UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM 10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended March 31, 2008
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Commission
File No. 0-12991
LANGER,
INC.
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
|
11-2239561
|
|
|
|
(State or other jurisdiction
|
|
(I.R.S. employer
|
|
|
|
of incorporation or organization)
|
|
identification number)
|
|
450
Commack Road, Deer Park, New York 11729-4510
(Address
of principal executive offices) (Zip code)
Registrant’s
telephone number, including area code:
(631)
667-1200
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
|
Large
accelerated filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
o
|
Smaller
Reporting Company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Common
Stock, Par Value $.02—11,136,860 shares as of May 9, 2008.
INDEX
LANGER,
INC. AND SUBSIDIARIES
|
|
|
|
|
Page
|
|
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
As
of March 31, 2008 (Unaudited) and December 31, 2007
|
|
3
|
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations
Three
month periods ended March 31, 2008 and 2007
|
|
4
|
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Stockholders’ Equity
Three
month period ended March 31, 2008
|
|
5
|
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
Three
month periods ended March 31, 2008 and 2007
|
|
6
|
|
|
|
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
8
|
|
|
|
|
|
|
|
Item
2 .
|
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
|
19
|
|
|
|
|
|
|
|
Item
3 .
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
28
|
|
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
|
29
|
|
|
|
|
|
|
|
PART
II.
|
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
|
30
|
|
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
|
30
|
|
|
|
|
|
|
|
Item
2.
|
|
Purchase
of Equity Securities by the Issuer and Affiliated
Purchases
|
|
30
|
|
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
|
30
|
|
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
|
31
|
|
|
|
|
|
|
|
Signatures
|
|
32
|
PART I.
FINANCIAL
INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
LANGER, INC.
AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,122,597
|
|
$
|
2,422,453
|
|
|
Restricted
cash - escrow
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
Accounts
receivable, net of allowances for doubtful accounts and returns
and
allowances aggregating $1,412,531 and $1,466,837,
respectively
|
|
|
9,800,654
|
|
|
8,764,401
|
|
|
Inventories,
net
|
|
|
6,930,487
|
|
|
6,680,353
|
|
|
Assets
held for sale
|
|
|
―
|
|
|
1,501,717
|
|
|
Prepaid
expenses and other current assets
|
|
|
1,225,772
|
|
|
1,156,333
|
|
|
Total
current assets
|
|
|
21,079,510
|
|
|
21,525,257
|
|
|
Property
and equipment, net
|
|
|
13,820,855
|
|
|
14,592,616
|
|
|
Identifiable
intangible assets, net
|
|
|
14,117,560
|
|
|
14,457,669
|
|
|
Goodwill
|
|
|
21,956,430
|
|
|
21,956,430
|
|
|
Other
assets
|
|
|
1,288,869
|
|
|
1,158,697
|
|
|
Total
assets
|
|
$
|
72,263,224
|
|
$
|
73,690,669
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,306,609
|
|
$
|
3,148,921
|
|
|
Liabilities
related to assets held for sale
|
|
|
―
|
|
|
472,318
|
|
|
Other
current liabilities, including current installment of note
payable
|
|
|
4,149,066
|
|
|
3,614,462
|
|
|
Unearned
revenue
|
|
|
319,860
|
|
|
336,232
|
|
|
Total
current liabilities
|
|
|
8,775,535
|
|
|
7,571,933
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
5%
Convertible Notes, net of debt discount of $368,566 at March 31,
2008 and
$390,771 at December 31, 2007
|
|
|
28,511,434
|
|
|
28,489,229
|
|
|
Notes
payable
|
|
|
103,214
|
|
|
113,309
|
|
|
Obligation
under capital lease
|
|
|
2,700,000
|
|
|
2,700,000
|
|
|
Unearned
revenue
|
|
|
79,300
|
|
|
83,682
|
|
|
Deferred
income taxes payable
|
|
|
1,809,273
|
|
|
1,801,653
|
|
|
Other
liabilities
|
|
|
1,031,002
|
|
|
1,043,288
|
|
|
Total
liabilities
|
|
|
43,009,758
|
|
|
41,803,094
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $1.00 par value; authorized 250,000 shares; no shares
issued
|
|
|
―
|
|
|
—
|
|
|
Common
stock, $.02 par value; authorized 50,000,000 shares;
issued
11,588,512 and 11,588,512, respectively
|
|
|
231,771
|
|
|
231,771
|
|
|
Additional
paid in capital
|
|
|
53,837,248
|
|
|
53,800,139
|
|
|
Accumulated
deficit
|
|
|
(24,564,687
|
)
|
|
(22,713,086
|
)
|
|
Accumulated
other comprehensive income
|
|
|
691,750
|
|
|
765,392
|
|
|
|
|
|
30,196,082
|
|
|
32,084,216
|
|
|
Treasury
stock at cost, 451,652 and 84,300 shares, respectively
|
|
|
(942,616
|
)
|
|
(196,641
|
)
|
|
Total
stockholders’ equity
|
|
|
29,253,466
|
|
|
31,887,575
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
72,263,224
|
|
$
|
73,690,669
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
LANGER,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
|
Three months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
15,778,171
|
|
$
|
14,320,963
|
|
|
Cost
of sales
|
|
|
10,910,781
|
|
|
9,030,234
|
|
|
Gross
profit
|
|
|
4,867,390
|
|
|
5,290,729
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
3,641,431
|
|
|
3,243,498
|
|
|
Selling
expenses
|
|
|
2,255,843
|
|
|
2,098,238
|
|
|
Research
and development expenses
|
|
|
269,795
|
|
|
196,711
|
|
|
Operating
loss
|
|
|
(1,299,679
|
)
|
|
(247,718
|
)
|
|
Other
expense, net:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
23,994
|
|
|
131,854
|
|
|
Interest
expense
|
|
|
(557,718
|
)
|
|
(525,769
|
)
|
|
Other
|
|
|
(16
|
)
|
|
(7,016
|
)
|
|
Other
expense, net
|
|
|
(533,740
|
)
|
|
(400,931
|
)
|
|
Loss
from continuing operations before income taxes
|
|
|
(1,833,419
|
)
|
|
(648,649
|
)
|
|
(Provision
for) income taxes
|
|
|
(18,182
|
)
|
|
(63,631
|
)
|
|
Loss
from continuing operations
|
|
|
(1,851,601
|
)
|
|
(712,280
|
)
|
|
Discontinued
Operations:
Loss
from operations of discontinued subsidiary
|
|
|
―
|
|
|
(72,185
|
)
|
|
(Provision
for) benefit from income taxes
|
|
|
―
|
|
|
—
|
|
|
Loss
from discontinued operations
|
|
|
―
|
|
|
(72,185
|
)
|
|
Net
Loss
|
|
$
|
(1,851,601
|
)
|
$
|
(784,465
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
Loss per common share:
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.17
|
)
|
$
|
(0.06
|
)
|
|
Loss
from discontinued operations
|
|
|
―
|
|
|
(0.01
|
)
|
|
Basic
and diluted loss per share
|
|
$
|
(0.17
|
)
|
$
|
(0.07
|
)
|
|
Weighted
average number of common shares used
in
computation of net (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
11,136,860
|
|
|
11,183,415
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
LANGER,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Stockholders’ Equity
For
the three months ended March 31, 2008
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income (Loss)
|
|
|
|
|
Common Stock
|
|
Treasury
|
|
Additional
Paid-in
|
|
Accumulated
|
|
Foreign
Currency
|
|
Comprehensive
|
|
Total
Stockholders’
|
|
|
|
|
Shares
|
|
Amount
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
Translation
|
|
Income (Loss)
|
|
Equity
|
|
|
Balance
at January 1, 2008
|
|
|
11,588,512
|
|
$
|
231,771
|
|
$
|
(196,641
|
)
|
$
|
53,800,139
|
|
$
|
(22,713,086
|
)
|
$
|
765,392
|
|
|
|
|
$
|
31,887,575
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,851,601
|
)
|
|
—
|
|
$
|
(1,851,601
|
)
|
|
―
|
|
|
Foreign
currency adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(73,642
|
)
|
|
(73,642
|
)
|
|
―
|
|
|
Total
comprehensive loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
$
|
(1,925,243
|
)
|
|
(1,925,243
|
)
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,109
|
|
|
—
|
|
|
—
|
|
|
|
|
|
37,109
|
|
|
Purchase
of Treasury Stock
|
|
|
—
|
|
|
—
|
|
|
(694,975
|
)
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(694,975
|
)
|
|
Shares
received as settlement of receivable
|
|
|
|
|
|
|
|
|
(51,000
|
)
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(51,000
|
)
|
|
Balance
at March 31, 2008
|
|
|
11,588,512
|
|
$
|
231,771
|
|
$
|
(942,616
|
)
|
$
|
53,837,248
|
|
$
|
(24,564,687
|
)
|
$
|
691,750
|
|
|
|
|
$
|
29,253,466
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
LANGER,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
For the three months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,851,601
|
)
|
$
|
(784,465
|
)
|
|
Loss
from discontinued operations
|
|
|
―
|
|
|
72,185
|
|
|
Loss
from continuing operations
|
|
|
(1,851,601
|
)
|
|
(712,280
|
)
|
|
Adjustments
to reconcile net loss from continuing operations to net cash provided
by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment and amortization of identifiable
intangible
assets
|
|
|
1,376,352
|
|
|
847,396
|
|
|
Loss
on receivable settlement
|
|
|
49,000
|
|
|
―
|
|
|
Amortization
of debt acquisition costs
|
|
|
88,652
|
|
|
65,325
|
|
|
Amortization
of debt discount
|
|
|
22,205
|
|
|
14,489
|
|
|
Loss
on pension settlement
|
|
|
―
|
|
|
47,824
|
|
|
Stock-based
compensation expense
|
|
|
37,109
|
|
|
69,865
|
|
|
Provision
for doubtful accounts receivable
|
|
|
(54,306
|
)
|
|
133,204
|
|
|
Deferred
income tax provision
|
|
|
7,620
|
|
|
63,651
|
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,002,258
|
)
|
|
(762,159
|
)
|
|
Inventories
|
|
|
(266,222
|
)
|
|
(231,027
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(177,648
|
)
|
|
(106,990
|
)
|
|
Other
assets
|
|
|
2,405
|
|
|
920,621
|
|
|
Accounts
payable and other current liabilities
|
|
|
1,786,826
|
|
|
1,141,084
|
|
|
Unearned
revenue and other liabilities
|
|
|
(33,040
|
)
|
|
(94,905
|
)
|
|
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
(14,906
|
)
|
|
1,396,098
|
|
|
Net
cash (used in) operating activities of discontinued
operations
|
|
|
―
|
|
|
(62,338
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
(14,906
|
)
|
|
1,333,760
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(372,114
|
)
|
|
(104,723
|
)
|
|
Increase
in restricted cash - escrow
|
|
|
―
|
|
|
(1,000,000
|
)
|
|
Purchase
of treasury stock
|
|
|
(694,975
|
)
|
|
―
|
|
|
Net
proceeds from sale of subsidiary
|
|
|
808,169
|
|
|
―
|
|
|
Due
to sellers of Twincraft
|
|
|
―
|
|
|
2,840,139
|
|
|
Purchase
of businesses, net of cash acquired
|
|
|
―
|
|
|
(25,708,492
|
)
|
|
Net
cash (used in) investing activities for continuing
operations
|
|
|
(258,920
|
)
|
|
(23,973,076
|
)
|
|
Net
cash (used in) investing activities of discontinued
operations
|
|
|
―
|
|
|
―
|
|
|
Net
cash (used in) investing activities
|
|
|
(258,920
|
)
|
|
(23,973,076
|
)
|
LANGER,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
|
|
|
For the three months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Repayment
of note payable
|
|
|
(9,469
|
)
|
|
(9,414
|
)
|
|
Net
cash (used in) financing activities of continuing
operations
|
|
|
(9,469
|
)
|
|
(9,414
|
)
|
|
Net
cash (used in) financing activities of discontinued
operations
|
|
|
―
|
|
|
—
|
|
|
Net
cash (used in) financing activities
|
|
|
(9,469
|
)
|
|
(9,414
|
)
|
|
Effect
of exchange rate changes on cash
|
|
|
(16,561
|
)
|
|
(6,758
|
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(299,856
|
)
|
|
(22,655,488
|
)
|
|
Cash
and cash equivalents at beginning of year, including $158,518,
reported
under assets held for sale in 2007.
