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 June 30, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File No. 0-12991
PC
GROUP, 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)
|
419
Park Avenue South, Suite 500, New York, New York 10016
(Address
of principal executive offices) (Zip code)
Registrant’s
telephone number, including area code:
(212) 687-3260
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES
x
NO
¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
YES
¨
NO
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
o
|
|
Smaller
Reporting Company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES
¨
NO
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Common
Stock, Par Value $.02— 7,848,774 shares as of August 9, 2010.
INDEX
PC
GROUP, INC. AND SUBSIDIARIES
|
|
|
|
Page
|
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
As
of June 30, 2010 (Unaudited) and December 31, 2009
|
|
3
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations
Three
and six month periods ended June 30, 2010 and 2009
|
|
4
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Stockholders’ Equity
Six
month period ended June 30, 2010
|
|
5
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
Six
month periods ended June 30, 2010 and 2009
|
|
6
|
|
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
8
|
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
|
16
|
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
24
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
|
24
|
|
|
|
|
|
PART
II.
|
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
|
25
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
|
25
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
|
25
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
|
26
|
|
|
|
|
|
Signatures
|
|
27
|
|
|
|
Exhibit
Index
|
|
28
|
PART I.
FINANCIAL
INFORMATION
ITEM 1.
FINANCIAL
STATEMENTS
PC
GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
|
June 30,
2010
(Unaudited)
|
|
|
December 31,
2009
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,051,629
|
|
|
$
|
4,599,940
|
|
Accounts
receivable, net of allowances for doubtful accounts and returns and
allowances aggregating $114,749 and $314,440,
respectively
|
|
|
6,531,597
|
|
|
|
4,394,180
|
|
Inventories,
net
|
|
|
7,128,328
|
|
|
|
5,988,209
|
|
Prepaid
expenses and other current assets
|
|
|
1,063,728
|
|
|
|
1,190,081
|
|
Total
current assets
|
|
|
17,775,282
|
|
|
|
16,172,410
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
8,190,691
|
|
|
|
8,490,229
|
|
Identifiable
intangible assets, net
|
|
|
7,546,287
|
|
|
|
8,017,568
|
|
Goodwill
|
|
|
11,175,637
|
|
|
|
11,175,637
|
|
Other
assets
|
|
|
275,476
|
|
|
|
426,073
|
|
Total
assets
|
|
$
|
44,963,373
|
|
|
$
|
44,281,917
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,928,449
|
|
|
$
|
2,422,003
|
|
Obligation
under capital lease – current portion
|
|
|
180,759
|
|
|
|
81,011
|
|
Other
current liabilities
|
|
|
2,905,558
|
|
|
|
2,299,920
|
|
Total
current liabilities
|
|
|
7,014,766
|
|
|
|
4,802,934
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
5%
Convertible Notes, net of debt discount of $637,500 at June 30, 2010 and
$862,500 at December 31, 2009
|
|
|
28,242,500
|
|
|
|
28,017,500
|
|
Obligation
under capital lease
|
|
|
2,519,241
|
|
|
|
2,618,989
|
|
Deferred
income taxes payable
|
|
|
698,010
|
|
|
|
698,010
|
|
Other
liabilities
|
|
|
1,000
|
|
|
|
1,210
|
|
Total
liabilities
|
|
|
38,475,517
|
|
|
|
36,138,643
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $1.00 par value; authorized 250,000 shares; no shares
issued
|
|
|
|
|
|
|
|
|
Common
stock, $.02 par value; authorized 25,000,000 shares; issued 11,648,512
shares
|
|
|
232,971
|
|
|
|
232,971
|
|
Additional
paid in capital
|
|
|
53,790,298
|
|
|
|
53,686,944
|
|
Accumulated
deficit
|
|
|
(45,062,476
|
)
|
|
|
(43,354,339
|
)
|
Accumulated
other comprehensive income
|
|
|
489,112
|
|
|
|
539,747
|
|
|
|
|
9,449,905
|
|
|
|
11,105,323
|
|
Treasury
stock at cost, 3,799,738 shares
|
|
|
(2,962,049
|
)
|
|
|
(2,962,049
|
)
|
Total
stockholders’ equity
|
|
|
6,487,856
|
|
|
|
8,143,274
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
44,963,373
|
|
|
$
|
44,281,917
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
PC
GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
11,726,135
|
|
|
$
|
11,734,101
|
|
|
$
|
22,184,114
|
|
|
$
|
20,799,024
|
|
Cost
of sales
|
|
|
8,364,897
|
|
|
|
8,121,603
|
|
|
|
15,781,215
|
|
|
|
15,033,300
|
|
Gross
profit
|
|
|
3,361,238
|
|
|
|
3,612,498
|
|
|
|
6,402,899
|
|
|
|
5,765,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,810,883
|
|
|
|
1,680,535
|
|
|
|
3,723,365
|
|
|
|
3,734,776
|
|
Selling
expenses
|
|
|
1,350,478
|
|
|
|
1,074,882
|
|
|
|
2,681,936
|
|
|
|
2,251,200
|
|
Research
and development expenses
|
|
|
209,823
|
|
|
|
204,267
|
|
|
|
455,644
|
|
|
|
439,172
|
|
Operating
income (loss)
|
|
|
(9,946
|
)
|
|
|
652,814
|
|
|
|
(458,046
|
)
|
|
|
(659,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
13,994
|
|
|
|
12,713
|
|
|
|
29,156
|
|
|
|
21,417
|
|
Interest
expense
|
|
|
(639,075
|
)
|
|
|
(643,538
|
)
|
|
|
(1,279,232
|
)
|
|
|
(1,288,826
|
)
|
Other
|
|
|
1,090
|
|
|
|
(11,001
|
)
|
|
|
(15
|
)
|
|
|
13,713
|
|
Other
expense, net
|
|
|
(623,991
|
)
|
|
|
(641,826
|
)
|
|
|
(1,250,091
|
)
|
|
|
(1,253,696
|
)
|
Income
(loss) from continuing operations before income taxes
|
|
|
(633,937
|
)
|
|
|
10,988
|
|
|
|
(1,708,137
|
)
|
|
|
(1,913,120
|
)
|
Benefit
from income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,075,200
|
|
Income
(loss) from continuing operations
|
|
|
(633,937
|
)
|
|
|
10,988
|
|
|
|
(1,708,137
|
)
|
|
|
(837,920
|
)
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations of discontinued subsidiaries (including gain on sales of
subsidiaries of $77,550 and $1,674 in the three and six months ended June
30, 2009)
|
|
|
—
|
|
|
|
77,550
|
|
|
|
—
|
|
|
|
1,674
|
|
Benefit
from income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
|
77,550
|
|
|
|
—
|
|
|
|
1,674
|
|
Net
income (loss)
|
|
$
|
(633,937
|
)
|
|
$
|
88,538
|
|
|
$
|
(1,708,137
|
)
|
|
$
|
(836,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
—
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.10
|
)
|
Income
from discontinued operations
|
|
|
—
|
|
|
|
0.01
|
|
|
|
—
|
|
|
|
—
|
|
Basic
and diluted income (loss) per share
|
|
$
|
(0.08
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.10
|
)
|
Weighted
average number of common shares used in computation of net income (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,848,774
|
|
|
|
7,838,260
|
|
|
|
7,848,774
|
|
|
|
8,246,598
|
|
Diluted
|
|
|
7,848,774
|
|
|
|
7,898,260
|
|
|
|
7,848,774
|
|
|
|
8,246,598
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
PC
GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Stockholders’ Equity
For
the six months ended June 30, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2010
|
|
|
11,648,512
|
|
|
$
|
232,971
|
|
|
$
|
(2,962,049
|
)
|
|
$
|
53,686,944
|
|
|
$
|
(43,354,339
|
)
|
|
$
|
539,747
|
|
|
|
|
|
$
|
8,143,274
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,708,137
|
)
|
|
|
|
|
|
$
|
(1,708,137
|
)
|
|
|
|
|
Foreign
currency adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,635
|
)
|
|
|
(50,635
|
)
|
|
|
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,758,772
|
)
|
|
|
(1,758,772
|
)
|
Stock-based
compensation
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,354
|
|
Balance
at June 30, 2010
|
|
|
11,648,512
|
|
|
$
|
232,971
|
|
|
$
|
(2,962,049
|
)
|
|
$
|
53,790,298
|
|
|
$
|
(45,062,476
|
)
|
|
$
|
489,112
|
|
|
|
|
|
|
$
|
6,487,856
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
PC
GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For
the six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,708,137
|
)
|
|
|
(836,246
|
)
|
Income
from discontinued operations
|
|
|
—
|
|
|
|
(1,674
|
)
|
Loss
from continuing operations
|
|
|
(1,708,137
|
)
|
|
|
(837,920
|
)
|
Adjustments
to reconcile net loss from continuing operations to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment and amortization of identifiable intangible
assets
|
|
|
1,168,175
|
|
|
|
1,290,013
|
|
Amortization
of debt acquisition costs
|
|
|
180,160
|
|
|
|
180,161
|
|
Amortization
of debt discount
|
|
|
225,000
|
|
|
|
225,000
|
|
Stock-based
compensation expense
|
|
|
103,354
|
|
|
|
102,236
|
|
Reduction
in fair value of derivative liability
|
|
|
(210
|
)
|
|
|
(14,000
|
)
|
(Recovery
of) provision for doubtful accounts receivable
|
|
|
(199,691
|
)
|
|
|
36,353
|
|
Deferred
income tax (benefit)
|
|
|
—
|
|
|
|
(1,075,200
|
)
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,987,477
|
)
|
|
|
(55,488
|
)
|
Inventories
|
|
|
(1,160,120
|
)
|
|
|
1,289,953
|
|
Prepaid
expenses and other current assets
|
|
|
(130,214
|
)
|
|
|
(28,498
|
)
|
Other
assets
|
|
|
(6,501
|
)
|
|
|
586
|
|
Accounts
payable and other current liabilities
|
|
|
2,122,418
|
|
|
|
(164,625
|
)
|
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
(1,393,243
|
)
|
|
|
948,571
|
|
Net
cash provided by (used in) operating activities of discontinued
operations
|
|
|
—
|
|
|
|
—
|
|
Net
cash provided by (used in) operating activities
|
|
|
(1,393,243
|
)
|
|
|
948,571
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(397,356
|
)
|
|
|
(513,277
|
)
|
Net
proceeds from sales of subsidiaries
|
|
|
237,500
|
|
|
|
353,918
|
|
Net
cash used in investing activities for continuing
operations
|
|
|
(159,856
|
)
|
|
|
(159,359
|
)
|
Net
cash used in investing activities of discontinued
operations
|
|
|
—
|
|
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(159,856
|
)
|
|
|
(159,359
|
)
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
PC
GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
|
|
For
the six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
—
|
|
|
|
(494,881
|
)
|
Repayment
of Note Receivable
|
|
|
19,065
|
|
|
|
—
|
|
Net
cash used in financing activities of continuing operations
|
|
|
19,065
|
|
|
|
(494,881
|
)
|
Net
cash used in financing activities of discontinued
operations
|
|
|
—
|
|
|
|
—
|
|
Net
cash used in financing activities
|
|
|
19,065
|
|
|
|
(494,881
|
)
|
Effect
of exchange rate changes on cash
|
|
|
(14,277
|
)
|
|
|
875
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,548,311
|
)
|
|
|
295,206
|
|
Cash
and cash equivalents at beginning of period
|
|
|
4,599,940
|
|
|
|
4,003,460
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,051,629
|
|
|
$
|
4,298,666
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,362,915
|
|
|
$
|
1,359,453
|
|
Income
taxes
|
|
$
|
250
|
|
|
$
|
4,600
|
|
Supplemental
Disclosures of Non Cash Financing Activities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities relating to property and
equipment
|
|
$
|
—
|
|
|
$
|
24,280
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
PC
GROUP, INC. AND SUBSIDIARIES
Notes
To Unaudited Condensed Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies and Other Matters
(a)
|
Basis
of Presentation
|
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and
Article 8-03 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals), other than the purchases and sales of affiliates discussed herein,
considered necessary for a fair presentation have been included. These unaudited
condensed consolidated financial statements should be read in conjunction with
the related financial statements and consolidated notes, included in the
Company’s annual report on Form 10-K for the fiscal year ended
December 31, 2009.
