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, 2009
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)
|
245
Fifth Avenue, Suite 2201, New York, New York 10016
(Address
of principal executive offices) (Zip code)
Registrant’s
telephone number, including area code:
(212) 687-3260
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.
YES
x
NO
o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
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).
YES
o
NO
x
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 — 7,788,774 shares as of May 8, 2009.
INDEX
LANGER,
INC. AND SUBSIDIARIES
|
|
|
Page
|
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
As
of March 31, 2009 (Unaudited) and December 31, 2008
|
3
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations
Three
month periods ended March 31, 2009 and 2008
|
4
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Stockholders’ Equity
Three
month period ended March 31, 2009
|
5
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
Three
month periods ended March 31, 2009 and 2008
|
6
|
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
8
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
18
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
24
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
25
|
|
|
|
|
PART
II.
|
|
OTHER
INFORMATION
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
26
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
26
|
|
|
|
|
Item
2.
|
|
Purchase
of Equity Securities by the Issuer and Affiliated
Purchasers
|
27
|
|
|
|
|
Item
6.
|
|
Exhibits
|
28
|
|
|
|
|
Signatures
|
29
|
PART I.
FINANCIAL
INFORMATION
ITEM 1.
FINANCIAL
STATEMENTS
LANGER, INC.
AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,698,909
|
|
|
$
|
4,003,460
|
|
Accounts
receivable, net of allowances for doubtful accounts and returns and
allowances aggregating $145,815 and $171,929,
respectively
|
|
|
5,320,969
|
|
|
|
5,591,824
|
|
Inventories,
net
|
|
|
6,657,973
|
|
|
|
6,865,294
|
|
Prepaid
expenses and other current assets
|
|
|
1,605,567
|
|
|
|
1,517,929
|
|
Total
current assets
|
|
|
17,283,418
|
|
|
|
17,978,507
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
9,256,583
|
|
|
|
9,314,299
|
|
Identifiable
intangible assets, net
|
|
|
9,814,340
|
|
|
|
10,079,499
|
|
Goodwill
|
|
|
15,898,063
|
|
|
|
15,898,063
|
|
Other
assets
|
|
|
640,828
|
|
|
|
894,539
|
|
Total
assets
|
|
$
|
52,893,232
|
|
|
$
|
54,164,907
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,410,445
|
|
|
$
|
2,579,976
|
|
Other
current liabilities
|
|
|
2,485,828
|
|
|
|
2,609,225
|
|
Total
current liabilities
|
|
|
5,896,273
|
|
|
|
5,189,201
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
5%
Convertible Notes, net of debt discount of $1,200,000 at March 31, 2009
and $300,264 at December 31, 2008
|
|
|
27,680,000
|
|
|
|
28,579,736
|
|
Obligation
under capital lease
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
Deferred
income taxes payable
|
|
|
698,010
|
|
|
|
1,773,210
|
|
Other
liabilities
|
|
|
5,000
|
|
|
|
—
|
|
Total
liabilities
|
|
|
36,979,283
|
|
|
|
38,242,147
|
|
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 shares
|
|
|
231,771
|
|
|
|
231,771
|
|
Additional
paid in capital
|
|
|
53,530,703
|
|
|
|
53,957,470
|
|
Accumulated
deficit
|
|
|
(35,801,881
|
)
|
|
|
(36,336,206
|
)
|
Accumulated
other comprehensive income
|
|
|
513,380
|
|
|
|
536,893
|
|
|
|
|
18,473,973
|
|
|
|
18,389,928
|
|
Treasury
stock at cost, 3,016,760 and 2,830,635 shares,
respectively
|
|
|
(2,560,024
|
)
|
|
|
(2,467,168
|
)
|
Total
stockholders’ equity
|
|
|
15,913,949
|
|
|
|
15,922,760
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
52,893,232
|
|
|
$
|
54,164,907
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
LANGER,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
9,064,923
|
|
|
$
|
11,389,604
|
|
Cost
of sales
|
|
|
6,911,697
|
|
|
|
8,112,844
|
|
Gross
profit
|
|
|
2,153,226
|
|
|
|
3,276,760
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
2,054,241
|
|
|
|
2,872,448
|
|
Selling
expenses
|
|
|
1,176,318
|
|
|
|
1,358,687
|
|
Research
and development expenses
|
|
|
234,905
|
|
|
|
269,795
|
|
Operating
loss
|
|
|
(1,312,238
|
)
|
|
|
(1,224,170
|
)
|
Other
expense, net:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8,704
|
|
|
|
9,892
|
|
Interest
expense
|
|
|
(645,288
|
)
|
|
|
(553,574
|
)
|
Other
|
|
|
24,714
|
|
|
|
(809
|
)
|
Other
expense, net
|
|
|
(611,870
|
)
|
|
|
(544,491
|
)
|
Loss
from continuing operations before income taxes
|
|
|
(1,924,108
|
)
|
|
|
(1,768,661
|
)
|
Benefit
from (provision for) income taxes
|
|
|
1,075,200
|
|
|
|
(8,000
|
)
|
Loss
from continuing operations
|
|
|
(848,908
|
)
|
|
|
(1,776,661
|
)
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
Loss
from operations of discontinued subsidiaries
|
|
|
(75,876
|
)
|
|
|
(64,758
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
|
(10,182
|
)
|
Loss
from discontinued operations
|
|
|
(75,876
|
)
|
|
|
(74,940
|
)
|
Net
Loss
|
|
$
|
(924,784
|
)
|
|
$
|
(1,851,601
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss per common share:
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.16
|
)
|
Loss
from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
Basic
and diluted loss per share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.17
|
)
|
Weighted
average number of common shares used in computation of net (loss) per
share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
8,659,474
|
|
|
|
11,136,860
|
|
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, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Currency
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Translation
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
Balance
at January 1, 2009
|
|
|
11,588,512
|
|
|
$
|
231,771
|
|
|
$
|
(2,467,168
|
)
|
|
$
|
53,957,470
|
|
|
$
|
(36,336,206
|
)
|
|
$
|
536,893
|
|
|
|
|
|
$
|
15,922,760
|
|
Cumulative
effect of change in accounting principal related to adoption of EITF
07-5. See Note 1.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(476,873
|
)
|
|
|
1,459,109
|
|
|
|
—
|
|
|
|
|
|
|
982,236
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(924,784
|
)
|
|
|
—
|
|
|
$
|
(924,784
|
)
|
|
|
―
|
|
Foreign
currency adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,513
|
)
|
|
|
(23,513
|
)
|
|
|
―
|
|
Total
comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(948,297
|
)
|
|
|
(948,297
|
)
|
Stock-based
compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,106
|
|
Purchase
of Treasury Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(92,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,856
|
)
|
Balance
at March 31, 2009
|
|
|
11,588,512
|
|
|
$
|
231,771
|
|
|
$
|
(2,560,024
|
)
|
|
$
|
53,530,703
|
|
|
$
|
(35,801,881
|
)
|
|
$
|
513,380
|
|
|
|
|
|
|
$
|
15,913,949
|
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(924,784
|
)
|
|
$
|
(1,851,601
|
)
|
Loss
from discontinued operations
|
|
|
75,876
|
|
|
|
74,940
|
|
Loss
from continuing operations
|
|
|
(848,908
|
)
|
|
|
(1,776,661
|
)
|
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
|
|
|
673,721
|
|
|
|
1,221,742
|
|
Loss
on receivable settlement
|
|
|
―
|
|
|
|
49,000
|
|
Amortization
of debt acquisition costs
|
|
|
90,081
|
|
|
|
88,652
|
|
Amortization
of debt discount
|
|
|
112,500
|
|
|
|
22,205
|
|
Stock-based
compensation expense
|
|
|
50,106
|
|
|
|
37,109
|
|
Reduction
in fair value of derivative
|
|
|
(25,000
|
)
|
|
|
―
|
|
Provision
for doubtful accounts receivable
|
|
|
9,011
|
|
|
|