|
|
|
2,422,453
|
|
|
(29,766,997
|
)
|
|
Cash
and cash equivalents at end of year, including $240,391, reported
under
assets held for sale in 2007.
|
|
$
|
2,122,597
|
|
$
|
(7,111,509
|
)
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
85,856
|
|
$
|
85,545
|
|
|
Income
taxes
|
|
$
|
29,350
|
|
$
|
38,312
|
|
|
Supplemental
Disclosures of Non Cash Investing Activities:
|
|
|
|
|
|
|
|
|
Issuance
of stock related to the
acquisition of Regal
|
|
|
|
|
$
|
1,372,226
|
|
|
Issuance
of stock related to the
acquisition of Twincraft
|
|
|
|
|
$
|
9,700,766
|
|
|
Note
receivable related to sale
of subsidiary
|
|
$
|
221,230
|
|
|
|
|
|
Supplemental
Disclosures of Non Cash Financing Activities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities relating to property and
equipment
|
|
$
|
101,797
|
|
$
|
1,273
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
LANGER,
INC. AND SUBSIDIARIES
Notes
To Unaudited Condensed Consolidated Financial Statements
NOTE
1
—SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
(a)
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim
financial information and with the instructions to Form 10-Q and
Article 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
In
the opinion of management, all adjustments (consisting of normal recurring
accruals), other than the purchases and sale of affiliates discussed herein,
considered necessary for a fair presentation have been included. These unaudited
condensed consolidated financial statements should be read in conjunction
with
the related financial statements and consolidated notes, included in the
Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2007.
Operating
results for the three months ended March 31, 2008 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2008. During the three months ended March 31, 2007, the
Company consummated two acquisitions which are included in the Company’s
financial statements for this period (see Note 2, "Acquisitions").
In
accordance with the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” the assets and liabilities relating to Langer
(UK) Limited (“Langer UK”) have been reclassified as held for sale in the
Consolidated Balance Sheets and the results of operations of Langer UK for
the
current and prior period have been reported as discontinued operations. The
Company sold the capital stock of Langer UK to a third party on January 18,
2008. We classify as discontinued operations for all periods presented any
component of our business that we believe is probable of being sold or has
been
sold that has operations and cash flows that are clearly distinguishable
operationally and for financial reporting purposes. For those components,
we
have no significant continuing involvement after disposal, and their operations
and cash flows are eliminated from our ongoing operations. Sales of significant
components of our business not classified as discontinued operations are
reported as a component of income from continuing operations.
(b)
Sale
of Langer (UK) Limited
On
January 18, 2008, the Company sold all of the outstanding capital stock of
its
wholly owned subsidiary, Langer (UK) Limited (“Langer UK”) to an affiliate of
Sole Solutions, a retailer of specialty footwear based in the Untied Kingdom.
The sales price was $1,155,313, of which $934,083 was paid in cash at closing
and the remaining $221,230 is evidenced by a note receivable. In addition,
transaction costs in the amount of $125,914 were incurred. The note bears
interest at 8.5% and does not require any monthly payments of principal or
interest. The note and accrued interest are due in full on January 18, 2010
and
are included in other long-term assets. In addition, upon closing, the Company
entered into an exclusive sales agency agreement and distribution services
agreement by which Langer UK will act as sales agent and distributor for
Silipos
products in the United Kingdom, Europe, Africa, and Israel. These agreements
have a term of three years.
(c)
Restricted
Cash
Restricted
cash consist of $1,000,000 being held in escrow relating to the Company’s
acquisition of Twincraft, Inc. (“Twincraft”). The escrow will be released July
23, 2008 (18 months after the closing), net of any claims against the escrow
plus any accrued interest and will be reflected as an adjustment to goodwill
at
that time.
(d)
Seasonality
Revenue
derived from sales of orthotic devices in North America has historically
been
significantly higher in the warmer months of the year. Revenues related to
the
personal care segment fluctuate during the year. Historically, these revenues
increase due to seasonal demand during the second and fourth
quarters.
(e)
Stock-Based
Compensation
The
total
stock compensation expense for the three months ended March 31, 2008 and
2007
was $32,120 and $60,358, respectively, and is included in general and
administrative expenses in the consolidated statements of
operations.
For
the three months ended March 31, 2007, the Company granted 425,000 options
under
the Company’s 2005 Stock Incentive Plan (the “2005 Plan”). These options were
granted to employees of Twincraft at an exercise price of $4.20. A total
of
325,000 options were awarded to employees, and 100,000 options were awarded
to a
non-employee.
The
Company accounts for equity issuances to non-employees in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services.” All transactions in which goods
or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is
more
reliably measurable. The fair value of the option issued is used to measure
the
transaction, as this is more reliable than the fair market value of the services
received. The Company utilizes the Black-Scholes option pricing model to
determine the fair value at the end of each reporting period. Non-employee
stock-based compensation expense is subject to periodic adjustment and is
being
recognized over the vesting periods of the related options. The fair value
of
the equity instrument is charged directly to compensation expense and additional
paid-in-capital. During the three months ended March 31, 2007, the Company
issued 100,000 stock options in conjunction with a non-employee consulting
agreement with Fifth Element, LLC. For the three months ended March 31, 2008
and
March 31, 2007, $4,989 and $9,507, respectively were recorded as consulting
expense.
Restricted
Stock
On
January 23, 2007, the Board of Directors approved a grant of 75,000 shares
of
restricted stock to Kathy Kehoe, 275,000 shares of restricted stock to W.
Gray
Hudkins, 7,500 shares of restricted stock to Stephen M. Brecher, 7,500 shares
of
restricted stock to Burtt R. Ehrlich, 7,500 shares to Stuart Greenspon and
500,000 shares of restricted stock to Warren B. Kanders, subject to vesting
upon
satisfaction of certain performance conditions. In September 2007, the Board
of
Directors approved a grant of 75,000 shares of restricted stock to Kathleen
P.
Bloch, subject to vesting upon satisfaction of certain performance conditions.
During the three months ended March 31, 2008, the restricted shares issued
to
Kathy Kehoe were forfeited on account of her resignation as an officer and
employee effective February 5, 2008. The Company will record stock compensation
expense with respect to these grants when the vesting of the grants is
probable.
(f)
Recently
Issued Accounting Pronouncements
On
September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. SFAS No. 157 provides guidance
related to estimating fair value and requires expanded disclosures. The standard
applies whenever other standards require (or permit) assets or liabilities
to be
measured at fair value. The standard does not expand the use of fair value
in
any new circumstances. In February 2008, the FASB provided a one year deferral
for the implementation of SFAS No. 157 for non-financial assets and liabilities
recognized or disclosed at fair value in the financial statements on a
non-recurring basis. The Company adopted SFAS No. 157 as of January 1, 2008.
The
Company has no financial assets or liabilities that are currently measured
at
fair value on a recurring basis and therefore had no impact upon
adoption.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 allows companies to
choose to measure many financial instruments and certain other items at fair
value. The statement requires that unrealized gains and losses on items for
which the fair value option has been elected be reported in earnings. SFAS
No.
159 is effective for fiscal years beginning after November 15, 2007, although
earlier adoption is permitted. SFAS No. 159 was effective for the Company
beginning in the first quarter of fiscal 2008. The Company did not elect
to
adopt the provisions under SFAS No. 159, therefore, the adoption of SFAS
No. 159
in the first quarter of fiscal 2008 did not impact the Company’s financial
position or results of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141 (R)”), which requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest
of an
acquiree at the acquisition date, measured at their fair values as of that
date,
with limited exceptions. SFAS No.141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008. Earlier
application is prohibited. We anticipate this will have a material effect
on
future acquisitions upon adoption.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which requires (1) ownership interests in
subsidiaries held by parties other than the parent to be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity; (2) the amount of
consolidated net income attributable to the parent and to the non-controlling
interest be clearly identified and presented on the face of the consolidated
statement of income; and (3) changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently as equity transactions. SFAS No. 160 applies prospectively
to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Earlier application is prohibited. The adoption of SFAS No. 160
is not
expected to have a material impact on our results of operations or our financial
position.
(g)
Stock
Repurchase
In
accordance with the previously announced stock repurchase program, the Company
purchased 342,352 shares of its common stock at a price of $2.00 per share
on
January 25, 2008. The total cost of this purchase, including brokerage
commission, amounted to $694,975.
NOTE
2
—ACQUISITIONS
(a)
Acquisition
of Regal
On
January 8, 2007, the Company acquired the business of Regal Medical Supply,
LLC
(“Regal”), which is a provider of contracture management products and services
to the long-term care market of skilled nursing and assisted living facilities
in 22 states. Regal was acquired in an effort to gain access to the long-term
care market, to gain a captive distribution channel for certain custom orthotic
products the Company manufactures into markets the Company has not previously
penetrated, and to establish a national network of service professionals
to
enhance its customer relationships in both its core and new markets. The
results
of operations of Regal since January 8, 2007 have been included in the Company’s
consolidated financial statements as part of its own operating
segment.
The
initial consideration for the acquisition of Regal (before post-closing
adjustments) was approximately $1,640,000, which was paid through the issuance
of 379,167 shares of the Company’s common stock valued under the asset purchase
agreement at a price of $4.329 per share. In addition, transaction costs
in the
amount of $69,721 were incurred, which increased the acquisition cost to
$1,709,721. The purchase price was subject to a post-closing downward adjustment
to the extent that the working capital as reflected on Regal’s January 8, 2007
(closing date) balance sheet was less than $675,000. On March 12, 2007, the
Company and Regal agreed to a post-closing downward adjustment, pursuant
to
terms of the purchase agreement, reducing the price from $1,709,721 to
$1,441,670, which was effected by the cancellation of 45,684 shares, which
were
valued for purposes of the adjustment at $4.114 per share, which was the
average
closing price of the Company’s common stock on The NASDAQ Global Market
(“NASDAQ”) for the 5 trading days ended December 19, 2006. Subsequently, the
Company reclassified certain assets, and asserted against the seller a claim
for
receivables acquired but not collected pursuant to the terms of the purchase
agreement; in March 2008, the Company accepted a return of 25,000 shares
of its
common stock from the sellers in full settlement of this claim. On the date
of
the transfer of these shares, the fair value of our common stock was $2.04
per
share, and the Company recorded a loss of $49,000 related to this settlement.
The Company entered into a three-year employment agreement with a former
employee and member of the seller and a non-competition agreement with the
seller and seller’s members.
The
following table sets forth the components of the purchase price:
|
Total
stock consideration
|
|
$
|
1,371,949
|
|
|
Transaction
costs
|
|
|
69,721
|
|
|
Total
purchase price
|
|
$
|
1,441,670
|
|
The
following table provides the final allocation of the purchase price based
upon
the fair value of the assets acquired and liabilities assumed at January
8,
2007:
|
Assets:
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
387,409
|
|
|
Amounts
receivable from seller
|
|
|
100,000
|
|
|
Property
and equipment
|
|
|
25,030
|
|
|
Goodwill
|
|
|
1,277,521
|
|
|
|
|
|
1,789,960
|
|
|
Liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
|
275,206
|
|
|
Accrued
liabilities
|
|
|
73,084
|
|
|
|
|
|
348,290
|
|
|
Total
purchase price
|
|
$
|
1,441,670
|
|
In
accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets,” the Company will not amortize goodwill. The value of allocated goodwill
is not deductible for income tax purposes.
