PC 10-Q 2007 Q1 Quarterly report

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, 2007

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.

YES  x NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  o Accelerated filer  o Non-accelerated filer  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—11,474,212 shares as of May 10, 2007.

INDEX

LANGER, INC. AND SUBSIDIARIES

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets As of March 31, 2007 and December 31, 2006	3
	Unaudited Condensed Consolidated Statements of Operations Three months ended March 31, 2007 and 2006	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity Three months ended March 31, 2007	5
	Unaudited Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2007 and 2006	6
	Notes to Unaudited Condensed Consolidated Financial Statements Three months ended March 31, 2007 and 2006	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 6.	Exhibits	31
Signatures		33

PART 1.FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

LANGER, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

	March 31,  2007		December 31,  2006
Assets
Current assets:
Cash and cash equivalents	$	7,111,509	$	29,766,997
Accounts receivable, net of allowances for doubtful accounts and returns and allowances aggregating $569,673 and $539,321, respectively		10,002,195		4,601,870
Inventories, net		7,723,882		3,275,113
Prepaid expenses and other current assets		1,113,009		891,357
Total current assets		25,950,595		38,535,337

Property and equipment, net		15,506,848			8,245,417
Identifiable intangible assets, net		15,518,689			5,960,590
Goodwill		21,975,543			14,119,213
Other assets		1,093,305			1,988,913
Restricted cash - escrow		1,000,000			—
Total assets	$	81,044,980		$	68,849,470
Liabilities and Stockholders’ Equity
Current liabilities:
Other current liabilities, including current installment of note payable	$	5,167,032		$	3,406,296
Accounts payable		3,477,155			1,242,531
Due to sellers of Twincraft		2,840,139			—
Unearned revenue		554,504			574,415
Total current liabilities		12,038,830			5,223,242
Non current liabilities:
Long-term debt:
5% Convertible notes, net of debt discount of $413,400		28,466,600			28,880,000
Note payable		142,556			151,970
Obligation under capital lease		2,700,000			2,700,000
Other liabilities		1,055,278			1,117,623
Unearned revenue		86,421			100,438
Deferred income taxes payable		1,722,997			1,659,333
Total liabilities		46,212,682			39,832,606
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 11,558,512 and 10,156,673 at March 31, 2007 and December 31, 2006, respectively		231,171			203,134
Additional paid-in capital		53,494,210			46,951,501
Accumulated deficit		(18,979,574	)		(18,195,109	)
Accumulated other comprehensive income		283,132			253,979
		35,028,939			29,213,505
Treasury stock at cost, 84,300 shares		(196,641	)		(196,641	)
Total stockholders’ equity		34,832,298			29,016,864
Total liabilities and stockholders’ equity	$	81,044,980		$	68,849,470

See accompanying notes to unaudited condensed consolidated financial statements.

3

LANGER, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended March 31,
	2007			2006
Net sales	$	15,139,542		$	8,345,054
Cost of sales		9,612,621			5,317,682
Gross profit		5,526,921			3,027,372
General and administrative expenses		3,421,692			2,340,705
Selling expenses		2,228,925			1,827,950
Research and development expenses		196,711			123,071
Operating loss		(320,407	)		(1,264,354	)
Other income (expense):
Interest income		133,019			158,832
Interest expense		(526,430	)		(303,883	)
Other		(7,016	)		(8,382	)
Other expense, net		(400,427	)		(153,433	)
Loss before income taxes		(720,834	)		(1,417,787	)
Provision for income taxes		63,631			8,168
Net loss	$	(784,465	)	$	(1,425,955	)
Net loss per common share:
Basic	$	(.07	)	$	(.14	)
Diluted	$	(.07	)	$	(.14	)
Weighted average number of common shares used in computation of net loss per share:
Basic		11,183,415			9,935,845
Diluted		11,183,415			9,935,845

See accompanying notes to unaduited condensed consolidated financial statements.

4

LANGER, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

For the three months ended March 31, 2007

(Unaudited)

													Accumulated Other Comprehensive Income (Loss)
								Additional					Foreign			Unrecognized						Total
	Common Stock				Treasury			Paid-in		Accumulated			Currency			Periodic			Comprehensive			Stockholders’
	Shares		Amount		Stock			Capital		Deficit			Translation			Pension Costs			Income (Loss)			Equity
Balance at January 1, 2007		10,156,673	$	203,134	$	(196,641	)	$	46,951,501	$	(18,195,109	)	$	397,450		$	(143,471	)				$	29,016,864
Net loss		—		—		—			—		(784,465	)		—			—		$	(784,465	)		—
Change in unrecognized periodic pension costs		—		—		—			—		—			—			47,824			47,824			—
Foreign currency adjustment		—		—		—			—		—			(18,671	)		—			(18,671	)		—
Total comprehensive loss		—		—		—			—		—			—			—		$	(755,312	)		(755,312	)
Stock-based compensation expense		—		—		—			69,865		—			—			—						69,865
Discount on 5% convertible notes		—		—		—			427,889		—			—			—						427,889
Issuance of stock to purchase Regal		333,483		6,670		—			1,365,279		—			—			—						1,371,949
Issuance of stock to purchase Twincraft		999,375		19,987		—			4,377,263		—			—			—						4,397,250
Adjustment to issuance of stock to purchase Twincraft		68,981		1,380		—			302,413		—			—			—						303,793
Balance at March 31, 2007		11,558,512	$	231,171	$	(196,641	)	$	53,494,210	$	(18,979,574	)	$	378,779		$	(95,647	)				$	34,832,298

See accompanying notes to unaudited condensed consolidated financial statements.

5

LANGER, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
	2007			2006
Cash Flows From Operating Activities:
Net loss	$	(784,465	)	$	(1,425,955	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation of property and equipment and amortization of identifiable intangible assets		854,597			416,271
Amortization of debt acquisition costs		65,325			47,945
Amortization of debt discount		14,489			—
Stock-based compensation expense		69,865			35,241
Provision for doubtful accounts receivable		133,204			34,813
Provision for pension settlement		47,824			—
Deferred income tax provision		63,631			(26,542	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		(875,994	)		508,352
Inventories		(195,076	)		(42,274	)
Prepaid expenses		(95,275	)		(177,917	)
Other assets		920,621			(48,137	)
Accounts payable and other current liabilities		1,210,108			548,901
Unearned revenue and other liabilities		(95,094	)		(13,364	)
Net cash provided by (used in) operating activities		1,333,760			(142,666	)
Cash Flows From Investing Activities:
Purchase of property and equipment		(104,723	)		(204,697	)
Increase in restricted cash - escrow		(1,000,000	)		—
Due to sellers of Twincraft		2,840,139			—
Purchase of Twincraft, net of cash acquired		(25,708,492	)		���
Net cash used in investing activities		(23,973,076	)		(204,697	)
Cash Flows From Financing Activities:
Repayment of note payable		(9,414	)		—
Proceeds from the exercise of stock options		—			45,750
Proceeds from the exercise of warrants		—			200
Net cash (used in) provided by financing activities		(9,414	)		45,950
Effect of exchange rate changes on cash		(6,758	)		(28,740	)
Net decrease in cash and cash equivalents		(22,655,488	)		(330,153	)
Cash and cash equivalents at beginning of period		29,766,997			18,828,989
Cash and cash equivalents at end of period	$	7,111,509		$	18,498,836
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	85,545		$	103,485
Income taxes	$	38,312
Supplemental Disclosures of Non-Cash Investing Activities:
Issuances of stock for two acquisitions	$	6,072,992
Supplemental Disclosures of Non-Cash Financing Activities:
Accounts payable and accrued liabilities relating to property and equipment	$	1,273		$	24,950

See accompanying notes to unaudited condensed consolidated financial statements.

