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, 2010
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 has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, 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 May 13, 2010, the Registrant had 10,795,000 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,
2010 2009
----------- -----------
Net sales $ 3,599,400 $ 3,891,900
----------- -----------
Operating costs and expenses:
Cost of Sales 1,881,100 2,245,700
Advertising 71,400 72,200
Selling 963,500 1,032,200
General and administrative 609,500 657,600
----------- -----------
3,525,500 4,007,700
----------- -----------
Income (loss) from operations 73,900 (115,800)
Interest and other income 34,500 2,900
Interest expense (69,200) (74,600)
----------- -----------
Income (loss) before income taxes 39,200 (187,500)
Income tax expense (benefit) - -
----------- -----------
Net income (loss) $ 39,200 $ (187,500)
=========== ===========
Net income (loss) per common share
(Note 2):
Basic & Diluted $ - $ (0.02)
=========== ===========
Weighted average shares outstanding:
Basic 10,795,000 10,732,000
=========== ===========
Diluted 11,196,750 10,732,000
=========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2010 2009
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 646,100 $ 654,100
Investment securities - 4,300
Trade receivables, net of allowance
of $60,000 and $59,800, respectively,
for doubtful accounts 338,400 314,400
Trade receivables, collateralized, net 658,300 -
Inventories, net 2,174,700 1,984,600
Prepaid expenses 206,500 142,300
----------- -----------
Total current assets, net 4,024,000 3,099,700
Property, plant and equipment, net 11,432,600 11,554,100
Other assets 104,900 110,000
----------- -----------
TOTAL ASSETS $15,561,500 $14,763,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Obligations collateralized
by receivables $ 396,100 $ -
Accounts payable 1,545,900 1,109,900
Accrued payroll and benefits 648,200 578,900
Other accrued expenses 287,300 370,000
Current maturities of long-term debt 322,200 319,600
----------- -----------
Total current liabilities 3,199,700 2,378,400
Long-term debt, net of current maturities 3,952,300 4,034,300
----------- -----------
TOTAL LIABILITIES 7,152,000 6,412,700
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,795,000 shares,
and 10,795,000 shares, respectively 1,079,500 1,079,500
Capital in excess of par 5,283,800 5,264,300
Accumulated comprehensive income - 300
Retained earnings 2,046,200 2,007,000
----------- -----------
Shareholders' equity 8,409,500 8,351,100
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $15,561,500 $14,763,800
=========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
-------------------------
2010 2009
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 39,200 $ (187,500)
----------- -----------
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 128,400 134,200
Stock issued to ESOP - 17,000
Stock-based compensation 19,500 18,900
Gain on sale of securities (300) -
Changes in assets and liabilities:
Proceeds from sale of accounts receivable - 982,100
Trade and other receivables, net (338,600) (1,019,400)
Inventories, net (190,100) (117,700)
Prepaid expenses and other assets (64,200) (23,200)
Accounts payable and accrued expenses 586,100 264,500
----------- -----------
Total adjustments to net income (loss) 140,800 256,400
----------- -----------
Net Cash Provided by
Operating Activities 180,000 68,900
----------- -----------
Cash flows from investing activities:
Proceeds from sale of securities 4,300 -
Real estate brokerage fees (41,200) -
Purchase of property, plant & equipment (1,800) -
----------- -----------
Net Cash Used by
Investing Activities (38,700) -
----------- -----------
Cash flows from financing activities:
Proceeds (payments) on obligations
collateralized by receivables (69,900) -
Principal payments on long-term borrowings (79,400) (67,900)
----------- -----------
Net Cash Used by
Financing Activities (149,300) (67,900)
---------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (8,000) 1,000
Cash and Cash Equivalents, beginning of period 654,100 909,900
----------- -----------
Cash and Cash Equivalents, end of period $ 646,100 $ 910,900
=========== ===========
Supplemental disclosures:
Cash Paid during period for:
Interest $ 69,200 $ 74,600
=========== ===========
See accompanying notes to consolidated financial statements.