(b)
Acquisition
of Twincraft
On
January 23, 2007, the Company completed the acquisition of all of the
outstanding stock of Twincraft. Twincraft is a leading private label
manufacturer of specialty bar soaps supplying the health and beauty markets,
mass markets and direct marketing channels and operates out of a manufacturing
facility in Winooski, Vermont. Twincraft was acquired to enable the Company
to
expand into additional product categories in the personal care market, to
increase the Company’s customer exposure for its current line of Silipos
gel-based skincare products, and to take advantage of potential commonalities
in
research and development advances between Twincraft’s and the Company’s current
product lines. The purchase price for Twincraft was determined by arm’s length
negotiations between the Company and the former stockholders of Twincraft
and
was based in part upon analyses and due diligence, which the Company performed
on the financial records of Twincraft, focusing on enterprise value, historic
cash flows and expected future cash flows to determine valuation. The results
of
operations of Twincraft since January 23, 2007 (the date of acquisition)
have
been included in the Company’s consolidated financial statements as part of the
personal care products operating segment.
The
purchase price paid for Twincraft at the time of closing was approximately
$26,650,000, of which $1,500,000 was held in two separate escrows to partially
secure payment of any indemnification claims, and payment for any purchase
price
adjustments and/or working capital adjustments based on the final post-closing
audit. On May 30, 2007, the escrow of $500,000 was released to the sellers
of
Twincraft. The remaining escrow of $1,000,000 will not be released until
18
months after the closing, net of any claims which the Company has against
the
escrow. This portion of the escrow is considered to be contingent consideration
and not part of the purchase price and is classified as restricted cash on
the
Company’s consolidated balance sheet. These escrow funds will increase goodwill
when and if they are released in July 2008. The purchase price was paid 85%
in
cash and the balance through the issuance of the Company’s common stock to the
sellers of Twincraft, which was valued based on the average closing price
of the
Company’s common stock on the two days before, two days after, and on November
14, 2006, which was the date the Company and Twincraft’s stockholders entered
into the purchase agreement. The purchase price was subject to adjustment
based
on Twincraft’s working capital target of $5,100,000 at closing, and operating
performance for the year ended December 31, 2006. On May 15, 2007, the working
capital adjustment, which was agreed to by the Company and the sellers of
Twincraft, in effect increased the purchase price of the Twincraft acquisition
by approximately $1,276,000 payable in cash. In addition, on May 15, 2007,
the
operating performance adjustments, which were agreed to by the Company and
the
sellers of Twincraft, increased the purchase price of Twincraft by approximately
$1,867,000, and the adjustments were made by the issuance of 68,981 shares
of
the Company’s common stock (representing 15% of the adjustment to the purchase
consideration) and the balance of approximately $1,564,000 was paid in cash.
The
cash adjustments for working capital and operating performance totaling
approximately $2,840,000 were paid to the sellers in May 2007. During the
year
2007, approximately $193,000 of additional transaction costs relating to
the
Twincraft acquisition were incurred, resulting in an increase to the cost
of the
Twincraft acquisition, and is reflected in goodwill. Total transactions costs
were $1,445,714.
Effective
January 23, 2007, Twincraft entered into three-year employment agreements
with
Peter A. Asch, who serves as President of Twincraft, and A. Lawrence Litke,
who
serves as Chief Operating Officer of Twincraft. Twincraft also entered into
a
consulting agreement with Fifth Element, LLC, a consulting firm controlled
by
Joseph Candido, who serves as Vice President of Sales and Marketing for
Twincraft. The employment agreements of Mr. Asch and Mr. Litke, and the
consulting agreement of Fifth Element, LLC, contain non-competition and
non-solicitation provisions covering the terms of their agreements and for
any
extended severance periods and for one year after termination of the agreements
or the extended severance periods, if any. Messrs. Asch, Litke and Candido
were
stockholders of Twincraft immediately before the sale of Twincraft to the
Company.
Subject
to the terms and conditions set forth in the Twincraft purchase agreement,
the
sellers of Twincraft (including Mr. Asch) can earn additional deferred
consideration for the years ended 2007 and 2008. Deferred consideration would
have been earned for the year ending December 31, 2007 if Twincraft’s adjusted
EBITDA (as defined) exceeded its 2006 adjusted EBITDA. For the year ended
December 31, 2007, the sellers of Twincraft did not earn any additional
consideration. The sellers of Twincraft will earn deferred consideration
for the
year ending December 31, 2008, if Twincraft’s 2008 EBITDA exceeds $4,383,000, in
which case the Company will be obligated to pay to the Sellers three times
the
difference between Twincraft’s 2008 EBITDA and $4,383,000. In the event this
target is met, the payment would be compensation expense, not purchase price,
since it is contingent upon their being employed.
On
January 23, 2007, as part of their employment agreements, the Company granted
stock options of 200,000 and 100,000 shares, respectively, to Messrs. Asch
and
Litke, all under the Company’s 2005 Stock Incentive Plan, to purchase shares of
the Company’s common stock having an exercise price equal to $4.20 per share,
which vest in three equal consecutive annual tranches beginning on January
23,
2009. The Company also granted stock options, on January 23, 2007, to Mr.
Mark
Davitt, another Twincraft employee, for 25,000 shares with an exercise price
of
$4.20 per share, vesting in three equal consecutive annual tranches commencing
on the first anniversary of the grant date. The Company is recognizing stock
compensation expenses related to these options over the requisite service
period
in accordance with SFAS No. 123(R). Pursuant to EITF No. 96-18, the Company
recorded consulting expenses relating to 100,000 stock options granted to
Fifth
Element, LLC, a non-employee consultant, which is controlled by Mr. Joseph
Candido, a Twincraft officer and one of the former Twincraft
stockholders.
The
following table sets forth the components of the purchase price:
|
Total
cash consideration
|
|
$
|
24,492,639
|
|
|
Total
stock consideration
|
|
|
4,701,043
|
|
|
Transaction
costs
|
|
|
1,445,714
|
|
|
Total
purchase price
|
|
$
|
30,639,396
|
|
The
following table provides the final allocation of the purchase price based
upon
the fair value of the assets acquired and liabilities assumed at January
23,
2007:
|
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
36,966
|
|
|
Accounts
receivable
|
|
|
3,984,756
|
|
|
Inventories
|
|
|
4,200,867
|
|
|
Other
current assets
|
|
|
127,911
|
|
|
Property
and equipment
|
|
|
7,722,140
|
|
|
Goodwill
|
|
|
7,022,425
|
|
|
Identifiable
intangible assets (trade names of $2,629,300 and repeat customer
base of
$7,214,500)
|
|
|
9,843,800
|
|
|
|
|
|
32,938,865
|
|
|
Liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
|
517,929
|
|
|
Accrued
liabilities
|
|
|
1,781,540
|
|
|
|
|
|
2,299,469
|
|
|
Total
purchase price
|
|
$
|
30,639,396
|
|
In
accordance with the provisions of SFAS No. 142, the Company will not amortize
goodwill. The intangible assets are deemed to have definite lives and will
be
amortized over an appropriate period that matches the economic benefit of
the
intangible assets. The trade names will be amortized over a 23 year period
and
the repeat customer base over a 19 year period. The customer list is amortized
using an accelerated method that reflects the economic benefit of the asset.
The
value allocated to goodwill and identifiable intangible assets in the purchase
of Twincraft are not deductible for income tax purposes.
(c)
Unaudited
Pro Forma Results
Below
are
the unaudited pro forma results of operations for the three months ended
March
31, 2007, as if the Company had acquired Regal and Twincraft on January 1,
2007.
Such pro forma results are not necessarily indicative of the actual consolidated
results of operations that would have been achieved if the acquisition occurred
on the date assumed, nor are they necessarily indicative of future consolidated
results of operations.
Unaudited
pro forma results for the three months ended March 31, 2007 were:
|
|
|
2007
|
|
|
Net
sales
|
|
$
|
16,256,152
|
|
|
Net
(loss)
|
|
|
(680,608
|
)
|
|
(Loss)
income per share – basic and diluted
|
|
$
|
(0.06
|
)
|
(3)
Discontinued
Operations
On
January 18, 2008, the Company completed the sale of Langer (UK) Limited (“Langer
UK”). In accordance with SFAS No. 144, the results of operations of Langer UK
for the current and prior periods have been reported as discontinued operations,
and the assets and liabilities related to Langer UK have been classified
as held
for sale in the Consolidated Balance Sheets. Operating results of Langer
UK,
which were formerly included in our medical products segment, are summarized
as
follows:
|
|
|
Three months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Total
revenues
|
|
$
|
—
|
|
$
|
818,579
|
|
|
Net
(loss) from Langer UK operations
|
|
$
|
—
|
|
$
|
(72,689
|
)
|
|
Other
income, net
|
|
|
—
|
|
|
(504
|
)
|
|
Loss
before income taxes
|
|
|
—
|
|
|
(72,185
|
)
|
|
(Provision
for) benefit from income taxes
|
|
|
—
|
|
|
—
|
|
|
Loss
from discontinued operations
|
|
$
|
—
|
|
$
|
(72,185
|
)
|
(4)
Net Assets Held for Sale
The
assets and liabilities of Langer UK have been reclassified as held for sale
in
the Consolidated Balance Sheets. The assets and liabilities related to Langer
UK
consist of the following
|
|
|
March
31,
|
|
December
31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Cash
|
|
$
|
—
|
|
$
|
—
|
|
|
Accounts
receivable
|
|
|
—
|
|
|
572,870
|
|
|
Inventories
|
|
|
—
|
|
|
380,132
|
|
|
Other
current assets
|
|
|
—
|
|
|
54,209
|
|
|
Goodwill
|
|
|
—
|
|
|
287,171
|
|
|
Property
and equipment
|
|
|
—
|
|
|
207,335
|
|
|
Assets
held for sale
|
|
$
|
—
|
|
$
|
1,501,717
|
|
|
Accounts
payable
|
|
$
|
—
|
|
$
|
132,102
|
|
|
Other
current liabilities
|
|
|
—
|
|
|
340,216
|
|
|
Liabilities
related to assets held for sale
|
|
$
|
—
|
|
$
|
472,318
|
|
(5)
Identifiable Intangible Assets
Identifiable
intangible assets at March 31, 2008 consisted of:
|
Assets
|
|
Estimated
Useful Life (Years)
|
|
Adjusted
Cost
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
|
Non-competition
agreements – Benefoot/Bi-Op
|
|
|
4
|
|
$
|
572,000
|
|
$
|
451,218
|
|
$
|
120,782
|
|
|
License
agreements and related technology – Benefoot
|
|
|
5
to 8
|
|
|
1,156,000
|
|
|
785,910
|
|
|
370,090
|
|
|
Repeat
customer base – Bi-Op
|
|
|
7
|
|
|
500,000
|
|
|
216,666
|
|
|
283,334
|
|
|
Trade
names – Silipos
|
|
|
Indefinite
|
|
|
2,688,000
|
|
|
―
|
|
|
2,688,000
|
|
|
Repeat
customer base – Silipos
|
|
|
7
|
|
|
1,680,000
|
|
|
954,100
|
|
|
725,900
|
|
|
License
agreements and related technology – Silipos
|
|
|
9.5
|
|
|
1,364,000
|
|
|
502,526
|
|
|
861,474
|
|
|
Repeat
customer base – Twincraft
|
|
|
19
|
|
|
7,214,500
|
|
|
642,450
|
|
|
6,572,050
|
|
|
Trade
names – Twincraft
|
|
|
23
|
|
|
2,629,300
|
|
|
133,370
|
|
|
2,495,930
|
|
|
|
|
|
|
|
$
|
17,803,800
|
|
$
|
3,686,240
|
|
$
|
14,117,560
|
|
Identifiable
intangible assets at December 31, 2007 consisted of:
|
Assets
|
|
Estimated
Useful Life (Years)
|
|
Adjusted
Cost
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
|
Non-competition
agreements – Benefoot/Bi-Op
|
|
|
4
|
|
$
|
572,000
|
|
$
|
431,089
|
|
$
|
140,911
|
|
|
License
agreements and related technology – Benefoot
|
|
|
5 to 8
|
|
|
1,156,000
|
|
|
762,806
|
|
|
393,194
|
|
|
Repeat
customer base – Bi-Op
|
|
|
7
|
|
|
500,000
|
|
|
200,926
|
|
|
299,074
|
|
|
Trade
names – Silipos
|
|
|
Indefinite
|
|
|
2,688,000
|
|
|
—
|
|
|
2,688,000
|
|
|
Repeat
customer base – Silipos
|
|
|
7
|
|
|
1,680,000
|
|
|
885,807
|
|
|
794,193
|
|
|
License
agreements and related technology – Silipos
|
|
|
9.5
|
|
|
1,364,000
|
|
|
466,632
|
|
|
897,368
|
|
|
Repeat
customer base – Twincraft
|
|
|
19
|
|
|
7,214,500
|
|
|
494,080
|
|
|
6,720,420
|
|
|
Trade
names – Twincraft
|
|
|
23
|
|
|
2,629,300
|
|
|
104,791
|
|
|
2,524,509
|
|
|
|
|
|
|
|
$
|
17,803,800
|
|
$
|
3,346,131
|
|
$
|
14,457,669
|
|
Aggregate
amortization expense relating to the above identifiable intangible assets
for
the three months ended March 31, 2008 and 2007 was $340,109, and $285,701,
respectively. As of March 31, 2008, the estimated future amortization expense
is
$1,040,794 for 2008, $1,318,039 for 2009, $1,200,257 for 2010, $1,137,073
for
2011, $1,133,307 for 2012 and $5,600,090 thereafter.
