UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
September 30, 2006March 31, 2008
Commission File No. 001-13458
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
State of Incorporation I.R.S. Employer
Identification No.
Indicate by check markCheck whether the Registrant: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 precedingpast
12 months (or for such shorter period that the Registrantregistrant 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 is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
non-accelerated filer.smaller reporting company. See definitionthe definitions of "large accelerated
filer," "accelerated filerfiler" and large accelerated filer""smaller reporting company" in Rule 12b-2
of the Exchange Act (Check one):Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ](Do not check if a smaller reporting
company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12-B-212b-2 of the Exchange Act. Yes [ ] No [X]
As of September 30, 2006,March 31, 2008, the Registrant had 10,503,000 shares10,595,000 of its $0.10
par value common stock outstanding.
PART I.I FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Nine Months
Ended
September 30, Ended September 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- -----------March 31,
2008 2007
----------- -----------
Net sales $ 3,842,4004,093,800 $ 6,506,000 $12,131,500 $17,753,3003,861,800
----------- -----------
Operating costs and expenses:
Cost of sales 2,069,300 3,513,600 6,880,200 9,752,500Sales 2,201,900 2,346,500
Advertising 360,900 151,800 1,062,200 630,300111,200 112,300
Selling 1,353,400 1,455,700 4,189,100 4,422,0001,340,300 1,255,400
General and administrative 791,400 757,100 2,566,700 2,779,100800,000 814,100
----------- -----------
4,453,400 4,528,300
----------- -----------
4,575,000 5,878,200 14,698,200 17,583,900Loss from operations (359,600) (666,500)
Interest income 8,500 24,200
Interest expense (103,100) (103,900)
----------- -----------
----------- -----------
Income (loss)
from operations (732,600) 627,800 (2,566,700) 169,400
Gain on disposal
of assets 67,100 - 67,100 -
Interest income 35,300 9,900 62,200 30,200
Interest expense (110,800) (54,000) (211,200) (149,300)
----------- ----------- ----------- -----------
Income (loss)Loss before income taxes (741,000) 583,700 (2,648,600) 50,300(454,200) (746,200)
Income tax expense (benefit) - -
- -
----------- ----------- ----------- -----------
Net income (loss)loss $ (741,000)(454,200) $ 583,700 $(2,648,600) $ 50,300
=========== ===========(746,200)
=========== ===========
Net income (loss)loss per common share (Note 3):
Basic $ (0.07)(0.04) $ 0.06 $ (0.25) $ 0.00
=========== ===========(0.07)
=========== ===========
Diluted $ (0.07)(0.04) $ 0.06 $ (0.25) $ 0.00
=========== ===========(0.07)
=========== ===========
Weighted average shares outstanding:
Basic 10,503,000 10,494,800 10,503,000 10,478,900
=========== ===========10,582,700 10,533,000
=========== ===========
Diluted 10,503,000 10,560,400 10,503,000 10,500,800
=========== ===========10,582,700 10,533,000
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
September 30,March 31, December 31,
2006 20052008 2007
------------ -------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,349,0001,100,100 $ 2,260,7001,483,300
Investment securities 51,100 51,90050,500 50,400
Trade receivables, net of allowance
for doubtful accounts of $62,000 740,400 1,633,100$62,900 1,072,200 1,004,900
Other receivables 75,700 55,30023,300 32,500
Inventories, net 3,841,200 3,184,6003,212,900 3,054,500
Prepaid expenses 402,100 326,900122,800 238,100
----------- -----------
Total current assets 8,459,500 7,512,5005,581,800 5,863,700
Property, plant and equipment, net 13,270,100 13,725,20012,476,800 12,624,000
Other assets 60,800 11,80054,300 55,400
----------- -----------
TOTAL ASSETS $21,790,400 $21,249,500$18,112,900 $18,543,100
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ 570,000
Accounts payable 2,398,600 1,745,700$ 1,676,000 $ 1,560,300
Accrued payroll and benefits 818,500 939,400831,200 866,200
Other accrued expenses 464,400 454,600359,500 390,500
Current maturities of long-term debt 187,800 956,000210,200 204,900
----------- -----------
Total current liabilities 3,869,300 4,665,7003,076,900 3,021,900
Long-term debt, net of current maturities 4,925,100 938,4004,616,100 4,671,600
----------- -----------
8,794,400 5,604,1007,693,000 7,693,500
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,503,00010,595,000 shares,
1,050,300 1,050,300and 10,575,000 shares, respectively 1,059,500 1,057,500
Capital in excess of par 4,994,200 4,994,2005,112,500 5,090,100
Accumulated comprehensive income 1,100 1,900500 400
Retained earnings 6,950,400 9,599,0004,247,400 4,701,600
----------- -----------
Shareholders' equity 12,996,000 15,645,40010,419,900 10,849,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $21,790,400 $21,249,500$18,112,900 $18,543,100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
NineThree Months Ended
September 30,
--------------------------
2006 2005March 31,
-------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net income (loss) $(2,648,600)loss $ 50,300(454,200) $ (746,200)
----------- -----------
Adjustments to reconcile net
income (loss)loss to net cash provided
(used) by operating activities:
Depreciation and amortization 533,000 553,700157,100 161,600
Stock issued to ESOP 48,700 16,800
Gain on disposal of assets (67,100) -options granted 15,200 4,000
Changes in assets and liabilities:
Trade and other receivables, net 872,400 352,800(58,100) (336,100)
Inventories net (656,600) (1,855,400)(158,400) (168,400)
Prepaid expenses and
other assets (80,000) 225,300115,300 31,800
Accounts payable and
accrued expenses 541,800 (327,400)49,700 326,800
----------- ---------------------
Total adjustments to net income (loss) 1,192,200 (1,034,200)loss 120,800 19,700
----------- -----------
Net Cash Used by
Operating Activities (1,456,400) (983,900)(333,400) (726,500)
----------- -----------
Cash flows from investing activities:
Purchase of investment securities - (248,400)
Proceeds from sale or maturity
of investment securities - 250,000
Proceeds from disposal of assets 93,800 -
Purchase of property, plant & equipment (84,200) (16,000)(8,800) (1,500)
----------- -----------
Net Cash Provided (Used)Used by
Investing Activities 9,600 (14,400)(8,800) (1,500)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings 5,156,600 -
Short-term borrowings (payments), net (570,000) 240,000
Purchaseexercise of
stock for contribution to ESOP (48,700)options 9,200 -
Principal payments on
long-term borrowings (1,938,200) (683,400)
Loan origination fees and other costs (64,600) -borrowing (50,200) (47,900)
----------- -----------
Net Cash Provided (Used)Used by
Financing Activities 2,535,100 (443,400)
-----------(41,000) (47,900)
---------- -----------
Net Increase (Decrease)Decrease in Cash and
Cash Equivalents 1,088,300 (1,441,700)(383,200) (775,900)
Cash and Cash Equivalents,
beginning of period 2,260,700 3,354,6001,483,300 2,804,100
----------- -----------
Cash and Cash Equivalents,
end of period $ 3,349,0001,100,100 $ 1,912,9002,028,200
=========== ===========
Supplemental disclosures:
Cash paidPaid during period for:
Interest $ 215,900103,200 $ 145,500104,000
=========== ===========
Income taxes $ 1,100- $ 600900
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was
incorporated on February 15, 1954. Scott's Liquid Gold-Inc. and its
wholly owned subsidiaries (collectively, "we" or "our") manufacture
and market quality household and skin care products. Sinceproducts, and we fill,
package and market our Mold Control 500 product. We act as the first quarter of 2001, we
have acted as a
distributor in the United States offor beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse. In 2006 and
2007, we began the distribution of products from COSMEX International
(Davinci & Moosehead men's grooming products), and in 2007 from
Baylis & Harding (bath, body and hair care products). Our business is
comprised of two segments -- household products and skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and
those of our subsidiaries. All intercompany accounts and transactions
have been eliminated.