Operating
results for the three and six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2010.
The
Company classifies as discontinued operations for all periods presented any
component of its business that is probable of being sold or has been sold that
has operations and cash flows that are clearly distinguishable operationally and
for financial reporting purposes. For those components, the Company has no
significant continuing involvement after disposal, and their operations and cash
flows are eliminated from ongoing operations. Sales of significant
components of the Company’s business not classified as discontinued operations
are reported as a component of income from continuing operations.
(b)
|
Non-Recurring,
Non-Cash Benefit
|
In the
six months ended June 30, 2009, the Company realized a non-recurring, non-cash
benefit from income taxes of approximately $1,075,000. This benefit
results from the reversal of a previously established tax valuation allowance
which is no longer required as a result of a change in the estimated useful life
of the Silipos tradename from an indefinite life to a useful life of 18 years
effective January 1, 2009.
Factors which can result in quarterly
variations include the timing and amount of new business generated by the
Company, the timing of new product introductions, revenue mix, and the
competitive and fluctuating economic conditions in the medical and skincare
industries.
(d)
|
Stock-Based
Compensation
|
The total
stock compensation expense for the three and six months ended June 30, 2010 was
$51,511 and $103,354, respectively, and for the three and six months ended June
30, 2009 was $52,220 and $102,326, respectively, and is included in general and
administrative expenses in the consolidated statements of
operations.
The
Company accounts for share-based compensation cost in accordance with FASB ASC
718-10 (prior authoritative literature: SFAS No. 123(R), “Share-Based
Payment”). The fair value of each option award is estimated on the date of
the grant using a Black-Scholes option valuation model. The compensation
cost is recognized over the service period which is usually the vesting period
of the award. Expected volatility is based on the historical volatility of
the price of the Company’s stock. The risk-free interest rate is based on
Treasury issues with a term equal to the expected life of the option. The
Company uses historical data to estimate expected dividend yield, expected life
and forfeiture rates. For stock options granted as consideration for
services rendered by non-employees, the Company recognizes compensation expense
in accordance with the requirements of EITF No. 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services” and FASB ASC 505-50 (prior
authoritative literature: EITF No. 00-18 “Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than
Employees,”).
(e)
|
Fair
Value Measurements
|
FASB ASC
820-10 (prior authoritative literature: SFAS No. 157, “Fair Value
Measurements”), was adopted January 1, 2008 and provides guidance related to
estimating fair value and requires expanded disclosures. The standard applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value in
any new circumstances. In February 2008, the FASB provided a one-year deferral
for the implementation of FASB ASC 820-10 for non-financial assets and
liabilities recognized or disclosed at fair value in the financial statements on
a non-recurring basis. The Company adopted FASB ASC 820-10 for non-financial
assets and liabilities as of January 1, 2009 which did not have a material
impact on the results of operations. On a nonrecurring basis, the Company uses
fair value measures when analyzing asset impairment. Long-lived tangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If it is determined
such indicators are present and the review indicates that the assets will not be
fully recoverable, based on undiscounted estimated cash flows over the remaining
amortization periods, their carrying values are reduced to estimated fair value.
During the fourth quarter of each year, the Company evaluates goodwill and
indefinite-lived intangibles for impairment at the reporting unit
level.
The fair
value hierarchy distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs).
The hierarchy consists of three levels:
|
·
|
Level
one— Quoted market prices in active markets for identical assets or
liabilities;
|
|
·
|
Level
two— Inputs other than level one inputs that are either directly or
indirectly observable; and
|
|
·
|
Level
three— Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions
that a market participant would
use.
|
The
following table identifies the financial assets and liabilities that are
measured at fair value by level at June 30, 2010 and December 31,
2009:
|
|
June 30, 2010
Fair Value Measurements Using
|
|
|
December 31, 2009
Fair Value Measurements Using
|
|
Description
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Markets
|
|
$
|
2,923,242
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,314,514
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,210
|
|
A level 3 unobservable input is used
when little or no market data is available. The derivative liability is valued
using the Black-Scholes option pricing model using various assumptions.
These assumptions are more fully discussed below.
The
following table provides a reconciliation of the beginning and ending balances
of assets and liabilities valued using significant unobservable inputs (level
3):
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
Derivative
liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
2,150
|
|
|
$
|
5,000
|
|
|
$
|
1,210
|
|
|
$
|
30,000
|
|
Total
(gains) losses included in earnings
|
|
|
(1,150
|
)
|
|
|
11,000
|
|
|
|
(210
|
)
|
|
|
(14,000
|
)
|
Ending
balance
|
|
$
|
1,000
|
|
|
$
|
16,000
|
|
|
$
|
1,000
|
|
|
$
|
16,000
|
|
Total
gains and losses included in earnings for the three and six months ended June
30, 2010 are reported as other income in the consolidated statements of
operations.
Although
there were no fair value adjustments to non-financial assets, the following
table identifies the non-financial assets that are measured at fair value by
level at June 30, 2010:
|
|
Fair Value Measurements Using
|
|
Description
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Gains
(Losses)
|
|
Identifiable
Intangible Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,546,287
|
|
|
$
|
—
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
11,175,637
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,721,924
|
|
|
$
|
—
|
|
As
prescribed under adopted FASB ASC 360-10 (prior authoritative literature: FAS
142 “Goodwill and Other Intangible Assets,”) the Company tests annually for
possible impairment to goodwill. The Company performs its test as of
October 1
st
each
year using a discounted cash flow analysis that requires that certain
assumptions and estimates be made regarding industry economic factors and future
growth and profitability at each of our reporting units. The Company also
incorporates market participant assumptions to estimate fair value for
impairment testing. The Company’s definite lived intangible assets are
tested under FASB ASC 350-30 (prior authoritative literature: FAS 144
“Accounting for the Impairment or Disposal of Long-Lived Assets”) when
impairment indicators are present. An undiscounted model is used to
determine if the carrying value of the asset is recoverable. If not, a
discounted analysis is done to determine the fair value. The Company
engages a valuation analysis expert to prepare the models and calculations used
to perform the tests, and the Company provides them with estimates regarding our
reporting units’ expected growth and performance for future years.
At June
30, 2010, the carrying amount of the Company’s financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximated fair value because of their short-term maturity.
The carrying value of long-term debt, net of discount, at June 30, 2010 and
December 31, 2009 was $28,242,500 and $28,017,500, respectively. The
approximated fair value of long-term debt based on borrowing rates currently
available to the Company for debt with similar terms was $27,765,142 at June 30,
2010. Fair value was determined using a discounted cash flow
model.
(f)
|
Discount
on Convertible Debt
|
In June
2008, the FASB published FASB ASC 815-40 (prior authoritative literature: EITF
No. 07-5 “Determining Whether an Instrument is Indexed to an Entity’s Own
Stock”) to address concerns regarding the meaning of “indexed to an entity’s own
stock” contained in FASB ASC 815-10 (prior authoritative literature: FASB
Statement 133 “Accounting for Derivative Instruments and Hedging
Activities.”) FASB ASC 815-40 addresses the issue of the
determination of whether a free-standing equity-linked instrument should be
classified as equity or debt. If an instrument is classified as debt, it
is valued at fair value, and this value is remeasured on an ongoing basis, with
changes recorded in earnings in each reporting period. FASB ASC 815-40 is
effective for years beginning after December 15, 2008 and earlier adoption was
not permitted. Although FASB ASC 815-40 is effective for fiscal years
beginning after December 15, 2008, any outstanding instrument at the date of
adoption required a retrospective application of the accounting principle
through a cumulative effect adjustment to retained earnings upon adoption.