(6)
Inventories, net
Inventories,
net, consisted of the following:
|
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
Raw
materials
|
|
$
|
4,270,480
|
|
$
|
4,266,875
|
|
|
Work-in-process
|
|
|
583,292
|
|
|
552,778
|
|
|
Finished
goods
|
|
|
3,729,139
|
|
|
3,422,556
|
|
|
|
|
|
8,582,911
|
|
|
8,242,209
|
|
|
Less:
Allowance for excess and obsolescence
|
|
|
1,652,424
|
|
|
1,561,856
|
|
|
|
|
$
|
6,930,487
|
|
$
|
6,680,353
|
|
(7)
Credit Facility
On
May 11, 2007, the Company entered into a secured revolving credit facility
agreement (the “Credit Facility”) with Wachovia Bank, N.A., expiring on
September 30, 2011. On April 16, 2008, the Company entered into an amendment
of
the Credit Facility with Wachovia that changed certain terms of the agreement.
The Credit Facility, as amended, provides an aggregate maximum availability,
if
and when the Company has the requisite levels of assets, in the amount of
$15
million, and is subject to a sub-limit of $5 million for the issuance of
letter
of credit obligations, another sub-limit of $3 million for term loans, and
a
sub-limit of $4 million on loans against inventory. The Credit Facility is
collateralized by a first priority security interest in inventory, accounts
receivables and all other assets and is guaranteed on a full and unconditional
basis by the Company and each of the Company’s domestic subsidiaries (Silipos,
Twincraft and Regal) and any other company or person that hereafter becomes
a
borrower or owner of any property in which the lender has a security interest
under the Credit Facility. As of March 31, 2008, the Company had not made
draws
on the Credit Facility and has approximately $8.0 million available under
the
Credit Facility related to eligible accounts receivable and inventory. In
addition, the Company has approximately $1.8 million of availability related
to
property and equipment for term loans.
If
the Company’s availability under the Credit Facility drops below $3 million or
borrowings under the facility exceed $10 million, the Company is required
under
the Credit Facility to deposit all cash received from customers into a blocked
bank account that will be swept daily to directly pay down any loan outstanding
under the Credit Facility. The Company would not have any control over the
blocked bank account.
The
Company’s borrowings availabilities are limited to 85% of eligible accounts
receivable and 60% of eligible inventory, and are subject to the satisfaction
of
certain conditions. Term loans shall be secured by equipment or real estate
hereafter acquired. The Company is required to submit monthly unaudited
financial statements to the lender.
If
the Company’s availability is less than $3,000,000, the Credit Facility requires
compliance with various covenants including but not limited to a Fixed Charge
Coverage Ratio of not less than 1.0 to 1.0. Availability under the Credit
Facility is reduced by 40% of the outstanding letters of credit related to
the
purchase of eligible inventory, as defined, and 100% of all other outstanding
letters of credit. At March 31, 2008, the Company had outstanding letters
of
credit related to the purchase of eligible inventory of approximately $778,000,
and other outstanding letters of credit of approximately $571,000.
The
Company is required to pay monthly interest in arrears at 0.5 percent above
the
lender’s prime rate or, at the Company’s election, at 2.5 percentage points
above an Adjusted Eurodollar Rate, as defined. To the extent that amounts
under
the Credit Facility remain unused, while the Credit Facility is in effect
and
for so long thereafter as any of the obligations under the Credit Facility
are
outstanding, the Company will pay a monthly commitment fee of three eights
of
one percent (0.375%) on the unused portion of the loan commitment. The Company
paid the lender a closing fee in the amount of $75,000 in August 2007. As
of
March 31, 2008, the Company has recorded deferred financing costs in connection
with the Credit Facility of $394,556, of which $22,465 has been amortized
during
the three months ended March 31, 2008 and the balance will be amortized over
the
life of the Credit Facility. In April 2008, the Company paid a $20,000 fee
to
Wachovia related to the Amendment of its Credit Facility, which has been
recorded as a deferred financing cost and will be amortized over the remaining
term of the Credit Facility.
(8)
Segment Information
During
the three months ended March 31, 2008 and 2007, the Company operated in three
segments (medical products, personal care, and Regal). In January 2007, the
Company acquired Regal, which operates as part of its own segment. Also,
in
January 2007, the Company acquired Twincraft, which operates as part of the
personal care segment. Assets and expenses related to the Company’s corporate
offices are reported under “other” as they do not relate to any of the operating
segments. Intersegment sales are recorded at cost.
Segment
information for the three months ended March 31, 2008 and 2007 is
summarized as follows:
|
Three months ended March 31, 2008
|
|
Medical Products
|
|
Personal
Care
|
|
Regal
|
|
Other
|
|
Total
|
|
|
Net
sales
|
|
$
|
6,261,601
|
|
$
|
8,515,315
|
|
$
|
1,001,255
|
|
|
―
|
|
$
|
15,778,171
|
|
|
Gross
profit
|
|
|
2,421,084
|
|
|
1,774,100
|
|
|
672,206
|
|
|
―
|
|
|
4,867,390
|
|
|
Operating
(loss) income
|
|
|
492,219
|
|
|
(139,035
|
)
|
|
(82,244
|
)
|
|
(1,570,619
|
)
|
|
(1,299,679
|
)
|
|
Total
assets as of March 31, 2008
|
|
|
27,526,593
|
|
|
36,361,172
|
|
|
2,257,793
|
|
|
6,117,666
|
|
|
72,263,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007
|
|
|
Medical Products
|
|
|
Personal
Care
|
|
|
Regal
|
|
|
Other
|
|
|
Total
|
|
|
Net
sales
|
|
$
|
6,503,585
|
|
$
|
7,082,898
|
|
$
|
734,480
|
|
|
―
|
|
$
|
14,320,963
|
|
|
Gross
profit
|
|
|
2,449,241
|
|
|
2,304,803
|
|
|
536,685
|
|
|
―
|
|
|
5,290,729
|
|
|
Operating
(loss) income
|
|
|
456,681
|
|
|
480,995
|
|
|
74,335
|
|
|
(1,259,729
|
)
|
|
(247,718
|
)
|
|
Total
assets as of March 31, 2007
|
|
|
32,287,607
|
|
|
41,457,913
|
|
|
2,068,776
|
|
|
3,848,474
|
|
|
79,662,770
|
|
Geographical
segment information for the three months ended March 31, 2008 and 2007 is
summarized as follows:
|
Three months ended March 31, 2008
|
|
United
States
|
|
Canada
|
|
United
Kingdom
|
|
Total
|
|
|
Net
sales to external customers
|
|
$
|
14,728,349
|
|
$
|
683,585
|
|
$
|
366,237
|
|
$
|
15,778,171
|
|
|
Intersegment
net sales
|
|
|
110,698
|
|
|
―
|
|
|
―
|
|
|
110,698
|
|
|
Gross
profit
|
|
|
4,304,395
|
|
|
281,984
|
|
|
281,011
|
|
|
4,867,390
|
|
|
Operating
(loss) income
|
|
|
(1,418,855
|
)
|
|
25,860
|
|
|
93,316
|
|
|
(1,299,679
|
)
|
|
Total
assets as of March 31, 2008
|
|
|
70,027,330
|
|
|
1,706,164
|
|
|
529,730
|
|
|
72,263,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007
|
|
|
United
States
|
|
|
Canada
|
|
|
United
Kingdom
|
|
|
Total
|
|
|
Net
sales to external customers
|
|
$
|
13,332,061
|
|
$
|
683,656
|
|
$
|
305,246
|
|
$
|
14,320,963
|
|
|
Intersegment
net sales
|
|
|
257,858
|
|
|
|
|
|
|
|
|
257,858
|
|
|
Gross
profit
|
|
|
4,726,565
|
|
|
341,483
|
|
|
222,681
|
|
|
5,290,729
|
|
|
Operating
(loss) income
|
|
|
(353,197
|
)
|
|
97,944
|
|
|
7,535
|
|
|
(247,718
|
)
|
|
Total
assets as of March 31, 2007
|
|
|
77,456,485
|
|
|
1,783,268
|
|
|
423,017
|
|
|
79,662,770
|
|
(9)
Comprehensive Loss
The
Company’s comprehensive income (loss) were as follows:
|
|
|
Three months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Net
loss
|
|
$
|
(1,851,601
|
)
|
$
|
(784,465
|
)
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Recognized
loss of unrecognized periodic pension costs
|
|
|
―
|
|
|
47,824
|
|
|
Change
in equity resulting from translation of financial statements into
U.S.
dollars
|
|
|
(73,642
|
)
|
|
(18,671
|
)
|
|
Comprehensive
loss
|
|
$
|
(1,925,243
|
)
|
$
|
(755,312
|
)
|
(10)
Income (Loss) per share
Basic
earnings per common share (“EPS”) are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings
per
common share are computed based on the weighted average number of common
shares,
after giving effect to dilutive common stock equivalents outstanding during
each
period. The diluted loss per share computations for the three months ended
March 31, 2008 and 2007 exclude approximately 1,823,000 and approximately
1,963,000 shares, respectively, related to employee stock options because
the
effect of including them would be anti-dilutive. The impact of the 5%
Convertible Notes on the calculation of the fully-diluted earnings per share
was
anti-dilutive and is therefore not included in the computation for the three
months ended March 31, 2008 and 2007, respectively.