27,388
|
|
Deferred
income tax (benefit) provision
|
|
|
(1,075,200
|
)
|
|
|
8,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
247,655
|
|
|
|
(1,168,808
|
)
|
Inventories
|
|
|
196,315
|
|
|
|
(253,873
|
)
|
Prepaid
expenses and other current assets
|
|
|
(41,165
|
)
|
|
|
(167,254
|
)
|
Other
assets
|
|
|
739
|
|
|
|
―
|
|
Accounts
payable and other current liabilities
|
|
|
639,062
|
|
|
|
1,792,428
|
|
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
28,917
|
|
|
|
(120,072
|
)
|
Net
cash provided by operating activities of discontinued
operations
|
|
|
―
|
|
|
|
105,166
|
|
Net
cash provided by (used in) operating activities
|
|
|
28,917
|
|
|
|
(14,906
|
)
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(350,846
|
)
|
|
|
(296,740
|
)
|
Net
proceeds from sale of subsidiary
|
|
|
116,418
|
|
|
|
808,169
|
|
Net
cash provided by (used in) investing activities for continuing
operations
|
|
|
(234,428
|
)
|
|
|
511,429
|
|
Net
cash used in investing activities of discontinued
operations
|
|
|
―
|
|
|
|
(75,374
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(234,428
|
)
|
|
|
436,055
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
LANGER,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
|
|
For
the three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
(92,856
|
)
|
|
|
(694,975
|
)
|
Repayment
of note payable
|
|
|
―
|
|
|
|
(9,469
|
)
|
Net
cash used in financing activities of continuing operations
|
|
|
(92,856
|
)
|
|
|
(704,444
|
)
|
Net
cash used in financing activities of discontinued
operations
|
|
|
―
|
|
|
|
―
|
|
Net
cash used in financing activities
|
|
|
(92,856
|
)
|
|
|
(704,444
|
)
|
Effect
of exchange rate changes on cash
|
|
|
(6,184
|
)
|
|
|
(16,561
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(304,551
|
)
|
|
|
(299,856
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
4,003,460
|
|
|
|
2,422,453
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,698,909
|
|
|
$
|
2,122,597
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
110,753
|
|
|
$
|
85,856
|
|
Income
Taxes
|
|
$
|
4,600
|
|
|
$
|
29,350
|
|
Supplemental
Disclosures of Non Cash Investing Activities:
|
|
|
|
|
|
|
|
|
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
|
|
$
|
101,295
|
|
|
$
|
101,797
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
LANGER,
INC. AND SUBSIDIARIES
Notes
To Unaudited Condensed Consolidated Financial Statements
(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, 2008.
Operating
results for the three months ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2009.
The
Company classifies as discontinued operations for all periods presented any
component of our business that 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, the Company
has no significant continuing involvement after disposal, and their operations
and cash flows are eliminated from the ongoing operations. Sales of
significant components of the business not classified as discontinued operations
are reported as a component of income from continuing operations.
In
accordance with the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” results of operations of Langer (UK) Limited
(“Langer UK”), Regal Medical Supply, LLC (“Regal”), Bi-Op Laboratories, Inc.
(“Bi-Op”), and the Langer branded custom orthotics and related products business
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, sold its entire membership interest in Regal to
a group of investors, including a member of Regal’s management, on June 11,
2008, sold all of the capital stock of Bi-Op on July 31, 2008, and sold
substantially all of the operating assets and liabilities related to the Langer
branded custom orthotics and related products business on October 24,
2008.
(b)
Non-recurring, non-cash benefit
In the three months ended March 31,
2009, the Company realized a non-recurring, non-cash benefit from income taxes
of approximately $1,075,000. This benefit results from the reversal
of a previously established tax valuation allowance which is no longer required
as a result of a change in the estimated useful life of the Silipos tradename
from an indefinite life to a useful life of 18 years effective January 1,
2009.
(c)
Seasonality
Factors which can result in quarterly
variations include the timing and amount of new business generated by us, the
timing of new product introductions, our revenue mix, and the competitive and
fluctuating economic conditions in the medical and skincare
industries.
(d)
Stock-Based
Compensation
The total
stock compensation expense for the three months ended March 31, 2009 and 2008
was $50,106 and $37,109, respectively, and is included in general and
administrative expenses in the consolidated statements of
operations.
The
Company accounts for share-based compensation cost in accordance with SFAS No.
123(R), “Share-Based Payment.” The fair value of each option award is
estimated on the date of the grant using a Black-Scholes option valuation
model. The compensation cost is recognized over the service period
which is usually the vesting period of the award. Expected volatility
is based on the historical volatility of the price of the Company’s
stock. The risk-free interest rate is based on Treasury issues with a
term equal to the expected life of the option. The Company uses
historical data to estimate expected dividend yield, expected life and
forfeiture rates. For stock options granted as consideration for
services rendered by non-employees, the Company recognizes compensation expense
in accordance with the requirements of EITF No. 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services” and EITF 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees,” as amended.
(e)
Fair
Value Measurements
SFAS No.
157 “Fair Value Measurements”, was adopted January 1, 2008 and 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 for non-financial assets
and liabilities as of January 1, 2009 which did not have a material impact on
the results of operations. On a non-recurring basis, the Company uses fair value
measures when analyzing asset impairment. Long-lived tangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If it is determined
such indicators are present and the review indicates that the assets will not be
fully recoverable, based on undiscounted estimated cash flows over the remaining
amortization periods, their carrying values are reduced to estimated fair value.
During the fourth quarter of each year, the Company evaluates goodwill for
impairment at the reporting unit level.
The fair
value hierarchy distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable
inputs). The hierarchy consists of three levels:
|
·
|
Level
one— Quoted market prices in active markets for identical assets or
liabilities;
|
|
·
|
Level
two— Inputs other than level one inputs that are either directly or
indirectly observable; and
|
|
·
|
Level
three— Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions
that a market participant would
use.
|
The
following table identifies the financial assets and liabilities that are
measured at fair value by level at March 31, 2009:
|
|
Fair
Value Measurements Using
|
|
Description
|
|
Quoted
Prices
in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market Funds
|
|
$
|
3,759,826
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,000
|
|
A level 3 unobservable input is used
when little or no market data is available. The derivative liability is valued
using the Black-Scholes option pricing model using various
assumptions. These assumptions are more fully discussed
below.