6

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) 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, 2006.

Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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").

(b) 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.

(c) Provision for Income Taxes

For the three months ended March 31, 2007 and 2006, the Company’s provision for income taxes on foreign operations was approximately $14,000 and $34,000, respectively.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”), an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed or to be claimed in tax returns that do not meet these recognition and measurement standards. The Company’s adoption of FIN 48 did not have a material effect on the Company's financial statements, and the Company does not expect the adoption of FIN 48 to have a significant impact on its results of operations or financial position during the next twelve months.

As permitted by FIN 48, the Company also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision. Previously, the Company's policy was to classify interest and penalties as an operating expense in arriving at pre-tax income. At March 31, 2007, the Company does not have accrued interest and penalties related to any unrecognized tax benefits. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the Company's statutes of limitation for tax liabilities are open for tax years ended December 31, 2003 and forward. The Company's major taxing jurisdictions include the U.S., Canada, the United Kingdom, and New York.

7

(c) Seasonality

Revenue derived from sales of medical devices in North America has historically been significantly higher in the warmer months of the year, while sales of medical devices by the United Kingdom subsidiary have historically not evidenced any seasonality. Personal care product revenues relating to the health and beauty aid segment fluctuates during the year, due to seasonal demand during the second and fourth quarters.

(d)Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25. SFAS No. 123(R) requires that all employee stock-based compensation be recognized as an expense in the financial statements and that such costs be measured at the fair value of the awards. This statement was adopted using the modified prospective method, which requires the Company to recognize compensation expense on a prospective basis. Under this method, total employee stock compensation expense, which is included in general and administrative expenses for the three months ended March 31, 2007 and 2006 was $60,358 and $35,241, respectively.

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 as part of the Twincraft acquisition 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, 2007, $9,507 was recorded as consulting expense.

Restricted Stock

On January 23, 2007, the Company entered into restricted stock award agreements with members of the Board of Directors and non-Board executives in the amount of 805,000 shares and 75,000 shares, respectively under the Company’s 2005 Plan. The awards have a 10 year life from date of grant. The restricted stock awards under SFAS No. 123(R) are classified as performance based awards in which the specific performance condition or contingency must be satisfied in order for the awards to vest, and the Company will recognize compensation expense when the achievement of performance condition is probable. As of March 31, 2007, the Company has not recognized compensation expense related to these awards. Under the terms of the restricted stock agreements, the shares are not presently vested and will vest in the event of change of control of the Company or when the Company achieves EBITDA (excluding non-recurring events at the discretion of the Company’s Board of Directors) in aggregate of $10,000,000 in any four consecutive calendar quarters, starting with the quarter beginning January 1, 2007, as reported in the Company’s quarterly and annual filings with the SEC. In the event the Company divests a business unit, EBITDA for any such period of four quarters which includes the date of the divestiture shall be the greater of (i) actual EBITDA for the relevant four quarters, and (ii) the net sum of (a) the actual EBITDA for the relevant four quarters, minus (b) EBITDA attributable to the divested portion of the business, plus (c) an amount equal to 20% of the purchase price paid to Langer in the divestiture. The shares may not be transferred for a period of 18 months following the vesting of the shares. The restricted stock awards are not considered outstanding in the computation of basic earnings per share.

8

(f)Recently Issued Accounting Pronouncements

On June 15, 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06−3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation),” which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of EITF No. 06-3 would include taxes that are imposed on a revenue transaction between a seller and a customer. If such taxes are significant, the accounting policy should be disclosed as well as the amount of taxes included in the financial statements if presented on a gross basis. The Company adopted EITF No. 06−3 as of January 1, 2007. The Company has been accounting for sales tax as net in the past and will continue to present as net.

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. The Company is evaluating SFAS No. 157 and its impact on the Company’s consolidated financial statements, but it is not expected to have a significant impact.

On February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This statement gives entities the option to carry most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. This statement, which will be effective in the first quarter of fiscal 2009, is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

NOTE 2—ACQUISITIONS

(a) Acquisition of Regal Medical Supply, LLC

On January 8, 2007, the Company acquired certain assets 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 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 (the date of acquisition) have been included in the Company’s consolidated financial statements as part of the medical products operating segment.

The initial consideration for the acquisition of the assets 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. 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 asset purchase agreement, reducing the price from $1,640,000 to $1,371,949, which was effected by the cancellation of 45,684 shares, which were valued for purposes of the adjustment at $4.114, 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. The cost of the Regal acquisition also included approximately $70,000 of transaction costs. The Company entered into a three-year employment agreement with a former employee of the seller and a non-competition agreement with the seller and seller’s members.

9

The following table sets forth the components of the purchase price:

Total stock consideration	$	1,371,949
Total purchase price	$	1,371,949

The following table provides the preliminary allocation of the purchase price based upon the fair value of the assets acquired and liabilities assumed at January 8, 2007:

Assets:
Accounts receivable	$	680,662
Inventories		57,468
Property and equipment		25,030
Goodwill		1,026,800
		1,789,960
Liabilities:
Accounts payable		275,206
Accrued liabilities		142,805
		418,011
Total purchase price	$	1,371,949

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company will not amortize goodwill. The value allocated to goodwill in the purchase of Regal 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 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 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 flow 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 is being 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. The escrows will be released incrementally during the 18 months following the closing, subject to payments, if any, for obligations secured by the escrow funds. The escrow of $1,000,000 will not be released until 18 months after the closing, net of any claims. 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. 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. The purchase price is 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 $1,277,000 payable in cash. In addition, on May 15, 2007, the operating performance adjustments, which was agreed to by the Company and the sellers of Twincraft, increased the purchase price of Twincraft by approximately $1,867,000 and will be made through the issuance of 68,981 shares of the Company’s common stock (representing 15% of the adjusted consideration) and the balance of approximately $1,564,000 in cash. The cash adjustment for working capital and operating performance totaling approximately $2,840,000 has been accrued as amount due to sellers. The fair value of the Company’s common stock based on the average closing price per share of the Company’s stock as quoted on NASDAQ, two days before, two days after and on November 14, 2006.

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The Company entered into three-year employment agreements with Peter A. Asch, who will serve as President of Twincraft, and Lawrence Litke, who will serve as Chief Operating Officer of Twincraft. The Company also entered into a consulting agreement with Fifth Element, LLC, a consulting firm controlled by Joseph Candido, who will serve 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.

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 Plan, to purchase shares of the Company’s common stock having an exercise price equal to $4.20 per share, which are scheduled to vest in three equal consecutive annual tranches beginning on January 23, 2009. The Company also granted a stock option, 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 Mr. Candido of Fifth Element, LLC, a non-employee consultant.

The following table sets forth the components of the purchase price:

Total cash consideration (including $1,500,000 escrow)	$	24,492,639
Total stock consideration		4,701,043
Transaction costs		1,252,819
Total purchase price	$	30,446,501

The following table provides the preliminary allocation of the purchase price based upon the fair value of the assets acquired and liabilities assumed at January 23, 2007 and is based upon a third-party appraisal:

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		6,829,530
Identifiable intangible assets (trade names of $2,629,300 and repeat customer base of $7,214,500)		9,843,800
		32,745,970
Liabilities:
Accounts payable		517,929
Accrued liabilities		1,781,540
		2,299,469
Total purchase price	$	30,446,501

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 19 years. The value allocated to goodwill and identifiable intangible assets in the purchase of Twincraft are not deductible for income tax purposes.