The Company has completed an analysis as it pertains to the conversion option in
its convertible debt, which was triggered by the reset provision, and has
determined that the fair value of the derivative liability was $30,000 and the
debt discount was $1,312,500 at January 1, 2009. The Company estimates the
fair value of the derivative liability using the Black-Scholes option pricing
model using the following assumptions:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
Annual
dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected
life (years)
|
|
|
1.19
|
|
|
|
1.94
|
|
Risk-free
interest rate
|
|
|
1.00
|
%
|
|
|
1.70
|
%
|
Expected
volatility
|
|
|
80
|
%
|
|
|
80
|
%
|
Expected volatility is based upon the
Company’s review of historical volatility. The Company believes this
method produces an estimate that is representative of the Company’s expectations
of future volatility over the expected term of the derivative liability.
The Company currently has no reason to believe future volatility over the
expected remaining life of this conversion option is likely to differ materially
from historical volatility. The expected life is based on the remaining
term of the conversion option. The risk-free interest rate is based on
three-year U.S. Treasury securities. The Company recorded an adjustment to
retained earnings in the amount of $1,459,109, which represents the cumulative
change in the fair value of the conversion option, net of the impact of
amortization of the additional debt discount from date of issuance of the notes
(December 8, 2006) through adoption of this pronouncement. In addition, as
required by FASB ASC 815-40, the Company recorded an adjustment to reduce
additional paid in capital in the amount of $467,873, which represents the
reversal of the value of the debt discount that was recorded in paid in capital
in connection with a reset of the bond conversion price in January 2007.
The debt discount will be amortized over the remaining life of the debt
resulting in greater interest expense. Interest expense related to the
discount amounted to $112,500 for each of the three months ended June 30, 2010
and 2009, and $225,000 for each of the six months ended June 30, 2010 and
2009.
(2)
Discontinued Operations
During
the year ended December 31, 2008, the Company completed the sale of Langer UK on
January 18, 2008, Regal on June 11, 2008, Bi-Op on July 31, 2008 and
substantially all of the operating assets and liabilities related to the Langer
branded custom orthotics and related products business on October 24,
2008. For the three months ended June 30, 2009, the operating results of
these wholly owned subsidiaries and businesses, which were formerly included in
the medical products and Regal segments, represent an adjustment to decrease the
loss on the sale of Regal in the amount of $2,550 and an adjustment to decrease
the loss on the Langer branded custom orthotics and related products business of
$75,000. For the six months ended June 30, 2009, the operating results of
these wholly owned subsidiaries and businesses represent adjustments to increase
the loss on the sale of Regal of $73,326 and an adjustment to decrease the loss
on the sale of the Langer branded custom orthotics and related products business
of $75,000.
(3)
Identifiable Intangible Assets
Identifiable
intangible assets at June 30, 2010 consisted of:
Assets
|
|
Estimated
Useful
Life (Years)
|
|
|
Adjusted
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Trade
names – Silipos
|
|
|
18
|
|
|
$
|
2,688,000
|
|
|
$
|
224,000
|
|
|
$
|
2,464,000
|
|
Repeat
customer base – Silipos
|
|
|
7
|
|
|
|
1,680,000
|
|
|
|
1,568,782
|
|
|
|
111,218
|
|
License
agreements and related technology – Silipos
|
|
|
9.5
|
|
|
|
1,364,000
|
|
|
|
825,579
|
|
|
|
538,421
|
|
Repeat
customer base – Twincraft
|
|
|
19
|
|
|
|
3,814,500
|
|
|
|
1,620,566
|
|
|
|
2,193,934
|
|
Trade
names – Twincraft
|
|
|
23
|
|
|
|
2,629,300
|
|
|
|
390,586
|
|
|
|
2,238,714
|
|
|
|
|
|
|
|
$
|
12,175,800
|
|
|
$
|
4,629,513
|
|
|
$
|
7,546,287
|
|
Identifiable
intangible assets at December 31, 2009 consisted of:
Assets
|
|
Estimated
Useful
Life (Years)
|
|
|
Adjusted
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Trade
names – Silipos
|
|
|
18
|
|
|
$
|
2,688,000
|
|
|
$
|
149,334
|
|
|
$
|
2,538,666
|
|
Repeat
customer base – Silipos
|
|
|
7
|
|
|
|
1,680,000
|
|
|
|
1,432,186
|
|
|
|
247,814
|
|
License
agreements and related technology – Silipos
|
|
|
9.5
|
|
|
|
1,364,000
|
|
|
|
753,790
|
|
|
|
610,210
|
|
Repeat
customer base – Twincraft
|
|
|
19
|
|
|
|
3,814,500
|
|
|
|
1,489,496
|
|
|
|
2,325,004
|
|
Trade
names – Twincraft
|
|
|
23
|
|
|
|
2,629,300
|
|
|
|
333,426
|
|
|
|
2,295,874
|
|
|
|
|
|
|
|
$
|
12,175,800
|
|
|
$
|
4,158,232
|
|
|
$
|
8,017,568
|
|
As of
December 31, 2009, the Company determined that the carrying value of the
Twincraft customer base was not recoverable and, accordingly, such value was
written down to its fair value resulting in an impairment of $1,000,000.
Also, effective January 1, 2009, the Company changed the estimated useful life
of the Silipos tradename from an indefinite life to a useful life of 18
years.
Aggregate
amortization expense relating to the above identifiable intangible assets for
the three months ended June 30, 2010 and 2009 was $235,394 and $265,591,
respectively, and for the six months ended June 30, 2010 and 2009 was $471,281
and $530,749, respectively. As of June 30, 2010, the estimated future
amortization expense is $445,411 for the last six months of 2010, $657,256 for
2011, $748,775 for 2012, $699,396 for 2013, $535,961 for 2014 and $4,459,488
thereafter.
(4)
Inventories, net
Inventories,
net, consisted of the following:
|
|
June
30,
2010
|
|
|
December 31,
2009
|
|
Raw
materials
|
|
$
|
4,808,201
|
|
|
$
|
3,752,980
|
|
Work-in-process
|
|
|
329,465
|
|
|
|
277,372
|
|
Finished
goods
|
|
|
2,570,836
|
|
|
|
2,572,236
|
|
|
|
|
7,708,502
|
|
|
|
6,602,588
|
|
Less:
Allowance for excess and obsolescence
|
|
|
(580,174
|
)
|
|
|
(614,379
|
)
|
|
|
$
|
7,128,328
|
|
|
$
|
5,988,209
|
|
(5)
Credit Facility
On
May 11, 2007, the Company entered into a secured revolving credit facility
agreement (the “Credit Facility”) with Wachovia Bank, N.A. (“Wachovia”),
expiring on September 30, 2011. During 2008, the Company entered two
amendments that decreased the maximum amount that the Company may borrow.
The Credit Facility, as amended, provides an aggregate maximum availability, if
and when the Company has the requisite levels of assets, in the amount of $12
million, and is subject to a sub-limit of $5 million for the issuance of letter
of credit obligations, another sub-limit of $3 million for term loans, and a
sub-limit of $4 million on loans against inventory. The Credit Facility
bears interest at 0.5 percent above the lender’s prime rate or, at the Company’s
election, at 2.5 percentage points above an Adjusted Eurodollar Rate, as defined
in the Credit Facility. The Credit Facility is collateralized by a first
priority security interest in inventory, accounts receivables and all other
assets and is guaranteed on a full and unconditional basis by the Company and
each of the Company’s domestic subsidiaries (Silipos and Twincraft) and any
other company or person that hereafter becomes a borrower or owner of any
property in which the lender has a security interest under the Credit
Facility. As of June 30, 2010, the Company had no outstanding advances
under the Credit Facility and has approximately $6.5 million available under the
Credit Facility related to eligible accounts receivable and inventory. In
addition, the Company has approximately $1.8 million of availability related to
property and equipment for term loans.
If
the Company’s availability under the Credit Facility drops below $3 million or
borrowings under the Credit Facility exceed $10 million, the Company is required
under the Credit Facility to deposit all cash received from customers into a
blocked bank account that will be swept daily to directly pay down any amounts
outstanding under the Credit Facility. In such event, the Company would
not have any control over the blocked bank account.
The
Company’s borrowing availabilities under the Credit Facility are limited to 85%
of eligible accounts receivable and 60% of eligible inventory, and are subject
to the satisfaction of certain conditions. Term loans shall be secured by
equipment or real estate hereafter acquired. The Company is required to submit
monthly unaudited financial statements to Wachovia.
If
the Company’s availability is less than $3,000,000, the Credit Facility requires
compliance with various covenants, including, but not limited to, a fixed charge
coverage ratio of not less than 1.0 to 1.0. Availability under the Credit
Facility is reduced by 40% of the outstanding letters of credit related to the
purchase of eligible inventory, as defined, and 100% of all other outstanding
letters of credit. At June 30, 2010, the Company had outstanding letters of
credit related to the purchase of eligible inventory of approximately
$457,000.
To the
extent that amounts under the Credit Facility remain unused, while the Credit
Facility is in effect and for so long thereafter as any of the obligations under
the Credit Facility are outstanding, the Company will pay a monthly commitment
fee of three-eighths of one percent (0.375%) on the unused portion of the loan
commitment. The Company paid Wachovia a closing fee in the amount of $75,000 in
August 2007. In addition, the Company paid legal and other costs associated with
obtaining the Credit Facility of $319,556 in 2007. In April 2008, the
Company paid a $20,000 fee to Wachovia related to an amendment of the Credit
Facility, which has been recorded as a deferred financing cost and is being
amortized over the remaining term of the Credit Facility. As of June 30,
2010, the Company had unamortized deferred financing costs in connection with
the Credit Facility of $119,467. Amortization expense for each of the three
months ended June 30, 2010 and 2009 was $23,893, and for each of the six months
ended June 30, 2010 and 2009 was $47,787.