The
following table provides a reconciliation of the beginning and ending balances
of assets and liabilities valued using significant unobservable inputs (level
3):
|
|
Fair Value
Measurements
Using
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
Derivative
|
|
Beginning
balance— January 1, 2009
|
|
$
|
30,000
|
|
Total
(gains) and losses included in earnings
|
|
|
(25,000
|
)
|
Ending
balance— March 31, 2009
|
|
$
|
5,000
|
|
Total
gains and losses included in earnings for the three months ended March 31, 2009
are reported as other income in the consolidated statements of
operations.
Although
there were no fair value adjustments to non-financial assets, the following
table identifies the non-financial assets that would be measured at fair value
on a non-recurring basis by level as of March 31, 2009:
|
|
Fair Value Measurements Using
|
|
Description
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Gains
(Losses)
|
|
Identifiable
Intangible Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,814,340
|
|
|
$
|
—
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
15,898,063
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,712,403
|
|
|
$
|
—
|
|
Identifiable
intangible assets and goodwill are valued using discounted cash-flow and
earnings capitalization models.
(f) Discount
on Convertible Debt
In June
2008, the Emerging Issues Task Force of the FASB published EITF Issue 07-5
“Determining Whether an Instrument is Indexed to an Entity’s Own Stock” (“EITF
07-5”) to address concerns regarding the meaning of “indexed to an entity’s own
stock” contained in FASB Statement 133 “Accounting for Derivative Instruments
and Hedging Activities”. EITF 07-5 addresses the issue of the
determination of whether a free-standing equity-linked instrument should be
classified as equity or debt. If an instrument is classified as debt,
it is valued at fair value, and this value is remeasured on an ongoing basis,
with changes recorded in earnings in each reporting period. EITF 07-5
is effective for years beginning after December 15, 2008 and earlier adoption
was not permitted.
Although EITF 07-5 is effective for
fiscal years beginning after December 15, 2008, any outstanding instrument at
the date of adoption will require a retrospective application of the accounting
principle through a cumulative effect adjustment to retained earnings upon
adoption. The Company has completed an analysis as it pertains to the
conversion option in its convertible debt, which was triggered by the reset
provision, and has determined that the fair value of the derivative liability
was $30,000 and the debt discount was $1,312,500 at January 1,
2009. As of March 31, 2009 the derivative liability was
$5,000. We estimate the fair value of the derivative liability using
the Black-Scholes option pricing model using the following
assumptions:
|
|
March 31,
2009
|
|
|
January 1,
2009
|
|
Annual
dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected
life (years)
|
|
|
2.67
|
|
|
|
2.94
|
|
Risk-free
interest rate
|
|
|
1.16
|
%
|
|
|
1.00
|
%
|
Expected
volatility
|
|
|
80
|
%
|
|
|
80
|
%
|
Expected volatility is based upon our
review of historical volatility. We believe this method produces an
estimate that is representative of our expectations of future volatility over
the expected term of the derivative liability. We currently have no
reason to believe future volatility over the expected remaining life of this
conversion option is likely to differ materially from historical
volatility. The expected life is based on the remaining term of the
conversion option. The risk-free interest rate is based on three-year
U.S. Treasury securities. The Company recorded an adjustment to
retained earnings in the amount of $1,459,109, which represents the cumulative
change in the fair value of the conversion option, net of the impact of
amortization of the additional debt discount from date of issuance of the notes
(December 8, 2006) through adoption of this pronouncement. In
addition, as required by EITF 07-5, the Company recorded an adjustment to reduce
additional paid in capital in the amount of $476,873, which represents the
reversal of the value of the debt discount that was recorded in paid in capital
in connection with a reset of the bond conversion price in January
2007. The debt discount will be amortized over the remaining life of
the debt resulting in greater interest expense in the future. The
Company recognized an additional $87,834 of interest expense in the three months
ended March 31, 2009.
(g) Other
Recently Issued Accounting Pronouncements
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 was prohibited. The Company did
not complete any acquisitions in the three months ended March 31, 2009 and
therefore the adoption of SFAS No. 141 (R) had no effect upon the Company’s
financial position or results of operations.
In March
2008, the FASB issued SFAS No. 161, “Disclosures and Derivative Instruments and
Hedging Activities — an Amendment of FASB Statement 133” (“SFAS No. 161”).
SFAS No. 161 will change the disclosure requirements for derivative
instruments and hedging activities. Entities will be required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. The adoption of SFAS No. 161 did not have a material
impact on the Company’s financial position or results of
operations.
(h) Stock
Repurchase
In
accordance with the previously announced stock repurchase program, the Company
purchased 186,125 shares of its common stock at prices ranging from $0.38 to
$0.60 during the three months ended March 31, 2009. As of March 31,
2009, the Company held 3,016,760 shares at a cost of $2,560,004. In
addition, from April 1, 2009 to April 15, 2009, the Company purchased an
additional 782,978 shares at prices ranging from $0.40 to $0.53. As
of April 15, 2009, the Company has acquired a total of 3,715,438 shares at an
average price of $0.74 per share and at a cost of $2,765,389 under this
program.
