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, 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.
Check whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past
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, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2
of the Exchange 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 12b-2 of the Exchange Act. Yes [ ] No [X]
As of March 31, 2008, the Registrant had 10,595,000 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,
2008 2007
----------- -----------
Net sales $ 4,093,800 $ 3,861,800
----------- -----------
Operating costs and expenses:
Cost of Sales 2,201,900 2,346,500
Advertising 111,200 112,300
Selling 1,340,300 1,255,400
General and administrative 800,000 814,100
----------- -----------
4,453,400 4,528,300
----------- -----------
Loss from operations (359,600) (666,500)
Interest income 8,500 24,200
Interest expense (103,100) (103,900)
----------- -----------
Loss before income taxes (454,200) (746,200)
Income tax expense (benefit) - -
----------- -----------
Net loss $ (454,200) $ (746,200)
=========== ===========
Net loss per common share (Note 3):
Basic $ (0.04) $ (0.07)
=========== ===========
Diluted $ (0.04) $ (0.07)
=========== ===========
Weighted average shares outstanding:
Basic 10,582,700 10,533,000
=========== ===========
Diluted 10,582,700 10,533,000
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2008 2007
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,100,100 $ 1,483,300
Investment securities 50,500 50,400
Trade receivables, net of allowance
for doubtful accounts of $62,900 1,072,200 1,004,900
Other receivables 23,300 32,500
Inventories, net 3,212,900 3,054,500
Prepaid expenses 122,800 238,100
----------- -----------
Total current assets 5,581,800 5,863,700
Property, plant and equipment, net 12,476,800 12,624,000
Other assets 54,300 55,400
----------- -----------
TOTAL ASSETS $18,112,900 $18,543,100
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,676,000 $ 1,560,300
Accrued payroll and benefits 831,200 866,200
Other accrued expenses 359,500 390,500
Current maturities of long-term debt 210,200 204,900
----------- -----------
Total current liabilities 3,076,900 3,021,900
Long-term debt, net of current maturities 4,616,100 4,671,600
----------- -----------
7,693,000 7,693,500
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,595,000 shares,
and 10,575,000 shares, respectively 1,059,500 1,057,500
Capital in excess of par 5,112,500 5,090,100
Accumulated comprehensive income 500 400
Retained earnings 4,247,400 4,701,600
----------- -----------
Shareholders' equity 10,419,900 10,849,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $18,112,900 $18,543,100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
-------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $ (454,200) $ (746,200)
----------- -----------
Adjustments to reconcile net
loss to net cash provided
(used) by operating activities:
Depreciation and amortization 157,100 161,600
Stock options granted 15,200 4,000
Changes in assets and liabilities:
Trade and other receivables, net (58,100) (336,100)
Inventories (158,400) (168,400)
Prepaid expenses and
other assets 115,300 31,800
Accounts payable and
accrued expenses 49,700 326,800
----------- -----------
Total adjustments to net loss 120,800 19,700
----------- -----------
Net Cash Used by
Operating Activities (333,400) (726,500)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant & equipment (8,800) (1,500)
----------- -----------
Net Cash Used by
Investing Activities (8,800) (1,500)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of
stock options 9,200 -
Principal payments on
long-term borrowing (50,200) (47,900)
----------- -----------
Net Cash Used by
Financing Activities (41,000) (47,900)
---------- -----------
Net Decrease in Cash and
Cash Equivalents (383,200) (775,900)
Cash and Cash Equivalents,
beginning of period 1,483,300 2,804,100
----------- -----------
Cash and Cash Equivalents,
end of period $ 1,100,100 $ 2,028,200
=========== ===========
Supplemental disclosures:
Cash Paid during period for:
Interest $ 103,200 $ 104,000
=========== ===========
Income taxes $ - $ 900
=========== ===========
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, and we fill,
package and market our Mold Control 500 product. We act as the
distributor in the United States for 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 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:
March 31, 2008 December 31, 2007
-------------- -----------------
Finished goods $ 2,177,200 $ 2,178,000
Raw materials 1,429,400 1,284,200
Inventory reserve
for obsolescence (393,700) (407,700)
----------- -----------
$ 3,212,900 $ 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 a then
prime rate. The carrying value of long-term debt approximates fair
value as of March 31, 2008 and December 31, 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 recognized when an arrangement exists to sell our
product, we have delivered such product in accordance with that
arrangement, the sales price is 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 March 31, 2008 and December 31, 2007 approximately $650,000
and $695,700, respectively, had been reserved as a reduction of accounts
receivable, and approximately $23,000 and $27,000, respectively, had
been reserved as current liabilities. Co-op advertising, marketing
funds, slotting fees and coupons are deducted from gross sales and
totaled $378,300 and $973,100 in the quarter ended March 31, 2008 and
2007, respectively.