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. Since the first quarter of 2001, we have
acted 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 certain other 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 wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
(c) 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
2009 Annual Report on Form 10-K. The results of operations for the
interim period may not be indicative of the results to be expected for
the full fiscal year.
(d) 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, coupon redemptions, bad debts, and
stock-based compensation.
(e) 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.
(f) Investments in Marketable Securities
We follow FASB authoritative guidance as it relates to 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 December 31, 2009, are
scheduled to mature within one year.
(g) Sale of Accounts Receivable
On November 3, 2008, effective as of October 31, 2008, we
established a $1,200,000 factoring line with an asset-based lender,
Summit Financial Resources ("Lender"), and secured by accounts
receivable, inventory, any lease in which we are a lessor, all
investment property and guarantees by our active subsidiaries. This
facility enables us to sell selected accounts receivable invoices to
the Lender with full recourse against us. During the first three months
of 2010, we sold approximately $2,618,000 of our accounts receivable
invoices to the Lender under a financing agreement for approximately
$1,833,200. The Company retains an interest equal to 30% of the total
accounts receivable invoice sold to the Lender less a collateral
management fee of 0.28% for each 10-day period that an accounts
receivable invoice is uncollected plus a daily finance fee, based on
Wall Street Journal prime (3.25% at March 31, 2010) plus 1%, imposed
on (a) the net of the outstanding accounts receivable invoices less
(b) retained amounts due to us. At March 31, 2010, approximately
$803,900 of this credit line was available for future factoring of
accounts receivable invoices.
We have adopted the FASB's amended authoritative guidance which
was issued in June 2009 and which became effective January 1, 2010 as
it relates to distinguishing between transfers of financial assets that
are sales from transfers that are secured borrowings. Under this new
guidance as adopted by the Company effective January 1, 2010, the
reporting of the sale of accounts receivable is treated as a secured
borrowing rather than as a sale. As a result, affected accounts
receivable are reported under Current Assets within the Company's
balance sheet as "Trade receivables, securitized" subject to reserves
for doubtful accounts, returns and other allowances. Similarly, the
net liability owing to Summit Financial Resources appears as "Obligations
collateralized by receivables" within the Current Liabilities section of
the Company's balance sheet. Net Proceeds received from the sale of
accounts receivable appear as cash provided or used by financing
activities within the Company's Consolidated Statements of Cash Flows.
Early adoption of this amended guidance was not permitted. Under the
authoritative guidance in effect prior to the amended guidance noted
above, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.
(h) 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
raw materials based upon historical and anticipated sales.
Inventories were comprised of the following at:
March 31, 2010 December 31, 2009
-------------- -----------------
Finished goods $ 1,263,500 $ 1,244,700
Raw materials 1,327,500 1,150,500
Inventory reserve
for obsolescence (416,300) (410,600)
----------- -----------
$ 2,174,700 $ 1,984,600
=========== ===========
(i) 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.
(j) 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 obligations collateralized by receivables,
accounts payable and accrued expenses approximate fair value due to
the short-term nature of these financial instruments. 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, 2010 and December 31, 2009.
(k) Long-Lived Assets
We follow FASB authoritative guidance as it relates to the proper
accounting treatment for the impairment or disposal of long-lived
assets. This guidance 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.
As of December 31, 2009, due to changes in the real estate market
in Denver, Colorado and the continuing economic downturn, we conducted
an evaluation into fair value impairment as regards our property, plant
and equipment with particular attention to our land and buildings
("facilities") which have an original cost of $17,485,800 and a
depreciated book value at December 31, 2009 of approximately
$10,792,700. For the facilities, we performed an evaluation utilizing
an income capitalization model employing rental, vacancy and
capitalization rates obtained from independent market data relative to
our area of the Denver market as well as the actual rental rate in
effect in the current lease of a portion of our office space. This
evaluation returned a range of fair value estimates in excess of
(a) the carrying value of the facilities and (b) the current listing
price for the facilities. We currently have the facilities listed for
sale at the price of $11,500,000 for the improved property plus an
unstated amount for an unimproved, adjacent 5.5 acre parcel of land with
a value estimated by us at $1,200,000. Based upon our evaluation, we
find there to be no impairment in the carrying values of our long-lived
assets at December 31, 2009 and there have been no events or changes in
circumstances that indicate the fair value of the facilities has
declined in the three months ended March 31, 2010; however, the
valuation of our facilities can be affected by future events including
the commercial real estate market in which our facilities are located.