(2)
Discontinued Operations
During
the year ended December 31, 2008, the Company completed the sale of Langer UK on
January 18, 2008, Regal on June 11, 2008, Bi-Op on July 31, 2008 and
substantially all of the operating assets and liabilities related to the Langer
branded custom orthotics and related products business on October 24,
2008. In accordance with SFAS No. 144, the results of operations of
these wholly owned subsidiaries and businesses for the current and prior periods
have been reported as discontinued operations. For the three months
ended March 31, 2009, the Company recognized an additional loss of $75,876
related to the sale of Regal. Operating results of these wholly owned
subsidiaries and businesses, which were formerly included in the medical
products and Regal segments, are summarized as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
Langer
UK
|
|
$
|
—
|
|
|
$
|
—
|
|
Regal
|
|
|
—
|
|
|
|
1,001,255
|
|
Bi-Op
|
|
|
—
|
|
|
|
617,467
|
|
Langer
branded custom orthotics
|
|
|
—
|
|
|
|
2,769,845
|
|
Total
revenues
|
|
$
|
—
|
|
|
$
|
4,388,567
|
|
|
|
|
|
|
|
|
|
|
Net
loss from operations
|
|
$
|
—
|
|
|
$
|
(75,509
|
)
|
Loss
on sale
|
|
|
(75,876
|
)
|
|
|
—
|
|
Other
income, net
|
|
|
—
|
|
|
|
10,751
|
|
Loss
before income taxes
|
|
|
(75,876
|
)
|
|
|
(64,758
|
)
|
Provision
for income tax
|
|
|
—
|
|
|
|
(10,182
|
)
|
Loss
from discontinued operations
|
|
$
|
(75,876
|
)
|
|
$
|
(74,940
|
)
|
Income (loss) from discontinued
operations, net of any tax benefit, is comprised of the following for the three
months ended March 31, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
Langer
UK
|
|
$
|
—
|
|
|
$
|
—
|
|
Regal
|
|
|
(75,876
|
)
|
|
|
(82,244
|
)
|
Bi-Op
|
|
|
—
|
|
|
|
(42,688
|
)
|
Langer
branded custom orthotics
|
|
|
—
|
|
|
|
49,992
|
|
Total
|
|
$
|
(75,876
|
)
|
|
$
|
(74,940
|
)
|
(3)
Identifiable Intangible Assets
Identifiable
intangible assets at March 31, 2009 consisted of:
Assets
|
|
Estimated
Useful
Life (Years)
|
|
|
Adjusted
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Trade
names – Silipos
|
|
|
18
|
|
|
|
2,688,000
|
|
|
|
37,334
|
|
|
|
2,650,666
|
|
Repeat
customer base – Silipos
|
|
|
7
|
|
|
|
1,680,000
|
|
|
|
1,227,292
|
|
|
|
452,708
|
|
License
agreements and related technology – Silipos
|
|
|
9.5
|
|
|
|
1,364,000
|
|
|
|
646,105
|
|
|
|
717,895
|
|
Repeat
customer base – Twincraft
|
|
|
19
|
|
|
|
4,814,500
|
|
|
|
1,203,041
|
|
|
|
3,611,459
|
|
Trade
names – Twincraft
|
|
|
23
|
|
|
|
2,629,300
|
|
|
|
247,688
|
|
|
|
2,381,612
|
|
|
|
|
|
|
|
$
|
13,175,800
|
|
|
$
|
3,361,460
|
|
|
$
|
9,814,340
|
|
Identifiable
intangible assets at December 31, 2008 consisted of:
Assets
|
|
Estimated
Useful
Life (Years)
|
|
|
Adjusted
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Trade
names – Silipos
|
|
Indefinite
|
|
|
|
2,688,000
|
|
|
|
―
|
|
|
|
2,688,000
|
|
Repeat
customer base – Silipos
|
|
|
7
|
|
|
|
1,680,000
|
|
|
|
1,158,994
|
|
|
|
521,006
|
|
License
agreements and related technology – Silipos
|
|
|
9.5
|
|
|
|
1,364,000
|
|
|
|
610,211
|
|
|
|
753,789
|
|
Repeat
customer base – Twincraft
|
|
|
19
|
|
|
|
4,814,500
|
|
|
|
1,107,988
|
|
|
|
3,706,512
|
|
Trade
names – Twincraft
|
|
|
23
|
|
|
|
2,629,300
|
|
|
|
219,108
|
|
|
|
2,410,192
|
|
|
|
|
|
|
|
$
|
13,175,800
|
|
|
$
|
3,096,301
|
|
|
$
|
10,079,499
|
|
On
January 1, 2009, the Company evaluated the asset lives of its intangible assets
and had a change in estimate related to the Silipos tradename. This
tradename was previously classified as an indefinite lived asset which was not
amortized. The Company has determined the life to be 18 years and
began amortizing the tradename on January 1, 2009. This change in
estimate will result in an increase in amortization expense of approximately
$150,000 in each year.
Aggregate
amortization expense relating to the above identifiable intangible assets for
the three months ended March 31, 2009 and 2008 was $265,158, and $281,136,
respectively. As of March 31, 2009, the estimated future amortization expense is
$796,772 for 2009, $1,029,227 for 2010, $764,794 for 2011, $895,676 for 2012,
$825,059 for 2013 and $5,502,812 thereafter.
(4)
Inventories, net
Inventories,
net, consisted of the following:
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Raw
materials
|
|
$
|
4,283,169
|
|
|
$
|
4,010,119
|
|
Work-in-process
|
|
|
276,259
|
|
|
|
287,823
|
|
Finished
goods
|
|
|
2,803,368
|
|
|
|
3,177,620
|
|
|
|
|
7,362,796
|
|
|
|
7,475,562
|
|
Less:
Allowance for excess and obsolescence
|
|
|
704,823
|
|
|
|
610,268
|
|
|
|
$
|
6,657,973
|
|
|
$
|
6,865,294
|
|
(5)
Credit Facility
On
May 11, 2007, the Company entered into a secured revolving credit facility
agreement (the “Credit Facility”) with Wachovia Bank, N.A. (“Wachovia”),
expiring on September 30, 2011. During 2008, the Company entered into
two amendments that decreased the maximum amount that the Company may
borrow. 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 $12 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 bears interest 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. 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
and Twincraft) 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, 2009, the Company had no outstanding
advances under the Credit Facility and has approximately $5.6 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 amounts
outstanding under the Credit Facility. In such event, the Company
would not have any control over the blocked bank account.
The
Company’s borrowings availabilities under the Credit Facility 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 Wachovia.
If
the Company’s availability is less than $3 million, 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, 2009, the Company had outstanding
letters of credit related to the purchase of eligible inventory of approximately
$429,000, and other outstanding letters of credit of approximately
$713,000.
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 Wachovia a closing fee in the amount of $75,000 in
August 2007. In addition, the Company paid legal and other costs associated with
obtaining the credit facility of $319,556 in 2007. In April 2008, the
Company paid a $20,000 fee to Wachovia related to an amendment of the credit
facility, which has been recorded as a deferred financing cost and is being
amortized over the remaining term of the Credit Facility. As of March
31, 2009, the Company had unamortized deferred financing costs in connection
with the Credit Facility of $238,934. Amortization expense for the
three months ended March 31, 2009 and 2008 was $23,893 and $22,465,
respectively.
(6)
Segment Information
At
March 31, 2009, the Company operated in two segments (medical products and
personal care). Our medical products segment, which previously
included Langer UK, Bi-Op and the Langer branded custom orthotics and related
products business, includes the orthopedic and prosthetic products of
Silipos. The personal care segment includes the operations of
Twincraft and the personal care products of Silipos. Regal operated
in its own segment until its sale in 2008. 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. There were no
intersegment sales during the period.