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(c) Unaudited Pro Forma Results

Below are the unaudited pro forma results of operations for the three months ended March 31, 2007 and 2006, as if the Company had acquired Regal and Twincraft on January 1, 2006. 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 and 2006 were:

	Three months ended March 31,
	2007			2006
Net sales	$	16,679,731		$	15,928,236
Net loss		(1,073	)		(2,180,306	)
Loss per share - basic and diluted		—			(.19	)

NOTE 3—IDENTIFIABLE INTANGIBLE ASSETS

Identifiable intangible assets at March 31, 2007 consisted of:

Assets	Estimated Useful Life		Original Cost		Accumulated Amortization		Net Carrying Value
Non-competition agreements—Benefoot/Bi-Op	4 Years	$	572,000	$	370,700	$	201,300
License agreements and related technology—Benefoot	5 to 8 Years		1,156,000		676,915		479,085
Repeat customer base—Bi-Op	7 Years		500,000		153,704		346,296
Trade names—Silipos	Indefinite		2,688,000		—		2,688,000
Repeat customer base—Silipos	7 Years		1,680,000		600,000		1,080,000
License agreements and related technology—Silipos	9.5 Years		1,364,000		358,948		1,005,052
Repeat customer base—Twincraft	19 Years		7,214,500		89,833		7,124,667
Trade names—Twincraft	23 Years		2,629,300		35,011		2,594,289
		$	17,803,800	$	2,285,111	$	15,518,689

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Identifiable intangible assets at December 31, 2006 consisted of:

Assets	Estimated Useful Life from Acquisition Date Unless Noted		Original Cost		Accumulated Amortization		Net Carrying Value
Non-competition agreements—Benefoot/Bi-Op	4 Years	$	572,000	$	350,570	$	221,430
License agreements and related technology—Benefoot	5 to 8 Years		1,156,000		647,824		508,176
Repeat customer base—Bi-Op	7 Years		500,000		137,963		362,037
Trade names—Silipos	Indefinite		2,688,000		—		2,688,000
Repeat customer base—Silipos	7 Years		1,680,000		540,000		1,140,000
License agreements and related technology—Silipos	9.5 Years		1,364,000		323,053		1,040,947
		$	7,960,000	$	1,999,410	$	5,960,590

Aggregate amortization expense relating to the above identifiable intangible assets for the three months ended March 31, 2007 and 2006 was $285,701 and $160,854, respectively. As of March 31, 2007, the estimated future amortization expense is $1,042,982 for 2007, $1,449,192 for 2008, $1,436,397 for 2009, $1,355,735 for 2010, $1,260,513 for 2011, and $6,285,870 thereafter.

NOTE 4—GOODWILL

Changes in goodwill for the three months ended March 31, 2007 and for the year ended December 31, 2006 are as follows:

	Medical Products		Personal Care Products		Total
Balance, January 1, 2006	$	11,293,494	$	2,825,719	$	14,119,213
Activity		—		—		—
Balance, December 31, 2006		11,293,494		2,825,719		14,119,213
Allocated goodwill related to the Regal Medical Supply, LLC acquisition (See Note 2(a))		1,026,800		—		1,026,800
Allocated goodwill related to the Twincraft acquisition (See Note 2(b)).		—		6,829,530		6,829,530
Balance, March 31, 2007	$	12,320,294	$	9,655,249	$	21,975,543

NOTE 5—INVENTORIES, NET

Inventories, net, consisted of the following:

	March 31, 2007		December 31, 2006
Raw materials	$	5,127,993	$	2,318,201
Work-in-process		575,377		173,822
Finished goods		2,920,340		1,668,241
		8,623,710		4,160,264
Less: Allowance for excess and obsolescence		899,828		885,151
	$	7,723,882	$	3,275,113

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NOTE 6—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 acquirable upon conversion of the 5% Convertible Notes, which may include additional number of shares of common stock issuable on account of adjustments of the conversion price under the 5% Convertible Notes. Pursuant to certain registration rights granted to the holders of 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”).

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, 2007. At the date of issuance, the 5% Convertible Notes were convertible at the rate of $4.75 per share, subject to certain anti-dilution 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, 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 (see Note 2, 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. This resulted in a debt discount of $427,889, 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 for the three months ended March 31, 2007 was $14,489. 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 held a Special Meeting of Stockholders on April 19, 2007, at which the Company’s stockholders approved the issuance by the Company of the Underlying Shares.

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 at least 51% of the 5% Convertible Notes if the Company pays all arrearages of interest on the 5% Convertible Notes.

The payment of interest and principal of the 5% Convertible Notes is subordinate to the Company’s presently existing capital lease obligation, in the amount of $2,700,000, excluding current installments, as of March 31, 2007, and the Company’s obligations under its secured revolving credit facility (discussed in Note 13, “Subsequent Events - Bank Financing”). 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 (See Note 13, “Subsequent Events”).

In connection with the sale of the 5% Convertible Notes, the Company paid a commission of $1,060,000 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 $1,305,429, which will be amortized through December 7, 2011, the due date for the payment on the 5% Convertible Notes. The amortization of these costs for the three months ended March 31, 2007 was $65,325 and is recorded as interest expense in the consolidated statement of operations.

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On October 31, 2001, the Company completed the sale in a private placement, of $14,589,000 principal amount of its 4% convertible subordinated notes due and paid in full, plus accrued interest, on August 31, 2006 (the “4% Convertible Notes”). The cost of raising these proceeds was $920,933, which was amortized through August 31, 2006. The amortization of these costs for the three months ended March 31, 2006 was $47,945 and was included in interest expense in the related consolidated statements 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, $33,729, is included in other current liabilities, including current installments of note payable, and the non-current portion of the Note of $142,556 is stated separately as note payable, on the March 31, 2007 balance sheet. Interest expense on the Note for the three months ended March 31, 2007 was $3,188.

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, 2007, the Company’s obligation under capital lease, excluding current installments, is $2,700,000.

NOTE 7—SEGMENT INFORMATION

The Company operates in two segments, medical products and personal care. Prior to January 1, 2007, the medical products segment was called the orthopedic segment and the personal care segment was called the skincare segment. As discussed in Note 2, the Company consummated two acquisitions during the three months ended March 31, 2007. The operations from the Twincraft acquisition are included in the personal care segment, and the operations from the Regal acquisition are included in the medical products segment. The medical products segment includes the orthopedic products of Silipos. Intersegment net sales are recorded at cost.