The
following table provides a reconciliation between basic and diluted (loss)
earnings per share:
|
|
|
Three months ended March 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
Loss
|
|
Shares
|
|
Per
Share
|
|
Loss
|
|
Shares
|
|
Per
Share
|
|
|
Basic
and diluted EPS
|
|
$
|
(1,843,601
|
)
|
|
11,136,860
|
|
$
|
(.17
|
)
|
$
|
(784,465
|
)
|
|
11,183,415
|
|
$
|
(.07
|
)
|
(11)
Related Party Transactions
5%
Convertible Subordinated Notes
.
On December 8, 2006, the Company sold $28,880,000 of the Company’s 5%
Convertible Notes due December 7, 2011 in a private placement. The number of
shares of common stock issuable on conversion of the notes, as of March 31,
2008, is 6,195,165, and the conversion price as of such date was $4.6617. The
number of shares and conversion price are subject to adjustment in certain
circumstances. A trust controlled by Mr. Warren B. Kanders, the Company’s
Chairman of the Board of Directors and largest beneficial stockholder, owns
(as
a trustee for a member of his family) $2,000,000 of the 5% Convertible Notes,
and one director, Stuart P. Greenspon, owns $150,000 of the 5% Convertible
Note.
(12)
Litigation
On
or
about February 13, 2006, Dr. Gerald P. Zook filed a demand for arbitration
with
the American Arbitration Association, naming the Company and Silipos as 2 of
the
16 respondents. (Four of the other respondents are the former owners of Silipos
and its affiliates, and the other 10 respondents are unknown entities.) The
demand for arbitration alleges that the Company and Silipos are in default
of
obligations to pay royalties in accordance with the terms of a license agreement
between Dr. Zook and Silipos dated as of January 1, 1997, with respect to seven
patents owned by Dr. Zook and licensed to Silipos. Silipos has paid royalties
to
Dr. Gerald P. Zook, but Dr. Gerald P. Zook claims that greater royalties are
owed. The demand for arbitration seeks an award of $400,000 and reserves the
right to seek a higher award after completion of discovery. Dr. Gerald P. Zook
has agreed to drop Langer, Inc. (but not Silipos) from the arbitration, without
prejudice. The matter is in the discovery stage.
On
or
about February 13, 2006, Mr. Peter D. Bickel, who was the executive vice
president of Silipos, Inc., until January 11, 2006, alleged that he was
terminated by Silipos without cause and, therefore, was entitled, pursuant
to
his employment agreement, to a severance payment of two years’ base salary. On
or about February 23, 2006, Silipos commenced action in New York State Supreme
Court, New York County, against Mr. Bickel seeking, among other things, a
declaratory judgment that Mr. Bickel is not entitled to severance pay or other
benefits, on account of his breach of various provisions of his employment
agreement with Silipos and his non-disclosure agreement with Silipos, and that
he voluntarily resigned his employment with Silipos. Silipos also sought
compensatory and punitive damages for breaches of the employment agreement,
breach of the non-disclosure agreement, breach of fiduciary duties,
misappropriation of trade secrets, and tortious interference with business
relationships. On or about March 22, 2006, Mr. Bickel removed the lawsuit to
the
United States District Court for the Southern District of New York and filed
an
answer denying the material allegations of the complaints and counterclaims
seeking a declaratory judgment that his non-disclosure agreement is
unenforceable and that he is entitled to $500,000, representing two years’ base
salary, in severance compensation, on the ground that Silipos did not have
“cause” to terminate his employment. On August 8, 2006, the Court determined
that the restrictive covenant was enforceable against Mr. Bickel for the
duration of its term (which expired on January 11, 2007) to the extent of
prohibiting Mr. Bickel from soliciting certain key customers of the Company
with
whom he had worked during his employment with the company. The Company has
withdrawn, without prejudice, its claims for compensatory and punitive damages
for breaches of the employment agreement, breach of the non-disclosure
agreement, breach of fiduciary duties, misappropriation of trade secrets, and
tortuous interference with business relations. On October 12, 2007, the court
issued an opinion and order dismissing all of Mr. Bickel’s claims against
Silipos, denying Mr. Bickel’s motion to dismiss the remaining claims of Silipos
against him, and allowing Silipos to proceed with its claims against Mr. Bickel
for breach of fiduciary duty and disloyalty.
Additionally,
in the normal course of business, the Company may be subject to claims and
litigation in the areas of general liability, including claims of employees,
and
claims, litigation or other liabilities as a result of acquisitions completed.
The results of legal proceedings are difficult to predict and the Company cannot
provide any assurance that an action or proceeding will not be commenced against
the Company or that the Company will prevail in any such action or proceeding.
An unfavorable outcome of the arbitration proceeding commenced by Dr. Gerald
P.
Zook against Silipos may adversely affect the Company’s rights to manufacture
and/or sell certain products or raise the royalty costs of these certain
products.
An
unfavorable resolution of any legal action or proceeding could materially
adversely affect the market price of the Company’s common stock and its
business, results of operations, liquidity, or financial condition.
(13)
Subsequent Event -Termination of lease
The
Company expects to be moving its executive offices in May 2008. The Company
has
executed a surrender agreement with the landlord of 41 Madison Avenue, New
York
which provides for the termination of the lease effective May 19, 2008 (the
“surrender date”). As part of this agreement the landlord has agreed to forgive
the remaining outstanding balance of $139,281 on the Company’s existing note
payable with the landlord. When the Company vacates the premises in May, 2008,
the Company will record a non-cash net gain of approximately $352,000 in the
period ended June 30, 2008 associated with vacating this lease, comprised
primarily of the net deferred rent balance and forgiveness of the note payable.
In addition, the Company has entered into a sublease agreement for office space
at 245 5th Avenue, New York, New York. The sublease requires monthly payments
of
$13,889 per month, commencing May 2008, until June 30, 2009, which is the
expiration date of the sublease.
|
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
|
Overview
We
design, manufacture and distribute high-quality medical products and services
targeting the long-term care, orthopedic, orthotic and prosthetic markets.
Through our wholly-owned subsidiaries, Twincraft, Inc., and Silipos, Inc.,
we
also offer a diverse line of personal care products for the private label
retail, medical, and therapeutic markets. We sell our medical products primarily
in the United States and Canada, as well as in more than 30 other countries,
to
national, regional, and international distributors, directly to healthcare
professionals, and directly to patients in instances where we also are providing
product fitting services. We sell our personal care products primarily in North
America to branded marketers of such products, specialty retailers, direct
marketing companies, and companies that service various amenities markets.
We
acquired Twincraft, a leading designer and manufacturer of bar soap, and the
business of Regal Medical Supply, LLC, a North Carolina limited liability
company (“Regal”), which is a provider of contracture management products and
services to patients in long-term care and other rehabilitation settings, in
January 2007.
Our
broad
range of over 500 orthopedic products, including custom foot and ankle orthotic
devices, pre-fabricated foot products, rehabilitation products, and gel-based
orthopedic and prosthetics products, are designed to correct, protect, heal
and
provide comfort for the patient. Through Regal, we also provide patient services
in long-term care settings by assisting facility personnel in product selection,
order fulfillment, product fitting and billing services. Our line of personal
care products includes bar soap, gel-based therapeutic gloves and socks, scar
management products, and other products that are designed to cleanse and
moisturize specific areas of the body, often incorporating essential oils,
vitamins and nutrients to improve the appearance and condition of the
skin.
Acquisition
History
In
February 2001, an investor group and management team led by our current
Chairman of the Board of Directors, Warren B. Kanders, purchased a controlling
interest in Langer, Inc., a custom orthotics company distributing its products
primarily to podiatric professionals.
The
investor group and management team since that time have evolved the Company’s
business toward a growth strategy in both the medical products and personal
care
industries. Since that time, we have consummated the following strategic
acquisitions:
|
|
·
|
Twincraft
.
On January 23, 2007, we acquired Twincraft, our largest acquisition
to date, a designer and manufacturer of bar soap focused on the health
and
beauty, direct marketing, amenities and mass market channels. We
acquired
Twincraft to expand into additional product categories in the personal
care market, to increase our customer exposure for our current line
of
Silipos gel-based skincare products, and to take advantage of potential
commonalities in research and development advances between Twincraft’s and
our product groups. The aggregate consideration paid by us in connection
with this acquisition was approximately $30.6 million, including
transaction costs, paid in cash ($25,938,353) and common stock ($4,701,043
valued at $4.40 per share) of the Company. The sellers of Twincraft
can
earn additional compensation in 2008, based upon the achievement
of
specific EBITDA targets per the terms of the Twincraft purchase
agreement.
|
|
|
·
|
Regal
.
On January 8, 2007, we acquired Regal, a provider of contracture
management products and services to patients in long-term care and
other
rehabilitation settings. We acquired Regal as part of an effort to
gain
access to the long-term care market, to gain a captive distribution
channel for certain custom products we manufacture into a market
we
previously had been unable to penetrate, to obtain higher average
selling
prices for these products, and to establish a national network of
service
professionals to enhance our customer relationships in our core markets
and new markets. The initial consideration for Regal was approximately
$1.7 million, which has since been reduced to approximately
$1.4 million due to a shortfall in the amount of working capital
delivered at closing and certain other post-closing adjustments.
|
|
|
·
|
Silipos
.
On September 30, 2004, we acquired Silipos, Inc., a designer,
manufacturer and marketer of gel-based products focusing on the
orthopedic, orthotic, prosthetic, and skincare markets. We acquired
Silipos
because of its distribution channels and proprietary products, and
to
enable us to expand into additional product lines that are part of
our
market focus. The aggregate consideration paid by us in connection
with
this acquisition was approximately $17.3 million, including
transaction costs, paid in cash and
notes.
|
|
|
·
|
Bi-Op
.
On January 13, 2003, we acquired Bi-Op Laboratories, Inc. (“Bi-Op”),
which is engaged in the design, manufacture and sale of footwear
and foot
orthotic devices as well as orthotic and prosthetic services. We
acquired
Bi-Op to gain access to additional markets and complementary product
lines. The aggregate consideration, including transaction costs,
was
approximately $2.2 million, paid in cash and shares of our common
stock.
|
|
|
·
|
Benefoot
.
On May 6, 2002, we acquired the net assets of Benefoot, Inc., and
Benefoot Professional Products, Inc. (together, “Benefoot”). Benefoot
designed, manufactured and distributed custom orthotics, custom
Birkenstock® sandals, therapeutic shoes, and prefabricated orthotic
devices to healthcare professionals. We acquired Benefoot to gain
additional scale in our historic custom orthotics business as well
as to
gain access to complementary product lines. The aggregate consideration,
including transaction costs, was approximately $7.9 million,
consisting of cash, notes, the assumption of liabilities consisting
of
approximately $0.3 million of long-term debt paid at closing and
shares of our common stock.
|
Recent
Developments
|
|
·
|
In
November 2007 we began a study of strategic alternatives available
to us
with regard to our various operating companies. We continue to consider
acquisitions in our target markets, as well as examine the possibility
of
divesting certain assets.
|
|
|
·
|
Langer
UK
.
On January 18, 2008 we sold all of the outstanding capital stock
of the
Company’s wholly- owned subsidiary, Langer (UK) Limited (“Langer UK”) to
an affiliate of Sole Solutions, a retailer of specialty footwear
based in
the United Kingdom. The sale price was approximately $1,155,000,
of which
$934,083 was paid at the closing and $221,230 is in the form of a
note
with 8.5% interest due in full in two years. Upon closing the Company
entered into an exclusive sales agency agreement and a distribution
services agreement by which Langer UK will act as sales agent and
distributor for Silipos products in the United Kingdom, Europe, Africa,
and Israel. In December 2007, we recognized a net loss of approximately
$176,000 associated with the disposal of Langer
UK.
|
|
|
|
For
the quarter ended March 31, 2007, the assets and liabilities of Langer
UK
are reflected in the consolidated balance sheet as assets and liabilities
held for sale.