(l) Income Taxes
We follow FASB authoritative guidance for the 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.
(m) 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, 2010 and December 31, 2009
approximately $381,000 and $403,000, respectively, had been reserved
as a reduction of accounts receivable, and approximately $23,000 and
$23,000, respectively, had been accrued as current liabilities. Co-op
advertising, marketing funds, slotting fees and coupons are deducted
from gross sales and totaled $202,800 and $356,200 in the quarters
ended March 31, 2010 and 2009, respectively.
(n) Advertising Costs
Advertising costs are expensed as incurred.
(o) Stock-based Compensation
During the first quarter of 2010, we granted 21,000 options for
shares of our common stock to certain employees at $0.30 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 2010 and 2009 were estimated on the date of grant,
using a Black-Scholes option pricing model with the following assumptions:
March 31, 2010 March 31, 2009
-------------- --------------
Expected life of options
(using the "simplified" method) 4.5 years 4.5 years
Risk-free interest rate 2.6% 1.9%
Expected volatility of stock 120% 75%
Expected dividend rate None None
Compensation cost related to stock options recognized in operating
results (included in general and administrative expenses) under
authoritative guidance issued by the FASB was $19,500 in the three
months ended March 31, 2010. Approximately $110,400 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 this same authoritative guidance, there was no tax
benefit from recording the non-cash expense as it 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.
(p) Comprehensive Income
We follow FASB authoritative guidance which establishes standards
for reporting and displaying comprehensive income and its components.
Comprehensive income includes all changes in equity during a period
from non-owner sources.
The following table is a reconciliation of our net income (loss)
to our total comprehensive income (loss) for the quarters ended
March 31, 2010 and 2009:
2010 2009
----------- -----------
Net income (loss) $ 39,200 $ (187,500)
Unrealized gain (loss) on
investment securities - (100)
----------- -----------
Comprehensive income (loss) $ 39,200 $ (187,600)
=========== ===========
(q) 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 $294,800 and
$346,000, for the quarters ended March 31, 2010 and 2009, 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.
(r) Recently Issued Accounting Pronouncements
In December 2007, the FASB issued new accounting guidance related
to the accounting for business combinations and related disclosures.
This new guidance addresses the recognition and accounting for
identifiable assets acquired, liabilities assumed, and noncontrolling
interests in business combinations. The guidance also establishes
expanded disclosure requirements for business combinations. The guidance
was effective on January 1, 2009, and the Company will apply this new
guidance prospectively to all business combinations subsequent to the
effective date.
In December 2007, the FASB issued new accounting guidance related
to the accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary.
The guidance was effective January 1, 2009 and did not have a material
effect on the Company's consolidated financial statements.
In September 2006, the Financial Accounting Standards Board (FASB)
issued new accounting guidance related to fair value measurements and
related disclosures. This new guidance defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. The Company adopted this new guidance on January 1,
2008, as required for its financial assets and financial liabilities.
However, the FASB deferred the effective date of this new guidance for
one year as it relates to fair value measurement requirements for
nonfinancial assets and nonfinancial liabilities that are not recognized
or disclosed at fair value on a recurring basis. The Company adopted
these remaining provisions on January 1, 2009. The adoption of this
accounting guidance did not have a material impact on the Company's
consolidated financial statements.
In June 2009, the FASB issued an amendment to its pre-existing
guidance as relates to accounting for transfers of financial assets and
extinguishments of liabilities. This new guidance, which is effective
January 1, 2010, changed the Company's current accounting treatment as
regards the sale of accounts receivable invoices as discussed in
Note 1(g). Early adoption of this amended guidance was not permitted.