(c) Use of Estimates
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, the 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. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, realizability of
deferred tax assets, reserves for slow moving and obsolete inventory,
customer returns, coupon redemptions and allowances, and bad debts.
(d) Cash Equivalents
We consider all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
(e) Investments in Marketable Securities
We account for investments in marketable securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities",
which requires that we classify investments in marketable securities
according to management's intended use of such investments. We invest
our excess cash and have established guidelines relative to
diversification and maturities in an effort to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. We consider all
investments as available for use in our current operations and,
therefore, classify them as short-term, available-for-sale
investments. Available-for-sale investments are stated at fair value,
with unrealized gains and losses, if any, reported net of tax, as a
separate component of shareholders' equity and comprehensive income
(loss). The cost of the securities sold is based on the specific
identification method. Investments in corporate and government
securities as of September 30, 2006,March 31, 2008, are scheduled to mature within one year.
(f) Inventories
Inventories consist of raw materials and finished goods and are
stated at the lower of cost (first-in, first-out method) or market.
We record a reserve for slow moving and obsolete products and raw
materials. We estimate reserves for slow moving and obsolete products
and raw materials based upon historical and anticipated sales.
Inventories were comprised of the following at:
September 30, 2006March 31, 2008 December 31, 2005
------------------2007
-------------- -----------------
Finished goods $ 2,662,6002,177,200 $ 2,149,1002,178,000
Raw materials 1,507,600 1,344,5001,429,400 1,284,200
Inventory valuation reserve
(329,000) (309,000)
----------------- -----------------for obsolescence (393,700) (407,700)
----------- -----------
$ 3,841,2003,212,900 $ 3,184,600
================= =================3,054,500
=========== ===========
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost.
Depreciation is provided using the straight-line method over estimated
useful lives of the assets ranging from three to forty-five years.
Building structures and building improvements are estimated to have
useful lives of 35 to 45 years and 3 to 20 years, respectively.
Production equipment and production support equipment are estimated to
have useful lives of 15 to 20 years and 3 to 10 years, respectively.
Office furniture and office machines are estimated to have useful
lives of 10 to 20 and 3 to 5 years, respectively. Carpeting, drapes
and company vehicles are estimated to have useful lives of 5 to 10
years. Maintenance and repairs are expensed as incurred.
Improvements that extend the useful lives of the assets or provide
improved efficiency are capitalized.
(h) Financial Instruments
Financial instruments which potentially subject us to
concentrations of credit risk include cash and cash equivalents,
investments in marketable securities, and trade receivables. We
maintain our cash balances in the form of bank demand deposits with
financial institutions that management believes are creditworthy.
As of the balance sheet date and periodically throughout the year,
the Company has maintained balances in various operating accounts in
excess of federally insured limits. We establish an allowance for
doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information. We have
no significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option contracts
or other foreign currency hedging arrangements.
The recorded amounts for cash and cash equivalents, receivables,
other current assets, and accounts payable and accrued expenses
approximate fair value due to the short-term nature of these financial
instruments. The fair value of investments in marketable securities is
based upon quoted market value. Our long-term debt bears interest at a
fixed rate that adjusts annually on the anniversary date to thea then
prime rate. The carrying value of long-term debt approximates fair
value as of September 30,
2006March 31, 2008 and December 31, 2005.2007.
(i) Long-Lived Assets
We account for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(j) Income Taxes
We account for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes", which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective income tax bases. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income
during the period in which related temporary differences become
deductible. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
(k) Revenue Recognition
Revenue is generally recognized upon delivery of productswhen an arrangement exists to customers, whichsell our
product, we have delivered such product in accordance with that
arrangement, the sales price is when title passes.determinable, and collectibility is
probable. Reserves for estimated market development support, pricing
allowances and returns are provided in the period of sale as a
reduction of revenue. Reserves for returns and allowances are recorded
as a reduction of revenue, and are maintained at a level that management
believes is appropriate to account for amounts applicable to existing
sales. Reserves for coupons and certain other promotional activities are
recorded as a reduction of revenue at the later of the date at which the
related revenue is recognized or the date at which the sales incentive is
offered. At September 30, 2006March 31, 2008 and December 31, 20052007 approximately $790,900$650,000
and $794,000,$695,700, respectively, had been reserved as a reduction of accounts
receivable, and approximately $50,000$23,000 and $35,000,$27,000, respectively, had
been reserved as current liabilities. Co-op advertising, marketing
funds, slotting fees and coupons are deducted from gross sales and
total $1,804,000totaled $378,300 and $1,447,900
for$973,100 in the nine monthsquarter ended September 30, 2006March 31, 2008 and
September 30, 2005,2007, respectively.
(l) Advertising Costs
We expense advertisingAdvertising costs are expensed as incurred.
(m) Stock-based Compensation
At September 30, 2006,March 31, 2008, we had fourthree stock-based employee compensation
plans. During the first quarter of fiscal 2006, we adopted the
provisions of, and account for stock-based compensation in accordance
with, the Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards No. 123-revised 2004 ("SFAS 123R"),
"Share-Based Payment" which replaced Statement of Financial Accounting
Standards No. 123, ("SFAS 123"), "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, ("APB 25"), "Accounting for Stock Issued to
Employees." Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant
date based on the fair value of the award and is recognized as expense
on a straight-line basis over the requisite service period, which is
the vesting period. We elected the modified-prospective method, under
which prior periods are not revised for comparative purposes. The
valuation provisions of SFAS 123R apply to new grants and to grants
that were outstanding as of the effective date and are subsequently
modified.
No grants have occurred subsequent to the adoption of SFAS 123R and all
outstanding options were fully vested as of December 31, 2005.
Prior to January 1, 2006, we accounted for the plans described
above under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is
reflected in net income prior to January 1, 2006, as all options
granted under those plans had an exercise price not less than the
market value of the underlying common stock on the date of grant.
The effect on net income and earnings per share ifDuring the first quarter of 2008, we had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation for the three to nine months ended September 30, 2005 was as
follows:
We granted 720,000134,000 options for
shares of our common stock duringto employees at $0.55 per share. The
options which vest ratably over forty-eight months, or upon a change
in control, and which expire after five years, were granted at or
above the nine months ended September 30, 2005 with an average exercise price
equal to $0.55. Had compensation cost been recorded based on the fairmarket value of options granted by us, our pro-forma net income (loss) and net
income (loss) per share would have been as follows:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- ----------
Net income (loss) $ 583,700 $ 526,200 $ 50,300 $ (98,200)
Basic loss per share $ 0.06 $ 0.05 $ - $ (0.01)
Diluted loss per share $ 0.06 $ 0.05 $ - $ (0.01)
The fair value of options granted has been estimated as of the date of grant.