Segment
information for the three months ended March 31, 2009 and 2008 is
summarized as follows:
Three months ended March 31, 2009
|
|
Medical
Products
|
|
|
Personal
Care
|
|
|
Other
|
|
|
Total
|
|
Net
sales
|
|
$
|
2,096,443
|
|
|
$
|
6,968,480
|
|
|
|
—
|
|
|
$
|
9,064,923
|
|
Gross
profit
|
|
|
935,300
|
|
|
|
1,217,926
|
|
|
|
|
|
|
|
2,153,226
|
|
Operating
(loss) income
|
|
|
(76,926
|
)
|
|
|
(348,275
|
)
|
|
|
(887,037
|
)
|
|
|
(1,312,238
|
)
|
Total
assets as of March 31, 2009
|
|
|
17,786,424
|
|
|
|
29,070,955
|
|
|
|
6,035,853
|
|
|
|
52,893,232
|
|
Three months ended March 31, 2008
|
|
Medical
Products
|
|
|
Personal
Care
|
|
|
Other
|
|
|
Total
|
|
Net
sales
|
|
$
|
2,874,765
|
|
|
$
|
8,514,839
|
|
|
$
|
—
|
|
|
|
11,389,604
|
|
Gross
profit
|
|
|
1,502,659
|
|
|
|
1,774,101
|
|
|
|
—
|
|
|
|
3,276,760
|
|
Operating
(loss) income
|
|
|
495,524
|
|
|
|
(139,094
|
)
|
|
|
(1,580,600
|
)
|
|
|
(1,224,170
|
)
|
Total
assets as of March 31, 2008
|
|
|
18,375,173
|
|
|
|
36,367,081
|
|
|
|
6,117,665
|
|
|
|
60,859,919
|
|
Geographical
segment information for the three months ended March 31, 2009 and 2008 is
summarized as follows:
Three months ended March 31, 2009
|
|
United
States
|
|
|
Canada
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
Net
sales to external customers
|
|
$
|
7,506,762
|
|
|
$
|
171,342
|
|
|
$
|
1,036,425
|
|
|
$
|
350,394
|
|
|
$
|
9,064,923
|
|
Gross
profit
|
|
|
1,572,010
|
|
|
|
30,521
|
|
|
|
394,499
|
|
|
|
156,196
|
|
|
|
2,153,226
|
|
Operating
(loss) income
|
|
|
(1,324,502
|
)
|
|
|
(4,943
|
)
|
|
|
9,646
|
|
|
|
7,561
|
|
|
|
(1,312,238
|
)
|
Total
assets as of March 31, 2009
|
|
|
52,568,810
|
|
|
|
—
|
|
|
|
324,422
|
|
|
|
—
|
|
|
|
52,893,232
|
|
Three months ended March 31, 2008
|
|
United
States
|
|
|
Canada
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
Net
sales to external customers
|
|
$
|
9,151,883
|
|
|
$
|
528,334
|
|
|
$
|
1,021,173
|
|
|
$
|
688,214
|
|
|
$
|
11,389,604
|
|
Gross
profit
|
|
|
2,324,394
|
|
|
|
101,896
|
|
|
|
490,677
|
|
|
|
359,793
|
|
|
|
3,276,760
|
|
Operating
(loss) income
|
|
|
(1,541,509
|
)
|
|
|
(1,613
|
)
|
|
|
179,716
|
|
|
|
139,234
|
|
|
|
(1,224,170
|
)
|
Total
assets as of March 31, 2008
|
|
|
60,330,107
|
|
|
|
—
|
|
|
|
529,812
|
|
|
|
—
|
|
|
|
60,859,919
|
|
The Company’s comprehensive loss was as
follows:
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
loss
|
|
$
|
(924,784
|
)
|
|
$
|
(1,851,601
|
)
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
Change
in equity resulting from translation of financial statements into U.S.
dollars
|
|
|
(23,513
|
)
|
|
|
(73,642
|
)
|
Comprehensive
loss
|
|
$
|
(948,297
|
)
|
|
$
|
(1,925,243
|
)
|
(8)
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, 2009 and 2008 exclude approximately 1,728,000 and 1,823,000
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, 2009 and 2008, respectively. At March 31, 2009 and
2008, the Company held 3,016,760 and 451,652 shares, respectively, of treasury
stock which are not included in the loss per share computation.
The
following table provides a reconciliation between basic and diluted (loss)
earnings per share:
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per
Share
|
|
Basic
and diluted EPS
|
|
$
|
(924,784
|
)
|
|
|
8,659,474
|
|
|
$
|
(0.11
|
)
|
|
$
|
(1,843,601
|
)
|
|
|
11,136,860
|
|
|
$
|
(.17
|
)
|
(9)
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, 2009, 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. During the year ended December 31, 2008,
the Company’s Chairman of the Board of Directors and largest beneficial
shareholder, Warren B. Kanders, purchased $3,250,000, and President and CEO, W.
Gray Hudkins, and CFO and COO, Kathleen P. Bloch, each purchased $250,000 of the
Company’s 5% Convertible Notes from the prior note holders. Mr. Kanders and
related entities, including a trust controlled by Mr. Kanders (as a
trustee for a member of his family) collectively own $5,250,000 of the
5% Convertible Notes, and one director, Stuart P. Greenspon, owns $150,000 of
the 5% Convertible Notes.
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.
Zook claims that greater royalties are owed. Silipos vigorously
disputes any liability and contests his theory of damages. Dr. Zook has agreed
to drop Langer, Inc. (but not Silipos) from the arbitration, without prejudice.
Arbitration hearings were conducted on February 2-6, 2009 at which time Dr. Zook
sought almost $1 million in damages and a declaratory judgment with respect to
royalty reports. Post-arbitration briefs were filed and a decision is
expected by June 30, 2009.
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.
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Through
our wholly-owned subsidiaries, Twincraft and Silipos, we offer a diverse line of
personal care products for the private label retail, medical, and therapeutic
markets. In addition, at Silipos, we design and manufacture high
quality gel-based medical products targeting the orthopedic and prosthetic
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. 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.
Our broad
range of gel-based orthopedic and prosthetics products are designed to protect,
heal, and provide comfort for the patient. 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.
Twincraft,
a manufacturer of bar soap, focuses on the health and beauty, direct marketing,
amenities, and mass market channels, was acquired in January, 2007, and Silipos,
which offers gel-based personal care products which moisturize and provide
comfort, was acquired in September 2004.
Operating
History
Prior to
2008, Langer owned a diverse group of subsidiaries and businesses including
Twincraft, Silipos, the Langer branded custom orthotics and related products
business, Langer UK Limited (“Langer UK”), Regal Medical Supply, LLC (“Regal”),
and Bi-Op Laboratories, Inc. (“Bi-Op”). In November 2007, we began a
study of strategic alternatives available to us with regard to our various
operating companies. During 2008, the Company sold Langer UK, Bi-Op,
Regal, and the Langer branded custom orthotics business, as further
discussed below:
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, to an affiliate of Sole Solutions, a
retailer of specialty footwear based in the United 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. The note bears
interest at 8.5% per annum with quarterly payments of interest. The
entire principal balance on the note receivable is due in full on January 18,
2010. This balance is included in prepaid expenses and other current
assets at March 31, 2009 and in other assets at December 31, 2008. 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 terms of three
years.
Sale
of Regal Medical Supply, LLC
On June 11, 2008, the Company sold its
entire membership interest of its wholly-owned subsidiary, Regal, to a group of
investors, including a member of Regal’s management. The sales price
was $501,000, which was paid in cash at closing. The Company recorded a loss
before income taxes on this sale of $1,929,564, which included an impairment of
$1,277,521 related to goodwill and transaction costs of $69,921. This loss is
included in loss from operations of discontinued subsidiaries in the
consolidated statements of operations for the year ended December 31,
2008. For the quarter ended March 31, 2009, the Company recorded an
additional $75,876 non-cash loss from discontinued operations which is a result
of a change in the Company’s estimate of the loss associated with the lease of
the offices formerly used by Regal in King of Prussia, PA.
Sale
of Bi-Op Laboratories, Inc.