Segment information for the three months ended March 31, 2007 and 2006 is summarized as follows:

Three months ended March 31, 2007	Medical Products			Personal Care		Total
Net sales	$	8,061,593		$	7,077,949	$	15,139,542
Gross profit		3,312,397			2,214,524		5,526,921
Operating (loss) income		(868,556	)		548,149		(320,407	)
Total assets as of March 31, 2007		37,815,469			43,229,511		81,044,980

Three months ended March 31, 2006	Medical Products			Personal Care			Total
Net sales	$	7,625,582		$	719,472		$	8,345,054
Gross profit		2,668,692			358,680			3,027,372
Operating loss		(1,247,084	)		(17,270	)		(1,264,354	)
Total assets as of March 31, 2006		48,410,460			8,577,603			56,988,063

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Geographical segment information for the three months ended March 31, 2007 and 2006 is summarized as follows:

Three months ended March 31, 2007	United States			Canada		United Kingdom			Total
Net sales to external customers	$	13,332,649		$	683,655	$	1,123,238		$	15,139,542
Intersegment net sales		257,858			—		—			257,858
Gross profit		4,726,564			341,482		458,875			5,526,921
Operating (loss) income		(288,035	)		48,948		(81,320	)		(320,407	)
Total assets as of March 31, 2007		76,742,939			2,100,188		2,201,853			81,044,980

Three months ended March 31, 2006	United States			Canada		United Kingdom			Total
Net sales to external customers	$	6,861,466		$	607,513	$	876,075		$	8,345,054
Intersegment net sales		207,816			—		—			207,816
Gross profit		2,385,245			270,971		371,156			3,027,372
Operating (loss) income		(1,291,670	)		75,916		(48,600	)		(1,264,354	)
Total assets as of March 31, 2006		52,247,005			1,891,791		2,849,267			56,988,063

NOTE 8—COMPREHENSIVE LOSS

The Company’s comprehensive income (loss) were as follows:

	Three months ended March 31,
	2007			2006
Net loss	$	(784,465	)	$	(1,425,955	)
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		(18,671	)		(59,047	)
Comprehensive loss	$	(755,312	)	$	(1,485,002	)

NOTE 9—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, 2007 and 2006 exclude approximately 1,963,000 and approximately 1,905,000 shares, respectively, related to employee stock options because the effect of including them would be anti-dilutive. The impact of the 5% Convertible Notes and the 4% 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, 2007 and 2006, respectively.

The following table provides a reconciliation between basic and diluted (loss) earnings per share:

	Three months ended March 31,
	2007								2006
	Loss			Shares		Per Share			Loss			Shares		Per Share
Basic EPS	$	(784,465	)		11,183,415	$	(.07	)	$	(1,425,955	)		9,935,845	$	(.14	)
Diluted EPS	$	(784,465	)		11,183,415	$	(.07	)	$	(1,425,955	)		9,935,845	$	(.14	)

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NOTE 10—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, 2007, is 6,183,359, and the conversion price as of such date was $4.6706. 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 two directors, Stuart P. Greenspon and Arthur Goldstein, own $150,000 and $100,000 of the 5% Convertible Notes, respectively.

New Employment Agreements. The Company entered into five three-year employment agreements as part of the acquisitions of Regal and Twincraft. The employment agreements were issued to John Shero, the former President of Regal, who will now serve as Vice President of Sales of the medical products group, Peter A. Asch, who will serve as President of Twincraft and the personal care division of the Company, and a member of the Board of Directors, Lawrence Litke, who will serve as Chief Operating Officer of Twincraft, and Richard Asch, who will be serving in a sales managerial capacity at Twincraft. In addition, the Company entered into a consulting agreement with Fifth Element, LLC, a consulting firm controlled by Joseph Candido, who will serve as Vice President of Sales and Marketing for Twincraft. The employment and consulting agreements contain non-competition and non-solicitation provisions covering the terms of the agreements and for any extended severance periods and for one year after termination of the agreements or the extended severance periods, if any.

NOTE 11—PENSION

Prior to July 30, 1986, the Company maintained a non-contributory defined benefit pension plan covering substantially all employees. Effective July 30, 1986, the Company adopted an amendment to the plan under which future benefit accruals to the plan ceased (freezing the maximum benefits available to employees as of July 30, 1986), other than those required by law. Previously accrued benefits remain in effect and continue to vest under the original terms of the plan.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements Nos. 87, 88, 106 and 132(R)” (“SFAS No.158”), which requires an entity to: (a) recognize in its statement of financial position an asset for defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements were effective to the Company’s 2006 fiscal year.

	Pension Benefits
Three months ended March 31	2007			2006
Interest cost	$	1,210		$	9,343
Expected return on plan assets		(1,867	)		(13,257	)
Amortization of transition obligations		22,237			1,948
Recognized actuarial loss		25,587			4,932
Net periodic benefit cost	$	47,167		$	2,966

Employer Contributions

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2006 that it does not expect to contribute to its pension plan in 2007. In addition, the Company is in the process of terminating its pension plan by December 31, 2007. As of March 31, 2007, no contributions have been made.

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NOTE 12—LITIGATION

In connection with the Company’s acquisition of Silipos, the Company could become subject to certain claims or actions brought by Poly-Gel, although no such claims have been brought to date. These claims may arise, for example, out of the supply agreement between Silipos and Poly-Gel dated August 20, 1999, the manufacture, marketing or sale of products made from gel not purchased from Poly-Gel, alleged misappropriation of trade secrets or other confidential information (including gel formulations) of Poly-Gel, as well as any other alleged violations of the supply agreement (the “Potential Poly-Gel Claims”). For any of these potential claims, SSL has agreed to indemnify the Company for losses up to $2.0 million, after which the Company would be liable for any such claims. Furthermore, the Company has assumed responsibility for the first $150,000 of such liability in connection with the Company’s acquisition of Silipos, and SSL’s maximum liability for total indemnification related to the Company’s acquisition of Silipos is between $5,000,000 and $7,000,000. Thus, if the total amount of all claims arising from the acquisition exceed this maximum, whether or not related to Poly-Gel, the Company would be liable for amounts in excess of the maximum. For claims arising out of conduct that occurs after the closing of the Silipos transaction on September 30, 2004, the Company has agreed to indemnify SSL against losses. The Company would expect to vigorously defend against any claims brought by Poly-Gel or any other third party.

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. Zook, but Dr. 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. Zook has agreed to drop Langer, Inc. (but not Silipos) from the arbitration, without prejudice. On January 26, 2007, the arbitrator gave Silipos (and certain other parties unrelated to the Company) permission to move before the arbitrator for a dismissal of the case against Silipos.

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 an 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 his termination by Silipos was for “cause” as defined in the employment agreement. 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 complaint 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 tortious interference with business relationships. The Company intends to continue to vigorously defend the counterclaims.

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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 those 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.

NOTE 13—SUBSEQUENT EVENTS

(a)Bank Financing

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”). The maximum availability under the Credit Facility, if and when the Company has the requisite levels of assets, would be $20,000,000, subject to a sublimit of $5,000,000 for letters of credit, another sublimit of $5,000,000 for term loans, and a sublimit of $750,000 on loans against inventory (subject to an increase in the sublimit on inventory loans to $7,500,000 if and when the bank receives a satisfactory appraisal of the inventory). Interest is payable monthly in arrears at the lender's prime rate or, at the Company's election, at 2 percentage points above an Adjusted Eurodollar Rate, as defined. 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. The Company is required to make certain improvements in its financial reporting systems before the full amount of the Credit Facility is available to the Company.

(b)Restructuring

On May 3, 2007, the Company announced its plan to close its Anaheim manufacturing facility in order to better leverage the Company’s resources by reducing costs, obtaining operational efficiencies and to further align the Company’s business with market conditions, future revenue expectations and planned future product directions. The plan includes the elimination of 27 positions, which represents approximately 4.5% of the workforce. These plans are expected to be substantially completed by the end of 2007. The Company estimates they will record severance costs of approximately $200,000, and the cost of exiting its existing facility lease is minimal, since such lease expires December 2007.