The weighted average fair market value of the options granted in
the first quarter of 2008 was estimated on the date of grant, using a
Black-Scholes option pricing model with the following assumptions as of:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------------ ------------------------
Dividend rate $ - $ -assumptions:
Expected volatility 65% 65%life of options
(using the "simplified" method) 4.5 years
Risk-free interest rate 3.80% 3.80%2.9%
Expected life (in years) 4.5 4.5volatility of stock 71%
Expected dividend rate None
Compensation cost related to stock options recognized in
operating results (included in general and administrative expenses)
under SFAS 123R was $15,200 in the three months ended March 31, 2008.
Approximately $213,700 of total unrecognized compensation costs
related to non-vested stock options is expected to be recognized over
the next forty-seven months. In accordance with SFAS 123R, there was
no tax benefit from recording the non-cash expense as relates to the
options granted to employees as these were qualified stock options which
are not normally tax deductible. With respect to the non-cash expense
associated with the options granted to the non-employee directors, no
tax benefit was recognized due to the existence of as yet unutilized
net operating losses. At such time as these operating losses have been
utilized and a tax benefit is realized from the issuance of
non-qualified stock options, a corresponding tax benefit may be
recognized.
(n) Comprehensive Income
We follow SFASStatement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" which establishes standards for
reporting and displaying comprehensive income and its components.
Comprehensive income includes all changes in equity during a period
from non-owner sources.
The following table is a reconciliation of our net income (loss)loss to itsour
total comprehensive income (loss)loss for the three monthsquarters ended March 31, 2008 and
nine
months ended September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2006 2005 2006 2005
---------- ----------2007:
2008 2007
----------- ---------------------
Net income (loss)loss $ (741,000)(454,200) $ 583,700 $(2,648,600) $ 50,300(746,200)
Unrealized gain (loss) on
investment securities 400 (900) (800) (1,700)
---------- ----------100 (200)
----------- ---------------------
Comprehensive income (loss)loss $ (740,600)(454,100) $ 582,800 $(2,649,400) $ 48,600
========== ==========(746,400)
=========== =====================
(o) Operating Costs and Expenses Classification
Cost of sales includes costs associated with manufacturing and
distribution including labor, materials, freight-in, purchasing and
receiving, quality control, internal transfer costs, repairs,
maintenance and other indirect costs, as well as warehousing and
distribution costs. We classify shipping and handling costs comprised
primarily of freight-out and nominal outside warehousing costs as a
component of selling expense on the accompanying Consolidated
Statement of Operations. Shipping and handling costs totaled
$1,106,800$403,000 and $1,153,200$345,000, for the nine monthsquarters ended September 30, 2006March 31, 2008 and 2005,2007,
respectively.
Selling expenses consist primarily of shipping and handling
costs, wages and benefits for sales and sales support personnel,
travel, brokerage commissions, promotional costs, as well as other
indirect costs.
General and administrative expenses consist primarily of wages
and benefits associated with management and administrative support
departments, business insurance costs, professional fees, office
facility related expenses, and other general support costs.
(p) Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141R, "Business Combinations"
("SFAS No. 141R"). This statement replaces SFAS 141 and defines
the acquirer in a business combination as the entity that obtains
control of one or more businesses in a business combination and
establishes the acquisition date as the date that the acquirer
achieves control. SFAS No. 141R requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their
fair values as of that date. SFAS No. 141R also requires the acquirer
to recognize contingent consideration at the acquisition date, measured
at its fair value at that date. This statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. The adoption
of this statement is not expected to have a material effect on the
Company's financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, "Noncontrolling Interests in Consolidated
Financial Statements - an Amendment of APB No. 51" ("SFAS No. 160").
This statement amends ARB 51 to establish accounting and reporting
standards for the Noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. Earlier adoption is prohibited. The
adoption of this statement is not expected to have a material effect
on the Company's future reported financial position or results of
operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of SFAS No.
115" ("SFAS No. 159"). This statement permits entities to choose to
measure certain financial instruments and liabilities at fair value.
Most of the provisions of SFAS No. 159 apply only to entities that
elect the fair value option. However, the amendment to SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities"
applies to all entities with available-for-sale and trading securities.
SFAS No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provision of SFAS No. 157, "Fair Value Measurements". The adoption of
this statement did not have a material effect on the Company's financial
statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements"
("SFAS No. 157"). This Statement defines fair value as used in
numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles
("GAAP") and expands disclosure related to the use of fair value
measures in financial statements. SFAS No. 157 does not expand the
use of fair value measures in financial statements, but standardizes
its definition and guidance in GAAP. The Standard emphasizes that
fair value is a market-based measurement and not an entity-specific
measurement based on an exchange transaction in which the entity sells
an asset or transfers a liability (exit price). SFAS No. 157
establishes a fair value hierarchy from observable market data as the
highest level to fair value based on an entity's own fair value
assumptions as the lowest level. SFAS No. 157 is effective in fiscal
years beginning after November 15, 2007. Adoption of this statement
is not expected to
materially impact our results of operations or financial position.
Also in September 2006, the FASB released Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). Under the new standard,
companies must recognize a net liability or asset to report the funded
status of their defined benefit pension and other postretirement benefit
plans on their balance sheets. The recognition and disclosure provisions
of SFAS No. 158 will be required to be adopted as of December 31, 2006.
We do not expect the adoption of SFAS No. 158 to have a material impact
on our results of operations or financial position.
The Financial Accounting Standards Board (FASB) has issued Statements
of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140" and
SFAS No. 156, "Accounting for Servicing of Financial Assets-an amendment
of FASB Statement No. 140" - but they will not have a relationship to the
operations of the Company. Therefore a description and its impact for
each on the Company's operations and financial position have not been
disclosed.
In May 2005, the FASB issued Statement of Financial Accounting
Standard No. 154, "Accounting Changes and Error Corrections (SFAS No. 154)."
This statement replaces APB Opinion No. 20, "Accounting Changes", and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements", and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS No. 154 applies to
all voluntary changes in accounting principle. Opinion No. 20 previously
required that most voluntary changes in accounting principle be recognized
by including in net income for the period of the change the cumulative
effect of changing to the new accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of a
change in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the cumulative effect of
applying a change in accounting principle to all prior periods, SFAS
No. 154 requires that the new accounting principle be applied as if it
were adopted prospectively from the earliest date practicable. SFAS No.
154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, nonfinancial assets be accounted for as
a change in accounting estimate affected by a change in accounting
principle. SFAS No. 154 is effective in fiscal years beginning after
December 15, 2005. Adoption of this statement did not have a material impact our results of operations or
financial position.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29" ("SFAS No. 153"). This Statement amends APB Opinion No. 29
to permit the exchange of nonmonetary assets to be recorded on a carryover
basis when the nonmonetary assets do not have commercial substance. This
is an exception to the basic measurement principle of measuring a
nonmonetary asset exchange at fair value. A nonmonetary asset exchange has
commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. We have not entered into exchanges of
nonmonetary assets in the past and do not expect to enter into any
nonmonetary assets exchanges in the foreseeable future; however, if we
enter into significant nonmonetary asset exchanges in the future, SFAS
No. 153 could have a material effect on our consolidated financial
position, results of operations or cash flows.
(q) Reclassifications
Certain reclassifications have been made to the 2005 financial
statements to conform to the current period presentation.
Note 2. Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated financial
statements in accordance with the rules and regulations of the
Securities and Exchange Commission. Such rules and regulations allow
the omission of certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles as long as the statements are not
misleading. In the opinion of management, all adjustments necessary
for a fair presentation of these interim statements have been included
and are of a normal recurring nature. These interim financial
statements should be read in conjunction with our financial statements
included in our 20052007 Annual Report on Form 10-K.10-KSB.