In June 2009, the FASB established the FASB Accounting Standards
Codification (ASC or Codification), officially released on July 1,
2009, as the sole source of authoritative generally accepted accounting
principles used by nongovernmental entities in the preparation of
financial statements. The Codification is meant to simplify the
authoritative accounting guidance by reorganizing US GAAP pronouncements
into roughly 90 accounting topics within a consistent structure. The
Codification supersedes all existing
non-SEC accounting and reporting standards and was effective for the
Company beginning July 1, 2009. The FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead, it will issue Accounting Standards
Updates. The FASB will not consider Accounting Standards Updates as
authoritative in their own right; these updates will serve only to
update the Codification, provide background information about the
guidance, and provide the bases for conclusions on the change(s) in the
Codification.
Note 2. 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 are comprised of outstanding stock options of 1,932,650 and
1,922,900 at March 31, 2010 and 2009, respectively. At March 31,
2010, those securities for which the average market price for the three
months ended March 31, 2010 exceeded the exercise price total
approximately 401,750 shares. Such securities were excluded from the
computation of weighted average shares outstanding at March 31, 2009
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:
2010 2009
---------- ----------
Common shares outstanding,
beginning of the year 10,795,000 10,695,000
Shares issued to ESOP (a) - 37,000
Stock options exercised - -
---------- ----------
Weighted average number of
common shares outstanding 10,795,000 10,732,000
Dilutive effect of common share
equivalents 401,750 -
---------- ----------
Diluted weighted average number
of common shares outstanding 11,196,750 10,732,000
========== ==========
(a) In February 2009, the Board of Directors authorized and the
Company issued 100,000 shares of common stock to the Employee Stock
Ownership Plan, which had a market price of $0.17 per share.
At March 31, 2010, 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, 2010.
Note 3. 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" wood care
products including a cleaner that preserves as it cleans and a wood wash
product; Mold Control 500, a mold remediation product; "Clean Screen,"
a surface cleaner for sensitive electronic televisions and other
devices; and "Touch of Scent" room air fresheners. 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. In the
skin care segment, we also distribute skin care and other sachets of
Montagne Jeunesse and certain other products.
The following provides information on our segments for the three
months ended March 31:
2010 2009
----------------------- ------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 1,966,700 $ 1,632,700 $ 1,826,700 $ 2,065,200
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ 154,100 $ (114,900) $ (140,400) $ (47,100)
=========== =========== =========== ===========
Identifiable assets $ 3,044,800 $ 4,204,700 $ 2,790,600 $ 4,586,900
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three months ended March 31:
2010 2009
----------- -----------
Net sales to external customers $ 3,599,400 $ 3,891,900
=========== ===========
Income (loss) before profit sharing,
bonuses and income taxes $ 39,200 $ (187,500)
=========== ===========
Consolidated income (loss) before
income taxes $ 39,200 $ (187,500)
=========== ===========
Identifiable assets $ 7,249,500 $ 7,377,500
Corporate assets 8,312,000 9,160,300
----------- -----------
Consolidated total assets $15,561,500 $16,537,800
=========== ===========
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 of Financial Condition
and Results of Operations
Results of Operations
During the first quarter of 2010, we experienced an overall
decrease in net sales of $292,500 as compared to the first quarter of
2009. Our net income was $39,200 in the first quarter of 2010 versus
a net loss of $187,500 in the first quarter of 2009. This $226,700
improvement in our result of operations resulted from improved gross
margins for household products and a reduction in operating expenses
as detailed below.