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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., (“Twincraft”) and Silipos, Inc. (“Silipos”), 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 certain assets of Regal Medical Supply, LLC (“Regal”), 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 our wholly owned subsidiary Regal Medical Inc., starting in 2007 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.

Since May 2002, we have consummated the following 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 grounds. The aggregate consideration paid by us in connection with this acquisition was approximately $30.4 million, including transaction costs, paid in cash ($25,745,458) and common stock ($4,701,043, valued at $4.40 per share) of the Company. The purchase price may be adjusted for further payments that may be earned hereafter based upon the performance of Twincraft in 2007 and 2008.

· Regal Medical Supply. On January 8, 2007, we acquired certain assets of 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 markets 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 the acquisition of the assets of Regal was approximately $1.6 million, which has since been reduced to approximately $1.4 million due to a shortfall in the amount of working capital delivered at closing.

· Silipos. On September 30, 2004, we acquired Silipos, Inc., a leading 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 of approximately $2.0 million, 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, of which approximately $1.8 million was paid in cash, and the remaining portion was paid through the issuance of 107,611 shares of our common stock.

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· Benefoot. On May 6, 2002, we acquired the net assets of Benefoot, Inc., and Benefoot Professional Products, Inc. (together, “Benefoot”). Benefoot designs, manufactures, and distributes custom orthotics, custom BirkenstockÒ sandals, therapeutic shoes, and prefabricated orthotic devices to healthcare professionals. We acquired Benefoot to gain additional scale in our core custom orthotics business as well as to gain access to complementary product lines. The aggregate consideration, including transaction costs, was approximately $7.9 million, of which approximately $5.6 million was paid in cash, $1.8 million was paid through the issuance of 4% promissory notes, and approximately $0.5 million was paid through the issuance of 61,805 shares of common stock. In connection with this acquisition, we also assumed certain liabilities of Benefoot, including approximately $0.3 million of long-term indebtedness which was paid at closing.

We sell our medical products directly to health care professionals and also to wholesale distributors. Custom orthotic products are primarily sold directly to health care professionals. Other products sold in our medical products business are sold both directly to health care professionals and to distributors. Products sold in our personal care business are sold primarily to wholesale distributors. Revenue from product sales is recognized at the time of shipment. Our most significant expense is cost of sales. Cost of sales consists of materials, direct labor and overhead, and related shipping costs. General and administrative expenses consist of executive, accounting, and administrative salaries and related expenses, insurance, pension expenses, bank service charges, stockholder relations, and amortization of identifiable intangible assets with definite lives. Selling expenses consist of advertising, promotions, commissions, conventions, postage, travel and entertainment, sales and marketing salaries and related expenses.

For the three months ended March 31, 2007 and 2006, we derived approximately 93% and approximately 90%, respectively, of our revenues from North America, and approximately 7% and approximately 10%, respectively, of our revenues from outside North America. Of our revenue derived from North America for the three months ended March 31, 2007 and 2006, approximately 95% and approximately 91%, respectively, was generated in the United States and approximately 5% and approximately 9%, respectively, was generated from Canada.

On a pro forma basis, after giving effect to our acquisitions of Twincraft and Regal as if they had occurred on January 1, 2006, approximately 93% and approximately 95% of our revenues for the three months ended March 31, 2007 and 2006, respectively, would have been derived from North America, and approximately 7% and approximately 5% of our revenues for the three months ended March 31, 2007 and 2006, respectively, would have been derived from outside North America. On a pro forma basis, after giving effect to our acquisitions of Twincraft and Regal as if they had occurred on January 1, 2006, approximately 96% of our revenues for each of the three months ended March 31, 2007 and 2006, would have been derived in the United States, and approximately 4% of our revenues for each of the three months ended March 31, 2007 and 2006, would have been derived from Canada.

We operate in two segments, medical products and personal care. Prior to January 1, 2007, the medical products segment was called the orthopedic segment and the personal care segment was called the skincare segment. We consummated two acquisitions during the period ended March 31, 2007. The operations from the Twincraft acquisition are included in the personal care segment, and the operations from the Regal acquisition are included in the medical products segment. The medical products segment includes the orthopedic products of Silipos.

For the three months ended March 31, 2007 and 2006, we derived approximately 53% and approximately 91% of our revenues, respectively, from our medical products segment and approximately 47% and approximately 9%, respectively, from our personal care segment.

On a pro forma basis, after giving effect to our acquisitions of Twincraft and Regal as of January 1, 2006, approximately 49% and 51% of our revenues for the three months ended March 31, 2007 and 2006, respectively, would have been derived from our medical products segment, and approximately 51% and 49% of our revenue for the three months ended March 31, 2007 and 2006, respectively, would have been derived from our personal care segment.

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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, 2006. 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, 2006.

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 (46.3% at March 31, 2007 and 29.2% at December 31, 2006) of our total assets. Goodwill and identifiable intangible assets, net, at March 31, 2007 and December 31, 2006 were approximately $37,494,000 and approximately $20,080,000, respectively.

The purchase price allocated to the identifiable intangible assets of trade names and customer relationships as pertaining to the acquisition of Twincraft and to customer relationships for Regal were based on a variation of the income approach to determine the fair value of these assets. The income approach was used due to the ability of these assets to generate current and future income. The customer relationships’ fair market value was estimated by using the excess earnings method, which the Company estimated the annual attrition rate of the Company’s customer relationships. The Company utilized the royalty savings method to estimate the fair value of Twincraft’s trade names. In subsequent reporting periods, the Company will test goodwill under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” to determine if it has been impaired, and will test identifiable intangible assets with definite lives pursuant to SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  

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, 2007 and 2006

Net loss for the three months ended March 31, 2007 was approximately $(784,000), or $(.07) per share on a fully diluted basis, compared to a net loss of approximately $(1,426,000), or $(.14) per share on a fully diluted basis for the three months ended March 31, 2006. The principal reason for the decrease in net loss of approximately $642,000 was an increase in net sales of approximately $6,795,000, or 81.4%, in the three months ended March 31, 2007, compared to the three months ended March 31, 2006, which was primarily due to the acquisitions of Twincraft (which we acquired on January 23, 2007) and Regal (which we acquired on January 8, 2007). This was offset by an increase in cost of sales of approximately $4,295,000, or 80.8%, in the three months ended March 31, 2007, compared to the three months ended March 31, 2006, resulting in an increase in gross profit of approximately $2,500,000 in the three months ended March 31, 2007, compared to the three months ended March 31, 2006. Additionally, general and administrative expenses and selling expenses increased by approximately $1,081,000 and approximately $401,000, respectively, for the three months ended March 31, 2007, compared to the three months ended March 31, 2006. Twincraft accounted for approximately $627,000 of the increase in general and administrative expenses in the three months ended March 31, 2007. The remaining increase of $454,000 was attributable to an increase in professional fees of approximately $205,000, which includes fees paid to a financial service consulting firm of approximately $146,000, an increase in depreciation expense and amortization of identifiable intangible assets of approximately $175,000, an increase in recruitment fees of approximately $99,000, and an increase in other net general and administrative expenses of approximately $55,000. These increases in general and administrative expenses were offset by a decrease in consulting fees (primarily information technology related) of approximately $80,000.

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Commencing January 1, 2007, we are reporting our operations in two segments, medical products and personal care. Prior to January 1, 2007, the medical products segment was called the orthopedic segment and the personal care segment was called the skincare segment. We consummated two acquisitions during the three months ended March 31, 2007. The operations from the Twincraft acquisition are included in the personal care segment, and the operations from the Regal acquisition are included in the medical products segment. In addition, the medical products segment includes the orthopedic products of Silipos. Intersegment net sales are recorded at cost.

