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
March 31, 2006
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 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 is a large
accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated
filer [X]
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12-B-2 of the Exchange Act.
Yes [ ] No [X]
As of March 31, 2006, the Registrant had 10,503,000 of its
$0.10 par value common stock outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
2006 2005
----------- -----------
Net sales $ 4,155,800 $ 5,522,500
----------- -----------
Operating costs and expenses:
Cost of Sales 2,243,500 3,107,500
Advertising 593,700 276,500
Selling 1,425,500 1,475,300
General and administrative 912,100 1,022,800
----------- -----------
5,174,800 5,882,100
----------- -----------
Loss from operations (1,019,000) (359,600)
Interest income 12,600 12,700
Interest expense (41,300) (48,000)
----------- -----------
(1,047,700) (394,900)
Income tax expense (benefit) - -
----------- -----------
Net loss $(1,047,700) $ (394,900)
=========== ===========
Net loss per common share (Note 2):
Basic and Diluted $ (0.10) $ (0.04)
=========== ===========
Weighted average shares outstanding:
Basic and Diluted 10,503,000 10,471,000
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2006 2005
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,933,000 $ 2,260,700
Investment securities 51,400 51,900
Trade receivables, net of allowance
for doubtful accounts of $62,000 1,005,200 1,633,100
Other receivables 49,900 55,300
Inventories 3,812,800 3,184,600
Prepaid expenses 469,100 326,900
----------- -----------
Total current assets 7,321,400 7,512,500
Property, plant and equipment, net 13,583,000 13,725,200
Other assets 9,100 11,800
----------- -----------
TOTAL ASSETS $20,913,500 $21,249,500
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 870,000 $ 570,000
Accounts payable 2,409,000 1,745,700
Accrued payroll and benefits 901,900 939,400
Other accrued expenses 474,200 454,600
Current maturities of long-term debt 973,000 956,000
----------- -----------
Total current liabilities 5,628,100 4,665,700
Long-term debt, net of current maturities 688,200 938,400
----------- -----------
6,316,300 5,604,100
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,503,000 shares 1,050,300 1,050,300
Capital in excess of par 4,994,200 4,994,200
Accumulated comprehensive income 1,400 1,900
Retained earnings 8,551,300 9,599,000
----------- -----------
Shareholders' equity 14,597,200 15,645,400
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $20,913,500 $21,249,500
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
---------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $(1,047,700) $ (394,900)
----------- -----------
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 175,800 185,800
Stock issued to ESOP 48,700 -
Changes in assets and liabilities:
Trade and other receivables, net 633,300 386,200
Inventories (628,200) (1,770,500)
Prepaid expenses and
other assets (144,400) (13,000)
Accounts payable and
accrued expenses 645,400 866,600
----------- -----------
Total adjustments to net loss 730,600 (344,900)
----------- -----------
Net Cash Used by
Operating Activities (317,100) (739,800)
----------- -----------
Cash flows from investing activities:
Purchase of investment securities - (248,400)
Purchase of property,
plant & equipment (28,700) (5,000)
----------- -----------
Net Cash Used by
Investing Activities (28,700) (253,400)
----------- -----------
Cash flows from financing activities:
Short-term borrowings (payments), net 300,000 (130,000)
Purchase of stock for contribution
to ESOP (48,700) -
Principal payments on
long-term borrowings (233,200) (225,400)
----------- -----------
Net Cash Provided (Used) by
Financing Activities 18,100 (355,400)
----------- -----------
Net Decrease in Cash and
Cash Equivalents (327,700) (1,348,600)
Cash and Cash Equivalents,
beginning of period 2,260,700 3,354,600
----------- -----------
Cash and Cash Equivalents,
end of period $ 1,933,000 $ 2,006,000
=========== ===========
Supplemental disclosures:
Cash Paid during period for:
Interest $ 41,300 $ 46,000
=========== ===========
Income taxes $ 1,100 $ 1,100
=========== ===========
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.
Since the first quarter of 2001, we have acted as a distributor in
the United States of beauty care products contained in individual
sachets and manufactured by Montagne Jeunesse. 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
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 and allowances, and
bad debts.
(d) Cash Equivalents
We consider all highly liquid investments purchased 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 March 31, 2006, 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:
March 31, 2006 December 31, 2005
-------------- -----------------
Finished goods $ 2,694,800 $ 2,149,100
Raw materials 1,427,000 1,344,000
Inventory valuation (309,000) (309,000)
----------- -----------
$ 3,812,800 $ 3,184,600
=========== ===========
(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 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.