Summary of Results as a Percentage of Net Sales
Year Ended Three Months Ended
December 31, March 31,
2009 2010 2009
----------- -------- --------
Net sales
Scott's Liquid Gold
household products 50.6% 54.6% 46.9%
Skin care products 49.4% 45.4% 53.1%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 58.0% 52.3% 57.7%
------ ------ ------
Gross profit 42.0% 47.7% 42.3%
Other revenue 0.2% 1.0% 0.1%
------ ------ ------
42.2% 48.7% 42.4%
------ ------ ------
Operating expenses 48.5% 45.7% 45.3%
Interest expense 2.1% 1.9% 1.9%
------ ------ ------
50.6% 47.6% 47.2%
------ ------ ------
Income (loss) before income taxes (8.4%) 1.1% (4.8%)
====== ====== ======
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 (q), Operating Costs and Expenses Classification,
to the unaudited Consolidated Financial Statements in this Report.
Comparative Net Sales
Percentage
Increase
2010 2009 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and other
household products $ 1,848,100 $ 1,605,600 15.1%
Touch of Scent 118,600 221,100 (46.4%)
----------- ----------- ---------
Total household
chemical products 1,966,700 1,826,700 7.7%
----------- ----------- ---------
Alpha Hydrox and other skin care 802,200 1,029,900 (22.1%)
Montagne Jeunesse and other
distributed skin care 830,500 1,035,300 (19.8%)
----------- ----------- ---------
Total skin care products 1,632,700 2,065,200 (20.9%)
----------- ----------- ---------
Total Net Sales $ 3,599,400 $ 3,891,900 (7.5%)
=========== =========== =========
Three Months Ended March 31, 2010
Compared to Three Months Ended March 31, 2009
Consolidated net sales for the first quarter of the current year
were $3,599,400 versus $3,891,900 for the first three months of 2009, a
decrease of $292,500. Average selling prices for the first quarter of
2010 were down by $13,800 over the first quarter of 2009 with household
products being up by $30,300, while skin care products were down by
$44,100. This decrease in selling prices reflects efforts to expand
distribution of our manufactured skin care products. Co-op advertising,
marketing funds, slotting fees, and coupons paid to retailers are
deducted from gross sales, and totaled $202,800 in the first quarter
of 2010 versus $356,200 in the same quarter in 2009, a decrease of
$153,400 or 43.1%. This decrease consisted of a decrease in coupon
expense of $3,800, a decrease in co-op marketing funds of $94,800, and
a decrease in slotting fee expenses of $54,800.
From time to time, our customers return product to us. For our
household 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, 2007 through March 31, 2010, our product returns
(as a percentage of gross revenue) have averaged as follows: household
products 0.4%, Montagne Jeunesse products 2.9%, and our Alpha Hydrox
and other skin care products 3.9%. 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, 2010 (indicated as a percentage of gross
revenues) were: household products 0.5%, Montagne Jeunesse products
1.4%, and our Alpha Hydrox and other skin care products 0.8%. 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, our 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 2010, net sales of skin care products
accounted for 45.4% of consolidated net sales compared to 53.1% for the
same quarter in 2009. Net sales of these products for that period were
$1,632,700 in 2010 compared to $2,065,200 in 2009, a decrease of
$432,500 or 20.9%. Our decrease in net sales of skin care products was
comprised of a decrease of $204,800 in sales of products for which we
act as a distributor and a decrease of $227,700 in our manufactured
skin care product lines.
Overall, net sales of our line-up of distributed products,
including Montagne Jeunesse, totaled $830,500 in the first quarter of
2010 as compared to net sales of $1,035,300 in the same period of 2009,
a decrease of $204,800 or 19.8%. This sales decrease is primarily the
result of a reduced selection of the Montagne Jeunesse products with our
largest retail customer; the decrease commencing in approximately the
third quarter of 2009, offset in part by introductory sales of Batiste
dry shampoo. Net sales of other distributed skin care products were
nominal in the first quarter of both 2010 and 2009.
Similarly, net sales of our Alpha Hydrox and other manufactured
skin care products declined $227,700, or 22.1%, from $1,029,900 in the
first quarter of 2009 to $802,200 for the same period of 2010. This
sales decrease was attributable primarily to the discontinued sale of
our Massage Oils by our largest retail customer.