Note 3. Earnings per Share
Per share data was determined by using the weighted average
number of common shares outstanding. Potentially dilutive securities,
including stock options, are considered only for diluted earnings per
share, unless considered anti-dilutive. The potentially dilutive
securities, which are comprised of outstanding stock options of
1,680,6001,922,150 and 1,780,0001,944,650 at September 30,
2006March 31, 2008 and 2005 respectively. The 2006 options2007, respectively,
were excluded from the computation of weighted average shares
outstanding due to their anti-
dilutiveanti-dilutive effect.
A reconciliation of the weighted average number of common shares
outstanding for the three and nine months ended September 30, 2006March 31 follows:
Total
Three Months Nine Months Shares
------------ -----------2008 2007
---------- ----------
Common shares outstanding,
beginning of period 10,503,000 10,503,000 10,503,000the year 10,575,000 10,533,000
Stock issued to ESOPoptions exercised 7,700 - - -
----------
---------- ----------
Weighted average number of
common shares outstanding 10,503,000 10,503,000 10,503,00010,582,700 10,533,000
Dilutive effect of common share
equivalents - - -
----------
---------- ----------
Diluted weighted average number
of common shares outstanding 10,503,000 10,503,000 10,503,000
==========10,582,700 10,533,000
========== ==========
At September 30, 2006,March 31, 2008, there were authorized 50,000,000 shares of
our $0.10$.10 par value common stock and 20,000,000 shares of preferred
stock issuable in one or more series. None of the preferred stock
was issued or outstanding at September 30, 2006.March 31, 2008.
Note 4. Segment Information
We operate in two different segments: household products and
skin care products. Our products are sold in the United Statesnationally and
internationally (primarily Canada), directly and through independent
brokers, to mass merchandisers, drug stores, supermarkets, wholesale
distributors and other retail outlets. Our Management has chosen to
organize our business around these segments based on differences in
the products sold. The household products segment includes:includes "Scott's
Liquid Gold" for wood, a wood cleaner which preserves as it cleans; a wood wash;
"Moldcleans,
Mold Control 500",500, a mold remediation product;product, and "Touch of Scent",Scent," a
room air freshener. The skin care segment includes:includes "Alpha Hydrox",Hydrox,"
alpha hydroxy acid cleansers and lotions;lotions, a retinol product, and
"Diabetic Skin Care", a healing cream and moisturizer developed to
address skin conditions of diabetics; anddiabetics. We also distribute skin
care and other sachets of Montagne Jeunesse, distributed by us.Davinci and Moosehead
men's grooming products, and bath, body and hair care products from
Baylis & Harding.
Accounting policies for our segments are the same as those
described in Note 1, "Summary of Significant Accounting Policies."
Our Management evaluates segment performance based on segment income
or loss before profit sharing, bonuses, income taxes and nonrecurring
gains and losses. The following table provides information related toon our segments
as of and for the three and nine months ended September 30:
Three Months Ended September 30,
-----------------------------------------------------
2006 2005
------------------------- -------------------------March:
2008 2007
----------------------- ------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 1,897,3001,732,300 $ 1,945,1002,361,500 $ 1,874,4002,305,500 $ 4,631,6001,556,300
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ (136,600)(224,100) $ (604,400)(230,100) $ (91,000)60,300 $ 674,700(806,500)
=========== =========== =========== ===========
Identifiable Assetsassets $ 3,763,1003,077,400 $ 5,908,9005,631,200 $ 3,420,4003,599,000 $ 7,797,600
=========== =========== =========== ===========
Nine Months Ended September 30,
-----------------------------------------------------
2006 2005
------------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ---------- -----------
Net sales to
external customers $ 6,523,300 $ 5,608,200 $ 6,027,900 $11,725,400
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ (510,400) $(2,138,200) $ (845,600) $ 895,900
=========== =========== =========== ===========
Identifiable Assets $ 3,763,100 $ 5,908,900 $ 3,420,400 $ 7,797,6005,664,600
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information as of and for the three and nine months ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- -----------March 31:
2008 2007
------------ -----------
Net sales to external customers $ 3,842,4004,093,800 $ 6,506,000 $12,131,500 $17,753,3003,861,800
=========== ===========
=========== ===========
Income (loss)Loss before profit sharing,
bonuses and income taxes $ (741,000)(454,200) $ 583,700 $(2,648,600)(746,200)
=========== ===========
Consolidated loss before income taxes $ 50,300
=========== ===========(454,200) $ (746,200)
=========== ===========
Identifiable assets $ 9,672,000 $11,218,0008,708,600 $ 9,672,000 $11,218,0009,263,600
Corporate assets 12,118,400 11,068,100 12,118,400 11,068,100
----------- -----------9,404,300 10,599,700
----------- -----------
Consolidated total assets $21,790,400 $22,286,100 $21,790,400 $22,286,100
=========== ===========$18,112,900 $19,863,300
=========== ===========
Corporate assets noted above are comprised primarily of our
cash and investments, and property and equipment not directly
associated with the manufacturing, warehousing, shipping and receiving
activities.
Item 2. Management's Discussion and Analysis or Plan of Financial Condition
and Results of Operations (Unaudited)Operation
Results of Operations
During the first nine monthsquarter of 2006,2008, we experienced an overall
increase in net sales and a decrease in our net loss as compared to the
first quarter of our household chemical products primarily because of our
introduction of our new mold control product Mold Control 500, while
experiencing decreases in sales of our Montagne Jeunesse line of skin care
products and our Alpha Hydrox skin care products.2007. Our net loss was $454,200 in the first quarter
of 2008 versus a net loss of $746,200 in the first quarter of 2007.
The decrease in our loss for the first nine monthsquarter of 2006 was $2,648,600 versus income of $50,300 in2008 compared to the
first nine monthsquarter of 2005. The loss for 2006 was primarily due to lower2007 resulted from a reduction in our sales of the Montagne Jeunesse product line and reduced sales of our Alpha
Hydrox skin care line.promotion
expenses which are deducted from gross sales.
Summary of Results as a Percentage of Net Sales
Year Ended NineThree Months Ended
December 31, September 30,
------------ -------------------
2005 2006 2005
------------ -------March 31,
2007 2008 2007
----------- -------- --------
Net sales
Scott's Liquid Gold
and other
household products 34.8% 53.8% 34.0%44.9% 42.3% 59.7%
Neoteric Cosmetics 65.2% 46.2% 66.0%55.1% 57.7% 40.3%
------ ------ ------
Total net salesNet Sales 100.0% 100.0% 100.0%
Cost of sales 56.1% 56.7% 54.9%Sales 56.5% 53.8% 60.8%
------ ------ ------
Gross profit 43.9% 43.3% 45.1%43.5% 46.2% 39.2%
Other revenue 0.4% 0.2% 1.1% 0.2%0.6%
------ ------ ------
44.1% 44.4% 45.3%43.9% 46.4% 39.8%
------ ------ ------
Operating expenses 44.2% 64.5% 44.2%48.9% 55.0% 56.5%
Interest expense 0.8% 1.7% 0.8%2.3% 2.5% 2.7%
------ ------ ------
45.0% 66.2% 45.0%51.2% 57.5% 59.2%
------ ------ ------
Income (loss)Loss before income taxes (0.9%(7.3%) (21.8%(11.1%) 0.3%(19.4%)
====== ============= ======
Our gross margins may not be comparable to those of other
entities, because some entities include all of the costs related to
their distribution network in cost of sales and others, like us,
exclude a portion of them (freight out to customers and nominal outside
warehouse costs) from gross margin, including them instead in the
selling expense line item. See Note 1(o), Operating Costs and Expenses
Classification, to the unaudited Consolidated Financial Statements
in this Report.
