 2007 until September 15, 2007, we made approximately twelve 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.
HISTORY
OF THE COMPANY
Pediatric
Prosthetics, Inc. (“we,” “us,” and the “Company”) was 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. From
approximately February 6, 2001, until the date of the Exchange (defined below)
we had been a non-operating, non-reporting, corporate shell, without assets
or
operations, but had traded our common stock on the Pinksheets under the symbol
"GDRG."
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"). Prior to the Exchange, Pediatric Texas had
limited operations, consisting solely of hiring Dan Morgan, our current Vice
President and Chief Prosthetist, and seeking a merger and/or acquisition
candidate, which was eventually affected in connection with the
Exchange.
In
connection with the Exchange, the shareholders of Pediatric Texas (who became
our shareholders subsequent to and in connection with 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.
Following
the Exchange, we remained as the surviving accounting entity and adopted a
name
change from Grant Douglas Acquisition Corp. to Pediatric Prosthetics, Inc.
on
October 31, 2003. We entered into the Exchange to acquire an operating business
in the form of Pediatric Texas, and the shareholders of Pediatric Texas entered
into the Exchange to obtain a shell company in which to place the operations
of
Pediatric Texas, and to trade such resulting company’s common stock on the
Pinksheets. Since May 25, 2007, our common stock has been quoted on
the OTCBB under the symbol “PDPR.”.
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
limited and totaled approximately $6,379 during the fiscal year ended
June 30, 2007.
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 and radio 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 220,000 restricted shares of common stock and issued 30,000 shares
of common stock to Andrew Austin as a commission in connection with the Global
Service Agreement in March 2006. The Service Agreement provided that the Company
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 date of the common stock.
We
also granted Global piggyback registration rights in connection with the shares
issued to Global pursuant to the Service Agreement. On or about June 2, 2006,
we
issued an aggregate of 446,427 shares of common stock valued at $31,250 as
consideration and commission in connection with the Global Service Agreement.
We
had the right to cancel the Service Agreement at anytime with thirty (30) days
written notice to Global, at which time Global would keep all consideration
issued as of that date. We gave Global formal notice of the termination of
the
Service Agreement in March 2007; however, we do not have any plans to issue
Global or Mr. Austin any additional shares of common
stock.
Loan
Agreements
On
March
1, 2006, and March 21, 2006, we entered into two separate loans for $17,500,
with two shareholders, Robert Castignetti and John Swartz, 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 2006, but were subsequently
verbally extended to May 2007, but were not further extended. Both
loans were repaid with all accrued and unpaid interest in August
2007.
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, which date was subsequently extended until May 29, 2007,
but
which was not further extended. The outstanding balance of the loan,
plus accrued and unpaid interest was repaid by us in August 2007.
Service
Agreement with Stock Enterprises
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. We issued 2,000,000 restricted shares of
our common stock to Stock, pursuant to this agreement on May 21,
2007.
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," the “Notes” or the
“Convertible Notes”), which are to be payable in three tranches, $600,000 of
which was received by the Company on or around May 31, 2006, in connection
with
the entry into the Securities Purchase Agreement; $400,000 which was received
in
February 2007, upon the filing of our 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 which was received shortly after the effectiveness
of our registration statement on July 27, 2007.
The
Debentures are convertible into our common stock at a 50% discount to the
average of the lowest three trading days over the most recent twenty (20) day
trading period in which our common stock trades on the market or exchange ,
ending one day prior to the date a conversion notice is received (the
“Conversion Price”). 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 originally agreed to register all of the shares of common
stock which the Debentures are convertible into and the shares of common stock
which the Warrants are exercisable for; however, pursuant to the Second Waiver
of Rights Agreement, described below, the Purchasers agreed to amend the terms
of the Registration Rights Agreement such that we were only required to register
9,356,392 shares underlying the Debentures on our Form SB-2 registration
statement, which was declared effective on July 20, 2007. 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, which we have been able to increase
to
$3,000,000 and $2,000,000, respectively.
The
$600,000 we received from the Purchasers at the Closing, in connection with
the
sales of the Debentures was used and distributed as follows:
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$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);
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$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);
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$75,000
in legal fees and closing payments to our counsel, the Purchaser's
counsel
and certain companies working on the Purchaser's
behalf;
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$10,000
to be held in escrow for the payment of additional key man life insurance
on Linda Putback-Bean and Kenneth W. Bean which policy has been obtained
and for which the Company will receive such funds;
and
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$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.
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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 average of the lowest
three trading days over the most recent twenty (20) day trading period in which
our common stock trades on the market or exchange , ending one day prior to
the
date a conversion notice is received (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.
"Events
of Default" under the Debentures include:
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1.
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Our
failure to pay any principal or interest when
due;
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2.
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Our
failure to issue shares of common stock to the Purchasers in connection
with any conversion as provided in the
Debentures;
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3.
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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 were later amended to February 15,
2007,
and August 13, 2007, respectively in connection with the Waiver of
Rights
Agreement and the Second Waiver of Rights Agreement, described in
greater
detail below, and which amended dates were both met by us, 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;
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4.