Net sales for the three months ended March 31, 2007 were approximately $15,140,000, compared to approximately $8,345,000 for the three months ended March 31, 2006, an increase of approximately $6,795,000, or 81.4%. The principal reasons for the increase were the net sales of approximately $6,046,000 and approximately $735,000 generated by Twincraft and Regal, respectively.

Net sales of medical products were approximately $8,062,000 in the three months ended March 31, 2007, compared to approximately $7,626,000 in the three months ended March 31, 2006, an increase of approximately $436,000, or 5.7%. Of this increase, Regal generated approximately $735,000. The remaining decrease of approximately $299,000 was due to the net sales decrease of approximately $384,000 from the medical products segment of Silipos, which was partially offset by an increase in net sales in our medical products business, excluding Silipos, of approximately $85,000, or 1.7%.

Within the medical products segment, net sales of custom orthotics for the three months ended March 31, 2007 were approximately $3,993,000, compared to approximately $3,958,000 for the three months ended March 31, 2006, an increase of approximately $35,000, or 0.9%.

Also within the medical products segment, net sales of distributed products for the three months ended March 31, 2007 were approximately $1,153,000, compared to approximately $1,103,000 for the three months ended March 31, 2006, an increase of approximately $50,000, or 4.5%. This increase was attributable to the increase in net sales of PPTÒ, a proprietary product, by approximately $188,000, which was partially offset by a decrease in the sales of our therapeutic footwear program of approximately $84,000, and in the net sales of other distributed products by approximately $54,000, in the three months ended March 31, 2007, compared to the three months ended March 31, 2006.

Net sales of Silipos branded medical products were approximately $2,181,000 in the three months ended March 31, 2007, compared to approximately $2,565,000 in the three months ended March 31, 2006, a decrease of approximately $384,000, or 15.0%, due to reduced orders in the three months ended March 31, 2007.

We generated net sales of approximately $7,078,000 in our personal care segment in the three months ended March 31, 2007, compared to approximately $719,000 in the three months ended March 31, 2006, an increase of approximately $6,359,000. Of this increase, Twincraft generated approximately $6,046,000. The remaining increase of approximately $313,000 was due to the net sales generated by the personal care segment of Silipos. Net sales in Silipos’ personal care segment represented 32.1% of Silipos’ net sales for the three months ended March 31, 2007, compared to 21.9% for the three months ended March 31, 2006. The reason for the increase in Silipos’ net sales in the personal care segment is higher volumes with existing customers in the three months ended March 31, 2007.

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Cost of sales, on a consolidated basis, increased approximately $4,295,000, or 80.8%, to approximately $9,613,000 for the three months ended March 31, 2007, compared to approximately $5,318,000 for the three months ended March 31, 2006. This increase was primarily attributable to the cost of sales incurred by Twincraft and Regal of approximately $4,313,000 and approximately $198,000, respectively, in the three months ended March 31, 2007, partially offset by a decrease in cost of sales in our historic business (including Silipos) of approximately $216,000, which was attributable to a decrease in overhead and certain materials costs.

Cost of sales in the medical products segment were approximately $4,750,000, or 58.9% of medical products net sales in the three months ended March 31, 2007, compared to approximately $4,957,000, or 65.0% of medical products net sales in the three months ended March 31, 2006.

Cost of sales for custom orthotics were approximately $2,882,000, or 72.2% of net sales of custom orthotics for the three months ended March 31, 2007, compared to approximately $3,190,000, or 80.6% of net sales of custom orthotics for the three months ended March 31, 2006. Cost of sales of historic distributed products were approximately $778,000, or 67.5% of net sales of distributed products in the medical products business for the three months ended March 31, 2007, compared to approximately $701,000, or 63.6% of net sales of distributed products in the medical products business for the three months ended March 31, 2006.

Cost of sales for Silipos’ branded medical products were approximately $892,000, or 40.9% of net sales of Silipos’ branded medical products of approximately $2,181,000 in the three months ended March 31, 2007, compared to approximately $1,066,000, or 41.6% of net sales of Silipos’ branded medical products of approximately $2,565,000 in the three months ended March 31, 2006.

Cost of sales for the personal care products were approximately $4,863,000, or 68.7% of net sales of personal care products of approximately $7,078,000 in the three months ended March 31, 2007, compared to approximately $361,000, or 50.2% of net sales of personal care products of approximately $719,000 in the three months ended March 31, 2006. Excluding Twincraft’s cost of sales of approximately $4,313,000, Silipos’ cost of sales increase of approximately $189,000 for its personal care products was attributable to its increased net sales of personal care products of approximately $313,000.

Consolidated gross profit increased approximately $2,500,000, or 82.6%, to approximately $5,527,000 for the three months ended March 31, 2007, compared to approximately $3,027,000 in the three months ended March 31, 2006. Consolidated gross profit as a percentage of net sales for the three months ended March 31, 2007 was 36.5%, compared to 36.3% for the three months ended March 31, 2006. The principal reason for the increase in gross profit was the gross profit contribution of Twincraft and Regal of approximately $1,733,000 and $537,000, respectively. Twincraft’s gross profit as a percentage of its net sales for the three months ended March 31, 2007 was 28.7%. The principal reason for the remaining increase in consolidated gross profit was the gross profit increase in our medical products business, excluding Silipos, of approximately $316,000 for the three months ended March 31, 2007, which was attributable to the decline in overhead costs and materials costs. This was partially offset by the decrease of Silipos’ gross profit of approximately $86,000. Silipos’ blended gross profit (including both medical products and personal care products) as a percentage of its net sales for the three months ended March 31, 2007 was 55.1%, compared to 56.5% for the three months ended March 31, 2006. The reduction in Silipos’ gross profit can be attributed to fixed cost components of cost of sales.

Gross profit for the medical products segment was approximately $3,312,000, or 41.1% of net sales of the medical products segment in the three months ended March 31, 2007, compared to approximately $2,669,000, or 35.0% of net sales of the medical products segment in the three months ended March 31, 2006.

Gross profit for custom orthotics was approximately $1,111,000, or 27.8% of net sales of custom orthotics for the three months ended March 31, 2007, compared to approximately $768,000, or 19.4% of net sales of custom orthotics for the three months ended March 31, 2006. Gross profit for our historic distributed products was approximately $375,000, or 32.5% of net sales of distributed products in the medical products business for the three months ended March 31, 2007, compared to approximately $402,000, or 36.4% of net sales of distributed products in the medical products business for the three months ended March 31, 2006. The increase in gross profit in custom orthotics was attributable to decreases in overhead expenses, as well as a slight decrease in certain material prices. The decrease in gross profit in distributed products from our historical business was attributable to a slight increase in cost of sales of historic distributed products.

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Gross profit generated by Silipos’ branded medical product sales was approximately $1,289,000, or 59.1% of net sales of Silipos’ branded medical products for the three months ended March 31, 2007, compared to approximately $1,499,000, or 58.4% of net sales of Silipos’ branded medical products for the three months ended March 31, 2006.