(6)
Segment Information
At
June 30, 2010, the Company operated in two segments (medical products and
personal care). The Company’s medical products segment, which used to
include Langer UK, Bi-Op and the Langer branded custom orthotics and related
products business, includes the orthopedic and prosthetic products of
Silipos. The personal care segment includes the operations of Twincraft
and the personal care products of Silipos. Regal operated in its own
segment until its sale in 2008. Assets and expenses related to the
Company’s corporate offices are reported under “other” as they do not relate to
any of the operating segments. Intersegment sales are recorded at
cost.
Segment
information for the three and six months ended June 30, 2010 and 2009 is
summarized as follows:
Three months ended June
30, 2010
|
|
Medical
Products
|
|
|
Personal
Care
|
|
|
Other
|
|
|
Total
|
|
Net
sales
|
|
$
|
2,032,329
|
|
|
$
|
9,693,806
|
|
|
$
|
—
|
|
|
$
|
11,726,135
|
|
Gross
profit
|
|
|
896,678
|
|
|
|
2,464,560
|
|
|
|
—
|
|
|
|
3,361,238
|
|
Operating
income (loss)
|
|
|
171,167
|
|
|
|
611,153
|
|
|
|
(792,266
|
)
|
|
|
(9,946
|
)
|
Total
assets as of June 30, 2010
|
|
|
15,891,150
|
|
|
|
24,825,028
|
|
|
|
4,247,195
|
|
|
|
44,963,373
|
|
Three months ended June
30, 2009
|
|
Medical
Products
|
|
|
Personal
Care
|
|
|
Other
|
|
|
Total
|
|
Net
sales
|
|
$
|
2,168,479
|
|
|
$
|
9,565,622
|
|
|
$
|
—
|
|
|
$
|
11,734,101
|
|
Gross
profit
|
|
|
1,175,529
|
|
|
|
2,436,969
|
|
|
|
—
|
|
|
|
3,612,498
|
|
Operating
income (loss)
|
|
|
233,699
|
|
|
|
1,018,296
|
|
|
|
(599,181
|
)
|
|
|
652,814
|
|
Total
assets as of June 30, 2009
|
|
|
17,251,516
|
|
|
|
28,616,297
|
|
|
|
6,044,632
|
|
|
|
51,912,445
|
|
Six months ended June 30, 2010
|
|
Medical
Products
|
|
|
Personal Care
|
|
|
Other
|
|
|
Total
|
|
Net
sales
|
|
$
|
4,602,389
|
|
|
$
|
17,581,725
|
|
|
$
|
—
|
|
|
$
|
22,184,114
|
|
Gross
profit
|
|
|
2,204,860
|
|
|
|
4,198,039
|
|
|
|
—
|
|
|
|
6,402,899
|
|
Operating
income (loss)
|
|
|
378,331
|
|
|
|
597,078
|
|
|
|
(1,433,455
|
)
|
|
|
(458,046
|
)
|
Total
assets as of June 30, 2010
|
|
|
15,891,150
|
|
|
|
24,825,028
|
|
|
|
4,247,195
|
|
|
|
44,963,373
|
|
Six months ended June 30, 2009
|
|
Medical
Products
|
|
|
Personal Care
|
|
|
Other
|
|
|
Total
|
|
Net
sales
|
|
$
|
4,265,300
|
|
|
$
|
16,533,724
|
|
|
$
|
—
|
|
|
$
|
20,799,024
|
|
Gross
profit
|
|
|
2,117,316
|
|
|
|
3,648,408
|
|
|
|
—
|
|
|
|
5,765,724
|
|
Operating
income (loss)
|
|
|
270,255
|
|
|
|
556,538
|
|
|
|
(1,486,217
|
)
|
|
|
(659,424
|
)
|
Total
assets as of June 30, 2009
|
|
|
17,251,516
|
|
|
|
28,616,297
|
|
|
|
6,044,632
|
|
|
|
51,912,445
|
|
Geographical
segment information for the three and six months ended June 30, 2010 and 2009 is
summarized as follows:
Three months ended June 30, 2010
|
|
United
States
|
|
|
Canada
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
Total
|
|
Net
sales to external customers
|
|
$
|
9,381,198
|
|
|
$
|
450,432
|
|
|
$
|
615,279
|
|
|
$
|
1,279,226
|
|
|
$
|
11,726,135
|
|
Gross
profit
|
|
|
2,427,256
|
|
|
|
116,351
|
|
|
|
246,964
|
|
|
|
570,667
|
|
|
|
3,361,238
|
|
Operating
income (loss)
|
|
|
(278,826
|
)
|
|
|
39,190
|
|
|
|
72,357
|
|
|
|
157,333
|
|
|
|
(9,946
|
)
|
Total
assets as of June 30, 2010
|
|
|
44,642,553
|
|
|
|
—
|
|
|
|
320,820
|
|
|
|
—
|
|
|
|
44,963,373
|
|
Three months ended June 30, 2009
|
|
United
States
|
|
|
Canada
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
Total
|
|
Net
sales to external customers
|
|
$
|
9,092,956
|
|
|
$
|
1,740,262
|
|
|
$
|
254,819
|
|
|
$
|
646,064
|
|
|
$
|
11,734,101
|
|
Gross
profit
|
|
|
2,769,807
|
|
|
|
396,586
|
|
|
|
177,908
|
|
|
|
268,197
|
|
|
|
3,612,498
|
|
Operating
income (loss)
|
|
|
327,467
|
|
|
|
104,575
|
|
|
|
127,068
|
|
|
|
93,704
|
|
|
|
652,814
|
|
Total
assets as of June 30, 2009
|
|
|
51,538,203
|
|
|
|
—
|
|
|
|
374,242
|
|
|
|
—
|
|
|
|
51,912,445
|
|
Six months ended June 30, 2010
|
|
United
States
|
|
|
Canada
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
Total
|
|
Net
sales to external customers
|
|
$
|
17,256,361
|
|
|
$
|
1,268,844
|
|
|
$
|
1,471,971
|
|
|
$
|
2,186,938
|
|
|
$
|
22,184,114
|
|
Gross
profit
|
|
|
4,379,292
|
|
|
|
288,339
|
|
|
|
687,817
|
|
|
|
1,047,452
|
|
|
|
6,402,899
|
|
Operating
income (loss)
|
|
|
(966,826
|
)
|
|
|
58,437
|
|
|
|
178,066
|
|
|
|
272,276
|
|
|
|
(458,046
|
)
|
Total
assets as of June 30, 2010
|
|
|
44,642,553
|
|
|
|
—
|
|
|
|
320,820
|
|
|
|
—
|
|
|
|
44,963,373
|
|
Six months ended June 30, 2009
|
|
United
States
|
|
|
Canada
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
Total
|
|
Net
sales to external customers
|
|
$
|
16,599,718
|
|
|
$
|
1,911,604
|
|
|
$
|
1,291,244
|
|
|
$
|
996,458
|
|
|
$
|
20,799,024
|
|
Gross
profit
|
|
|
4,341,817
|
|
|
|
427,107
|
|
|
|
572,407
|
|
|
|
424,393
|
|
|
|
5,765,724
|
|
Operating
income (loss)
|
|
|
(997,035
|
)
|
|
|
99,632
|
|
|
|
136,714
|
|
|
|
101,265
|
|
|
|
(659,424
|
)
|
Total
assets as of June 30, 2009
|
|
|
51,538,203
|
|
|
|
—
|
|
|
|
374,242
|
|
|
|
—
|
|
|
|
51,912,445
|
|
(7)
Comprehensive Loss
The Company’s comprehensive income
(loss) was as follows:
|
|
Six months ended June
30,
|
|
|
|
2010
|
|
|
2009
|
|
Net
loss
|
|
$
|
(1,708,137
|
)
|
|
$
|
(836,246
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Change
in equity resulting from translation of financial statements into U.S.
dollars
|
|
|
(50,635
|
)
|
|
|
10,497
|
|
Comprehensive
loss
|
|
$
|
(1,758,772
|
)
|
|
$
|
(825,749
|
)
|
(8)
Income (Loss) Per Share
Basic
earnings per common share (“EPS”) are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings per
common share are computed based on the weighted average number of common shares,
after giving effect to dilutive common stock equivalents outstanding during each
period. The diluted loss per share computations for the three and six months
ended June 30, 2010 and 2009 exclude approximately 1,728,000 shares each,
related to employee stock options because the effect of including them would be
anti-dilutive. The impact of the 5% Convertible Notes on the calculation of the
fully-diluted earnings per share was anti-dilutive and is therefore not included
in the computation for the three and six months ended June 30, 2010 and 2009,
respectively.
The
following table provides a reconciliation between basic and diluted (loss)
earnings per share:
|
|
Six
months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per
Share
|
|
Basic
and diluted EPS
|
|
$
|
(1,708,137
|
)
|
|
|
7,848,774
|
|
|
$
|
(0.22
|
)
|
|
$
|
(836,246
|
)
|
|
|
8,246,598
|
|
|
$
|
(0.10
|
)
|
|
|
Three
months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
Basic
|
|
$
|
(633,937
|
)
|
|
|
7,848,774
|
|
|
$
|
(0.01
|
)
|
|
$
|
88,538
|
|
|
|
7,838,260
|
|
|
$
|
(0.26
|
)
|
Diluted
|
|
$
|
(633,937
|
)
|
|
|
7,848,774
|
|
|
$
|
(0.01
|
)
|
|
$
|
88,538
|
|
|
|
7,898,260
|
|
|
$
|
(0.26
|
)
|
(9)
Related Party Transactions
5% Convertible Subordinated
Notes
. On December 8, 2006, the Company sold $28,880,000 of the
Company’s 5% Convertible Notes due December 7, 2011 in a private placement. The
number of shares of common stock issuable on conversion of the notes, as of June
30, 2010, is 6,195,165, and the conversion price as of such date was $4.6617.