(l) Advertising Costs
Advertising costs are expensed as incurred.
(m) Stock-based Compensation
At March 31, 2008, we had three 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, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 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.
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.
During the first quarter of 2008, we granted 134,000 options for
shares of our common stock to 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 market value 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:
Expected life of options
(using the "simplified" method) 4.5 years
Risk-free interest rate 2.9%
Expected volatility 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 Statement 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 loss to our
total comprehensive loss for the quarters ended March 31, 2008 and
2007:
2008 2007
----------- -----------
Net loss $ (454,200) $ (746,200)
Unrealized gain (loss) on
investment securities 100 (200)
----------- -----------
Comprehensive loss $ (454,100) $ (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
$403,000 and $345,000, for the quarters ended March 31, 2008 and 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
did not have a material impact our results of operations or
financial position.
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 2007 Annual Report on Form 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
1,922,150 and 1,944,650 at March 31, 2008 and 2007, respectively,
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:
2008 2007
---------- ----------
Common shares outstanding,
beginning of the year 10,575,000 10,533,000
Stock options exercised 7,700 -
---------- ----------
Weighted average number of
common shares outstanding 10,582,700 10,533,000
Dilutive effect of common share
equivalents - -
---------- ----------
Diluted weighted average number
of common shares outstanding 10,582,700 10,533,000
========== ==========
At March 31, 2008, 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, 2008.
Note 4. Segment Information
We operate in two different segments: household products and
skin care products. Our products are sold nationally and
internationally (primarily Canada), directly and through independent
brokers, to mass merchandisers, drug stores, supermarkets, wholesale
distributors and other retail outlets. 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,
Mold Control 500, a mold remediation product, and "Touch of Scent," a
room air freshener. The skin care segment includes "Alpha Hydrox,"
alpha hydroxy acid cleansers and lotions, a retinol product, and
"Diabetic Skin Care", a healing cream and moisturizer developed to
address skin conditions of diabetics. We also distribute skin
care and other sachets of Montagne Jeunesse, 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 provides information on our segments
as of and for the three months ended March:
2008 2007
----------------------- ------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 1,732,300 $ 2,361,500 $ 2,305,500 $ 1,556,300
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ (224,100) $ (230,100) $ 60,300 $ (806,500)
=========== =========== =========== ===========
Identifiable assets $ 3,077,400 $ 5,631,200 $ 3,599,000 $ 5,664,600
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three months ended March 31:
2008 2007
------------ -----------
Net sales to external customers $ 4,093,800 $ 3,861,800
=========== ===========
Loss before profit sharing,
bonuses and income taxes $ (454,200) $ (746,200)
=========== ===========
Consolidated loss before income taxes $ (454,200) $ (746,200)
=========== ===========
Identifiable assets $ 8,708,600 $ 9,263,600
Corporate assets 9,404,300 10,599,700
----------- -----------
Consolidated total assets $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 Operation
Results of Operations
During the first quarter of 2008, we experienced an overall
increase in net sales and a decrease in our net loss as compared to the
first quarter of 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 quarter of 2008 compared to the
first quarter of 2007 resulted from a reduction in our sales promotion
expenses which are deducted from gross sales.