Sales of household products for the first quarter of 2010
accounted for 54.6% of consolidated net sales compared to 46.9% for the
same period in 2009. These products are comprised of Scott's Liquid
Gold wood care products, Mold Control 500, Clean Screen, and Touch of
Scent. During the quarter ended March 31, 2010 sales of household
products were $1,966,700 as compared to $1,826,700 for the same period
in 2009, an increase of $140,000, or 7.7%. Sales of Scott's Liquid
Gold products increased by $246,500, or 16.4%, in 2010 versus 2009
while Mold Control 500 sales were down by $4,000, or 4.0%, and sales
of Touch of Scent products declined $102,500, or 46.4%, in the same
comparative periods. The increase in sales of Scott's Liquid Gold
products is primarily attributable to the introduction of
"Clean Screen," a surface cleaner for sensitive electronics including
HDTV screens, computer monitors and other such devices, coupled with a
modest increase in sales of wood care products and a $49,300 decrease
in co-op marketing costs. The decrease in sales of Touch of Scent
products is attributable primarily to the discontinuation of the air
freshener products Cube Scents and Odor Extinguisher in 2008 and 2009.
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"
wood care or mold remediation products could have a significant adverse
impact on our revenues and operating results.
We also believe that the introduction of successful new products,
including line extensions of existing products, such as the wood wash
and our mold remediation product, using the name "Scott's Liquid Gold",
are important in our efforts to maintain or grow our revenue. In the
second quarter of 2009, we introduced, with limited sales to date,
"Clean Screen", a new household product under the Scott's Liquid Gold
brand. Additionally, in the fourth quarter of 2009 we introduced
Batiste dry shampoo for distribution in the United States.
Additionally, 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. 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 $1,881,100 during
the first three months of 2010 compared to $2,245,700 for the same period
of 2009, a decrease of $346,600 or 16.2%, against a sales decrease of
7.5%. As a percentage of consolidated net sales, cost of goods sold was
52.3% in 2010 versus 57.7% in 2009, a decrease of about 9.3%. With
respect to our skin care products, the cost of goods rose to 56.2% in
the first quarter of 2010 as compared to 54.8% in the first quarter of
2009 as a result of efforts to improve volume with discount sales,
which was intended to mitigate sales volume foregone with our decision
in 2009 to discontinue our business relationship with a retail chain
where excessive retail support in the form of product returns, marketing
co-op funds, coupons and promotion programs and damage claims had made
such business unprofitable. Household products, however, experienced
a decline in cost of goods sold from 60.9% in the first three months
in 2009 compared to 49.0% for the same period in 2010. In 2009, cost
of goods sold reflected the sale of discontinued products at below our
cost of approximately $300,000 as well as higher steel can costs which
were subsequently negotiated down in mid 2009 and again in early 2010.
Further contributing to the lower overall cost of goods sold percentage
is the decrease in sales promotion expenses which favorably impacts our
net revenues and thus affected our margins.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2010 2009 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 71,400 $ 72,200 (1.1%)
Selling 963,500 1,032,200 (6.7%)
General & Administrative 609,500 657,600 (7.3%)
----------- ---------- ---------
Total operating
expenses $ 1,644,400 $ 1,762,000 (6.7%)
=========== =========== =========
Interest and Other Income $ 34,500 $ 2,900 1,089.7%
=========== =========== =========
Interest Expense $ 69,200 $ 74,600 (7.2%)
=========== =========== =========
Operating expenses, comprised of advertising, selling and general
and administrative expenses, decreased by $117,600 in the first quarter
of 2010 when compared to first quarter of 2009. The various components
of operating expenses are discussed below.
Advertising expenses for the first three months of 2010 were
$71,400 compared to $72,200 for the comparable quarter of 2009, a
decrease of $800 or 1.1%. As in prior quarters, we have limited
advertising as part of our cost reduction efforts.