The number of shares and conversion price are subject to adjustment in certain
circumstances. During the year ended December 31, 2009, the
Company’s Chairman of the Board of Directors and largest beneficial stockholder,
Warren B. Kanders, purchased $3,250,000, President and CEO, W. Gray Hudkins, and
CFO and COO, Kathleen P. Bloch, each purchased $250,000 of the Company’s 5%
Convertible Notes from certain previous debt holders. Mr. Kanders and
trusts controlled by Mr. Kanders (as a trustee for members of his family) own
$5,250,000 of the 5% Convertible Notes, and one director, Stuart P. Greenspon,
owns $150,000 of the 5% Convertible Notes. On September 29, 2008, an
affiliate of Mr. Kanders entered into letter agreements with Mr. Hudkins and Ms.
Bloch pursuant to which they agreed (i) not to sell, transfer, pledge, or
otherwise dispose of or convert into Common Stock, any portion of the 5%
Convertible Notes respectively owned by them, and (ii) to cast all votes which
they respectively may cast with respect to any shares of Common Stock underlying
the 5% Convertible Notes in the same manner and proportion as shares of Common
Stock voted by Mr. Kanders and his affiliates.
Lease Agreement
–
Essex,
Vermont.
On August 4, 2010, the Company
’
s wholly-owned
subsidiary, Twincraft, Inc. (
“Twincraft
”), entered into a third
amendment (the
“Amendment
”) to its existing
sublease agreement dated October 1, 2003 (as amended, the
“Essex Lease
”) with Asch Enterprises,
LLC (
“Asch
Enterprises
”), a Vermont limited
liability company, the principal of which is Peter A. Asch, a director of the
Company and President of Twincraft. Pursuant to the Essex Lease, Twincraft
leases approximately 76,000 squre feet in Essex, Vermont, for use as a warehouse
facility. The term of the Essex Lease was scheduled to expire on October 1,
2010. The Amendment extends the term of the Essex Lease for a period commencing
on October 1, 2010 and expiring on September 30, 2015 (the
“Extended Term
”). Pursuant to the
Amendment, Twincraft has the right to terminate the Essex Lease during the
Extended Term upon two months
’
prior written
notice to Asch Enterprises, effective at any time following the first year of
the Extended Term. In the event of such a termination, in addition to any rent
owing to Asch Enterprises, Twincraft will pay Asch Enterprises a termination fee
of $104,362.50 prior to the effective date of such
termination.
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 resolution of any legal action or proceeding could materially
adversely affect the market price of the Company’s common stock and its
business, results of operations, liquidity, or financial
condition.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Through
our wholly-owned subsidiaries, Twincraft and Silipos, we offer a diverse line of
personal care products for the private label retail, medical, and therapeutic
markets. In addition, at Silipos, we design and manufacture high quality
gel-based medical products targeting the orthopedic and prosthetic
markets. We sell our medical products primarily in the United States and
Canada, as well as in more than 30 other countries, to national, regional, and
international distributors. We sell our personal care products primarily
in North America to branded marketers of such products, specialty and mass
market retailers, direct marketing companies, and companies that service various
amenities markets.
Our broad
range of gel-based orthopedic and prosthetics products are designed to protect,
heal, and provide comfort for the patient. Our line of personal care
products includes bar soap, gel-based therapeutic gloves and socks, scar
management products, and other products that are designed to cleanse and
moisturize specific areas of the body, often incorporating essential oils,
vitamins, and nutrients to improve the appearance and condition of the
skin.
Twincraft,
a manufacturer of bar soap, focuses on the health and beauty, direct marketing,
amenities, and mass market channels, was acquired in January 2007, and Silipos,
which offers gel-based personal care and medical products, was acquired in
September 2004.
Recent
Developments
Notice
of Delisting or Failure to Satisfy a Continued Listing Rule or Standard;
Transfer of Listing
As previously disclosed, on January 11,
2010, the Office of General Counsel (the “Staff”) of the Nasdaq Stock Market
(“Nasdaq”) informed PC Group, Inc. (the “Company”) that the Nasdaq Hearings
Panel (the “Panel”) reviewing the Company’s listing had granted the Company
until July 19, 2010 to achieve a minimum bid price of $1.00 or more for at least
ten consecutive trading days as required by Listing Rule 5550(a)(2) (the “Bid
Price Rule”), which has not occurred.
On July
20, 2010, the Company received a letter from the Staff indicating that the
Company had not regained compliance with the Bid Price Rule and that the Panel
had made a determination to delist the Company’s common stock, par value $0.02
per share (trading symbol: PCGR), from Nasdaq. The Company’s common stock
was suspended from trading on the Nasdaq Capital Market effective at the opening
of business on July 22, 2010 and the Company understands that Nasdaq will
subsequently file a notification of removal from listing on Form 25 with the
Securities and Exchange Commission (“SEC”), with the delisting of the Company’s
common stock effective 10 days after such filing.
The
Company’s common stock began to be quoted on the OTCQB
TM
marketplace of the Pink OTC Markets Inc. commencing on July 22, 2010 and it is
presently expected that the Company will continue to meet its reporting
obligations with the SEC.
Segment
Information
We currently operate in two segments,
medical products and personal care products. The medical products segment
includes the medical, orthopedic and prosthetic gel-based products of
Silipos. The operations of Twincraft and the personal care products
of Silipos are included in the personal care segment.
For the
six months ended June 30, 2010 and 2009, we derived approximately 20.8% and
20.5%, respectively, of our revenues from continuing operations from our medical
products segment and approximately 79.2% and 79.5%, respectively, from our
personal care products segment. For the six months ended June 30,
2010 and 2009, we derived approximately 83.5% and 89.0%, respectively, of our
revenues from continuing operations from North America, and approximately 16.5%
and 11.0%, respectively, from outside North America. Of
our revenue derived from North America for the six months ended June 30, 2010
and 2009, approximately 93.2% and 89.7%, respectively, was generated in the
United States and approximately 6.8% and 10.3%, respectively, was generated from
Canada.
For the
three months ended June 30, 2010 and 2009, we derived approximately 17.3% and
18.5%, respectively, of our revenues from continuing operations from our medical
products segment and approximately 82.7% and 81.5%, respectively, from our
personal care segment. For the three months ended June 30, 2010 and 2009,
we derived approximately 83.8% and 92.3%, respectively, of our revenues from
North America, and approximately 16.2% and 7.7%, respectively, of our revenues
from outside North America. Of our revenue derived from North America for
the three months ended June 30, 2010 and 2009, approximately 95.4% and 83.9%,
respectively, was generated in the United States and approximately 4.6% and
16.1%, respectively, was generated from Canada.
Critical
Accounting Policies and Estimates
Our
accounting policies are more fully described in Note 1 of the Notes to the
Consolidated Financial Statements included in our annual report on
Form 10-K for the year ended December 31, 2009. 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.
Goodwill
and other identifiable intangible assets comprise a substantial portion (41.6%
at June 30, 2010 and 43.3% at December 31, 2009) of our total assets. As
prescribed under FASB ASC 350-10 (prior authoritative literature: FAS 142
“Goodwill and Other Intangible Assets”), we test annually for possible
impairment to goodwill. We engage a valuation analysis expert to prepare
the models and calculations used to perform the tests, and we provide them with
information regarding our reporting units’ expected growth and performance for
future years. The method to compute the amount of impairment incorporates
quantitative data and qualitative criteria including new information that can
dramatically change the decision about the valuation of an intangible asset in a
very short period of time. The Company continually monitors the expected
cash flows of its reporting units for the purpose of assessing the carrying
values of its goodwill and its other intangible assets. Any resulting
impairment loss could have a material adverse effect on the Company’s reported
financial position and results of operations for any particular quarterly or
annual period. At June 30, 2010 the Company believes its goodwill is not
impaired.
As of
June 30, 2010, the Company’s market capitalization was approximately $3,218,000,
which is substantially lower than the Company’s estimated combined fair values
of its three reporting units. The Company has completed a reconciliation
of the sum of the estimated fair values of its reporting units as of October 1,
2009 (the annual testing date) to its market value (based upon its stock price
at June 30, 2010), which included the quantification of a controlling interest
premium. The Company has $28.8 million of convertible notes at the
corporate level that are not allocated to the reporting units. This was
done because this financing was raised for corporate strategic alternatives and
not to fund the operations of the individual reporting units. Also the
Company’s corporate-level expenses are not allocated to the individual reporting
units as they do not relate to their operations. In addition, the Company
considers the following qualitative items that cannot be accurately quantified
and are based upon the beliefs of management, but provide additional support for
the explanation of the remaining difference between the estimated fair value of
the Company’s report units and its market capitalization:
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·
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The
Company’s stock is thinly traded;
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·
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The
decline in the Company’s stock price is not correlated to a change in the
overall operating performance of the Company;
and
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Previously
unseen pressures are in place given the global financial and economic
crisis.
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There can
be no assurances that the Company’s estimated fair value of its reporting units
will be reflected in the Company’s market capitalization in the
future.
Six
months ended June 30, 2010 and 2009
The
Company’s net loss from continuing operations before income taxes was
approximately $(1,708,000) for the six months ended June 30, 2010, compared to a
net loss from continuing operations before income taxes of approximately
$(1,913,000) for the six months ended June 30, 2009. The decrease in the
Company’s net loss from continuing operations before income taxes was due to an
increase in sales of approximately $1,385,000 which produced an increase in
gross profit of approximately $637,000, offset by increases in selling expenses
of approximately $431,000 for the six months ended June 30, 2010 as compared to
the six months ended June 30, 2009 and are more fully discussed below. Net
loss from continuing operations for the six months ended June 30, 2010 was
approximately $(1,708,000) or $(0.22) per share on a fully diluted basis,
compared to a loss from continuing operations for the six months ended June 30,
2009 of approximately $(838,000) or $(0.10) per share on a fully diluted
basis. The operating results for the six months ended June 30, 2009
include a non-recurring, non-cash deferred tax benefit of approximately
$1,075,000. This benefit resulted from the reversal of a previously
established tax valuation allowance which was no longer required as a result of
a change in the estimated useful life of the Silipos tradename from an
indefinite life to a useful life of approximately 18 years effective January 1,
2009.