Summary of Results as a Percentage of Net Sales
Year Ended Three Months Ended
December 31, March 31,
2007 2008 2007
----------- -------- --------
Net sales
Scott's Liquid Gold
household products 44.9% 42.3% 59.7%
Neoteric Cosmetics 55.1% 57.7% 40.3%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 56.5% 53.8% 60.8%
------ ------ ------
Gross profit 43.5% 46.2% 39.2%
Other revenue 0.4% 0.2% 0.6%
------ ------ ------
43.9% 46.4% 39.8%
------ ------ ------
Operating expenses 48.9% 55.0% 56.5%
Interest expense 2.3% 2.5% 2.7%
------ ------ ------
51.2% 57.5% 59.2%
------ ------ ------
Loss before income taxes (7.3%) (11.1%) (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
Percentage
Increase
2008 2007 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold
and other household products $ 1,553,100 $ 1,960,100 (20.8%)
Touch of Scent 179,200 345,400 (48.1%)
----------- ----------- ---------
Total household
chemical products 1,732,300 2,305,500 (24.9%)
----------- ----------- ---------
Alpha Hydrox and
other skin care 980,200 860,400 13.9%
Montagne Jeunesse and other
distributed skin care 1,381,300 695,900 98.5%
----------- ----------- ---------
Total skin care products 2,361,500 1,556,300 51.7%
----------- ----------- ---------
Total Net Sales $ 4,093,800 $ 3,861,800 6.0%
=========== =========== =========
Three Months Ended March 31, 2008
Compared to Three Months Ended March 31, 2007
Consolidated net sales for the first quarter of the current year
were $4,093,800 versus $3,861,800 for the first three months of 2007,
an increase of $232,000. Average selling prices for the first quarter
of 2008 were up by $199,600 over the first quarter of 2007. Average
selling prices of household products were up by $82,200, while average
selling prices of skin care products were up by $117,400. This increase
in selling prices was primarily due to a decrease in coupon usage in
2008 versus 2007. Co-op advertising, marketing funds, slotting fees,
and coupons paid to retailers are deducted from gross sales, and
totaled $378,300 in the first quarter of 2008 versus $973,100 in the
same quarter in 2007, a decrease of $594,800 or 61.1%. This decrease
consisted of a decrease in coupon expense of $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 $147,000, and an
increase in slotting fee expenses of $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 quarter of 2008, net sales of skin care
products accounted for 57.7% of consolidated net sales compared to
40.3% for the same quarter of 2007. Net sales of these products for
that period were $2,361,500 in 2008 compared to $1,556,300 in 2007,
an increase of $805,200 or 51.7%. Our increase in net sales of
Alpha Hydrox and other skin care was due to the decrease in
promotions to retailers, which are deducted from gross sales, 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 retailers.) We have
continued to experience a drop in unit sales of our more 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 first quarter of 2008, the sales of our Alpha
Hydrox products accounted for 22.1% of net sales of skin care products
and 12.8% of total net sales, compared to 19.7% of net sales of skin
care products and 7.9% of total net sales in 2007. During 2007 we
introduced four new items to the Alpha 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 $1,381,300 in the first quarter versus
$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, offset
by a slight decrease in Montagne Jeunesse skin care sales in the
first quarter of 2008 versus the first quarter of 2007. The first
quarter of 2007 includes this product's placement in additional stores.
Sales of household products for the first quarter of this year
accounted for 42.3% of consolidated net sales compared to 59.7% for
the same period 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 quarter ended March 31, 2008 sales of
household products were $1,732,300 as compared to $2,305,500 for the
same quarter in 2007, a decrease of $573,200 or 24.9%. Sales of
Scott's Liquid Gold wood care and other household products decreased
from $1,960,100 in 2007 to $1,553,100 in 2008 a decrease of $407,000
or 20.8%. We believe this reduction to be a result of a decrease in
media advertising of our products in the last two years. Mold
Control 500 sales were $94,400 for the first quarter of 2008 versus
$213,100 for the first quarter of 2007. Sales of "Touch of Scent"
were down by $166,200 or 48.1%, primarily due to a decrease in
distribution in past quarters. During the third quarter of 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 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.