Selling expenses for the first quarter of 2010 were $963,500
compared to $1,032,200 for the comparable three months of 2009, a
decrease of $68,700 or 6.7%. That decrease was comprised of a decrease
in freight expenses of $51,900 largely resulting from declining fuel
prices and the utilization of a third-party logistics firm as well as
the overall reduction in sales in the first quarter of 2010 compared to
2009 and a decrease in promotional selling expenses of $35,100 related
to reduced sales of Montagne Jeunesse displays offset by a net increase
in other selling expenses, none of which by itself is significant, of
$18,300.
General and administrative expenses for the first three months of
2010 were $609,500 compared to $657,600 for the same period of 2009, a
decrease of $48,100, or 7.3%. That decrease resulted primarily from a
decrease in salaries, fringe benefits and related travel expense of
$25,600 associated with a reduction in personnel and the fees paid to
outside directors and a decrease in professional fees and reporting
costs of $25,000 offset by a net increase in various other expense
items of $2,500.
Interest expense for the first quarter of 2010 was $69,200 and
included $25,000 in collateral management fees incurred relative to the
sale of accounts receivable invoices to Summit Financial Resources.
Interest expense for the first quarter of 2009 was $74,600 and
included $10,900 in collateral management fees. The decrease in
interest expense reflects the combined effect of a decrease in the
outstanding mortgage liability from 2009 to 2010 and the reduction in
the interest rate in effect on that mortgage from 5.0% prior to
June 28, 2009 to 3.25% effective after that date.
Interest and other income for the first three months of 2010
of $34,500 included $32,100 of net rental receipts and $2,400 in
interest earned on our cash reserves as compared to $2,900 in interest
earned on our cash reserves in the first three months of 2009. There
were no rental receipts in the first three months of 2009.
Liquidity and Capital Resources
Citywide Loan
On June 28, 2006, we entered into a loan with a fifteen year
amortization with Citywide Banks (the "Bank") for $5,156,600 secured by
the land, building and fixtures at our Denver, Colorado facilities.
Interest on the bank loan (3.25% at March 31, 2010) is at the prime rate
as published in The Wall Street Journal, adjusted annually each June.
This loan requires 180 monthly payments of approximately $38,200.
Monthly payments 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, the
aforementioned ratios to be calculated in accordance with U.S.
generally accepted accounting principles. We may not declare any
dividends that would result in a violation of either of these covenants.
Affirmative covenants in the loan agreement concern, among other things,
compliance in all material respects with applicable laws and regulations
and compliance with our agreements with other parties which materially
affect our financial condition. Negative covenants require that we not
do any of the following, among other things, without the consent of the
Bank: Sell, lease or grant a security interest in assets; engage in any
business activity substantially different than those in which we are
presently engaged; sell assets out of the ordinary course of business;
or purchase another entity or an interest in another entity. The
foregoing requirements were met at the end of quarter ending March 31,
2010.
Financing Agreement
On November 3, 2008, effective as of October 31, 2008, we entered
into a financing agreement with an "asset-based" lender for the purpose
of improving working capital. An amendment to this agreement was
executed March 12, 2009 extending the initial anniversary date to
March 12, 2010. The term of the agreement is one year and is
automatically renewed for 12 months unless either party elects to cancel
in writing at least 60 days prior to the anniversary date. Neither
party sent such a notice of non-renewal, and therefore the term of the
financing agreement has automatically been extended to March 12, 2011.
The agreement provides for up to $1,200,000 and is secured primarily
by accounts receivable, inventory, any lease in which we are a lessor,
all investment property and guarantees by our active subsidiaries.
Under the financing agreement, the lender will make loans at our request
and in the lender's discretion (a) based on purchases of our Accounts
by the lender, with recourse against us and an advance rate of 70% (or
such other percentage determined by the lender in its discretion), and
(b) based on Acceptable Inventory not to exceed certain amounts,
including an aggregate maximum of $250,000. Advances under the agreement
bear interest at a rate of 1% over the prime rate (as published in the
Wall Street Journal) for the accounts receivable portion of the advances
and 3% over the prime rate for the inventory portion of the borrowings.