Net sales
for the six months ended June 30, 2010 were approximately $22,184,000 compared
to approximately $20,799,000 for the six months ended June 30, 2009, an increase
of approximately $1,385,000, or 6.7%, which increase was due to an increase in
net sales of Silipos, partially offset by a decrease in net sales of
Twincraft. Twincraft’s net sales for the six months ended June 30, 2010
were approximately $15,516,000, a decline of approximately $183,000 or 1.2% as
compared to net sales of approximately $15,699,000 for the six months ended June
30, 2009. In the six months ended June 30, 2009, Twincraft experienced a
$1.2 million boost to net sales due to an initial order related to one large
retailer that did not recur during the six months ended June 30, 2010. In
2010, Twincraft experienced increases in sales to other customers, particularly
in the national brand-equivalent market. Silipos’ net sales for the six
months ended June 30, 2010 were approximately $6,668,000, an increase of
approximately $1,568,000 or 30.7% as compared to net sales of approximately
$5,100,000 for the six months ended June 30, 2009. Approximately $751,000
of this increase is attributable to one large order received from a new
customer, and the remainder is primarily due to an increase in the volume of
orders from existing customers during the six months ended June 30,
2010.
Twincraft’s
sales are reported in the personal care products segment. Also included in
this segment are the net sales of Silipos personal care products which were
approximately $2,066,000 in the six months ended June 30, 2010, an increase of
approximately $1,231,000 or 147.4% as compared to Silipos’ net sales of personal
care products of approximately $835,000 for the six months ended June 30,
2009. This change was primarily a result of one large order received from
a new customer.
Net sales
of medical products were approximately $4,602,000 in the six months ended June
30, 2010, compared to approximately $4,265,000 in the six months ended June 30,
2009, an increase of approximately $337,000 or
7.9%. The
increase was primarily due to increases in the volume of orders from certain
existing customers in the six months ended June 30, 2010 as compared to the six
months ended June 30, 2009.
Cost of
sales, on a consolidated basis, increased approximately $748,000, or 5.0%, to
approximately $15,781,000 for the six months ended June 30, 2010, compared to
approximately $15,033,000 for the six months ended June 30, 2009. Cost of
sales as a percentage of net sales was 71.1% for the six months ended June 30,
2010, as compared to 72.3% for the six months ended June 30, 2009. The
decrease in cost of goods sold as a percentage of net sales is primarily
attributable to a decrease in raw material prices at Twincraft in the six months
ended June 30, 2010 as compared to the six months ended June 30, 2009.
This was partially offset by an increase in cost of sales as a percentage of net
sales at Silipos due to the shipment of a large order to a new customer at a
higher than normal cost.
Cost of
sales in the medical products segment were approximately $2,398,000, or 52.1% of
medical products net sales in the six months ended June 30, 2010, compared to
approximately $2,148,000 or 50.4% of medical products net sales in the six
months ended June 30, 2009, largely due to increases in certain raw material
prices.
Cost of
sales for the personal care products were approximately $13,385,000, or 76.1% of
net sales of personal care products in the six months ended June 30, 2010,
compared to approximately $12,885,000, or 77.9% of net sales of personal care
products in the six months ended June 30, 2009, primarily as a result of the
factors discussed above.
Consolidated
gross profit increased approximately $637,000, or 11.1%, to approximately
$6,403,000 for the six months ended June 30, 2010, compared to approximately
$5,766,000 in the six months ended June 30, 2009. Consolidated gross
profit as a percentage of net sales for the six months ended June 30, 2010 was
28.9%, compared to 27.7% for the six months ended June 30, 2009. Increases in
net sales and reductions in raw material prices at Twincraft both contributed to
the increase in consolidated gross profits. These were offset by a change
in the sales mix at Silipos. A greater proportion of Silipos’ net sales
were in the personal care market during the six months ended June 30, 2010,
which have a lower gross profit percentage than the Silipos medical
products.
General
and administrative expenses for the six months ended June 30, 2010 were
approximately $3,723,000, or 16.8% of net sales, compared to approximately
$3,735,000, or 18.0% of net sales for the six months ended June 30, 2009,
representing a decrease of approximately $12,000. The decrease is
comprised of reductions in salaries and rents of approximately $88,000 as a
result of our continuing efforts to reduce our corporate overhead structure,
reductions in legal fees of approximately $44,000, and amortization of
intangible assets of approximately $59,000. These reductions were offset
by increases in insurance of approximately $40,000, recruiting fees of
approximately $76,000, and foreign currency exchange expense of approximately
$37,000.
Selling
expenses increased approximately $431,000, or 19.1%, to approximately $2,682,000
for the six months ended June 30, 2010, compared to approximately $2,251,000 for
the six months ended June 30, 2009. Selling expenses as a percentage of
net sales were 12.1% in the six months ended June 30, 2010, compared to 10.8% in
the six months ended June 30, 2009. The principal reasons for the increase
were an increase in sales salaries and related travel and entertainment expenses
at Silipos of approximately $272,000 related to the hiring of additional
personnel, including the vice president of sales and marketing in 2009, an
increase in advertising expenses of approximately $90,000 and an increase in
royalties of approximately $46,000.
Research
and development expenses increased from approximately $439,000 in the six months
ended June 30, 2009, to approximately $456,000 in the six months ended June 30,
2010, an increase of approximately $17,000, or 3.9%. This increase is
primarily attributable to an increase in clinical study costs at Silipos of
approximately $66,000. This increase was offset by reductions in salaries
of approximately $18,000 and supplies of approximately $32,000.
Interest
expense was approximately $1,279,000 for the six months ended June 30, 2010,
compared to approximately $1,289,000 for the six months ended June 30, 2009, a
decrease of approximately $10,000 as a result of lower interest expense related
to the Silipos capital lease obligation.
Three
months ended June 30, 2010 and 2009
The
Company’s loss from continuing operations for the three months ended June 30,
2010 was approximately $(634,000), or $(0.08) per share on a fully diluted
basis, compared to income from continuing operations of approximately $11,000,
or less than $0.01 per share on a fully diluted basis for the three months ended
June 30, 2009. The principal reasons for the decrease in income from continuing
operations for the three months ended June 30, 2010 as compared to the three
months ended June 30, 2009 was a decrease in gross profit of approximately
$251,000, increases in general and administrative expenses of approximately
$130,000, and increases in selling expenses of approximately $276,000.
These changes are more fully discussed below.
Net sales
for the three months ended June 30, 2010 were approximately $11,726,000,
compared to approximately $11,734,000 for the three months ended June 30, 2009,
a decrease of approximately $8,000, or 0.1%. Twincraft’s net sales for the three
months ended June 30, 2010 were approximately $8,052,000, a decrease of
approximately $1,008,000 or 11.1% as compared to net sales of approximately
$9,060,000 for the three months ended June 30, 2009. In the six months ended
June 30, 2009, Twincraft experienced a $1.2 million boost to net sales due to an
initial order related to one large retailer that did not recur in the six months
ended June 30, 2010. Silipos’ net sales for the three months ended June 30, 2010
were approximately $3,674,000, an increase of approximately $1,000,000 or 37.4%
as compared to net sales of approximately $2,674,000 for the three months ended
June 30, 2009. Approximately $751,000 of this increase is due to one large order
received from a new customer and the remainder is primarily as a result of
increases in the volume of orders received from existing
customers.
Twincraft’s
sales are reported in the personal care products segment. Also included in
the personal care products segment are the net sales of Silipos personal care
products, which were approximately $1,641,000 in the three months ended June 30,
2010, an increase of approximately $1,136,000 or 225.0% as compared to Silipos’
net sales of personal care products of approximately $505,000 for the three
months ended June 30, 2009. This change is primarily the result of the
factors discussed above.
Net sales
of medical products were approximately $2,032,000 in the three months ended June
30, 2010, compared to approximately $2,168,000 in the three months ended June
30, 2009, a decrease of approximately $136,000, or 6.3%. This decrease is
primarily due to a lower demand for our prosthetic related products during the
three months ended June 30, 2010 as compared to the three months ended June 30,
2009.
Cost of
sales, on a consolidated basis, increased approximately $243,000, or 3.0%, to
approximately $8,365,000 for the three months ended June 30, 2010, compared to
approximately $8,122,000 for the three months ended June 30, 2009. Cost of
sales as a percentage of net sales was 71.3% for the three months ended June 30,
2010, as compared to cost of sales as a percentage of net sales of 69.2% for the
three months ended June 30, 2009. At Twincraft, cost of sales as a
percentage of net sales was 78.4% for the three months ended June 30, 2010, as
compared to cost of sales as a percentage of net sales for the three months
ended June 30, 2009 of 76.1%. This increase in cost of sales as a
percentage of net sales was primarily the result of increases in labor and
shipping costs that were due to changes in the sales mix. At Silipos, cost of
sales as a percentage of net sales was 55.9% for the three months ended June 30,
2010, as compared to 45.8% for the three months ended June 30, 2009. This
increase in cost of sales as a percentage of net sales was primarily the result
of a greater proportion of sales in the personal care market in the three months
ended June 30, 2010.
Cost of
sales in the personal care products segment were approximately $7,229,000 in the
three months ended June 30, 2010 compared to approximately $7,129,000 in the
three months ended June 30, 2009, primarily as a result of the factors discussed
above.
Cost of
sales in the medical products segment were approximately $1,136,000, or 55.9% of
medical products net sales in the three months ended June 30, 2010, compared to
approximately $993,000, or 45.6% of medical products net sales in the three
months ended June 30, 2009, also due to the factors discussed
above.