Late in the fourth quarter of 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 $2,201,900
during the first three months of 2008 compared to $2,346,500 for the
same period of 2007, a decrease of $144,600 or 6.2%, on a sales
increase of 6.0%. As a percentage of consolidated net sales, cost
of goods sold was 53.8% in 2008 versus 60.8% in 2007, a decrease of
about 11.5%. This was essentially due to a decrease in sales
promotion expenses, which are deducted from gross sales, and thus
affected our margins particularly in the skin care line of products,
offset somewhat by lower plant utilization and increase costs of
steel cans and petroleum based raw materials.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2008 2007 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 111,200 $ 112,300 (1.0%)
Selling 1,340,300 1,255,400 6.8%
General & Administrative 800,000 814,100 (1.7%)
----------- ---------- ---------
Total operating
expenses $ 2,251,500 $ 2,181,800 3.2%
=========== =========== =========
Interest Income $ 8,500 $ 24,200 (64.9%)
Interest Expense $ 103,100 $ 103,900 (0.8%)
Operating expenses, comprised of advertising, selling and general
and administrative expenses, increased by $69,700 in the first quarter
of 2008 when compared to first quarter of 2007. The various components
of operating expenses are discussed below.
Advertising expenses for the first three months of 2008 were
$111,200 compared to $112,300 for the comparable quarter of 2007, a
decrease of $1,100 or 1.0%.
Selling expenses for the first quarter of 2008 were $1,340,300
compared to $1,255,400 for the comparable three months of 2007, an
increase of $84,900 or 6.8%. That increase was comprised of an
increase in salaries and fringe benefits and related travel expense
of $55,800 primarily because 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 royalty fee
expenses of $35,000 and a net decrease in other selling expenses of
$42,300.
General and administrative expenses for the first three months
of 2008 were $800,000 compared to $814,100 for the same period of
2007, a decrease of $14,100 or 1.7%.
Interest expense for the first quarter of 2008 was $103,100
versus $103,900 for the comparable quarter of 2007. Interest income
for the three months ended March 31, 2008 was $8,500 compared to
$24,200 for the same period of 2007, which consists of interest
earned on our cash reserves in 2008 and 2007.
During the first quarter of 2008 and of 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 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. Interest
on the bank loan (8.25% at March 31, 2008) is at the prime rate as
published in The Wall Street Journal, adjusted annually each June.
This loan requires 180 monthly payments of approximately $50,500,
which commenced on July 28, 2006. 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 2008.
During the first quarter of 2008 our working capital decreased
by $336,900, and concomitantly, our current ratio (current assets
divided by current liabilities) decreased from 1.9:1 at
December 31, 2007 to 1.8:1 at March 31, 2008. This decrease in
working capital is attributable to a net loss in the first three
months of 2008 of $454,200, and a reduction in long-term debt of
$55,500, offset by depreciation in excess of capital additions
of $147,200.
At March 31, 2008, trade accounts receivable were $1,072,200
versus $1,004,900 at the end of 2007, largely because sales in the
last two months of the quarter ended March 31, 2008 were more than
those of the last two months of the quarter ended December 31, 2007.
Accounts payable increased from the end of 2007 through March of 2008
by $115,700 corresponding primarily with the increase and timing of
purchases of inventory over that period. At March 31, 2008
inventories were $158,400 more than at December 31, 2007, due to the
increase in household chemical products inventory resulting from
lower than anticipated sales in the first quarter. Prepaid expenses
decreased from the end of 2007 by $115,300 primarily due to the
expensing of prepaid promotional expenses and reductions in the amount
of deposits required on raw material purchases.
We have no significant capital expenditures planned for 2008 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
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. In order to improve our operating cash flow, we need to
achieve profitability.
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;
uncertainty of consumer acceptance of the new Alpha Hydrox products
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; the loss of any executive officer; and other
matters discussed in 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.
Item 3. Quantitative and Qualitative Disclosures About
Market Risks.
Not Applicable
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
As of 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
as of 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 March 31, 2008 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 2. Not Applicable.
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
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
SIGNATURES
Pursuant to the requirements of the Exchange Act, 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 2, 2008 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
May 2, 2008 BY: /s/ Jeffry B. Johnson
Date --------------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Document
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