Comparative Net Sales
Nine Months Ended Percentage
September 30, Increase
2006 20052008 2007 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold
and other household products $ 5,476,4001,553,100 $ 4,683,000 16.9%1,960,100 (20.8%)
Touch of Scent 1,046,900 1,344,900 (22.2%179,200 345,400 (48.1%)
----------- ----------- ---------------
Total household
chemical products 6,523,300 6,027,900 8.2%1,732,300 2,305,500 (24.9%)
----------- ----------- ---------------
Alpha Hydrox and
other skin care 2,836,400 4,863,500 (41.7%)980,200 860,400 13.9%
Montagne Jeunesse and other
distributed skin care 2,771,800 6,861,900 (59.6%)1,381,300 695,900 98.5%
----------- ----------- ---------------
Total skin care product 5,608,200 11,725,400 (52.2%)products 2,361,500 1,556,300 51.7%
----------- ----------- ---------------
Total net sales $12,131,500 $17,753,300 (31.7%)Net Sales $ 4,093,800 $ 3,861,800 6.0%
=========== =========== ======
Nine=========
Three Months Ended September 30, 2006March 31, 2008
Compared to NineThree Months Ended September 30, 2005March 31, 2007
Consolidated net sales for the first nine monthsquarter of the current year
were $12,131,500$4,093,800 versus $17,753,300$3,861,800 for the first ninethree months of 2005, a
decrease2007,
an increase of $5,621,800 or about (31.7)%.$232,000. Average selling prices for the first nine monthsquarter
of 20062008 were downup by $142,700$199,600 over thosethe first quarter of the comparable
period of 2005,2007. Average
selling prices of household products beingwere up by $410,000,$82,200, while average
selling prices of skin care products were downup by $552,700.$117,400. This decreaseincrease
in selling prices was primarily due to price promotions on selected cosmetic
products.a decrease in coupon usage in
2008 versus 2007. Co-op advertising, marketing funds, slotting fees,
and coupon
expenses (promotional allowances)coupons paid to retailers were subtractedare deducted from gross sales, in accordance with current accounting policies totaling
$1,804,000and
totaled $378,300 in the first nine monthsquarter of 20062008 versus $1,447,900$973,100 in the
same periodquarter in 2005, an increase2007, a decrease of $356,100$594,800 or 24.6%61.1%. This increasedecrease
consisted of an increasea decrease in coupon expense of $302,000, an increase$461,100 (Included in
the 2007 coupon expense was a one-time charge from one retailer of
$314,000.), a decrease in co-op marketing funds of $183,900$147,000, and a decreasean
increase in slotting fee expenses of $129,800.$13,300. In the first quarter
we announced price increases for the majority of our product lines.
From time to time, our customers return product to us. For our
household chemicals products, we permit returns only for a limited
time, and generally only if there is a manufacturing defect. With
regard to our skin care products, returns are more frequent under an
unwritten industry standard that permits returns for a variety of
reasons. In the event a skin care customer requests a return of
product, the Company will consider the request, and may grant such
request in order to maintain or enhance relationships with customers,
even in the absence of an enforceable right of the customer to do
so. Some retailers have not returned products to us. Return price
credit (used in exchanges typically, or rarely, refunded in cash)
when authorized is based on the original sale price plus a handling
charge of the retailer that ranges from 8-10%. The handling charge
covers costs associated with the return and shipping of the
product. Additions to our reserves for estimated returns are
subtracted from gross sales.
From January 1, 2006 through March 31, 2008, our product returns
(as a percentage of gross revenue) have averaged as follows: household
products 0.3%, Montagne Jeunesse products 3.0%, and our Alpha Hydrox
and other skin care products 6.8%. The level of returns as a
percentage of gross revenue for the household products and Montagne
Jeunesse products have remained fairly constant as a percentage of
sales over that period while the Alpha Hydrox and other skin care
products return levels have fluctuated. More recently, as our sales
of the skin care products have declined we have seen a decrease in
returns as a percentage of gross revenues. The products returned in
the three months ended March 31, 2008 (indicated as a percentage of
gross revenues) were: household products 0.1%, Montagne Jeunesse
products 0.9%, and our Alpha Hydrox and other skin care
products 0.9%. We are not aware of any industry trends, competitive
product introductions or advertising campaigns at this time which
would cause returns as a percentage of gross sales to be materially
different for the current fiscal year than for the above averages.
Furthermore, the Company's management is not currently aware of any
changes in customer relationships that we believe would adversely
impact anticipated returns. However, we review our reserve for
returns quarterly and we regularly face the risk that the existing
conditions related to product returns will change.
During the first nine monthsquarter of 2006,2008, net sales of skin care
products accounted for 46.2%57.7% of consolidated net sales compared to
66.0%40.3% for the first nine monthssame quarter of 2005.2007. Net sales of these products for
those
periodsthat period were $5,608,200$2,361,500 in 20062008 compared to $11,725,400$1,556,300 in 2005, a
decrease2007,
an increase of $6,117,200$805,200 or (52.2)%51.7%. During the first quarter of 2005 we
began introduction of four new itemsOur increase in our Alpha Hydrox line of cosmetic
products. This resulted in "pipeline" orders of the new items in 2005
that were not repeated in 2006. The new items accounted for approximately
45.1% of ournet sales of
Alpha Hydrox and other skin care sales (which does
not include Montagne Jeunesse sales) in the first nine months of 2006
versus 54.7% in the first nine months of 2005. These new items accounted
for approximately 40.4% of our sales of Alpha Hydrox and other skin care
sales in the third quarter of 2006 versus 67.0% in the third quarter of
2005. Net sales of the new Alpha Hydrox products declined in the second and
third quarters of 2006 comparedwas due to the same quartersdecrease in
2005 as a result
of returns from one retailer in the second quarter, the filling of store
shelves with the introduction of the product in 2005, and higher couponing
and co-op advertising costs thatpromotions to retailers, which are deducted from gross sales. It is
still too earlysales, in
2008 versus 2007. This increase was offset by a decrease in our
sales of our Alpha Hydrox products introduced in 2005 and the
massage oils introduced in 2007. (The first quarter 2007 sales of the
massage oils included initial pipeline sales to tell the consumer acceptance of these products
which is necessary for reorders of these products and expanding the
distribution of these products.retailers.) We have
continued to experience a drop in unit sales of our earlier-
establishedmore recently
introduced Alpha Hydrox products and our earlier-established alpha
hydroxy acid-based products due primarily to maturing in the market for
alpha hydroxy acid-based skin care products, intense competition
from producers of similar or alternative products, many of which are
considerably larger than Neoteric Cosmetics, Inc. and reduced
distribution of these products at retail stores in current and prior
periods. For the thirdfirst quarter of 2006 and the first nine months of 2006,2008, the sales of our Alpha
Hydrox products accounted for 22.9% and 35.5%22.1% of net sales of skin care products
and 7.2% and 16.5%12.8% of total net sales, compared to 46.0% and 32.9%19.7% of net sales of skin
care products and 32.7%
and 21.7%7.9% of total net sales forin 2007. During 2007 we
introduced four new items to the three and nine months ended
September 30, 2005.