The
operating results and cash flows of Langer UK are classified as
discontinued operations in the consolidated statements of operations
and
cash flows.
|
|
|
·
|
Common
Stock Repurchase Program
—
On
December 6, 2007, we announced that our Board had authorized the
purchase
of up to $2,000,000 of our outstanding common stock, using whatever
means
the Chief Executive Officer may deem appropriate. In connection with
this
matter, the Company’s senior lender, Wachovia Bank, National Association,
has waived, until April 15, 2009, the provisions of the credit facility
that would otherwise preclude the Company from making purchases of
its
common stock. Through May 9, 2008, the Company made one purchase
consisting of 342,352 shares at a cost of $694,975 (or $2.03 per
share)
including commissions paid, and accepted 25,000 shares in connection
with
the settlement with the former owners of
Regal.
|
|
|
·
|
On
April 16, 2008, the Company amended its credit facility with Wachovia
Bank
which will allow the Company to repurchase a maximum of $6,000,000
of its
common stock and extended the repurchase period to April 15, 2009.
The
Amendment also resulted in other changes to the terms and availability
of
borrowings which are more fully discussed in Note 7 to the financial
statements.
|
Segment
Information
We
operate in three segments, medical products, personal care products, and Regal
services. The medical products segment includes our orthopedic manufacturing
and
distribution activities at Langer and BiOp Laboratories and the orthopedic
products of Silipos. The personal care products segment includes the operations
of Twincraft and the personal care products of Silipos. We added a third
operating segment for the activities of Regal, a provider of contracture
management products and services to the long-term care market. For the three
months ended March 31, 2008 and 2007, we derived approximately 39.7% and
approximately 45.4% of our revenues, respectively, from our medical products
segment and approximately 54.0% and approximately 49.5%, respectively, from
our
personal care segment and approximately 6.3% and 5.1% respectively, from our
Regal services segment.
For
the
three months ended March 31, 2008 and 2007, we derived approximately 97.7%
and
approximately 97.9%, respectively, of our revenues from North America, and
approximately 2.3% and approximately 2.1%, respectively, of our revenues from
outside North America. Of our revenue derived from North America for the three
months ended March 31, 2008 and 2007, approximately 95.6% and approximately
95.1%, respectively, was generated in the United States and approximately 4.4%
and approximately 4.9%, respectively, was generated from Canada.
Critical
Accounting Policies and Estimates
Our
accounting policies are more fully described in Note 1 of the Notes to the
Consolidated Financial Statements included in our annual report on
Form 10-K for the year ended December 31, 2007. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results may differ from these estimates under
different assumptions or conditions. The following are the only updates or
changes to Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies and
Estimates” in the Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2007.
Goodwill
and Identifiable Intangible Assets. Goodwill represents the excess of purchase
price over fair value of identifiable net assets of acquired businesses.
Identifiable intangible assets primarily represent allocations of purchase
price
to identifiable intangible assets of acquired businesses. Because of our
strategy of growth through acquisitions, goodwill and other identifiable
intangible assets comprise a substantial portion (49.9% at March 31, 2008
and 49.4% at December 31, 2007) of our total assets. Goodwill and
identifiable intangible assets, net, at March 31, 2008 and
December 31, 2007 were approximately $36,074,000 and approximately
$36,414,000, respectively.
Goodwill
is tested annually using a methodology which requires forecasts and assumptions
about the reporting units growth and future results. If factors change or if
assumptions are not met, it could have a material effect on operating
results.
Adoption
of FIN 48. Upon the adoption of Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007, we performed a
thorough review of our tax returns not yet closed due to the statute of
limitations and other currently pending tax positions of the Company. We,
together with consultants reviewed and analyzed our tax records and
documentation supporting tax positions for purposes of determining the presence
of any uncertain tax positions and confirming other tax positions as certain
under FIN 48. We reviewed and analyzed our records in support of tax
positions represented by both permanent and timing differences in reporting
income and deductions for tax and accounting purposes. We maintain a
policy, consistent with principals under FIN 48, to continually monitor past
and
present tax positions.
Three
months ended March 31, 2008 and 2007
On
January 18, 2008, we sold all of the outstanding stock of Langer UK Limited
(“Langer UK”), one of the Company’s wholly-owned subsidiaries. In 2007, we
recognized a net loss of approximately $176,000 associated with the disposal
of
Langer UK. As of March 31, 2007, Langer UK is reflected in the financial
statements as assets and liabilities held for sale. The results of operations
of
Langer UK are reflected as discontinued operations in the three months ended
March 31, 2007.
Net
loss
for the three months ended March 31, 2008 was approximately $(1,852,000),
or $(.17) per share on a fully diluted basis, compared to a net loss of
approximately $(784,000), or $(.07) per share on a fully diluted basis for
the
three months ended March 31, 2007. The principal reasons for the increase
in the net loss are a decrease of approximately $423,000 in gross profit, along
with increases in general and administrative expenses of approximately $398,000
and selling expenses of approximately $158,000.
Net
sales for the three months ended March 31, 2008 were approximately
$15,778,000, compared to approximately $14,321,000 for the three months ended
March 31, 2007, an increase of approximately $1,457,000, or 10.2%. The
principal reason for the increase in net sales are the sales generated by
Twincraft, which were approximately $7,910,000 in the quarter ended March 31,
2008, an increase of $1,864,000 as compared to the quarter ended March 31,
2007.
Twincraft was acquired January 23, 2007, and its sales for the first 23 days
of
2007 of approximately $1,645,000 were not included in the Company’s 2007 first
quarter sales.
Twincraft’s
sales are reported in the personal care products segment. Also in personal
care
products segment, net sales of Silipos were approximately $605,000 in the three
months ended March 31, 2008, a decrease of approximately $432,000 or 41.7%
as
compared to Silipos’ net sales of personal care products of approximately
$1,037,000 for the three months ended March 31, 2007. This change is a result
of
the discriminatory buying patterns of retail customers, which can be volatile
from quarter to quarter.
Net
sales
of medical products were approximately $6,262,000 in the three months ended
March 31, 2008, compared to approximately $6,504,000 in the three months
ended March 31, 2007, a decrease of approximately $242,000, or
3.7%.
Within
the medical products segment, net sales of custom orthotics for the three months
ended March 31, 2008 were approximately $4,881,000, compared to approximately
$4,842,000 for the three months ended March 31, 2007, an increase of
approximately $39,000, or 0.8%. For the three months ended March 31, 2008,
custom orthotics sales at Langer were approximately $1,875,000, a decrease
of
approximately $694,000 or approximately 27.0% as compared to custom orthotic
sales at Langer of approximately $2,569,000 in the first quarter of 2007. This
decline is related to our closure of the Anaheim, California manufacturing
facility in June 2007. For the first three months of 2008, Silipos custom
orthotics sales were approximately $2,306,000, an increase of approximately
$761,000 or 49.3% as compared to Silipos’ custom orthotics sales of $1,545,000
for the three months ended March 31, 2007. This increase is attributable to
a
$662,000 increase in shipments to a large distributor during the three months
ended March 31, 2008, along with other increases in sales.
Also
within the medical products segment, net sales of distributed products for
the
three months ended March 31, 2008 were approximately $812,000, compared to
approximately $1,031,000 for the three months ended March 31, 2007, a decrease
of approximately $219,000, or 21.2%. This decrease was attributable to the
discontinuation of certain of our therapeutic footwear product
lines.
Net
sales of Silipos branded medical products were approximately $2,874,000 in
the
three months ended March 31, 2008, compared to approximately $2,176,000 in
the
three months ended March 31, 2007, an increase of approximately $698,000, or
32.1%. This was attributable to the increase in shipments to a large distributor
during the three months ended March 31, 2008, as mentioned above.
In
our
Regal business, net sales for the three months ended March 31, 2008 were
approximately $1,001,000 as compared to net sales of approximately $734,000
for
the three months ending March 31, 2007. This increase is primarily attributable
to an increase in the average sales orders generated by each sales
representative.
Cost
of
sales, on a consolidated basis, increased approximately $1,881,000, or 20.8%,
to
approximately $10,911,000 for the three months ended March 31, 2008, compared
to
approximately $9,030,000 for the three months ended March 31, 2007.
Approximately $921,000 of this increase is a result of increases in net sales
of
10.2% when comparing the three months ended March 31, 2008 to the three months
ended March 31, 2007. The remainder of the increase is attributable to raw
material price increases of approximately $591,000 at Twincraft, and other
factors of approximately $242,000 which impacted Silipos. The increase in
material costs at Twincraft is primarily due to increases in the price of soap
base, which represents the largest component of its total material costs. At
Silipos, changes in the sales mix resulted in increases to labor and
overhead.
Cost
of
sales in the personal care products segment were $6,741,000 in the three months
ended March 31, 2008 compared to $4,778,000 in the three months ended March
31,
2007, primarily as a result of the factors discussed above related to Twincraft
and Silipos cost of materials.
Cost
of sales in the medical products segment were approximately $3,841,000, or
61.3%
of medical products net sales in the three months ended March 31, 2008, compared
to approximately $4,054,000, or 62.3% of medical products net sales in the
three
months ended March 31, 2007.
Cost
of
sales for custom orthotics were approximately $3,064,000, or 62.8% of net sales
of custom orthotics for the three months ended March 31, 2008, compared to
approximately $3,118,000, or 64.4% of net sales of custom orthotics for the
three months ended March 31, 2007. Cost of sales of historic distributed
products were approximately $505,000, or 62.2% of net sales of distributed
products in the medical products business for the three months ended March
31,
2008, compared to approximately $653,000, or 63.6% of net sales of distributed
products in the medical products business for the three months ended March
31,
2007.
Cost
of
sales for Silipos’ branded medical products were approximately $1,372,000, or
47.7% of net sales in the three months ended March 31, 2008, compared to cost
of
sales of approximately $977,000 or 44.9% of net sales in the three months ended
March 31, 2007.
Cost
of
sales in the Regal business were approximately $329,000 or approximately 32.9%
of net sales for the three months ended March 31, 2008, compared to cost of
sales of approximately $198,000 or approximately 26.9% of net sales for the
three months ended March 31, 2007. The increase in the cost of sales percentage
at the Regal business is primarily due to increases in the reserves for sales
allowances in 2008.
Consolidated
gross profit decreased approximately $424,000, or 8.0%, to approximately
$4,867,000 for the three months ended March 31, 2008, compared to approximately
$5,291,000 in the three months ended March 31, 2007. Consolidated gross profit
as a percentage of net sales for the three months ended March 31, 2008 was
30.9%, compared to 36.9% for the three months ended March 31, 2007. The
principal reason for the decrease in gross profit are increases in material,
labor, and overhead costs in the three months ended March 31, 2008 at both
Twincraft and Silipos, as discussed above.
General
and administrative expenses for the three months ended March 31, 2008 were
approximately $3,641,000, or 23.1% of net sales, compared to approximately
$3,243,000, or 22.6% of net sales for the three months ended March 31, 2007,
an
increase of approximately $398,000. The increase is due to an acceleration
of
depreciation expenses of $350,000 on the leasehold improvements related to
the
41 Madison Avenue, New York lease which will be surrendered during the second
quarter of 2008, a write off of $49,000 of the receivable due from the sellers
of the Regal business, increases in salaries related to the establishment of
the
permanent corporate finance staff of $127,000, bank fees of $70,000 related
to
audits of certain assets which support the Company’s credit facility, increases
in the amortization of intangible assets of $54,000 and approximately $139,000
of additional expenses at Twincraft, since the first quarter of 2008 was the
first full period of reporting, all of which were offset by declines in
professional fees paid to outside accounting consultants of approximately
$152,000, a decrease of $165,000 in legal fees, and other net reductions of
approximately $74,000.