The prime rate (3.25% as of March 31, 2010) adjusts with changes to the
rate. In addition there are collateral management fees of 0.28% for
each 10-day period that an advance on an accounts receivable invoice
remains outstanding and a 1.35% collateral management fee on the average
monthly loan outstanding on the inventory portion of any advance. The
agreement provides that no change in control concerning us or any of
our active subsidiaries shall occur except with the prior written
consent of the lender. Events of default include, but are not limited
to, the failure to make a payment when due or a default occurring on any
indebtedness of ours.
Liquidity
During the first quarter of 2010 our working capital increased by
$103,000 resulting in a current ratio (current assets divided by current
liabilities) of 1.3:1 at March 31, 2010, unchanged from December 31,
2009. The increase in working capital is attributable to net income of
$39,200, depreciation and amortization in excess of capital additions
of $126,600 and the granting of stock options valued at $19,500, offset
by a reduction in long-term debt of $82,000.
At March 31, 2010, trade and other receivables were $996,700
versus $314,400 at the end of 2009. As discussed in Note 1(g), on
January 1, 2010 the Company adopted new authoritative guidance which
prospectively modified the presentation of transferred trade receivables
and the related securitized obligation. Had early adoption been
permitted then trade and other receivables at December 31, 2009 would
have increased $343,700 to $658,100 along with a corresponding increase
in current liabilities. Aside from the impact of this change in
guidance, the increase in trade and other receivables is largely the
result of sales in March 2010 being greater than those in December
2009. Accounts payable, accrued payroll and other accrued expenses
increased by $422,600 from the end of 2009 through March of 2010
corresponding with the increase and timing of purchases of inventory
and rise in receivables over that period. At March 31, 2010 inventories
were $190,100 more than at December 31, 2009, due primarily to an
increase in household chemical raw material inventory quantities in
anticipation of planned production of finished goods inventory to
support anticipated sales of Clean Screen. Prepaid expenses increased
from the end of 2009 by $64,200 primarily related to the production and
insertion costs associated with a coupon program scheduled for the
second quarter of 2010.
We have no significant capital expenditures planned for 2010.
The Summit Financial Resources line of credit is expected to
provide working capital which may be necessary to meet the needs of the
Company over the next 12 months. The Company, in general, has high
quality accounts receivable which may be sold pursuant to the line of
credit. The Summit Financial Resources agreement has a term of one year
which expired March 12, 2010; however, it is automatically renewed for
12 months unless either party elects to cancel in writing at least
60 days prior to the anniversary date. Neither party sent such a notice
of non-renewal, and therefore the term of the financing agreement has
automatically been extended to March 12, 2011. The Company has no
intention to exercise the cancellation right mentioned above, and the
lender has not given any indication that the lender has any such
intention.
As a result of the foregoing, we expect that our available cash,
projected cash flows from operating activities, and borrowing available
under the Summit Financial Resources agreement (assuming no cancellation
of the agreement) will fund the twelve months' cash requirements, ending
March 31, 2011.
In order to improve our liquidity and our operating results, we
will also continue to pursue the following steps: the sale or lease of
all or a portion of our real estate which we have listed with a real
estate firm, efforts to improve revenues, a further reduction in our
fixed operating expense if needed, and potentially the addition of
external financing. In October 2009 we entered into a long-term lease
of the second floor of our five-story office building to an established
subsidiary of an international company. Our officers and employees now
occupy three other floors of the office building.
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. 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. Any external debt financing could require the
cooperation and approval of existing lenders. 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; limited consumer acceptance of the
Alpha Hydrox products introduced in 2005 and 2007; uncertainty of
consumer acceptance of Mold Control 500, wood wash products and
products recently introduced or being introduced in 2010; 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; additional net losses which could affect our liquidity;
the loss of any executive officer; and other matters discussed in our
Annual Report on Form 10-K for the year ended December 31, 2009 and 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, 2010, 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, 2010.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting during the quarter ended March 31, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
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 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 14, 2010 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
May 14, 2010 BY: /s/ Brian L. Boberick
Date --------------------------------------
Brian L. Boberick
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