NetAlpha Hydrox line of products; it
is too early to tell about consumer acceptance of these additions.
For 2008, net sales of Montagne Jeunesse and other distributed
skin care products were $2,771,800$1,381,300 in the nine
months ended September 30, 2006first quarter versus
$6,861,900$695,900 for the comparable quarter of 2007, an increase of $685,400
or 98.5%. This sales increase was due primarily to the sales of
Davinci and Moosehead men's grooming products and bath, body and hair
care products of Baylis & Harding, which were not sold during the first
quarter of 2007 or only had nominal sales during that period, of 2005,offset
by a slight decrease of $4,090,100 or 59.6%. The decrease reflects
changes in product positioning at several key retailers in 2006 as they
have revised the amount of shelf and floor space allocated to these types
of products, including the eliminationMontagne Jeunesse skin care sales in the
first quarter of 2006 at
approximately 1,500 Wal-Mart stores2008 versus the first quarter of the department2007. The first
quarter of 2007 includes this product's placement in which Montagne
Jeunesse products were previously displayed.additional stores.
Sales of household products for the first nine monthsquarter of this year
accounted for 53.8%42.3% of consolidated net sales compared to 34.0%59.7% for
the same period of 2005.in 2007. These products are comprised primarily of
Scott's Liquid Gold wood care products (Scott's Liquid Gold for
wood, a wood wash and wood wipes), mold remediation products and
Touch of Scent. During the nine monthsquarter ended September 30, 2006,March 31, 2008 sales of
household products were $6,523,300,$1,732,300 as compared to sales of $6,027,900$2,305,500 for the
same nine monthsquarter in 2007, a decrease of 2005, an increase of $495,400$573,200 or 8.2%24.9%. This increase in sales is due
to somewhat higher net sales of our Scott's Liquid Gold for wood and our
wood wash products, plus sales during the second quarter of 2006 of a
promotional combination packageSales of
Scott's Liquid Gold for wood care and either
the wood washother household products decreased
from $1,960,100 in 2007 to $1,553,100 in 2008 a decrease of $407,000
or wood wipes, offset by20.8%. We believe this reduction to be a result of a decrease in
media advertising of our products in the sale of wood
wipes. The primary reasonlast two years. Mold
Control 500 sales were $94,400 for the increase in wood care sales is increased
distribution of the wood wash product. In the secondfirst quarter of 2005 we
began introducing a wood wash under2008 versus
$213,100 for the Scott's Liquid Gold product line.
It is too early to determine if the wood wash product introduction will be
successful. During the secondfirst quarter of 2006 we began the introduction
of our mold remediation product "Mold Control 500" with sales of $125,200
during the third quarter of 2006 and $558,000 during the first nine months
of 2006. It is too early to determine if this introduction will be
successful.2007. Sales of "Touch of Scent"
were down by $298,000$166,200 or 22.2%48.1%, primarily due to decreasesa decrease in
distribution prior toin past quarters. During the third quarter of 2006.2007,
we introduced the Odor Extinguisher air fragrance product line; it
is too early to tell about consumer acceptance of this addition.
As sales of a consumer product decline, there is the risk that
retailers will stop carrying the product. The loss of any significant
customer for any skin care products, "Scott's Liquid Gold" wood care
or mold remediation products or "Touch of Scent", could have a significant adverse impact
on our revenues and operating results. We believe that our future
success is highly dependent on favorable acceptance in the marketplace
of Montagne Jeunesse products, of our new Alpha Hydrox products and of
our "Scott's Liquid Gold" wood care and mold remediation products.
We also believe that the introduction of successful new products,
including line extensions of existing products such as the wood wash
and our new mold remediation product, using the name "Scott's Liquid
Gold", are important in our efforts to maintain or grow our revenue.
We
currently plan to make one or two additional product introductions duringLate in the fourth quarter of 2006.2007, we introduced new items within
the Moosehead men's grooming products and bath, body and hair care
products of Baylis & Harding. We regularly review possible additional
products to sell through distribution agreements or to manufacture
ourselves. To the extent that we manufacture a new product rather
than purchase it from external parties, we are also benefited by the
use of existing capacity in our facilities. We are using our
facilities to fill and package the mold control products. The actual
introduction of additional products, the timing of any additional
introductions and any revenues realized from new products is uncertain.
On a consolidated basis, cost of goods sold was $6,880,200$2,201,900
during the first ninethree months of 20062008 compared to $9,752,500$2,346,500 for the
same period of 2005,2007, a decrease of $2,872,300 (29.5%$144,600 or 6.2%, on a sales
decreaseincrease of 31.7%)6.0%. As a percentage of consolidated net sales, for the first nine months of
2006, cost
of goods sold was 56.7% compared to 54.9%53.8% in 2005, an increase2008 versus 60.8% in 2007, a decrease of
1.8%about 11.5%. This was essentially due to oura decrease in plant utilization,
resulting from decreased sales of our Alpha Hydrox cosmetic products
during 2006 and the increase in sales
promotion expenses, which lowered our
revenuesare deducted from gross sales, and thus
affected our margins particularly in the skin care line of products.
Operating Expenses, Interest Expenseproducts,
offset somewhat by lower plant utilization and Other Income
Nine Months Ended Percentage
September 30, Increase
2006 2005 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 1,062,200 $ 630,300 68.5%
Selling 4,189,100 4,422,000 (5.3%)
General & Administrative 2,566,700 2,779,100 (7.6%)
----------- ----------- ------
Total operating expenses $ 7,818,000 $ 7,831,400 (0.2%)
=========== =========== ======
Interest and Other Income $ 129,300 $ 30,200 328.1%
=========== =========== ======
Interest Expense $ 211,200 $ 149,300 41.5%
=========== =========== ======
Operating expenses, comprised of advertising, selling and general
and administrative expenses, decreased by $13,400 or (0.2)% in the first
nine months of 2006, when compared to the first nine months of 2005. The
various components of operating expenses are discussed below. We have
initiated limited cost reductions in the third and fourth quarters of
2006, including a reduction in the number of employees and salary
reductions for officers and certain employees. These measures will result
in a cost savings of approximately $700,000 on an annualized basis.
Advertising expenses for the first nine months of 2006 were
$1,062,200 compared to $630,300 for the comparable nine months of 2005,
an increase of $431,900 or 68.5%. That increase was spread evenly over
both household chemical products and our Alpha Hydrox skin care products.
We will be advertising both our household chemical products and our skin
care products in the fourth quarter. As a result, our advertising
expenses for 2006 will likely exceed last year's totals and, depending
on the sales benefit of that advertising, may lower operating results
in the fourth quarter.
Selling expenses for the first nine months of 2006 were $4,189,100
compared to $4,422,000 for the comparable nine months of 2005, a decrease
of $232,900 or (5.3)%. That decrease was comprised of a decrease in
freight and brokerage expenses of $128,000, a decrease in salaries and
fringe benefits and related travel expense of $207,900 primarily because
of staffing changes in 2006 versus 2005, a decrease in depreciation and
royalty expense of $69,500 offset by an increase in promotional goods and
related expenses of $85,200, an increase in internet and web design costs of
$58,300steel cans and by a net increase in other selling expenses, none of which
by itself is significant, of $29,000.