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 variable rate, the lender's base rate, which approximates the prime
rate. The carrying value of long-term debt approximates fair value as
of March 31, 2006 and December 31, 2005.
(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 products to
customers, which is when title passes. 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 March 31, 2006 and December 31, 2005
approximately $624,000 and $794,000, respectively, had been reserved
as a reduction of accounts receivable, and approximately $50,000 and
$35,000, respectively, had been reserved as current liabilities. Co-op
advertising, marketing funds, slotting fees and coupons are deducted
from gross sales and total $630,100 and $364,000 at March 31, 2006
and 2005, respectively.
(l) Advertising Costs
We expense advertising costs as incurred.
(m) Stock-based Compensation
At March 31, 2006, we had four 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, as all options granted under those plans
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The effect on net income and
earnings per share if 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 quarter
ended March 31, 2005 was not material.
(n) Comprehensive Income
We follow SFAS 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 loss to
our total comprehensive loss for the quarters ended March 31, 2006
and 2005:
2006 2005
----------- -----------
Net loss $(1,047,700) $ (394,900)
Unrealized gain (loss) on
investment securities (500) (1,500)
----------- -----------
Comprehensive loss $(1,048,200) $ (396,400)
=========== ===========
(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 $387,700 and $349,900 for the quarters ended March 31,
2006 and 2005, 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 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 effected 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 November 2004, the FASB issued Statement of Financial
Accounting Standards No. 151, "Inventory Costs - an amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). The provisions of SFAS No. 151
are intended to eliminate narrow differences between the existing
accounting standards of the FASB and the International Accounting
Standards Board (IASB) related to inventory costs, in particular,
the treatment of abnormal idle facility expense, freight, handling
costs, and spoilage. SFAS No. 151 requires that theses costs be
recognized as current period charges regardless of the extent to
which they are considered abnormal. The provisions of SFAS No. 151
are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of SFAS No. 151 did not
have a material impact on our operations, financial position or
liquidity.
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 principal 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
2005 Annual Report on Form 10-K.
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 1,680,600 and 1,115,500 at March 31, 2006 and
2005, were excluded from the computation of weighted average shares
outstanding due to their anti-dilutive effect.
A reconciliation of the weighted average number of common
shares outstanding for the three months ended March 31 follows:
2006 2005
---------- ----------
Common shares outstanding,
beginning of the year 10,503,000 10,471,000
Stock options exercised - -
---------- ----------
Weighted average number of
common shares outstanding 10,503,000 10,471,000
Dilutive effect of common share
equivalents - -
---------- ----------
Diluted weighted average number
of common shares outstanding 10,503,000 10,471,000
========== ==========
At March 31, 2006, there were authorized 50,000,000 shares of
our $.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 March 31, 2006.
Note 4. Segment Information
We operate in two different segments: household products
and skin care products. Our products are sold in the United States
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 "Scott's Liquid Gold" for wood, a wood
cleaner which preserves as it cleans, and "Touch of Scent, " a room
air freshener. The skin care segment includes: "Alpha Hydrox",
alpha hydroxy acid cleansers and lotions; a retinol product;
"Diabetic Skin Care", a healing cream and moisturizer developed
to address skin conditions of diabetics; and skin care and other
sachets of Montagne Jeunesse distributed by us.
The following provides information on our segments for the
three months ended March 31:
2006 2005
----------------------- ------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 2,065,000 $ 2,090,800 $ 2,092,200 $ 3,430,300
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ (327,100) $ (720,600) $ (421,300) $ 26,400
=========== =========== =========== ===========
Identifiable assets $ 3,660,700 $ 6,401,800 $ 4,041,300 $ 7,427,100
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three months ended March 31:
2006 2005
------------ -----------
Net sales to external customers $ 4,155,800 $ 5,522,500
=========== ===========
Loss before profit sharing,
bonuses and income taxes $(1,047,700) $ (394,900)
=========== ===========
Identifiable assets $10,062,500 $11,468,400
Corporate assets 10,851,000 11,333,900
----------- -----------
Consolidated total assets $20,913,500 $22,802,300
=========== ===========
Corporate assets noted above are comprised primarily of our cash
and investments, deferred income tax assets and property and equipment
not directly associated with the manufacturing, warehousing, shipping
and receiving activities.