On July 31, 2008, the Company sold all
of the outstanding capital stock of its wholly-owned subsidiary, Bi-Op, to a
third party, which included the general manager of Bi-Op. The sales price of
$2,040,816 was paid in cash at closing, and was subject to adjustment following
the closing to the extent that working capital, as defined by the purchase
agreement, is less or greater than $488,520. In October 2008, a working capital
adjustment due to the Company in the amount of $325,961 was agreed to by both
parties to the transaction. The Company recorded a loss before income taxes on
this sale of $659,798, which included an impairment of goodwill of $808,502 and
transaction costs of $334,594. This loss is included in loss from
operations of discontinued subsidiaries in the consolidated statement of
operations for the year ended December 31, 2008.
Sale
of Langer Branded Custom Orthotics Assets and Liabilities
On
October 24, 2008, the Company sold substantially all of the operating assets and
liabilities of the Langer branded custom orthotics and related products business
to a third party. The sales price was approximately $4,750,000, of which
$475,000 was held in escrow for up to 12 months to satisfy indemnification
claims of the purchaser. As of March 31, 2009, the $475,000 is included in
prepaid expenses and other current assets. The sales price was
subject to adjustment within 90 days of closing to the extent that working
capital, as defined by the purchase agreement, was less or greater than
$1,100,000 as of the closing date. In January 2009, a working capital
adjustment due to the Company in the amount of $116,418 was agreed to by both
parties to the transaction. The Company recorded a loss before income
taxes on this sale of $179,715, which included an impairment of $1,672,344
related to goodwill and transaction costs of $565,327. This loss is
included in loss from operations of discontinued subsidiaries in the
consolidated statements of operations for the year ended December 31,
2008. In connection with this sales transaction, the Company
surrendered its right to continue to use the Langer name and trademark, and
accordingly, the Company has agreed to seek a change of its corporate name at
its next annual shareholders’ meeting.
Through
April 30, 2009, the sales of these businesses generated approximately $7.2
million in cash proceeds, which the Company has deployed in part to purchase its
own capital stock in the market and has retained for future
needs. The Company also holds approximately $160,000 in notes
receivable and expects to receive $237,500 in October 2009, which represents the
remainder of the funds currently held in escrow.
We
believe that along with strengthening our balance sheet through these
divestitures, by retaining Twincraft and Silipos we have honed our focus on our
two largest and most significant businesses. In addition, during 2008
we streamlined the corporate structure of the Company, significantly reducing
general and administrative expenses. We expect this streamlined and
focused organization will enhance our ability to develop and market innovative
products.
In
addition, our Board has authorized the purchase of up to $6,000,000 of our
outstanding common stock. In connection with this matter, the
Company’s senior lender, Wachovia Bank, National Association, had waived, until
April 15, 2009, the provisions of the Credit Facility that would otherwise
preclude the Company from making such repurchases. From January 2008
through April 15, 2009, the Company has purchased 3,715,438 of its common shares
at a cost of $2,765,389 (or $0.74 per share) including commissions
paid.
Recent
Developments
On
October 3, 2008, the Company received two deficiency letters from the NASDAQ
Stock Market (“NASDAQ”) Listing Qualifications Department notifying the Company
that for the past 30 consecutive business days, its common stock had: (i) closed
below the $1 per share minimum bid price as required by NASDAQ Marketplace Rule
4450(a)(5) and (ii) not maintained a minimum market value of publicly held
shares of $5,000,000 as required by NASDAQ Marketplace Rule
4450(a)(2).
On
October 22, 2008, the Company received notification that as of October 16, 2008,
NASDAQ, due to recent extraordinary market conditions, has suspended, for a
three month period, the enforcement of the rules requiring listed companies to
maintain a minimum $1.00 per share closing bid price and a $5 million minimum
market value of publicly held shares. On March 24, 2009, we received
a notice from NASDAQ that it is suspending enforcement of the market value and
the minimum bid price requirements until July 20, 2009 and will inform the
Company of the new compliance period and specific dates by which it must regain
compliance with these requirements.
There can
be no guarantee that the Company will be able to regain compliance with these
NASDAQ continued listing requirements.
Segment
Information
We
currently operate in two segments, medical products and personal care
products. The operations of Twincraft are included in the personal
care segment, and the personal care products of Silipos are also included in
this segment. The other segment is the medical products segment which
includes the medical, orthopedic and prosthetic gel-based products of
Silipos.
For the
three months ended March 31, 2009 and 2008, we derived approximately 23.1% and
approximately 25.2% of our revenues, respectively, from our medical products
segment and approximately 76.9% and approximately 74.8%, respectively, from our
personal care segment.
For the
three months ended March 31, 2009 and 2008, we derived approximately 84.7% and
approximately 85.0%, respectively, of our revenues from North America, and
approximately 15.3% and approximately 15.0%, respectively, of our revenues from
outside North America. Of our revenue derived from North America for the three
months ended March 31, 2009 and 2008, approximately 97.8% and approximately
94.5%, respectively, was generated in the United States and approximately 2.2%
and approximately 5.5%, 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, 2008. 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. There have been no material changes on
critical estimates since year end.
Because
of our strategy of growth through acquisitions, goodwill and other identifiable
intangible assets comprise a substantial portion (48.6% at March 31, 2009 and
48.0% at December 31, 2008) of our total assets. As prescribed under
FAS 142 “Goodwill and Other Intangible Assets,” we test annually for possible
impairment to goodwill. We engage a valuation analysis expert to
prepare the models and calculations used to perform the tests, and we provide
them with information regarding our reporting units’ expected growth and
performance for future years. The method to compute the amount of
impairment incorporates quantitative data and qualitative criteria including new
information that can dramatically change the decision about the valuation of an
intangible asset in a very short period of time. The Company
continually monitors the expected cash flows of its reporting units for the
purpose of assessing the carrying values of its goodwill and its other
intangible assets. Any resulting impairment loss could have a
material adverse effect on the Company’s reported financial position and results
of operations for any particular quarterly or annual period.
As of
March 31, 2009, the Company’s market capitalization was approximately
$3,000,000, which is substantially lower than the Company’s estimated combined
fair values of its three reporting units. The Company has completed a
reconciliation of the sum of the estimated fair values of its reporting units as
of October 1, 2008 (the annual testing date) to its market value (based upon its
stock price at March 31, 2009), which included the quantification of a
controlling interest premium. In addition, the Company considers the
following qualitative items that cannot be accurately quantified and are based
upon the beliefs of management, but provide additional support for the
explanation of the remaining difference between the estimated fair value of the
Company’s reporting units and its market capitalization:
|
·
|
The
Company’s stock is thinly traded;
|
|
·
|
The
decline in the Company’s stock price during 2009 is not correlated to a
change in the overall operating performance of the Company;
and
|
|
·
|
Previously
unseen pressures on the stock price are in place given the global
financial and economic crisis.
|
There can be no assurances that
the Company
’
s
estimated fair value of its reporting units will be reflected in the
Company
’
s
market capitalization in the future.