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Our
entry into bankruptcy or the appointment of a receiver or
trustee;
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5.
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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; or
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6.
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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.
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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.
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 Warrants for the purchase of 50,000,000
shares of our common stock 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, 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 number
of 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, and until February 15, 2007, in connection with the Second Waiver
of
Rights Agreement (both described below), which filing date was met by us.
Additionally, the number of shares of common stock we were required to register
on the Registration Statement has been amended to include only 9,356,392 shares
of common stock underlying the Debentures, due to amendments to the Registration
Rights Agreement affected by the Second Waiver of Rights
Agreement. We gained effectiveness of the Registration
Statement on July 20, 2007.
Waiver
of Rights Agreement
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
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 our registration statement from July 31, 2006 to January 15,
2007, which filing date was not met, and the date our registration statement
was
required to be effective with the Commission from October 22, 2006 to April
16,
2007. The amendments affected by the Waiver of Rights Agreement were later
modified pursuant to the Second Waiver of Rights Agreement, described
below.
RECENT
EVENTS
Amendment
to Articles of Incorporation
On
March
15, 2007, we filed an amendment to our Articles of Incorporation with the
Secretary of State of Idaho to increase our authorized shares of common stock
to
950,000,000 shares of Common Stock, $0.001
par
value
per share, and to re-authorize 10,000,000 shares of preferred stock, $0.001
par
value per share (the “Amendment”).
Additionally,
the Amendment provided that shares of our preferred stock may be issued from
time to time in one or more series, with distinctive designation or title as
shall be determined by our Board of Directors prior to the issuance of any
shares thereof. The preferred stock shall have such voting powers, full or
limited, or no voting powers, and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated in such resolution or resolutions
providing for the issue of such class or series of preferred stock as may be
adopted from time to time by our Board of Directors prior to the issuance of
any
shares thereof. The number of authorized shares of preferred stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the voting
power of all the then outstanding shares of the capital stock of the corporation
entitled to vote generally in the election of directors, voting together as
a
single class, without a separate vote of the holders of the preferred stock,
or
any series thereof, unless a vote of any such holders is required pursuant
to
any preferred stock designation.
The
Amendment was approved by the affirmative vote of 61,290,112 shares entitled
to
vote at our special meeting of shareholders held on March 9, 2007, consisting
of
41,290,112 shares voted by our common stockholders and 1,000,000 shares of
preferred stock which vote an equivalent of 20,000,000 shares of our common
stock, voted by our preferred stockholders, which shares on an as converted
basis represented approximately 52% of our outstanding common stock as of
February 12, 2007, the record date of the meeting.
The
affect of the Amendment is reflected throughout this report.
Closing
of Second Funding Tranche
On
or
about February 16, 2007 (the "Second Closing”) we sold an aggregate of $400,000
in Callable Secured Convertible Notes (“Debentures," the “Notes” or the
“Convertible Notes”), to the Purchasers. The sale of the Debentures represented
the second tranche of funding in connection with our Securities Purchase
Agreement ("Purchase Agreement") entered into with the Purchasers on May 30,
2006.
The
Debentures are convertible into our common stock at a 50% discount to the
average of the lowest three trading days over the most recent twenty (20) day
trading period in which our common stock trades on the market or exchange ,
ending one day prior to the date a conversion notice is received (the “Trading
Price”), 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 price 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
$400,000 we received from the Purchasers at the Second Closing, in connection
with the sales of the second tranche of Debentures was distributed as follows
(all amounts listed are approximate):
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$50,000
to Lionheart Associates, LLC doing business as Fairhills Capital
("Lionheart"), as a finder's fee in connection with the
funding;
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$50,000
in legal fees owed to our corporate counsel in connection with the
preparation of our Form 10-SB and Form SB-2 registration statements
and
various other of our public filings;
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$60,000
in accounting/auditing fees in connection with the audit of and review
of
our financial statements contained in our Form 10-SB and Form SB-2
registration statements and our other quarterly and annual report
filings;
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$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 $9,000
upon the payment of the final tranche of funding by the
Purchasers);
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$5,000
in closing costs associated with the
funding;
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$40,000
to be used by us in connection with the purchase of additional equipment
and machinery in connection with the fitting of
prosthesises;
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$100,000
to be used by us in connection with our continuing marketing and
advertising plans (as described in greater detail under “Plan of
Operations” in our latest periodic filing); and
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$77,000
to be used by us as needed for general working capital and the purchase
of
inventory for our prosthesises on an ongoing
basis.
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Second
Waiver of Rights Agreement
On
April
17, 2007, with an effective date of January 15, 2007, we entered into a Second
Waiver of Rights Agreement (the “Second Waiver”) with the Purchasers. Pursuant
to the previous Waiver of Rights Agreement we entered into with the Purchasers
in October 2006 (the “First Waiver”), we agreed to use our best efforts to
obtain shareholder approval to increase our authorized shares by December 15,
2006; to file a registration statement with the SEC covering the Underlying
Shares no later than January 15, 2007, and to obtain effectiveness of such
registration statement with the SEC by April 16, 2007.