Note 5. Subsequent Event; Agreements
On March 28, 2006, we entered into an Asset Purchase and Sale
Agreement (the "Agreement") with Keltec Dispensing Systems USA
Inc., a Delaware corporation. Pursuant to the Agreement, we will
sell a portion of our plastic molding equipment and related machinery
(the "plastics equipment"), for a purchase price of $85,000 in cash.
This equipment has been used to make plastic components, such as
caps, used on the containers for our products. The Agreement
provides for a closing at a mutually agreeable date prior to
July 1, 2006.
As a condition to the Agreement, we also entered into a Lease
Agreement with Keltec (the "Lease") pursuant to which we will lease
to Keltec the space that is located in our Denver facility and has
been used for the operations of the plastics equipment. The lease
also includes the use of certain common areas and equipment. The
annual Lease payment is $108,450 plus a portion of the utility
payments for the building that includes the leased space. The term
of the Lease is three years beginning upon the closing of the
Agreement. Keltec may renew the lease for an additional term of
three years upon advance written notice under the same terms and
conditions, except that during the renewal term the rent will be
increased by the same percentage as the increase in the CPI-Denver
from the commencement date to the initial expiration date.
Concurrently with the signing of the Agreement, we entered
into a Supply Agreement with Keltec (the "Supply Agreement"),
pursuant to which Keltec will manufacture and supply to us certain
plastic components used on our product containers. The initial
term of the Supply Agreement is for a period of 18 months, with a
pricing adjustment possible for the last six months of the term.
In addition, the Supply Agreement may be renewed for an additional
twelve months upon mutual consent of the parties provided the
parties agree to renewal pricing based on guidelines in the Supply
Agreement. The Supply Agreement may also be terminated by mutual
agreement, upon a material breach of the terms, or upon 30-days
notice by either party during any renewal period.
On April 4, 2006, we and our subsidiary, SLG Chemicals, Inc.
entered into a Product Development, Production and Marketing
Agreement (the "Agreement") with Modec, Inc., a Colorado
corporation. Pursuant to the Agreement, we will purchase from
Modec a product for the treatment of mold. We will fill and package
the product at our facilities and market the product to retail
stores in North America. The Agreement provides us with a license
for this purpose. We are required to use our commercially reasonable
efforts to develop a consumer market for the product in North
America. The initial term of the Agreement is until December 31,
2007, and is automatically renewable for successive one-year terms.
We began our marketing activity for these products in the second
quarter of 2006 and, if sales are achieved, with shipments to
commence during that quarter.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
During the first quarter of 2006, we experienced an increase
in sales of our Scott's Liquid Gold wood care products and our
Neoteric line of skin care products, while experiencing a decrease
in sales of our Montagne Jeunesse line of skin care products and a
decrease in sales of our Touch of Scent air freshener line of
products. Our net loss for the first quarter of 2006 was $1,047,700
versus a loss of $394,900 in the first quarter of 2005. The loss
for 2006 was primarily due to lower sales of the Montagne Jeunesse
product line coupled with an increase in advertising of our Alpha
Hydrox skin care line.
Summary of Results as a Percentage of Net Sales
Year Ended Three Months Ended
December 31, March 31,
2005 2006 2005
----------- -------- --------
Net sales
Scott's Liquid Gold
household products 34.8% 49.7% 37.9%
Neoteric Cosmetics 65.2% 50.3% 62.1%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 56.1% 54.0% 56.3%
------ ------ ------
Gross profit 43.9% 46.0% 43.7%
Other revenue 0.2% 0.3% 0.2%
------ ------ ------
44.1% 46.3% 43.9%
------ ------ ------
Operating expenses 44.2% 70.5% 50.2%
Interest expense 0.8% 1.0% 0.9%
------ ------ ------
45.0% 71.5% 51.1%
------ ------ ------
Loss before income taxes (0.9%) (25.2%) (7.2%)
====== ====== ======
Our gross margins may not be comparable to those of other entities,
since some entities include all of the costs related to their
distribution network in cost of sales while 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 Consolidated
Financial Statements in this Report.