Gross profit generated by our personal care segment was approximately $2,215,000, or 31.3% of net sales in the personal care segment for the three months ended March 31, 2007, compared to approximately $358,000, or 49.8% of net sales in the personal care segment for the three months ended March 31, 2006. Excluding Twincraft’s gross profit of approximately $1,733,000, or 28.7% of Twincraft’s net sales for the three months ended March 31, 2007, the gross profit generated by Silipos’ personal care segment was approximately $482,000, or approximately 46.7% of Silipos’ net sales in the personal care segment for the three months ended March 31, 2007, compared to approximately $358,000, or approximately 49.8% of Silipos’ net sales in the personal care segment for the three months ended March 31, 2006.

General and administrative expenses for the three months ended March 31, 2007 were approximately $3,422,000, or 22.6% of net sales, compared to approximately $2,341,000, or 28.1% of net sales for the three months ended March 31, 2006, representing an increase of approximately $1,081,000. Twincraft generated approximately $627,000 of general and administrative expenses in the three months ended March 31, 2007. The principal reason for the remaining increase of $454,000 was primarily attributable to an increase in professional fees of approximately $205,000, which includes fees paid to a financial service consulting firm of approximately $146,000, an increase in depreciation expense and amortization of identifiable intangible assets of approximately $175,000, an increase in recruitment fees of approximately $99,000, and an increase in other net general and administrative expenses of approximately $55,000. These increases in general and administrative expenses were offset by a decrease in consulting fees (primarily information technology related) of approximately $80,000.

Selling expenses increased approximately $401,000, or 21.9%, to approximately $2,229,000 for the three months ended March 31, 2007, compared to approximately $1,828,000 for the three months ended March 31, 2006. Selling expenses as a percentage of net sales were 14.7% in the three months ended March 31, 2007, compared to 21.9% in the three months ended March 31, 2006. Twincraft and Regal generated approximately $612,000 and $453,000, respectively, of selling expenses in the three months ended March 31, 2007. The principal reasons for the remaining decrease of $664,000 is primarily attributable to certain reclassifications of personnel and its related selling expenses in our medical products business that are now under Regal and due to our continued rationalization of selling expenses.

Research and development expenses increased from approximately $123,000 in the three months ended March 31, 2006, to approximately $197,000 in the three months ended March 31, 2007, an increase of approximately $74,000, or 60.2%, which was attributable to the inclusion of Twincraft’s research and development expenses of approximately $80,000.

Interest expense was approximately $526,000 for the three months ended March 31, 2007, compared to approximately $304,000 for the three months ended March 31, 2006, an increase of approximately $222,000. The principal reason for the increase was that the three months ended March 31, 2007 included interest expense of approximately $375,000 associated with the $28,880,000 principal amount of 5% convertible subordinated notes due December 7, 2011 (the “5% Convertible Notes”) incurred in connection with the Twincraft acquisition, compared to interest expense of approximately $144,000 associated with the $14,589,000 principal amount of 4% convertible subordinated notes due August 31, 2006 incurred in connection with the Silipos acquisition.

Interest income was approximately $133,000 in the three months ended March 31, 2007, compared to approximately $159,000 in the three months ended March 31, 2006.

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The provision for income taxes was approximately $64,000 in the three months ended March 31, 2007, compared to approximately $8,000 in the three months ended March 31, 2006. 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 totalling approximately $50,000 (approximately $11,000 of which relates to foreign taxes). In the three months ended March 31, 2006, we provided for current foreign income taxes of approximately $34,000 and a deferred income tax (benefit) totalling approximately $(26,000) (approximately $9,000 of which relates to foreign taxes).

Liquidity and Capital Resources

Working capital as of March 31, 2007 was approximately $13,912,000, compared to approximately $33,312,000 as of December 31, 2006. Cash balances decreased approximately $22,655,000, to approximately $7,112,000 at March 31, 2007, from approximately $29,767,000 at December 31, 2006. The decrease in working capital at March 31, 2007 is primarily attributable to decreases in cash and cash equivalents, and increases in accrued liabilities, accounts payable, and the amount due to sellers of Twincraft resulting from an adjustment to the purchase price, the accrued interest relating to the 5% Convertible Notes, and to the timing of certain payments, partially offset by increases in accounts receivable, inventories and prepaid expenses.

Net cash provided by operating activities was approximately $1,334,000 in the three months ended March 31, 2007. Net cash used in operating activities was approximately $143,000 in the three months ended March 31, 2006. 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 and other assets primarily due to the acquisitions of Twincraft and Regal. The net cash used in operating activities in the three months ended March 31, 2006 resulted primarily from increases in prepaid expenses and other assets.

Net cash used in investing activities was approximately $23,973,000 and approximately $205,000 in the three months ended March 31, 2007 and 2006, respectively. 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 investing activities in the three months ended March 31, 2006 reflects the purchases of property and equipment of approximately $205,000, principally production related equipment at our custom orthotics operation.

Net cash used in financing activities in the three months ended March 31, 2007 was approximately $9,000, which represented the note payments related to the furnishings of our new office space in New York, N.Y that was financed by the landlord over a term of five years with interest at 7% per annum. Net cash provided by financing activities in the three months ended March 31, 2006 was approximately $46,000, which represented the proceeds from the exercise of certain stock options and warrants.

Our principal cash needs are to reduce amounts incurred in connection with our acquisition of Twincraft, which resulted from the post closing purchase price adjustment, and to provide working capital and to fund growth.

Our ability to fund working capital requirements and make acquisitions and anticipated capital expenditures and satisfy our debt obligations will depend on our future performance, which is subject to general economic, financial and other factors, some of which are beyond our control, as well as the availability to us of other sources of liquidity. We believe that based on current levels of operations and anticipated growth, our cash flow from operations will be adequate for at least the next twelve months to fund our working capital requirements, and anticipated capital expenditures.

In the three months ended March 31, 2007, we generated a net loss of approximately $(784,000), compared to a net loss of approximately $(1,426,000) for the three months ended March 31, 2006, an improvement of approximately $642,000. The improvement was primarily the result of an increase in gross profit of approximately $2,500,000, which was offset in part by increases in our general and administrative expenses and selling expenses of approximately $1,081,000 and $401,000 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.

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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”). The maximum availability under the Credit Facility, if and when the Company has the requisite levels of assets, would be $20,000,000, subject to a sublimit of $5,000,000 for letters of credit, another sublimit of $5,000,000 for term loans, and a sublimit of $750,000 on loans against inventory (subject to an increase in the sublimit on inventory loans to $7,500,000 if and when the bank receives a satisfactory appraisal of the inventory). Interest is payable monthly in arrears at the lender's prime rate or, at the Company's election, at 2 percentage points above an Adjusted Eurodollar Rate, as defined. 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. The Company is required to make certain improvements in its financial reporting systems before the full amount of the Credit Facility is available to the Company. In addition, we are in the process of consolidating our banking relationships with one bank. This process, when complete, will enable us to better manage our cash and other liquid assets by allowing all of our cash and cash equivalents to be accessed and controlled centrally. Such a facility will allow the daily investment of cash balances in excess of immediate requirements.

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, 2007:

		Payment due By Period (In thousands)
Contractual Obligations		Total		9 Months Ended Dec. 31, 2007		1-3 Years		4-5 Years		More than 5 Years
Operating Lease Obligations	$	11,840	$	1,452	$	4,858	$	2,200	$	3,330
Capital Lease Obligations		5,464		317		1,328		948		2,871
Convertible Notes due December 7, 2011		28,880		—		—		28,880		—
Due to Sellers of Twincraft		2,840		2,840		—		—		—
Note Payable to Landlord		179		27		125		27		—
Interest on Long-term Debt		6,762		1,083		4,332		1,347		—
Interest on Note Payable to Landlord		29		8		20		1		—
Severance Obligations		240		240		—		—		—
Total	$	56,234	$	5,967	$	10,663	$	33,403	$	6,201

Such 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 number of shares of common stock as may be issuable on account of adjustments of the conversion price under the 5% Convertible Notes. Pursuant to certain registration rights granted to the holders of 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”).