Consolidated
gross profit decreased approximately $251,000, or 7.0%, to approximately
$3,361,000 for the three months ended June 30, 2010, compared to approximately
$3,612,000 in the three months ended June 30, 2009. Consolidated gross profit as
a percentage of net sales for the three months ended June 30, 2010 was 28.7%,
compared to 30.8% for the three months ended June 30, 2009. At Twincraft, gross
profit as a percentage of net sales was 21.6% for the three months ended June
30, 2010, as compared to 23.9% for the three months ended June 30, 2009. The
primary reason for the decrease in gross profit as a percentage of net sales was
the change in the sales mix at Twincraft. At Silipos, gross profit as a
percentage of net sales was 44.1% for the three months ended June 30, 2010, as
compared to 54.2% for the three months ended June 30, 2009. The principal
reason for the decrease in gross profit is due to a greater proportion of
Silipos sales being in the personal care market in the three months ended June
30, 2010.
General
and administrative expenses for the three months ended June 30, 2010 were
approximately $1,811,000, or 15.4% of net sales, compared to approximately
$1,681,000, or 14.3% of net sales for the three months ended June 30, 2009, an
increase of approximately $130,000. The principal reason for this increase
was an increase in salary costs of approximately $70,000 due to the reversal of
an accrual related to the Company’s incentive plan in the three months ended
June 30, 2009 and an increase in insurance expense of approximately $91,000 due
to insurance refunds received in the three months ended June 30, 2009. In
addition, our amortization of intangible assets was approximately $30,000 lower
in the three months ended June 30, 2010 as compared to the three months ended
June 30, 2009.
Selling
expenses increased approximately $275,000, or 25.6%, to approximately $1,350,000
for the three months ended June 30, 2010, compared to approximately $1,075,000
for the three months ended June 30, 2009. Selling expenses as a percentage of
net sales were 11.5% in the three months ended June 30, 2010, compared to 9.2%
in the three months ended June 30, 2009. The principal reasons for the increase
were an increase in sales salaries and related travel and entertainment expenses
at Silipos of approximately $156,000 related to the hiring of additional
personnel, an increase in advertising expenses of approximately $62,000 and an
increase in royalties of approximately $27,000.
Research
and development expenses increased from approximately $204,000 in the three
months ended June 30, 2009, to approximately $210,000 in the three months ended
June 30, 2010, an increase of approximately $6,000, or 2.9%, which was primarily
attributable to increases in clinical study costs.
Liquidity
and Capital Resources
Working
capital as of June 30, 2010 was approximately $10,761,000, compared to
approximately $11,369,000 as of December 31, 2009. This reduction is
primarily the result of increases in accounts payable and accrued expenses of
approximately $2,122,000, coupled with a decrease in cash of approximately
$1,548,000, offset by increases in accounts receivable of approximately
$2,187,000 and inventories of approximately $1,160,000. Unrestricted cash
balances were approximately $3,052,000 at June 30, 2010, as compared to
approximately $4,600,000 at December 31, 2009.
Net cash
used in operating activities of continuing operations was approximately
$(1,393,000) in the six months ended June 30, 2010. The cash used is
attributable to our loss from continuing operations of approximately
$(1,708,000), net of depreciation, amortization, and other non-cash expenses of
approximately $1,676,000 and changes in our current assets and liabilities of
approximately $(1,361,000). Net cash provided by operating activities of
continuing operations was approximately $949,000 for the six months ended June
30, 2009. The net cash used in operating activities of continuing operations for
the six months ended June 30, 2009 is attributable to our loss from continuing
operations of $(836,000), which was offset by non-cash depreciation,
amortization, and other non-cash expenses of approximately $708,000 and changes
in the balances of current assets and liabilities of approximately
$1,077,000.
Net cash
used in investing activities of continuing operations was approximately
$(160,000) in the six months ended June 30, 2010. Net cash used in
investing activities of continuing operations was approximately $(159,000) in
the six months ended June 30, 2009. Cash flows used in investing
activities of continuing operations for the six months ended June 30, 2010 were
as a result of cash received from escrow that was related to the sale of th
Langer branded custom orthotics and related products business of approximately
$238,000, offset by approximately $397,000 of cash used to purchase
equipment. Net cash provided by investing activities of continuing
operations in the six months ended June 30, 2009 reflects the net cash proceeds
from the sale of Langer branded custom orthotics and related products business
of approximately $353,000, offset by purchases of property and equipment of
approximately $513,000.
Net cash
provided by financing activities in the six months ended June 30, 2010 was
approximately $19,065 and was attributable to cash received on our note
receivable related to our sale of Langer UK. Net cash used in financing
activities for the six months ended June 30, 2009 was approximately $(495,000)
and was primarily related to the Company’s purchase of treasury
stock.
In the
six months ended June 30, 2010, we generated a net loss of approximately
$(1,708,000), compared to a net loss of approximately $(836,000) for the six
months ended June 30, 2009, an increase in net loss of approximately
$872,000. There can be no assurance that our business will generate cash
flow from operations sufficient to enable us to fund our liquidity needs.
We may finance acquisitions of other companies or product lines in the future
from existing cash balances, through borrowings from banks or other
institutional lenders, and/or the public or private offerings of debt or equity
securities. We cannot make any assurances that any such funds will be available
to us on favorable terms, or at all.
Our
Credit Facility with Wachovia Bank expires on September 30, 2011. During
2008, the Company entered into two amendments that decreased the maximum amount
that the Company may borrow. The Credit Facility, as amended, provides an
aggregate maximum availability, if and when the Company has the requisite levels
of assets, in the amount of $12 million. The Credit Facility bears
interest at 0.5 percent above the lender’s prime rate or, at the Company’s
election, at 2.5 percentage points above an Adjusted Eurodollar Rate, as
defined. The obligations under the Credit Facility are guaranteed by the
Company’s domestic subsidiaries and are secured by a first priority security
interest in all the assets of the Company and its subsidiaries. The Credit
Facility requires compliance with various covenants including but not limited to
a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0 at all times when
excess availability is less than $3 million. As of June 30, 2010, the
Company does not have any outstanding advances under the Credit Facility and has
approximately $8.3 million (which includes approximately $1.8 million in term
loans based upon the value of Twincraft’s machinery and equipment) available
under the Credit Facility. Availability under the Credit Facility is
reduced by 40% of the outstanding letters of credit related to the purchase of
eligible inventory, as defined, and 100% of all other outstanding letters of
credit. At June 30, 2010, the Company had outstanding letters of credit
related to the purchase of eligible inventory of approximately $457,000 and no
other outstanding letters of credit.
On
December 8, 2006, the Company entered into a note purchase agreement for the
sale of $28,880,000 of 5% convertible subordinated notes due December 7, 2011
(the “5% Convertible Notes”). The 5% Convertible Notes are not registered
under the Securities Act of 1933, as amended. The Company filed a registration
statement with respect to the shares acquirable upon conversion of the 5%
Convertible Notes, including an additional number of shares of common stock
issuable on account of adjustments of the conversion price under the 5%
Convertible Notes, (collectively, the “Underlying Shares”) in January, 2007, and
filed Amendment No. 1 to the registration statement in November, 2007, Amendment
No. 2 in April 2008, and Amendments No. 3 and 4 in June 2008; the registration
statement was declared effective on June 18, 2008. The 5% Convertible
Notes bear interest at the rate of 5% per annum, payable in cash semiannually on
June 30 and December 31 of each year, commencing June 30, 2007. For each
of the six months ended June 30, 2010 and 2008 the Company recorded interest
expense related to the 5% Convertible Notes of approximately $722,000. At
the date of issuance, the 5% Convertible Notes were convertible at the rate of
$4.75 per share, subject to certain reset provisions. At the original conversion
price at December 31, 2006, the number of Underlying Shares was 6,080,000. Since
the conversion price was above the market price on the date of issuance and
there were no warrants attached, there was no beneficial conversion. Subsequent
to December 31, 2006, on January 8, 2007 and January 23, 2007, in conjunction
with common stock issuances related to two acquisitions, the conversion price
was adjusted to $4.6706, and the number of Underlying Shares was thereby
increased to 6,183,359, pursuant to the anti-dilution provisions applicable to
the 5% Convertible Notes. On May 15, 2007, as a result of the issuance of
an additional 68,981 shares of common stock to the Twincraft sellers on account
of upward adjustments to the Twincraft purchase price, and the surrender to the
Company of 45,684 shares of common stock on account of downward adjustments in
the Regal purchase price, the conversion price under the 5% Convertible Notes
was reduced to $4.6617, and the number of Underlying Shares was increased to
6,195,165 shares. The adjustment to the conversion price resulted in an
original debt discount of $476,873. Effective January 1, 2009, the Company
adopted the provisions of FASB ASC 815-40 which required a retrospective
adjustment to the debt discount. At January 1, 2009, the debt discount was
adjusted to $1,312,500. This amount will be amortized over the remaining
term of the 5% Convertible Notes and be recorded as interest expense in the
consolidated statements of operations. The charge to interest expense relating
to the debt discount for the three and six months ended June 30, 2010 was
approximately $112,500 and $225,000, respectively.
The
principal of the 5% Convertible Notes is due on December 7, 2011, subject to the
earlier call of the 5% Convertible Notes by the Company, as follows: (i) the 5%
Convertible Notes could not be called prior to December 7, 2007; (ii) from
December 7, 2007, through December 7, 2009, the 5% Convertible Notes may be
called and redeemed for cash, in the amount of 105% of the principal amount of
the 5% Convertible Notes (plus accrued but unpaid interest, if any, through the
call date); (iii) after December 7, 2009, the 5% Convertible Notes may be called
and redeemed for cash in the amount of 100% of the principal amount of the 5%
Convertible Notes (plus accrued but unpaid interest, if any, through the call
date); and (iv) at any time after December 7, 2007, if the closing price of the
common stock of the Company on the NASDAQ (or any other exchange on which the
Company’s common stock is then traded or quoted) has been equal to or greater
than $7.00 per share for 20 of the preceding 30 trading days immediately prior
to the Company’s issuing a call notice, then the 5% Convertible Notes shall be
mandatorily converted into common stock at the conversion price then
applicable. The Company had a Special Meeting of Stockholders on April 19,
2007, at which the Company’s stockholders approved the issuance by the Company
of the shares acquirable on conversion of the 5% Convertible
Notes.