Comparative Net Sales
Percentage
Increase
2006 2005 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold wood
care products $ 1,681,200 $ 1,555,700 8.1%
Touch of Scent 383,800 536,500 (28.5%)
----------- ----------- ----------
Total household
chemical products 2,065,000 2,092,200 (1.3%)
----------- ----------- ----------
Alpha Hydrox and other
skin care 1,028,700 735,700 39.8%
Montagne Jeunesse
skin care 1,062,100 2,694,600 (60.6%)
----------- ----------- ----------
Total skin care
products 2,090,800 3,430,300 (39.0%)
----------- ----------- ----------
Total Net Sales $ 4,155,800 $ 5,522,500 (24.7%)
=========== =========== ==========
Three Months Ended March 31, 2006
Compared to Three Months Ended March 31, 2005
Consolidated net sales for the first quarter of the current
year were $4,155,800 versus $5,522,500 for the first three months
of 2005, a decrease of $1,366,700. Average selling prices of
household products were up by $104,400. This increase in average
selling prices was primarily due to an increase in pricing on our
Scott's Liquid Gold for wood products. The average selling prices
of skin care products were down by $87,700 as a result of greater
price promotions in the first quarter 2006 versus 2005. Co-op
advertising, marketing funds, slotting fees, and coupons paid to
retailers are deducted from gross sales, and totaled $630,100 in
the first quarter of 2006 versus $364,000 in the same quarter in
2005, an increase of $266,100 or 73.1%. This increase consisted
of an increase in coupon expense of $115,000, an increase in co-op
marketing funds of $105,500, and an increase in slotting fee
expenses of $45,600.
During the first quarter of 2006, net sales of skin care
products accounted for 50.3% of consolidated net sales compared to
62.1% for the same quarter of 2005. Net sales of these products
for that period were $2,090,800 in 2006 compared to $3,430,300 in
2005, a decrease of $1,339,500 or 39.0%. During the first quarter
of 2005 we began introduction of four new items in our Alpha Hydrox
line of cosmetic products. Because of this, our sales of Alpha
Hydrox products (with and without alpha hydroxy acid) have increased
in the first quarter of 2006 versus the first quarter of 2005. The
new items accounted for approximately 49% of our sales of Alpha
Hydrox and other skin care sales in the first quarter of 2006.
There were no sales of the new items in the first quarter of 2005.
Although we are optimistic that this trend will continue, it is
still too early to tell the consumer acceptance of these products
which is necessary for reorders of these products and expanding the
distribution of these products. We have continued to experience a
drop in unit sales of 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 first quarter of 2006, the sales of our
Alpha Hydrox products accounted for 32.9% of net sales of skin
care products and 16.6% of total net sales, compared to 9.6% of
net sales of skin care products and 6.0% of total net sales in
2005.
For 2006, net sales of Montagne Jeunesse products were
$1,062,100 in the first quarter versus $2,694,600 for the comparable
quarter of 2005, a decrease of $1,632,500 or 60.6%. 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 elimination
at approximately 1,500 Wal-Mart Stores of the department where
Montagne Jeunesse products were previously displayed.
Sales of household products for the first quarter of this
year accounted for 49.7% of consolidated net sales compared to
37.9% for the same period in 2005. These products are comprised
of Scott's Liquid Gold wood care products, and Touch of Scent, a
room air freshener. During the quarter ended March 31, 2006
sales of household products were $2,065,000 as compared to
$2,092,200 for the same quarter in 2005, a decrease of $27,200,
or 1.3%. Sales of Scott's Liquid Gold wood care products
increased from $1,555,700 in 2005 to $1,681,200 in 2006 an
increase of $125,500 or 8.1%. This increase in the amount of
sales is primarily due to sales of our wood wash products in
2006 which are included in the sales shown for Scott's Liquid
Gold for wood. Sales of "Touch of Scent" were down by $152,700
or 28.5%, primarily due to a decrease in distribution. In the
second quarter of 2005 we began introducing a wood wash under
the Scott's Liquid Gold product line. It is too early to
determine if this introduction will be successful.
As sales of a consumer product decline, there is the risk
that retail stores will stop carrying the product. The loss of
any significant customer for any skin care products, "Scott's
Liquid Gold" for wood 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, the sales of our new Alpha Hydrox products and our
"Scott's Liquid Gold" for wood products.