Selling
expenses increased approximately $158,000, or 7.5%, to approximately $2,256,000
for the three months ended March 31, 2008, compared to approximately $2,098,000
for the three months ended March 31, 2007. Selling expenses as a percentage
of
net sales were 14.3% in the three months ended March 31, 2008, compared to
14.7%
in the three months ended March 31, 2007. The principal reason for the increase
of $158,000 is due to the inclusion of Twincraft’s operating results for the
entire quarter of 2008 versus only partial inclusion of Twincraft’s operating
results for the first quarter of 2007.
Research
and development expenses increased from approximately $197,000 in the three
months ended March 31, 2007, to approximately $270,000 in the three months
ended
March 31, 2008, an increase of approximately $73,000, or 37.1%, which was
attributable to an increase in certain research and development expenses at
Twincraft.
Interest
expense was approximately $558,000 for the three months ended March 31,
2008, compared to approximately $526,000 for the three months ended
March 31, 2007, an increase of approximately $32,000. The principal reason
for the increase was that the three months ended March 31, 2008 included
approximately $22,000 of amortization of deferred financing costs related to
the
Company’s credit facility with Wachovia which did not occur during the three
months ended March 31, 2007.
Interest
income was approximately $24,000 in the three months ended March 31, 2008,
compared to approximately $132,000 for the three months ended March 31, 2007.
Interest income in 2007 was related to investment of the proceeds from the
$28,880,000 of 5% Convertible of Notes.
The
provision for income taxes was approximately $18,000 for the three months ended
March 31, 2008, compared to approximately $64,000 for the three months
ended March 31, 2007. In the three months ended March 31, 2008, we
provided a deferred income tax provision of approximately $8,000. In the three
months ended March 31, 2007, we provided for current foreign income taxes
of approximately $14,000 and a deferred income tax provision of approximately
$63,000.
Liquidity
and Capital Resources
Working
capital as of March 31, 2008 was approximately $12,304,000, compared to
approximately $13,953,000 as of December 31, 2007. Unrestricted cash
balances were approximately $2,123,000 at March 31, 2008, as compared to
approximately $2,422,000 at December 31, 2007. The decrease in working
capital at March 31, 2008 is primarily attributable to the decrease of
working capital of Langer UK (classified as assets and liabilities held for
sale
at December 31, 2007, net of receipt of approximately $808,000 in January 2008
as a result of the sale, the use of approximately $695,000 of cash to purchase
the Company’s common stock, and approximately $372,000 of cash used to purchase
equipment, offset by increases in other current liabilities of approximately
$731,000.
Net
cash used in operating activities was approximately $15,000 in the three months
ended March 31, 2008. Net cash provided by operating activities was
approximately $1,334,000 in the three months ended March 31, 2007. The net
cash used in operating activities for the three months ended March 31, 2008
is
primarily attributable to our operating loss of $1,844,000 which was offset
by
non-cash depreciation and amortization expenses of approximately $1,376,000
and
changes in the balances of current assets and liabilities. The net cash provided
by operating activities in the three months ended March 31, 2007 resulted
primarily from increases in accounts payable and accrued liabilities, which
is
partially offset by increases in other assets primarily due to the acquisitions
of Twincraft and Regal.
Net
cash used in investing activities was approximately $259,000 and approximately
$23,973,000 in the three months ended March 31, 2008 and 2007,
respectively. Cash flows from investing activities for the three months ended
March 31, 2008 were as a result of cash provided from the sale of Langer UK
of
approximately $808,000, offset by approximately $372,000 of cash used to
purchase equipment and of approximately $695,000 of cash used to purchase
treasury stock. Net cash used in investing activities in the three months ended
March 31, 2007 reflects the net cash proceeds used for the purchase of the
Twincraft acquisition, in addition to the increases in amounts due to Twincraft
and restricted cash in escrow resulting from this acquisition, and the purchases
of property and equipment of approximately $105,000.
Net
cash used in financing activities in the three months ended March 31, 2008
and 2007 was approximately $9,000, which represented the note payments related
to the leasehold improvements of our office space at 41 Madison Avenue, New
York, New York that was financed by the landlord over a term of five years
with
interest at 7% per annum.
In
the
three months ended March 31, 2008, we generated a net loss of approximately
$(1,844,000), compared to a net loss of approximately $(784,000) for the three
months ended March 31, 2007, an increase in net loss of approximately
$1,060,000. This was primarily the result of the decrease in gross profit of
approximately $423,000, coupled with increases in our general and administrative
expenses and selling expenses of approximately $398,000 and $158,000
respectively, which were primarily attributable to our acquisitions of Twincraft
and Regal. There can be no assurance that our business will generate cash flow
from operations sufficient to enable us to fund our liquidity needs. In
addition, our growth strategy contemplates our making acquisitions, and we
may
need to raise additional funds for this purpose. We may finance acquisitions
of
other companies or product lines in the future from existing cash balances,
through borrowings from banks or other institutional lenders, and/or the public
or private offerings of debt or equity securities. We cannot make any assurances
that any such funds will be available to us on favorable terms, or at
all.
On
May
11, 2007 the Company entered into a secured revolving credit facility agreement
with a bank expiring on September 30, 2011, which will enable the Company to
borrow funds based on its levels of inventory and accounts receivable, in the
amount of 85% of the eligible accounts receivable and 60% of the eligible
inventory, and, subject to the satisfaction of certain conditions, term loans
secured by equipment or real estate hereafter acquired (the “Credit Facility”).
Effective April 16, the Company amended its Credit Facility. The changes
effected by the amendment include:
|
|
(i)
|
a
decrease of the maximum amount of the credit facility to $15 million
from
$20 million;
|
|
|
(ii)
|
an
increase in the interest rate from the prime rate to the prime rate
plus
0.5 percentage points, or, for loans based on the LIBOR rate, from
LIBOR
plus 2 percentage points to LIBOR plus 2.5 percentage
points;
|
|
|
(iii)
|
an
increase in the unused line fee from 0.375% per year on the first
$10,000,000 of the line and 0.25% per year on the excess of the unused
line over $10,000,000 to 0.375% on the entire unused
line.
|
|
|
(iv)
|
an
increase in the amount of the Company’s outstanding stock that the Company
is permitted to repurchase from $2,000,000 to $6,000,000, and the
extension of the period during which the Company may carry out such
purchases to April 15, 2009;
|
|
|
(v)
|
a
reduction in the sublimit on terms loans under the facility from
$5,000,000 to $3,000,000;
|
|
|
(vi)
|
a
reduction in the sublimit on availability based on inventory from
$7,500,000 to $4,000,000; and
|
|
|
(vii)
|
a
reduction in the amount of availability against Company-owned real
estate
from 70% to 60%.
|
The
Credit Facility is secured by a security interest in favor of the bank in all
the Company's assets. If the Company's availability under the Credit Facility,
net of borrowings, is less than $3,000,000, or if the balance owed under the
Credit Facility is more than $10,000,000, then the Company's accounts receivable
proceeds must be paid into a lock-box account. As of March 31, 2008, the Company
had not made draws on the Credit Facility and has approximately $8.0 million
available under the Credit Facility related to eligible accounts receivable
and
inventory. In addition, the Company has approximately $1.8 million of
availability related to property and equipment for term loans.
Contractual
Obligations
Certain
of our facilities and equipment are leased under noncancelable operating and
capital leases. Additionally, as discussed below, we have certain long-term
and
short-term indebtedness. The following is a schedule, by fiscal year, of future
minimum rental payments required under current operating, capital leases and
debt repayment requirements as of March 31, 2008, except as
noted:
|
|
|
Payment
due By Period (In thousands)
|
|
|
Contractual Obligations
|
|
|
Total
|
|
|
9 Months Ended
Dec.
31, 2008
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
More than
5 Years
|
|
|
Operating
Lease Obligations (1)
|
|
$
|
10,528
|
|
$
|
1,604
|
|
$
|
4,397
|
|
$
|
2,312
|
|
$
|
2,215
|
|
|
Capital
Lease Obligations
|
|
|
5,039
|
|
|
324
|
|
|
1,364
|
|
|
977
|
|
|
2,374
|
|
|
Convertible
Notes due December 7, 2011
|
|
|
28,880
|
|
|
—
|
|
|
28,880
|
|
|
—
|
|
|
—
|
|
|
Note
Payable to Landlord (1)
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest
on Long-term Debt
|
|
|
5,776
|
|
|
1,444
|
|
|
4,332
|
|
|
—
|
|
|
—
|
|
|
Interest
on Note Payable to Landlord (1)
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
50,231
|
|
$
|
3,380
|
|
$
|
38,973
|
|
$
|
3,289
|
|
$
|
4,589
|
|
|
(1)
|
This
table reflects the terms of the surrender agreement and sublease
agreement
as discussed in Note 13 to the financial statements, which is expected
to
become effective in May 2008.
|
The
above
table excludes any obligation for leasehold improvements beyond the landlord’s
contribution.
Long-Term
Debt, Including Current Installments
On
December 8, 2006, the Company entered into a note purchase agreement for the
sale of $28,880,000 of 5% convertible subordinated notes due December 7, 2011
(the “5% Convertible Notes”). The 5% Convertible Notes are not registered under
the Securities Act of 1933, as amended. The shares of the Company’s common stock
issuable upon conversion of the 5% Convertible Notes, which may include
additional shares of common stock as may be issuable on account of adjustments
of the conversion price under the 5% Convertible Notes. The Company filed a
registration statement with respect to the shares acquirable on conversion
of
the 5% Convertible Notes (the “Underlying Shares”) and has filed Amendment No. 1
of the registration statement on November 19, 2007. The Company has received
a
comment letter from the Securities and Exchange Commission dated December 18,
2007, and filed Amendment No. 2 thereof on April 18, 2008.
The
5%
Convertible Notes bear interest at the rate of 5% per annum, payable in cash
semiannually on June 30 and December 31 of each year, commencing June 30, 2007.
Accrued interest on the 5% Convertible Notes was $458,043 at March 31, 2008.
At
the date of issuance, the 5% Convertible Notes were convertible at the rate
of
$4.75 per share, subject to certain reset provisions. At the original conversion
price, the number of Underlying Shares was 6,080,000. Since the conversion
price
was above the market price on the date of issuance, and there were no warrants
attached, there was no beneficial conversion. Subsequent to December 31, 2006,
on January 8, 2007 and January 23, 2007, in conjunction with common stock
issuances related to two acquisitions, the conversion price was adjusted to
$4.6706, and the number of Underlying Shares was thereby increased to 6,183,359,
pursuant to the anti-dilution provisions applicable to the 5% Convertible Notes.
On May 15, 2007, as a result of the issuance of an additional 68,981 shares
of
common stock to the Twincraft sellers on account of upward adjustments to the
Twincraft purchase price, and the surrender to the Company of 45,684 shares
of
common stock, on account of downward adjustments in the Regal purchase price,
the conversion price under the 5% Convertible Notes was reduced to $4.6617,
and
the number of Underlying Shares was increased to 6,195,165 shares. This resulted
in a debt discount of $476,873,which is amortized over the term of the 5%
Convertible Notes and is recorded as interest expense in the consolidated
statements of operations. The charge to interest expense relating to the debt
discount for the quarters ended March 31, 2008 and 2007 were approximately
$22,000, and $14,000, respectively.
The
principal of the 5% Convertible Notes is due on December 7, 2011, subject to
the
earlier call of the 5% Convertible Notes by the Company, as follows: (i) the
5%
Convertible Notes may not be called prior to December 7, 2007; (ii) from
December 7, 2007, through December 7, 2009, the 5% Convertible Notes may be
called and redeemed for cash, in the amount of 105% of the principal amount
of
the 5% Convertible Notes (plus accrued but unpaid interest, if any, through
the
call date); (iii) after December 7, 2009, the 5% Convertible Notes may be called
and redeemed for cash in the amount of 100% of the principal amount of the
5%
Convertible Notes (plus accrued but unpaid interest, if any, through the call
date); and (iv) at any time after December 7, 2007, if the closing price of
the
common stock of the Company on the NASDAQ (or any other exchange on which the
Company’s common stock is then traded or quoted) has been equal to or greater
than $7.00 per share for 20 of the preceding 30 trading days immediately prior
to the Company’s issuing a call notice, then the 5% Convertible Notes shall be
mandatorily converted into common stock at the conversion price then applicable.