In the
event of a default on the 5% Convertible Notes, the due date of the 5%
Convertible Notes may be accelerated if demanded by holders of at least 40% of
the 5% Convertible Notes, subject to a waiver by holders of 51% of the 5%
Convertible Notes if the Company pays all arrearages of interest on the 5%
Convertible Notes. Events of default are defined to include change in
control of the Company. The Company anticipates needing to refinance all
or a portion of the 5% Convertible Notes, as the Company does not expect to have
sufficient cash from operations to repay such indebtedness in full at
maturity. There can be no assurance that the Company will be able to
refinance such indebtedness on commercially reasonable terms or at
all.
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 June 30, 2010, and the Company’s obligations
under its Credit Facility. The 5% Convertible Notes would also be subordinated
to any additional debt which the Company may incur hereafter for borrowed money,
or under additional capital lease obligations, obligations under letters of
credit, bankers’ acceptances or similar credit transactions.
In
connection with the sale of the 5% Convertible Notes, the Company paid a
commission of $1,338,018 based on a rate of 4% of the amount of 5% Convertible
Notes sold, excluding the 5% Convertible Notes sold to members of the Board of
Directors and their affiliates, to Wm. Smith & Co., who served as placement
agent in the sale of the 5% Convertible Notes. The total cost of raising these
proceeds was $1,338,018, which will be amortized through December 7, 2011, the
due date for the payment of principal on the 5% Convertible Notes. The
amortization of these costs for the three and six months ended June 30, 2010 was
$66,187 and $132,373, respectively.
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 June 30, 2010, the Company’s obligation under capital lease is
$2,700,000.
Certain
Factors That May Affect Future Results
Information
contained or incorporated by reference in the quarterly report on
Form 10-Q, in other SEC filings by the Company, in press releases, and in
presentations by the Company or its management, contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the Company of forward-looking terminology
such as “believes,” “expects,” “plans,” “intends,” “estimates,” “projects,”
“could,” “may,” “will,” “should,” or “anticipates” or the negative thereof,
other variations thereon or comparable terminology or by discussions of
strategy. No assurance can be given that future results covered by the
forward-looking statements will be achieved. Such forward looking statements
include, but are not limited to, those relating to the Company’s financial and
operating prospects, future opportunities, the Company’s acquisition strategy
and ability to integrate acquired companies and assets, outlook and financial
health 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 that could cause actual results to differ
materially from those contemplated by such forward-looking statements.
These risks and uncertainties include, among others, the delisting of our common
stock from the Nasdaq Capital Market and actions taken by holders of our common
stock in response to this announcement; the willingness of market makers to
trade the Company's common stock on the Pink Sheets; the history of net losses
and the possibility of continuing net losses during and beyond 2010; the current
economic downturn and its effect on the credit and capital markets as well as
the industries and customers that utilize our products; the risk that any
intangibles on our balance sheet may be deemed impaired resulting in substantial
write-offs; the risk that we may not be able to raise adequate financing to fund
our operations and growth prospects; risks associated with our ability to
repay debt obligations, including the risk that the Company is unable to finance
its 5% Convertible Notes; the cost and expense of complying with government
regulations which affect the research, development and formulation of our
products; changes in our relationships with customers; declines in the business
of our customers; the loss of major customers; risks associated with the
acquisition and integration of businesses we may acquire; and other factors
described in the “Risk Factors” section of the Company's filings with the
Securities and Exchange Commission, including the Company's latest annual report
on Form 10-K and most recently filed Forms 8-K and 10-Q. Also, the
Company’s business could be materially adversely affected and the trading price
of the Company’s common stock could decline if any such risks and uncertainties
develop into actual events. The Company undertakes no obligation to publicly
update or revise forward-looking statements to reflect events or circumstances
after the date of this Form 10-Q or to reflect the occurrence of
unanticipated events.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
following discussion about the Company’s market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements.
In
general, business enterprises can be exposed to market risks, including
fluctuation in commodity and raw material prices, foreign currency exchange
rates, and interest rates that can adversely affect the cost and results of
operating, investing, and financing. In seeking to minimize the risks and/or
costs associated with such activities, the Company manages exposure to changes
in commodities and raw material prices, interest rates and foreign currency
exchange rates through its regular operating and financing activities. The
Company does not utilize financial instruments for trading or other speculative
purposes, nor does the Company utilize leveraged financial instruments or other
derivatives.
The
Company’s exposure to market rate risk for changes in interest rates relates
primarily to the Company’s short-term monetary investments. There is a market
rate risk for changes in interest rates earned on short-term money market
instruments. There is inherent rollover risk in the short-term money instruments
as they mature and are renewed at current market rates. The extent of this risk
is not quantifiable or predictable because of the variability of future interest
rates and business financing requirements. However, there is no risk of loss of
principal in the short-term money market instruments, only a risk related to a
potential reduction in future interest income. Derivative instruments are not
presently used to adjust the Company’s interest rate risk profile.
The
majority of the Company’s business is denominated in United States dollars.
There are costs associated with the Company’s operations in foreign countries,
primarily the United Kingdom and Canada that require payments in the local
currency, and payments received from customers for goods sold in these countries
are typically in the local currency. The Company partially manages its foreign
currency risk related to those payments by maintaining operating accounts in
these foreign countries and by having customers pay the Company in those same
currencies.
ITEM 4.
CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
June 30, 2010, the Company’s management carried out an evaluation, under the
supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, who are, respectively, the Company’s principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), pursuant to Exchange Act
Rule 13a-15. Based on such evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that the disclosure controls and
procedures were effective as of June 30, 2010.
Changes
in Internal Controls
There
have been no changes in the Company’s internal control over financial reporting
during the three months ended June 30, 2010 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL
PROCEEDINGS
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 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.
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, 2009,
which could materially affect our business, financial condition or future
results. This section supplements and updates that discussion and
you should read both together. The risks described below and 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.
Our
common stock is traded on the Pink OTC Markets Inc. which may adversely affect
our stock.
The
Company’s common stock began to be quoted on the OTCQB
TM
marketplace of the Pink OTC Markets Inc. (or Pink Sheets) commencing on July 22,
2010. The Pink OTC Markets are viewed by most investors as a less
desirable, and less liquid, marketplace than Nasdaq. As a result, there
could be an adverse impact on the price of our shares of common stock, the
volatility of the price of our shares could increase and/or the liquidity in our
common stock could decrease as investors may find it more difficult to purchase,
dispose of or obtain accurate quotations as to the value of our common
stock.
Additionally,
as a result of delisting from Nasdaq, our common stock may be subject to the
SEC’s so-called “penny stock” rules, which impose additional sales practice
requirements on broker-dealers, subject to certain exceptions, including
suitability determinations for investors other than established customers of the
broker and “accredited investors”. If our common stock is determined to be a
penny stock, a broker-dealer may find it more difficult to trade our common
stock and an investor may find it more difficult to acquire or dispose of our
common stock on the secondary market.
ITEM 5.
OTHER
INFORMATION
On August
4, 2010, the Company’s wholly-owned subsidiary, Twincraft, Inc. (“Twincraft”),
entered into a third
amendment
(the “Amendment”) to its existing sublease agreement dated October 1, 2003 (as
amended, the “Essex
Lease”)
with Asch Enterprises, LLC (“Asch Enterprises”), a Vermont limited liability
company, the principal of
which is
Peter A. Asch, a director of the Company and President of Twincraft.
Pursuant to the Essex Lease,
Twincraft
leases approximately 76,000 square feet in Essex, Vermont, for use as a
warehouse facility. The term of
the Essex
Lease was scheduled to expire on October 1, 2010. The Amendment extends
the term of the Essex Lease
for a
period commencing on October 1, 2010 and expiring on September 30, 2015 (the
“Extended Term”). Pursuant
to the
Amendment, Twincraft has the right to terminate the Essex Lease during the
Extended Term upon two
months’
prior written notice to Asch Enterprises, effective at any time following the
first year of the Extended Term.
In the
event of such a termination, in addition to any rent owing to Asch Enterprises,
Twincraft will pay Asch
Enterprises
a termination fee of $104,362.50 prior to the effective date of such
termination. The foregoing summary
of the
terms of the Amendment is qualified in its entirety by reference to the
Amendment, which is filed as
Exhibit
10.1 to this report.
ITEM 6.
EXHIBITS
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Third Amendment,
dated August 4, 2010, to Lease dated October 1, 2003, as amended,
between Twincraft, Inc. and Asch Enterprises, LLC.
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(a) (17
CFR 240.13a-14(a)).
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a) (17
CFR 240.13a-14(a)).
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(b) (17
CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. Section 1350).
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(b) (17
CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. Section
1350).
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
PC
GROUP, INC.
|
|
|
|
Date:
August 10, 2010
|
By:
|
/s/ W. GRAY
HUDKINS
|
|
|
W.
Gray Hudkins
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
Date:
August 10, 2010
|
By:
|
/s/ KATHLEEN P.
BLOCH
|
|
|
Kathleen
P. Bloch
|
|
|
Vice
President, Chief Operating Officer and Chief Financial
Officer
|
|
|
(Principal
Financial
Officer)
|
EXHIBIT
INDEX
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Third
Amendment, dated August 4, 2010, to Lease dated October 1, 2003, as
amended, between Twincraft, Inc. and Asch Enterprises,
LLC.
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(a) (17
CFR 240.13a-14(a)).
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(a) (17
CFR 240.13a-14(a)).
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer Pursuant to Rule 13a-14(b) (17
CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. Section 1350).
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer Pursuant to Rule 13a-14(b) (17
CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. Section
1350).
|
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