We also believe that the introduction of successful new
products, including line extensions of existing products, such
as the wood wash using the name "Scott's Liquid Gold", are
important to maintaining or growing our revenue. We currently
plan to make one to three product introductions during 2006, one
of which is a mold control product. We will use our facilities
to fill and package the mold control product. The agreement
regarding this product is described in Note 5 to the Consolidated
Financial Statements contained in this Report. We began our
marketing activity in the second quarter. 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. 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 $2,243,500
during the first three months of 2006 compared to $3,107,500 for
the same period of 2005, a decrease of $864,000 or 27.8%, on a
sales decrease of 24.7%. As a percentage of consolidated net
sales, cost of goods sold was 54.0% in 2006 versus 56.3% in 2005,
a decrease of about 4.1%, which reflects sales price increases
on Scott's Liquid Gold products initiated in the latter part of
2005, as well as a reflection of the higher margins attained on
our new Alpha Hydrox products which we did not begin to ship to
retailers until after the first quarter of 2005 and the effect of
a decrease in the percentage of sales from Montagne Jeunesse
products which have a lower gross margin.
We are working on ways to more fully utilize our production
capacity at our manufacturing facilities in Denver. We discuss
from time to time manufacturing private label products, but those
discussions have not resulted in any agreements to date. In late
March 2006 we entered into agreements with a plastics parts
manufacturer to lease space that is located in our Denver facility
and has been used for the operations of our plastics equipment.
This manufacturer will purchase a portion of our plastics
equipment, and supply us with the plastic parts we presently
manufacture ourselves. These agreements should provide better
utilization of our facilities and reduce the cost of the plastic
parts we presently produce. For additional information on these
agreements, see Note 5 of the Consolidated Financial Statements
in this Report.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2006 2005 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 593,700 $ 276,500 114.7%
Selling 1,425,500 1,475,300 (3.4%)
General & Administrative 912,100 1,022,800 (10.8%)
----------- ----------- ---------
Total operating
expenses $ 2,931,300 $ 2,774,600 5.6%
=========== =========== =========
Interest Income $ 12,600 $ 12,700 (0.8%)
Interest Expense $ 41,300 $ 48,000 (14.0%)
Operating expenses, comprised of advertising, selling and
general and administrative expenses, increased by $156,700 in the
first quarter of 2006 when compared to first quarter of 2005. The
various components of operating expenses are discussed below.
Advertising expenses for the first three months of 2006 were
$593,700 compared to $276,500 for the comparable quarter of 2005,
an increase of $317,200 or 14.7%. A majority of that increase
was due to an increase in advertising expenses applicable to
our Alpha Hydrox skin care products.
Selling expenses for the first quarter of 2006 were $1,425,500
compared to $1,475,300 for the comparable three months of 2005, a
decrease of $49,800 or 3.4%. That decrease was comprised of a
decrease in salaries and fringe benefits and related travel
expense of $82,400 primarily because of a decrease in personnel
in 2006 versus 2005, offset by a net increase in other selling
expenses, none of which by itself is significant, of $32,600.
General and administrative expenses for the first three
months of 2006 were $912,100 compared to $1,022,800 for the
comparable period of 2005, a decrease of $110,700 or 10.8%. 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.
Interest expense for the first quarter of 2006 was $41,300
versus $48,000 for the comparable quarter of 2005. Interest
income for the three months ended March 31, 2006 was $12,600
compared to $12,700 for the same period of 2005, which consists
of interest earned on our cash reserves in 2006 and 2005.
During the first quarter of 2006 and of 2005, expenditures
for research and development were not material (under 2% of
revenues).
Liquidity and Capital Resources
On August 8, 2005 we obtained a new $1,800,000 line of credit
with Citywide Banks of Aurora, Colorado. This line replaced the
$1,500,000 line of credit dated August 8, 2004, from the same bank.
Initially the original line of credit was to assist with inventory
for the 2004 holiday sales; we continue to use the line of credit
for inventory and other working capital purposes. The line of
credit bears interest at a rate of .5% over the bank's base rate
(7.75% at March 31, 2006) and matures on August 8, 2006. The line
of credit is secured by inventory and accounts receivable. Under
its terms, events of default include a material adverse change in
our financial condition. The covenants remain the same as the bank
loan described below.
We have a bank loan for approximately $1.66 million at the
bank's base rate, adjustable annually each November (the interest
rate on this loan was 7.00% at December 31, 2005) secured by our
land and buildings, with principal and interest payable monthly
through November 2007. The 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 three months of 2006.