General and administrative expenses for the first nine months of
2006 were $2,566,700 compared to $2,779,100 for the comparable nine months
of 2005, a decrease of $212,400 or (7.6)%. That decrease was primarily
attributable to a decrease in salaries and fringe benefits resulting
from a reduction in both personnel and net health care costs of $147,000,
and a net decrease in other general and administrative expenses of
$65,000.
Interest expense for the first nine months of 2006 was $211,200
versus $149,300 for the comparable period of 2005. Interest expense
increased because of higher interest rates and increased borrowing levels.
Interest and other income for the nine months ended September 30, 2006
was $129,300 which was comprised of $67,100 of gain on sale of assets
(that is, the sale of our plastic molding equipment and related machinery
in July 2006 as described in our Form 10-Q Report for the quarter ended
June 30, 2006) and $62,200 of interest income as compared to $30,200 of
interest income for the same period of 2005. Interest income consists of
interest earned on our cash reserves in 2006 and 2005.
During the third quarter of 2006 and of 2005, expenditures for
research and development were not material (under 2% of revenues).
Three Months Ended September 30, 2006
Compared to Three Months Ended September 30, 2005
Comparative Net Sales
Three Months Ended September 30,
-----------------------------------------
Percentage
Increase
2006 2005 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 1,545,600 $ 1,434,400 7.8%
Touch of Scent 351,700 440,000 (20.1%)
----------- ----------- ------
Total household products 1,897,300 1,874,400 1.2%
----------- ----------- ------
Alpha Hydrox and
other skin care 1,155,300 2,462,700 (53.1%)
Montagne Jeunesse
skin care 789,800 2,168,900 (63.6%)
----------- ----------- ------
Total skin care
products 1,945,100 4,631,600 (58.0%)
----------- ----------- ------
Total net sales $ 3,842,400 $ 6,506,000 (40.9%)
=========== =========== ======
Consolidated net sales for the third quarter of the current year
were $3,842,400 versus $6,506,000 for the comparable quarter of 2005, a
decrease of $2,663,600, or 40.9%. Average selling prices for the third
quarter of 2006 were down by $167,800 over those of the comparable period
of 2005, prices of household products being up by $70,900, while average
selling prices of skin care products were down by $238,700. Co-op
advertising, marketing funds, slotting fees and coupon expenses
(promotional allowances) paid to retailers were subtracted from gross
sales in accordance with current accounting policies totaling $651,200
in the third quarter of 2006 versus $592,400 in the same period in 2005,
an increase of $58,800.
During the third quarter of 2006, net sales of skin care products
accounted for 50.6% of consolidated net sales compared to 71.2% for the
third quarter of 2005. Net sales of these products for those periods were
$1,945,100 in 2006 compared to $4,631,600 in 2005, a decrease of $2,686,500
or (58.0)%. Net sales of Montagne Jeunesse were approximately $789,800
in the third quarter of 2006 compared to $2,168,900 in the third quarter
of 2005. Please see the discussion above for the first nine months of
2006 for additional information regarding sales of skin care products,
which is also applicable to sales of skin care products in the third
quarter of 2006.
Sales of household products for the third quarter of this year
accounted for 49.4% of consolidated net sales compared to 28.8% for the
same period of 2005. These products are comprised of Scott's Liquid Gold
wood care products (Scott's Liquid Gold for wood, a wood wash and wood
wipes), mold remediation products and Touch of Scent. During the third
quarter of 2006, sales of household products were $1,897,300, as compared
to sales of $1,874,400 for the same three months of 2005. Sales of
"Scott's Liquid Gold" and other household products (excluding Touch of
Scent) were up by $111,200, an increase of 7.8%, as a result of our sales
of the mold remediation product. Sales of "Touch of Scent" were down by
$88,300 or 20.1%, primarily due to a decrease in distribution. Please
see the discussion above for the first nine months of 2006 for additional
information regarding sales of household products, which is also applicable
to sales of household products in the third quarter of 2006.
On a consolidated basis, cost of goods sold was $2,069,300 during
the third quarter of 2006 compared to $3,513,600 for the same period of
2005, a decrease of $1,444,300 (41.1% on a sales decrease of 40.9%). As a
percentage of consolidated net sales for the period, cost of goods sold was
53.9% compared to 54.0% in 2005, a decrease of 0.1%.petroleum based raw materials.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2006 20052008 2007 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 360,900111,200 $ 151,800 137.7%112,300 (1.0%)
Selling 1,353,400 1,455,700 (7.0%)1,340,300 1,255,400 6.8%
General & Administrative 791,400 757,100 4.5%800,000 814,100 (1.7%)
----------- --------------------- ---------
Total operating
expenses $ 2,505,7002,251,500 $ 2,364,600 6.0%2,181,800 3.2%
=========== =========== =========
Interest and Other Income $ 102,4008,500 $ 9,900 9,449.0%24,200 (64.9%)
Interest Expense $ 110,800103,100 $ 54,000 105.6%103,900 (0.8%)
Operating expenses, comprised of advertising, selling and general
and administrative expenses, increased by $141,100 or 6.0%$69,700 in the thirdfirst quarter
of 2006,2008 when compared to the same period during 2005.first quarter of 2007. The various components
of operating expenses are discussed below.
Advertising expenses for the third quarterfirst three months of 20062008 were
$360,900$111,200 compared to $151,800$112,300 for the comparable quarter of 2005, an increase2007, a
decrease of $209,100$1,100 or 137.7%. Advertising expenses applicable to household products
increased by $275,100 (968.7%), and advertising expenses for Alpha Hydrox
products decreased for the comparative three-month period by $66,000
(53.5%)1.0%.
Selling expenses for the three months ended September 30, 2006first quarter of 2008 were $1,353,400$1,340,300
compared to $1,455,700$1,255,400 for the comparable three months of 2005, a decrease2007, an
increase of $102,300$84,900 or (7.0)%6.8%. This decrease resultedThat increase was comprised of an
increase in salaries and fringe benefits and related travel expense
of $55,800 primarily frombecause of an increase in personnel in 2008
versus 2007, an increase in freight expenses of $49,700, an increase
in promotional selling expenses of $56,700 a decrease in brokerageroyalty fee
expenses of $35,000 and freight expense of $80,800, a decrease
in depreciation and amortization expense of $69,200, a net decrease in other selling expenses none of
which by itself is significant of $4,900,
offset by an increase in promotional expenses of $52,600.$42,300.
General and administrative expenses for the third quarterfirst three months
of 20062008 were $791,400$800,000 compared to $757,100$814,100 for the comparablesame period of
2005, an
increase2007, a decrease of $34,300$14,100 or 4.5%1.7%. Such increase was attributable to a net
increase in several administrative expenses, none of which by itself is
significant.
Interest expense for the thirdfirst quarter of 20062008 was $110,800$103,100
versus $53,900$103,900 for the comparable periodquarter of 2005.2007. Interest expense increased
because of higher interest rates and increased borrowing levels. Interest
and other income
for the three months ended September 30, 2006March 31, 2008 was $102,400
which was comprised of $67,100 of gain on the sale of assets and $35,300 of
interest income as$8,500 compared to
$9,800 of interest income$24,200 for the same period of 2005.2007, which consists of interest
earned on our cash reserves in 2008 and 2007.
During the thirdfirst quarter of 20062008 and of 2005,2007, expenditures for
research and development were not material (under 2% of revenues).