The Company had a Special Meeting of Stockholders on April 19, 2007, to obtain
such approval, and holders of approximately 50% of the Company’s common stock
agreed to vote in favor of such approval at any meeting of stockholders held
prior to July 1, 2007.
In
the
event of a default on the 5% Convertible Notes, the due date of the 5%
Convertible Notes may be accelerated if demanded by holders of at least 40%
of
the 5% Convertible Notes, subject to a waiver by holders of 51% of the 5%
Convertible Notes if the Company pays all arrearages of interest on the 5%
Convertible Notes. Events of default are defined to include change in control
of
the Company.
The
payment of interest and principal of the 5% Convertible Notes is subordinate
to
the Company’s presently existing capital lease obligations, in the amount of
approximately $2,700,000 as of March 31, 2008, and the Company’s obligations
under its Credit Facility. The 5% Convertible Notes would also be subordinated
to any additional debt which the Company may incur hereafter for borrowed money,
or under additional capital lease obligations, obligations under letters of
credit, bankers’ acceptances or similar credit transactions.
In
connection with the sale of the 5% Convertible Notes, the Company paid a
commission of $1,338,018 based on a rate of 4% of the amount of 5% Convertible
Notes sold, excluding the 5% Convertible Notes sold to members of the Board
of
Directors and their affiliates, to Wm Smith & Co., who served as placement
agent in the sale of the 5% Convertible Notes. The total cost of raising these
proceeds was $1,338,018, which will be amortized through December 7, 2011,
the
due date for the payment of principal on the 5% Convertible Notes. The
amortization of these costs for the three months ended March 31, 2008 was
$66,187 and is recorded as interest expense in the consolidated statement of
operations.
In
June
2006, the Company elected, pursuant to its option under the lease of 41 Madison
Avenue, New York, N.Y., to finance $202,320 of leasehold improvements by
delivery of a note payable to the landlord (the “Note”). The Note, which matures
in July 2011, provides for interest at a rate of 7% per annum and 60 monthly
installments of principal and interest totaling $4,006, commencing August 2006.
The Note is secured by a $202,320 increase to an unsecured letter of credit
originally provided to the landlord as security at lease commencement. The
amount of the revised unsecured letter of credit is $570,992. The current
portion of the Note, $36,167, is included in other current liabilities,
including current installments of note payable, and the non-current portion
of
the Note is $103,214 at March 31, 2008. Interest expense on the Note for the
three months ended March 31, 2008 was $2,550. In connection with the surrender
of the Company’s lease at 41 Madison Avenue, New York, New York, the landlord
has agreed to forgive the remaining outstanding balance of $139,281 on the
Company’s existing note payable.
Pursuant
to the acquisition of Silipos, the Company is obligated under a capital lease
covering the land and building at the Silipos facility in Niagara Falls, N.Y.
that expires in 2018. This lease also contains two five-year renewal options.
As
of March 31, 2008, the Company’s obligation under capital lease, excluding
current installments, is $2,700,000.
Recently
Issued Accounting Pronouncements
On
September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. SFAS No. 157 provides guidance
related to estimating fair value and requires expanded disclosures. The standard
applies whenever other standards require (or permit) assets or liabilities
to be
measured at fair value. The standard does not expand the use of fair value
in
any new circumstances. In February 2008, the FASB provided a one year deferral
for the implementation of SFAS No. 157 for non-financial assets and liabilities
recognized or disclosed at fair value in the financial statements on a
non-recurring basis. The Company adopted SFAS No. 157 as of January 1, 2008.
The
Company had no financial assets or liabilities that are currently measured
at
fair value on a recurring basis and therefore had no impact upon
adoption.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 allows companies to
choose to measure many financial instruments and certain other items at fair
value. The statement requires that unrealized gains and losses on items for
which the fair value option has been elected be reported in earnings. SFAS
No.
159 is effective for fiscal years beginning after November 15, 2007, although
earlier adoption is permitted. SFAS No. 159 was effective for the Company
beginning in the first quarter of fiscal 2008. The Company did not elect to
adopt the provisions under SFAS No. 159, therefore, the adoption of SFAS No.
159
in the first quarter of fiscal 2008 did not impact the Company’s financial
position or results of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141 (R)”), which requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest of
an
acquiree at the acquisition date, measured at their fair values as of that
date,
with limited exceptions. SFAS No.141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008. Earlier
application is prohibited. We anticipate this will have a material effect on
future acquisitions upon adoption.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which requires (1) ownership interests in
subsidiaries held by parties other than the parent to be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity; (2) the amount of
consolidated net income attributable to the parent and to the non-controlling
interest be clearly identified and presented on the face of the consolidated
statement of income; and (3) changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently as equity transactions. SFAS No. 160 applies prospectively
to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Earlier application is prohibited. The adoption of SFAS No. 160 is
not
expected to have a material impact on our results of operations or our financial
position.
Certain
Factors That May Affect Future Results
Information
contained or incorporated by reference in the quarterly report on
Form 10-Q, in other SEC filings by the Company, in press releases, and in
presentations by the Company or its management, contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the Company of forward-looking terminology
such as “believes,” “expects,” “plans,” “intends,” “estimates,” “projects,”
“could,” “may,” “will,” “should,” or “anticipates” or the negative thereof,
other variations thereon or comparable terminology or by discussions of
strategy. No assurance can be given that future results covered by the
forward-looking statements will be achieved. Such forward looking statements
include, but are not limited to, those relating to the Company’s financial and
operating prospects, future opportunities, the Company’s acquisition strategy
and ability to integrate acquired companies and assets, outlook of customers,
and reception of new products, technologies, and pricing. In addition, such
forward-looking statements involve known and unknown risks, uncertainties,
and
other factors including those described from time to time in the Company’s
Registration Statement on Form S-3, its most recent Form 10-K and
10-Q’s and other Company filings with the Securities and Exchange Commission
which may cause the actual results, performance or achievements by the Company
to be materially different from any future results expressed or implied by
such
forward-looking statements. Also, the Company’s business could be materially
adversely affected and the trading price of the Company’s common stock could
decline if any such risks and uncertainties develop into actual events. The
Company undertakes no obligation to publicly update or revise forward-looking
statements to reflect events or circumstances after the date of this
Form 10-Q or to reflect the occurrence of unanticipated
events.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
following discussion about the Company’s market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements.
In
general, business enterprises can be exposed to market risks, including
fluctuation in commodity and raw material prices, foreign currency exchange
rates, and interest rates that can adversely affect the cost and results of
operating, investing, and financing. In seeking to minimize the risks and/or
costs associated with such activities, the Company manages exposure to changes
in commodities and raw material prices, interest rates and foreign currency
exchange rates through its regular operating and financing activities. The
Company does not utilize financial instruments for trading or other speculative
purposes, nor does the Company utilize leveraged financial instruments or other
derivatives.
The
Company’s exposure to market rate risk for changes in interest rates relates
primarily to the Company’s short-term monetary investments. There is a market
rate risk for changes in interest rates earned on short-term money market
instruments. There is inherent rollover risk in the short-term money instruments
as they mature and are renewed at current market rates. The extent of this
risk
is not quantifiable or predictable because of the variability of future interest
rates and business financing requirements. However, there is no risk of loss
of
principal in the short-term money market instruments, only a risk related to
a
potential reduction in future interest income. Derivative instruments are not
presently used to adjust the Company’s interest rate risk profile.
The
majority of the Company’s business is denominated in United States dollars.
There are costs associated with the Company’s operations in foreign countries,
primarily the United Kingdom and Canada that require payments in the local
currency, and payments received from customers for goods sold in these countries
are typically in the local currency. The Company partially manages its foreign
currency risk related to those payments by maintaining operating accounts in
these foreign countries and by having customers pay the Company in those same
currencies.
ITEM
4.
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
of
March 31, 2008, the Company’s management carried out an evaluation, under the
supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, who are, respectively, the Company’s principal
executive officer and principal financial officer, of the effectiveness of
the
design and operation of the Company’s disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”), pursuant to Exchange Act Rule 13a-15.
Based on such evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that the disclosure controls and procedures
were effective as of March 31, 2008.
Changes
in Internal Controls
There
have been no changes in the Company’s internal control over financial reporting
during the three months ended March 31, 2008 that have materially affected,
or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART II.
OTHER
INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
Reference
is made to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007 in Item 3, Legal Proceedings.
ITEM
1A.
RISK
FACTORS
In
addition to the information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A, “Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2007,
which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the
only risks facing our Company. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial may also materially
adversely affect our business, financial condition and/or operating
results.
ITEM
2.
PURCHASE
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
The
following table sets forth information regarding the Company’s purchase of
outstanding common stock during the quarter ended March 31, 2008.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
|
(a) Total number
of shares (or
units purchased)
|
|
(b) Average
price paid per
share (or unit)
|
|
(c) Total number of
shares (or units)
purchased as part of
publicly announced
plans or programs
|
|
(d) Maximum number
(or approximate dollar
value) of shares (or units)
that may yet be
purchased
under the
plans or programs
|
|
|
January
1-January 31, 2008
|
|
|
342,352
|
(1)
|
$
|
2.03
|
|
|
342,352
|
|
$
|
1,305,025
|
(2)
|
|
February
1-February 29, 2008
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
March
1-March 31-2008
|
|
|
25,000
|
(3)
|
|
2.04
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
367,352
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
(1)
|
The
342,352 shares were purchased in the open
market.
|
|
(2)
|
On
December 6, 2007, the Company announced its Board of Directors had
authorized the purchase of up to $2,000,000 of its outstanding common
stock. The Company’s lender, Wachovia Bank, waived the provision of the
credit facility which would otherwise preclude the Company from making
any
purchases of its common stock. The waiver related to $2,000,000 of
permitted common stock purchases and expired March 31,
2008.
|
|
(3)
|
On
March 28, 2008, the Company accepted 25,000 shares from the sellers
of the
Regal business in settlement of a claim related to receivables
acquired by
not collected.
|
Effective
April 16, 2008 the Company entered into an Amendment of its credit facility
with
Wachovia Bank which, among other changes, permits the Company to repurchase
up
to $6,000,000 of its common stock during the period ending April 15, 2009.
ITEM
5.
OTHER INFORMATION
On
May 8, 2008, the Board of Directors of the Company authorized an
increase, to $6,000,000 from $2,000,000, in the amount the Company may apply
to
repurchase its outstanding common stock in the program which was first announced
in December 2007.
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(a) (17
CFR 240.13a-14(a)).
|
|
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a) (17
CFR 240.13a-14(a)).
|
|
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(b) (17
CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. Section 1350).
|
|
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(b) (17
CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. Section
1350).
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
LANGER,
INC.
|
|
|
|
|
|
Date:
May 12, 2008
|
By:
|
/s/
W. GRAY HUDKINS
|
|
|
|
W.
Gray Hudkins
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
Date:
May 12, 2008
|
By:
|
/s/ KATHLEEN
P. BLOCH
|
|
|
|
Kathleen
P. Bloch
|
|
|
|
Vice
President and Chief Financial Officer
|
|
|
|
(Principal
Financial Officer)
|
Langer (NASDAQ:GAIT)
Historical Stock Chart
From Jun 2024 to Jul 2024
Langer (NASDAQ:GAIT)
Historical Stock Chart
From Jul 2023 to Jul 2024