During the first quarter of 2006 our working capital
decreased by $1,153,500, and concomitantly, our current ratio
(current assets divided by current liabilities) decreased from
1.6:1 at December 31, 2005 to 1.3:1 at March 31, 2006. This
decrease in working capital is attributable to a net loss in the
first three months of 2006 of $1,047,700, and a reduction in
long-term debt of $250,200, a decrease in accumulated comprehensive
income of $500, offset by depreciation in excess of capital
additions of $142,200, and a decrease in other assets of $2,700.
At March 31, 2006, trade accounts receivable were $1,005,200
versus $1,633,100 at year-end, largely because sales in the
quarter ended March 31, 2006 were less than those of the quarter
ended December 31, 2005. Accounts payable increased from the end
of 2005 through March of 2006 by $663,300 corresponding primarily
with the increase in inventory over that period, as well as, an
increase in advertising activity during the first quarter of 2006
when compared to the fourth quarter of 2005. At March 31, 2006
inventories were $628,200 more than at December 31, 2005, due to
the increase in Montagne Jeunesse inventory, resulting partially
from lower than anticipated sales in the first quarter, and due to
an increase in household chemical products inventory to support
sales of these products in the upcoming quarters. Prepaid expenses
increased from the end of 2005 by $142,200 primarily due to prepaid
promotional costs related to our new mold product.
We have no significant capital expenditures planned for 2006
and have no current plans for any external financing, other than
our existing bank loans. 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 chemical 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. Except for the short-term line of credit described
above, we have no arrangements for an 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. We expect our
operating cash flows to improve if we achieve profitability in 2006.
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. Except to the
extent changes in the prime rate affect our line of credit, 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;
consumer acceptance of the new Alpha Hydrox 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; adverse developments
in pending litigation; the loss of any executive officer; and other
matters discussed in our 2005 Annual Report on Form 10-K. 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.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Please see "Market Risks" in Item 2 of Part I of this
Report which information is incorporated herein by this reference.
Item 4. Controls and Procedures
As of March 31, 2006, 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 March 31, 2006. There
was no change in our internal control over financial reporting
during the quarter ended March 31, 2006 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 1A. Risk Factors
There have been no material changes from risk factors
as previously disclosed in our 2005 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds.
On February 7, 2006, we purchased 50,000 shares of our
common stock from a former officer at the then market price of
$0.975 per share for contribution to our Employee Stock Ownership
Plan (the "Plan"). On the same date, we contributed all such
50,000 shares to the Plan. No consideration was paid by the Plan
for these contributions. We believe that these contributions
were not subject to the securities registration requirements of
the Securities Act of 1933 because they did not involve a sale.
The contributions of the shares to the Plan may also be exempt
from such securities registration as a non-public offering under
Section 4(2) of the Securities Act of 1933.
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits
10.1 Asset Purchase and Sale Agreement dated as of March 28, 2006
between us and Keltec Dispensing Systems USA, Inc.; Form of
Bill of Sale by us to Keltec Dispensing Systems USA, Inc.;
Form of Lease for Keltec Dispensing Systems USA, Inc.
10.2 Supply Agreement dated as of March 28, 2006 between us and
Keltec Dispensing Systems USA, Inc.*
10.3 Second Amendment to September 1, 2000 License Agreement
between Neoteric Cosmetics, Inc. and TriStrata Technology, Inc.*
10.4 License Agreement dated as of September 1, 2000 between
TriStrata Technology, Inc. and Neoteric Cosmetics, Inc.*
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certification
* This Exhibit is currently subject to a Confidential Treatment
Request with the Securities and Exchange Commission.
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.
SCOTT'S LIQUID GOLD-INC.
May 12, 2006 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
May 12, 2006 BY: /s/ Jeffry B. Johnson
Date --------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Document
10.1 Asset Purchase and Sale Agreement dated as of March 28, 2006
between us and Keltec Dispensing Systems USA, Inc.; Form of
Bill of Sale by us to Keltec Dispensing Systems USA, Inc.;
Form of Lease for Keltec Dispensing Systems USA, Inc.
10.2 Supply Agreement dated as of March 28, 2006 between us and
Keltec Dispensing Systems USA, Inc.
10.3 Second Amendment to September 1, 2000 License Agreement
between Neoteric Cosmetics, Inc. and TriStrata Technology, Inc.*
10.4 License Agreement dated as of September 1, 2000 between
TriStrata Technology, Inc. and Neoteric Cosmetics, Inc.*
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certification
* This Exhibit is currently subject to a Confidential Treatment
Request with the Securities and Exchange Commission.