Three
months ended March 31, 2009 and 2008
During
2008, the Company sold all of the outstanding stock of Langer UK, sold our
entire membership interest in Regal, sold all of the outstanding stock of Bi-Op,
and sold substantially all of the operating assets and liabilities of the Langer
custom branded orthotics business (“Langer Branded Orthotics”). The
results of operations of Langer UK, Regal, Bi-Op, and Langer Branded Orthotics
are reflected as discontinued operations in the three months ended March 31,
2009 and 2008.
Net loss
from continuing operations for the three months ended March 31, 2009 was
approximately $(849,000), or $(0.10) per share on a fully diluted basis,
compared to a net loss of approximately $(1,777,000), or $(0.16) per share on a
fully diluted basis for the three months ended March 31,
2008. The operating results for the three months ended March 31, 2009
include a non-recurring, non-cash deferred tax benefit of approximately
$1,075,000. This benefit results from the reversal of a previously
established tax valuation allowance which is no longer required as a result of a
change in the estimated useful life of the Silipos tradename from an indefinite
life to a useful life of 18 years effective January 1, 2009. The
Company’s net loss from continuing operations before income taxes was
approximately $(1,924,000) for the three months ended March 31, 2009, compared
to a net loss from continuing operations before income taxes of approximately
$(1,769,000) for the three months ended March 31, 2008. The increase
in the Company’s net loss from continuing operations before income taxes is due
to the decline in gross profit of approximately $1,124,000, primarily as a
result of the approximately $2,325,000 decline in sales when comparing the first
three months of 2009 to the first three months of 2008, which is offset by
reductions in general and administrative expenses of approximately $818,000 for
the three months ended March 31, 2009, as compared to the three months ended
March 31, 2008.
Net
sales for the three months ended March 31, 2009 were approximately
$9,065,000, compared to approximately $11,390,000 for the three months ended
March 31, 2008, a decrease of approximately $2,325,000, or
20.4%. Both of the Company’s operating subsidiaries, Twincraft and
Silipos, experienced declines in sales when comparing the first three months of
2009 to the first three months of 2008. Twincraft’s net sales for the
three months ended March 31, 2009 were approximately $6,638,000, a decline of
approximately $1,272,000 or 16.1% as compared to net sales of approximately
$7,910,000 for the three months ended March 31, 2008. Silipos’ net
sales for the three months ended March 31, 2009 were approximately $2,426,000, a
decline of approximately $1,053,000 or 30.3% as compared to net sales of
approximately $3,479,000 for the three months ended March 31,
2008. These declines are primarily the result of the current economic
conditions, which are characterized by lower consumer demand, retailer’s and
distributor’s programs to reduce inventory, and the reluctance of our customers
to launch new products.
Twincraft’s
sales are reported in the personal care products segment. Also
included in the personal care products segment are the net sales of Silipos
personal care products, which were approximately $330,000 in the three months
ended March 31, 2009, a decrease of approximately $274,000 or 45.4% as compared
to Silipos’ net sales of personal care products of approximately $604,000 for
the three months ended March 31, 2008. This change is primarily a
result of the economic factors discussed above.
Net sales
of medical products were approximately $2,096,000 in the three months ended
March 31, 2009, compared to approximately $2,875,000 in the three months
ended March 31, 2008, a decrease of approximately $779,000, or
27.1%. The decrease was primarily due to fewer new product launches
in the three months ended March 31, 2009, as compared to the three months ended
March 31, 2008.
Cost of
sales, on a consolidated basis, decreased approximately $1,201,000, or 14.8%, to
approximately $6,912,000 for the three months ended March 31, 2009, compared to
approximately $8,113,000 for the three months ended March 31,
2008. Cost of sales as a percentage of net sales was 76.2% for
the three months ended March 31, 2009, as compared to cost of sales as a
percentage of net sales of 71.2% for the three months ended March 31,
2008. The increase in cost of goods sold as a percentage of net sales
is primarily attributable to the shift of Twincraft’s net sales toward the
amenity business, which historically carries lower gross margins than the health
and beauty market. For the three months ended March 31, 2009, amenity
sales represented approximately 42.2% of Twincraft’s net sales, as compared to
33.3% of Twincraft’s net sales for the three months ended March 31,
2008. In addition, both manufacturing facilities experienced lower
overhead absorption due to lower production volumes in the three months ended
March 31, 2009 as compared to the same period in 2008.
Cost of
sales in the personal care products segment were approximately $5,750,000 in the
three months ended March 31, 2009 compared to approximately $6,741,000 in the
three months ended March 31, 2008, primarily as a result of the factors
discussed above.
Cost
of sales in the medical products segment were approximately $1,162,000, or 55.4%
of medical products net sales in the three months ended March 31, 2009, compared
to approximately $1,372,000, or 47.7% of medical products net sales in the three
months ended March 31, 2008, largely due to lower production levels which
resulted in lower overhead absorption.
Consolidated
gross profit decreased approximately $1,124,000, or 34.3%, to approximately
$2,153,000 for the three months ended March 31, 2009, compared to approximately
$3,277,000 in the three months ended March 31, 2008. Consolidated gross profit
as a percentage of net sales for the three months ended March 31, 2009 was
23.8%, compared to 28.8% for the three months ended March 31, 2008. The
principal reasons for the decrease in gross profit are reductions in net sales,
the movement of Twincraft’s business to amenities, and lower overhead
absorption.
General
and administrative expenses for the three months ended March 31, 2009 were
approximately $2,054,000, or 22.7% of net sales, compared to approximately
$2,872,000, or 25.2% of net sales for the three months ended March 31, 2008, a
decrease of approximately $818,000. Approximately $385,000 of the
decrease is related to reductions in salaries, rents, and professional fees as a
result of our effort to redact our corporate overhead
structure. Approximately $348,000 of the reduction is due to our
acceleration of the depreciation on the leasehold improvements at our former
corporate offices which was recorded in the three months ended March 31,
2008. In addition, our amortization of intangible assets is
approximately $75,000 lower in the three months ended March 31, 2009 as compared
to the three months ended March 31, 2008.
Selling
expenses decreased approximately $182,000, or 13.4%, to approximately $1,176,000
for the three months ended March 31, 2009, compared to approximately $1,359,000
for the three months ended March 31, 2008. Selling expenses as a percentage of
net sales were 13.0% in the three months ended March 31, 2009, compared to 11.9%
in the three months ended March 31, 2008. The decreases are due to reductions in
spending on discretionary selling expenses.
Research
and development expenses decreased from approximately $270,000 in the three
months ended March 31, 2008, to approximately $235,000 in the three months ended
March 31, 2009, a decrease of approximately $35,000, or 12.9%, which was
primarily attributable to decreases in consulting services.
Interest
expense was approximately $645,000 for the three months ended March 31,
2009, compared to approximately $554,000 for the three months ended
March 31, 2008, an increase of approximately $91,000. The principal reason
for the increase was that the three months ended March 31, 2009 included
approximately $89,000 of additional amortization of the debt discount on the
Company’s 5% Convertible Notes resulting from the adoption of EITF 07-5
“Determining Whether an Instrument is Indexed to an Entity’s Own Stock”, which
became effective January 1, 2009.