Pursuant
to the Second Waiver, the Purchasers agreed to waive our failure to file a
registration statement by the prior January 15, 2007, deadline (we filed the
registration statement on February 9, 2007), agreed we are not in default of
the
Rights Agreement; agreed to waive our inability to maintain effective controls
and procedures as was required pursuant to the Purchase Agreement, that we
are
required to use our “best efforts” to maintain effective controls and procedures
moving forward; to waive the requirement pursuant to the Purchase Agreement
that
we keep solvent at all times (defined as having more assets than liabilities);
to waive the requirement pursuant to the Purchase Agreement that we obtain
authorization to obtain listing of our common stock on the Over-the-Counter
Bulletin Board (“OTCBB”), and to allow for us to use our “best efforts” to
obtain listing of our common stock on the OTCBB, which listing we obtained
effective May 25, 2007.
We
also
agreed along with the Purchasers, pursuant to the Second Waiver, to amend the
Rights Agreement to reduce the number of shares we are required to register
pursuant to the Rights Agreement, from all of the Underlying Shares, to only
9,356,392 of the shares issuable upon conversion of the Notes and to amend
the
date we are required to obtain effectiveness of our registration statement
by
from April 16, 2007, to August 13, 2007, which registration statement was
declared effective on July 20, 2007. The 9,356,392 shares of common
stock we are required to register pursuant to the Second Waiver is equal to
the
amount remaining after calculating approximately 30% of our then public float
(17,909,961 shares, with our public float equal to approximately 58,866,538
shares as of the date of the Second Waiver), and subtracting the 8,553,569
shares of common stock held by other shareholders, which were being registered
in our Registration Statement, which gave us a total of 9,356,392 shares
available to be registered for the Purchasers. Because we believe that the
registration of shares totaling only approximately 30% of our public float
clearly does not represent a primary offering of our securities, we and the
Purchasers believe that the registration of only 9,356,392 shares underlying
the
Notes would expedite the review and effectiveness of our Registration
Statement.
It
is
anticipated that the Purchasers will rely on Rule 144 under the Securities
Act
of 1933, as amended in the future for any sales of shares issuable in connection
with the conversion of the Notes and/or exercise of the Warrants which are
no
longer required to be registered on a registration statement by us pursuant
to
the amendments above.
In
consideration for their entry into the Second Waiver, we granted the Purchasers
additional warrants to purchase 1,000,000 shares of our common stock at an
exercise price of $0.10 per share, which warrants shall expire if unexercised
on
the same date as the original Warrants expire if unexercised, May 30, 2013,
which warrants were granted to the Purchasers as follows:
|
AJW
Partners, LLC
|
Warrant
to purchase 102,000 shares of common stock
|
|
AJW
Offshore, Ltd.
|
Warrant
to purchase 606,000 shares of common stock
|
|
AJW
Qualified Partners, LLC
|
Warrant
to purchase 279,000 shares of common stock
|
|
New
Millennium Capital Partners II, LLC
|
Warrant
to purchase 13,000 shares of common
stock
|
|
Total
|
Warrants
to purchase 1,000,000 shares of common stock
|
|
|
|
Third
Funding Tranche
On
or
about July 27, 2007 (the "Third Closing"), we sold an aggregate of $500,000
in
Callable Secured Convertible Notes (“Debentures”), to the Purchasers, which
funds were received by us on or about July 31, 2007. The sale of the Debentures
represented the third and final tranche of funding in connection with our
Securities Purchase Agreement ("Purchase Agreement") entered into with the
Purchasers on May 30, 2006.
The
$500,000 we received from the Purchasers at the Third Closing, in connection
with the sales of the Debentures will be used as follows (all amounts listed
are
approximate):
|
|
|
|
Outstanding
legal expenses in connection with
|
|
|
our
Form SB-2 Registration Statement and periodic filings:
|
$40,000
|
|
|
|
|
Accounting
fees and expenses
|
$40,000
|
|
|
|
|
Repayment
of shareholder notes
|
$75,000
|
|
|
|
|
Supplier
expenses
|
$40,000
|
|
|
|
|
Closing
costs and finders fees
|
$20,000
|
|
|
|
|
Equipment
purchases and capital improvements
|
$40,000
|
|
|
|
|
Marketing
expenses and general working capital
|
$245,000
|
|
|
|
|
Total
|
$500,000
|
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.
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
September 18, 2007, we had six 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:
Consultants
Occupational
Therapists
1.
Nancy
Conte-Fisher
2.
JoAnne
Liberatore
Physical
Therapist
1.
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.
OTC
Financial Network, Geoffrey Eiten.
7.
Agility
Business Partners, Financial Consulting/SEC Consulting
Agreements
with Host Affiliates
We
have
entered into consulting contracts with fifteen (15) 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
September 18, 2007, our Host Affiliate companies were:
1.
Restorative Health Services, Nashville, TN
2.
Creative
Prosthetics and Orthotics, 9 cities throughout New York
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.
Innovative
Prosthetic Solutions, Lake Forest, 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
15.
Capitol
Prosthetics, Columbia, SC
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.