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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, 2007. At the date of issuance, the 5% Convertible Notes were convertible at the rate of $4.75 per share, subject to certain anti-dilution 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, 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 (see Note 2, 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. This resulted in a debt discount of $427,889, 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 for the three months ended March 31, 2007 was $14,489. 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 held a Special Meeting of Stockholders on April 19, 2007, at which the Company’s stockholders approved the issuance by the Company of the Underlying Shares.

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.

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, 2007, 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 $1,060,000 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 $1,305,429, 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, 2007 was $65,325 and is recorded as interest expense in the consolidated statement of operations.

On October 31, 2001, the Company completed the sale in a private placement, of $14,589,000 principal amount of its 4% convertible subordinated notes due and paid in full, plus accrued interest, on August 31, 2006 (the “4% Convertible Notes”). The cost of raising these proceeds was $920,933, which was amortized through August 31, 2006. The amortization of these costs for the three moths ended March 31, 2006 was $47,945 and was included in interest expense in the related consolidated statements of operations.

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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, $33,729, is included in other current liabilities, including current installments of note payable, and the non-current portion of the Note is $142,556 at March 31, 2007. Interest expense on the Note for the three months ended March 31, 2007 was $3,188.

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 December 31, 2006, the Company’s obligation under capital lease, excluding current installments, is $2,700,000.

Recently Issued Accounting Pronouncements

On June 15, 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06−3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation),” which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of EITF No. 06-3 would include taxes that are imposed on a revenue transaction between a seller and a customer. If such taxes are significant, the accounting policy should be disclosed as well as the amount of taxes included in the financial statements if presented on a gross basis. The Company adopted EITF No. 06−3 as of January 1, 2007. The Company has been accounting for sales tax as net in the past and will continue to present as net.

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. The Company is evaluating SFAS No. 157 and its impact on the Company’s consolidated financial statements, but it is not expected to have a significant impact.

On February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This statement gives entities the option to carry most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. This statement, which will be effective in the first quarter of fiscal 2009, is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

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.

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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

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s current Chief Executive Officer, who is its current principal executive officer and acting as its 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”) as of March 31, 2007, pursuant to Exchange Act Rule 13a-15. Based on such evaluation, the Company’s Chief Executive Officer and acting principal financial officer, has concluded that the disclosure controls and procedures are effective.

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2005 and Form 10-K for the year ended December 31, 2005, the Company identified a material weakness relating to the controls in place relating to the accounting of stock options and restricted stock, which were not effective during such periods to provide reasonable assurance that these stock options would be properly recorded and disclosed in the financial statements, and that this is a material weakness in internal control over financial reporting. As a result, the Company subsequently restated its first and second quarter 2005 quarterly reports on Form 10-Q/A on December 22, 2005.

Remediation of Material Weakness

The Audit Committee of the Company reviewed the internal controls in 2006 to determine how this material weakness occurred and how to implement stronger controls to avoid the occurrence of this weakness in the future. Management implemented a written policy and procedures to correct the above stated weakness.

Changes in Internal Controls

The Company has implemented the internal control over financial reporting (as defined in Rules 13a-15(f) of the Exchange Act) during its fiscal quarter ended March 31, 2007.

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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, 2006 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, 2006, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On April 19, 2007, the Company held a Special Meeting of Stockholders (the “Special Meeting”) for the purpose of seeking the approval of the issuance of shares of the Company’s common stock, $0.02 par value, issuable upon the conversion of our 5% Convertible Notes due December 7, 2011.  The following table sets forth the votes cast for or against the proposal presented at the Special Meeting, as well as the number of abstentions:

For	Against	Abstain	Broker Non-Votes
7,500,373	48,008	52,371	0

ITEM 6.EXHIBITS

10.45	Form of Note Purchase Agreement dated as of December 7, 2006, among the Company and the purchasers of the Company’s 5% Convertible Subordinated Notes Due December 7, 2011, including letter amendment dated as of December 7, 2006, without exhibits, incorporated herein by reference to the Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 14, 2006.
10.46	Form of the Company’s 5% Convertible Subordinated Note Due December 7, 2011, incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on Form 8-K filed December 14, 2006.
10.47	Registration Rights Agreement dated as of January 8, 2007, by and between Langer, Inc., and Regal Medical Supply, LLC, incorporated herein by reference to the Exhibit 10.1 of the Company’s Current Report on Form 8-K filed January 12, 2007.
10.48	Asset Purchase Agreement dated as December 15, 2006, by and among Langer, Inc., Regal Acquisition Co., Regal Medical Supply, LLC, John Eric Shero, William Joseph Warning, John P Kenney, Richard Alan Nace, Linda Ann Lee, Carl David Ray, and Roy Kelley, incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on Form 8-K filed January 12, 2007.
10.49	Registration Rights Agreement dated as of January 23, 2007, by and between the Company, Peter A. Asch, Richard D. Asch, A. Lawrence Litke, and Joseph M. Candido, incorporated herein by reference to the Exhibit 10.1 of the Company’s Current Report on Form 8-K filed January 29, 2007.
10.50	Employment Agreement dated January 23, 2007, between Twincraft, Inc. and Peter A. Asch, incorporated herein by reference to the Exhibit 10.2 of the Company’s Current Report on Form 8-K filed January 29, 2007.+
10.51	Employment Agreement dated January 23, 2007, between Twincraft, Inc. and A. Lawrence Litke, incorporated herein by reference to the Exhibit 10.3 of the Company’s Current Report on Form 8-K filed January 29, 2007.+
10.52	Employment Agreement dated January 23, 2007, between Twincraft, Inc. and Richard. Asch, incorporated herein by reference to the Exhibit 10.4 of the Company’s Current Report on Form 8-K filed January 29, 2007.+

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10.53	Consulting Agreement dated January 23, 2007, between Twincraft, Inc. and Fifth Element LLC, incorporated herein by reference to the Exhibit 10.5 of the Company’s Current Report on Form 8-K filed January 29, 2007.+
10.54	Lease Agreement dated January 23, 2007, between Twincraft, Inc. and Asch Partnership, incorporated herein by reference to the Exhibit 10.6 of the Company’s Current Report on Form 8-K filed January 29, 2007.
10.55	Lease dated October 1, 2003 and as amended January 23, 2006, between Twincraft, Inc. and Asch Enterprises, LLC, incorporated herein by reference to the Exhibit 10.7 of the Company’s Current Report on Form 8-K filed January 29, 2007.
10.56	Stock Purchase Agreement dated as of November 14, 2006, by and among Langer, Inc., Peter A. Asch, Richard D. Asch, A. Lawrence Litke, and Joseph M. Candido, incorporated herein by reference to the Exhibit 10.8 of the Company’s Current Report on Form 8-K filed January 29, 2007.
31.1	Certification of Principal Executive Officer and Financial Officer Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)).
32.1	Certification of Principal Executive Officer and 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. 1350).

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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 15, 2007	By:	/s/ W. Gray Hudkins
		W. Gray Hudkins
		President and Chief Executive Officer
		(Principal Executive and Financial Officer)

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