The three
months ended March 31, 2009 include a loss of approximately $76,000 from
discontinued operations, which was a result of a change in the Company’s
estimate of the loss associated with the lease of the offices formerly used by
Regal in King of Prussia, PA.
Liquidity
and Capital Resources
Working
capital as of March 31, 2009 was approximately $11,387,000, compared to
approximately $12,789,000 as of December 31, 2008. Unrestricted cash
balances were approximately $3,699,000 at March 31, 2009, as compared to
approximately $4,003,000 at December 31, 2008.
Net
cash provided by operating activities of continuing operations was approximately
$29,000 in the three months ended March 31, 2009. The net cash provided is
attributable to our loss from operations of approximately $849,000, and non-cash
tax benefit of approximately $1,075,000 and a reduction of $25,000 in the market
value of a derivative liability, all of which were offset by depreciation,
amortization, and other non-cash expenses of approximately $900,000 and changes
in our current assets and liabilities of approximately
$1,078,000. Net cash used by operating activities of continuing
operations was approximately $120,000 for the three months ended March 31,
2008. The net cash used in operating activities of continuing operations for the
three months ended March 31, 2008 is attributable to our operating loss of
$1,777,000, which was offset by non-cash depreciation, amortization, and other
expenses of approximately $1,454,000 and changes in the balances of current
assets and liabilities.
Net cash
used in investing activities of continuing operations was approximately $234,000
in the three months ended March 31, 2009. Net cash provided by
investing activities of continuing operations was approximately $511,000 in the
three months ended March 31, 2008. Cash flows used in investing
activities of continuing operations for the three months ended March 31, 2009
were as a result of cash provided from the sale of Langer Branded Orthotics of
approximately $116,000, offset by approximately $350,000 of cash used to
purchase equipment. Net cash provided by investing activities of
continuing operations in the three months ended March 31, 2008 reflects the
net cash proceeds from the sale of Langer UK of approximately $808,000, offset
by purchases of property and equipment of approximately $297,000.
Net
cash used in financing activities in the three months ended March 31, 2009
and 2008 was approximately $93,000 and $704,000, respectively. Cash
used in financing activities for the three months ended March 31, 2009
represents amounts used to purchase treasury stock. Net cash used in
financing activities for the three months ended March 31, 2008 was approximately
$704,000, which represents approximately $695,000 used to purchase treasury
stock and approximately $9,000 related to the payment on a note payable to our
former landlord.
In the
three months ended March 31, 2009, we generated a net loss of approximately
$(925,000), compared to a net loss of approximately $(1,852,000) for the three
months ended March 31, 2008, a decrease in net loss of approximately
$927,000. There can be no assurance that our business will generate
cash flow from operations sufficient to enable us to fund our liquidity
needs. 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.
Our
Credit Facility with Wachovia Bank expires on September 30,
2011. During 2008, the Company entered into two amendments that
decreased the maximum amount that the Company may borrow. 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 $12
million. The Credit Facility bears interest 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. The obligations under
the Credit Facility are guaranteed by the Company’s domestic subsidiaries and
are secured by a first priority security interest in all the assets of the
Company and its subsidiaries. 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 at all times when excess availability is less
than $3 million. As of March 31, 2009, the Company does not have any
outstanding advances under the Credit Facility and has approximately $7.4
million (which includes approximately $1.8 million in term loans based upon the
value of Twincraft’s machinery and equipment) available under the Credit
Facility. 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, 2009, the Company had outstanding letters of credit related to the
purchase of eligible inventory of approximately $429,000, and other outstanding
letters of credit of approximately $713,000.
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 Company filed a
registration statement with respect to the shares acquirable upon conversion of
the 5% Convertible Notes, including an additional number of shares of common
stock issuable on account of adjustments of the conversion price under the 5%
Convertible Notes (collectively, the “Underlying Shares”) in January, 2007, and
filed Amendment No. 1 to the registration statement in November, 2007, Amendment
No. 2 in April 2008, and Amendments No. 3 and 4 in June 2008; the registration
statement was declared effective on June 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. For
each of the three months ended March 31, 2009 and 2008 the Company recorded
interest expense related to the 5% Convertible Notes of approximately
$361,000. 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 at December 31, 2006, 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 an original debt discount of $476,873. Effective January
1, 2009, the Company has complied with the provisions of EITF 07-5, “Determining
Whether an Instrument is Indexed to an Entity’s Own Stock” which required a
retrospective adjustment to the debt discount. At January 1, 2009,
the debt discount was adjusted to $1,312,500. This amount will be
amortized over the remaining term of the 5% Convertible Notes and will be
recorded as interest expense in the consolidated statements of operations. The
charge to interest expense relating to the debt discount for the three months
ended March 31, 2009 was approximately $112,500.
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, at which the Company’s stockholders approved the issuance by the
Company of the shares acquirable on conversion of the 5% Convertible
Notes.
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, 2009, 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, 2009 was
$66,187.
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, 2009, the Company’s obligation under capital lease, excluding
current installments, is $2,700,000.
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, 2009, 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, 2009.
Changes
in Internal Controls
There
have been no changes in the Company’s internal controls over financial reporting
during the three months ended March 31, 2009 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
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.
Zook claims that greater royalties are owed. Silipos vigorously
disputes any liability and contests his theory of damages. Dr. Zook has agreed
to drop Langer, Inc. (but not Silipos) from the arbitration, without prejudice.
Arbitration hearings were conducted on February 2-6, 2009 at which time Dr. Zook
sought almost $1 million in damages and a declaratory judgment with respect to
royalty reports. Post-arbitration briefs were filed and a decision is
expected by June 30, 2009.
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.
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, 2008,
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, 2009.
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, 2009
|
|
|
7,075
|
(1)
|
|
$
|
0.51
|
|
7,075
|
|
$
|
3,725,463
|
(2)
|
February
1 - February 28, 2009
|
|
154,050
|
(1)
|
|
|
0.52
|
|
154,050
|
|
|
3,646,137
|
|
March
1 - March 31, 2009
|
|
|
25,000
|
(1)
|
|
|
0.38
|
|
25,000
|
|
|
3,636,637
|
|
Total
|
|
|
186,125
|
|
|
$
|
0.50
|
|
|
|
|
|
|
(1)
|
The
186,125 shares were purchased in the open
market.
|
(2)
|
On
April 16, 2008, the Company announced that it had entered into an
amendment of its Credit Facility with its lender, Wachovia Bank, which,
among other things, increased the amount of common stock that the Company
is permitted to repurchase from $2,000,000 to $6,000,000 and extends the
period during which the Company may carry out such purchases to April 15,
2009.
|
ITEM 6.
EXHIBITS
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 11, 2009
|
By:
|
/s/
W. GRAY HUDKINS
|
|
W.
Gray Hudkins
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
|
Date:
May 11, 2009
|
By:
|
/s/ KATHLEEN
P. BLOCH
|
|
Kathleen
P. Bloch
|
|
Vice
President and Chief Financial Officer
|
|
(Principal
Financial
Officer)
|