Liquidity and Capital Resources
On June 28, 2006, we entered into a new loan with a fifteen year
amortization with Citywide Banks for $5,156,600 secured by the land,
building and fixtures at our Denver, Colorado facilities. This loan
replaces the bank loan with Citywide Banks, secured by the facilities,
in the principal amount of approximately $1,582,900. Interest
on the bank loan (8.0%(8.25% at September 30, 2006)March 31, 2008) is at the prime rate as
published in The Wall Street Journal, adjusted annually each June.
Part of the proceeds of the new
loan was used to pay off the prior loan, and the remaining proceeds have
been or will be used in business operations, including the development and
introduction of new products. This loan requires 180 monthly payments of approximately $49,500,$50,500,
which commenced on July 28, 2006. As did the prior
bank loan, theThe loan agreement contains a
number of covenants, including the requirement for maintaining a
current ratio of at least 1:1 and a ratio of consolidated long-term
debt to consolidated net worth of not more than 1:1. We may not
declare any dividends that would result in a violation of either of
these covenants. The foregoing requirements were met at the end of
the first ninethree months of 2006.
In connection with the new loan, we agreed with Citywide Banks to
reduce the amount available under our line of credit with Citywide Banks
from $1,800,000 to $1,300,000. In August of 2006 we paid off the balance
remaining on our line of credit. We chose not to renew the line of credit
when it matured on August 8, 2006.2008.
During the first nine monthsquarter of 2006,2008 our working capital increaseddecreased
by $1,743,400,$336,900, and concomitantly, our current ratio (current assets
divided by current liabilities) increaseddecreased from 1.6:1.9:1 at
December 31, 20052007 to 2.2:1.8:1 at September 30, 2006.March 31, 2008. This increasedecrease in
working capital is attributable to an increasea net loss in the first three
months of 2008 of $454,200, and a reduction in long-term debt of
$3,986,700,$55,500, offset by depreciation in excess of capital additions
and disposals of $455,100, offset by a net
loss in the first nine months of 2006 of $2,648,600, an increase in other
assets of $49,000, and a decrease in accumulated comprehensive income
of $800.$147,200.
At September 30, 2006,March 31, 2008, trade accounts receivable were $740,400$1,072,200
versus $1,633,100$1,004,900 at year-end,the end of 2007, largely because sales in the
last two months of the quarter ended September 30, 2006March 31, 2008 were lessmore than
those of the last two months of the quarter ended December 31, 2005.2007.
Accounts payable increased from the end of 20052007 through SeptemberMarch of 20062008
by $652,900$115,700 corresponding primarily with the increase inand timing of
purchases of inventory over that period. At September 30, 2006March 31, 2008
inventories were $656,600$158,400 more than at December 31, 2005, primarily2007, due to anthe
increase in household chemical products inventory including inventory for
our new mold remediation product, to supportresulting from
lower than anticipated sales of these products in the upcoming quarters.first quarter. Prepaid expenses
increaseddecreased from the end of 20052007 by $75,200$115,300 primarily due to the
expensing of prepaid promotional costs related to our new mold
product. Accrued payrollexpenses and benefits decreased $120,900 from December 31,
2005 to September 30, 2006 primarily because only one weekreductions in the amount
of wages were
outstanding at September 30, 2006 compared to two weeks at December 31, 2005.deposits required on raw material purchases.
We have no significant capital expenditures planned for the remainder
of 20062008 and
have no current plans for any external financing, other than our
existing bank loan. We expect that our available cash and cash flows
from operating activities will fund the next twelve months' cash
requirements.
Our dependence on operating cash flow means that risks involved
in our business can significantly affect our liquidity. Any loss of a
significant customer, any further decreases in distribution of our
skin care or household products, any new competitive products
affecting sales levels of our products, or any significant expense
not included in our internal budget could result in the need to raise
cash, such as through a bank financing. We have no arrangements for
any additional external financing of debt or equity, and we are not
certain whether any such financing would be available on acceptable
terms. Please also see other
risks summarized in "Forward Looking Statements" below. In order to improve our operating cash flow, we need to
achieve profitability.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss due to adverse changes in
financial and commodity market prices and rates. We are not materially
exposed to market risks regarding interest rates. The interest on our
long-term debt is at the lender's base rate, which approximates the prime
rate, adjustable yearly. Our investments in debt and equity securities
are short-term and not subject to significant fluctuations in fair
value. If interest rates were to rise 10% from year-end levels, the
fair value of our debt and equity securities would have decreased by
approximately $600. Further, we do not use foreign currencies in our
business. Currently, we receive payments for sales to parties in foreign
countries in U.S. dollars. Additionally, we do not use derivative
instruments or engage in hedging activities. As a result, we do not
believe that near-term changes in market risks will have a material effect
on results of operations, financial position or our cash flows.
Forward-Looking Statements
This report may contain "forward-looking statements" within
the meaning of U.S. federal securities laws. These statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements and our
performance inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking
statements. Factors that would cause or contribute to such
differences include, but are not limited to, continued acceptance of
each of our significant products in the marketplace; the degree of
success of any new product or product line introduction by us;
the uncertainty of consumer acceptance of the new Alpha Hydrox mold controlproducts
introduced in 2005 and 2007, and Mold Control 500 and wood wash
products; competitive factors; any decrease in distribution of
(i.e., retail stores carrying) our significant products; continuation
of our distributorship agreement with Montagne Jeunesse; the need for
effective advertising of our products; limited resources available
for such advertising; new competitive products and/or technological
changes; dependence upon third party vendors and upon sales to major
customers; changes in the regulation of our products, including
applicable environmental regulations; continuing losses which could
affect our liquidity; adverse developments
in pending litigation; the loss of any executive officer; and other
matters discussed in our 2005 Annual Report on Form 10-K.this Report. We undertake no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.Report.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Please see "Market Risks" inRisks.
Not Applicable
Item 2 of Part I of this Report which
information is incorporated herein by this reference.
Item 4.4T. Controls and Procedures
Disclosure Controls and Procedures
As of September 30, 2006,March 31, 2008, we conducted an evaluation, under the
supervision and with the participation of the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective
to ensure that
information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms as of September 30,
2006.March 31, 2008.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting during the quarter ended September 30, 2006March 31, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal
control over financingfinancial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 1A. Risk Factors
We have previously stated a risk factor that our cash flow was
dependent upon operating cash flow and our existing bank line of credit.
As indicated in this Report, we obtained a new 15-year bank loan and
repaid and terminated our bank line of credit. Please see the last two
paragraphs in Part I, Item 2 Management's Discussion and Analysis of the
Financial Condition and Results of Operations - Liquidity and Capital
Resources for risks involved in our dependence on available cash and
cash flows from operating activities.
Item 2. Not applicable.Applicable.
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
(b) Exhibits
31.1 Rule 13(a)-14(a)13a-14(a) Certification of the Chief Executive Officer
31.2 Rule 13(a)-14(a)13a-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 CertificationsCertification
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, of
1934, the Registrantregistrant
has duly caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
SCOTT'S LIQUID GOLD-INC.
May 2, 2008 BY: /s/ Mark E. Goldstein
November 10, 2006 -----------------------------------
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
May 2, 2008 BY: /s/ Jeffry B. Johnson
November 10, 2006 -----------------------------------
Date --------------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Document
31.1 Rule 13(a)-14(a)13a-14(a) Certification of the Chief Executive Officer
31.2 Rule 13(a)-14(a)13a-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certification