UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
June 30, 2007
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 issuer: (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 shell company (as
defined in Rule 12-B-2 of the Exchange Act. Yes [ ] No [X]
As of June 30, 2007, the Registrant had 10,533,000 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 Six Months Ended
------------------------- -------------------------
June 30, June 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net sales $ 4,304,200 $ 4,133,300 $ 8,480,000 $ 8,289,100
Operating costs
and expenses:
Cost of sales 2,340,600 2,567,400 4,687,100 4,810,900
Advertising 88,800 107,600 201,100 701,300
Selling 1,379,000 1,410,200 2,634,400 2,835,700
General and
administrative 768,800 863,200 1,582,900 1,775,300
----------- ----------- ----------- -----------
4,577,200 4,948,400 9,105,500 10,123,200
----------- ----------- ----------- -----------
Loss from operations (273,000) (815,100) (625,500) (1,834,100)
Interest income 19,600 14,300 43,800 26,900
Interest expense (104,200) (59,100) (208,100) (100,400)
----------- ----------- ----------- -----------
(357,600) (859,900) (789,800) (1,907,600)
Income tax expense
(benefit) - - - -
----------- ----------- ----------- -----------
Net loss $ (357,600) $ (859,900) $ (789,800) $(1,907,600)
=========== =========== =========== ===========
Net loss per common
share (Note 3):
Basic and Diluted $ (0.03) $ (0.08) $ (0.07) $ (0.18)
=========== =========== =========== ===========
Weighted average shares
outstanding:
Basic and Diluted 10,533,000 10,503,000 10,533,000 10,503,000
=========== =========== =========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2007 2006
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,836,300 $ 2,804,100
Investment securities 50,500 51,100
Trade receivables, net of allowance
for doubtful accounts of $62,800
and $62,000, respectively 1,143,400 743,700
Other receivables 70,400 55,500
Inventories, net 3,593,500 3,291,400
Prepaid expenses 253,800 161,600
----------- -----------
Total current assets 6,947,900 7,107,400
Property, plant and equipment, net 12,869,700 13,159,700
Other assets 57,500 59,700
----------- -----------
TOTAL ASSETS $19,875,100 $20,326,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,275,700 $ 1,893,600
Accrued payroll and benefits 1,038,200 866,400
Other accrued expenses 280,400 417,100
Current maturities of long-term debt 198,400 191,600
----------- -----------
Total current liabilities 3,792,700 3,368,700
Long-term debt, net of current maturities 4,774,200 4,875,500
----------- -----------
8,566,900 8,244,200
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,533,000 shares 1,053,300 1,053,300
Capital in excess of par 5,031,800 5,015,800
Accumulated comprehensive income 500 1,100
Retained earnings 5,222,600 6,012,400
----------- -----------
Shareholders' equity 11,308,200 12,082,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $19,875,100 $20,326,800
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
--------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net loss $ (789,800) $(1,907,600)
----------- -----------
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 323,200 353,300
Stock issued to ESOP - 48,700
Stock options granted 16,000 -
Gain on disposal of assets - (8,800)
Changes in assets and liabilities:
Trade and other receivables, net (414,600) 691,100
Inventories (302,100) (521,600)
Prepaid expenses and other assets (92,200) (292,500)
Accounts payable and
accrued expenses 417,200 417,200
----------- -----------
Total adjustments to net loss (52,500) 687,400
----------- -----------
Net Cash Used by
Operating Activities (842,300) (1,220,200)
----------- -----------
Cash flows from investing activities:
Proceeds from disposal of assets - 8,800
Purchase of property, plant & equipment (31,000) (68,200)
----------- -----------
Net Cash Used by Investing Activities (31,000) (59,400)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings - 5,156,600
Short-term borrowings (payments), net - (150,000)
Purchase of stock for contribution to ESOP - (48,700)
Principal payments on long-term borrowings (94,500) (1,894,400)
Loan origination fees and other costs - (64,600)
----------- -----------
Net Cash Provided (Used) by
Financing Activities (94,500) 2,998,900
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (967,800) 1,719,300
Cash and Cash Equivalents, beginning of period 2,804,100 2,260,700
----------- -----------
Cash and Cash Equivalents, end of period $ 1,836,300 $ 3,980,000
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 209,300 $ 101,500
=========== ===========
Income taxes $ 900 $ 1,100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was incorporated
on February 15, 1954. Scott's Liquid Gold-Inc. and its wholly owned
subsidiaries (collectively, "we" or "our") manufacture and market quality
household and skin care products, and we fill, package and market our Mold
Control 500 product. Since the first quarter of 2001, we have acted as a
distributor in the United States of beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse. Our business is
comprised of two segments, household products and skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and 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 June 30, 2007, 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:
June 30, 2007 December 31, 2006
-------------- -----------------
Finished goods $ 2,496,000 $ 2,435,400
Raw materials 1,505,200 1,337,200
Inventory reserve
for obsolescence (407,700) (481,200)
----------- -----------
$ 3,593,500 $ 3,291,400
=========== ===========
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost.
Depreciation is provided using the straight-line method over estimated
useful lives of the assets ranging from three to forty-five years.
Building structures and building improvements are estimated to have useful
lives of 35 to 45 years and 3 to 20 years, respectively. Production
equipment and production support equipment are estimated to have useful
lives of 15 to 20 years and 3 to 10 years, respectively. Office furniture
and office machines are estimated to have useful lives 10 to 20 and 3 to 5
years, respectively. Carpeting, drapes and company vehicles are estimated
to have useful lives of 5 to 10 years. Maintenance and repairs are
expensed as incurred. Improvements that extend the useful lives of the
assets or provide improved efficiency are capitalized.
(h) Financial Instruments
Financial instruments which potentially subject us to concentrations
of credit risk include cash and cash equivalents, investments in marketable
securities, and trade receivables. We maintain our cash balances in the
form of bank demand deposits with financial institutions that management
believes are creditworthy. 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 June 30,
2007 and December 31, 2006.
(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 June 30, 2007 and December 31,
2006 approximately $915,000 and $649,000, respectively, had been reserved
as a reduction of accounts receivable, and approximately $55,000 and
$50,000, respectively, had been reserved as current liabilities. Co-op
advertising, marketing funds, slotting fees and coupons are deducted from
gross sales and totaled $1,007,200, and $1,152,700 at June 30, 2007 and
2006, respectively.
(l) Advertising Costs
We expense advertising costs as incurred.
(m) Stock-based Compensation
At June 30, 2007, we had four stock-based employee compensation plans.
During the first quarter of fiscal 2007, we adopted the provisions of, and
account for stock-based compensation in accordance with, the Financial
Accounting Standards Board's ("FASB") Statement of Financial Accounting
Standards No. 123-revised 2004 ("SFAS 123R"), "Share-Based Payment" which
replaced Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees." Under the fair
value recognition provisions of this statement, stock-based compensation
cost is measured at the grant date based on the fair value of the award
and is recognized as expense on a straight-line basis over the requisite
service period, which is the vesting period. We elected the modified-
prospective method, under which prior periods are not revised for
comparative purposes. The valuation provisions of SFAS 123R apply to new
grants and to grants that were outstanding as of the effective date and are
subsequently modified. No grants occurred in 2006 subsequent to the
adoption of SFAS 123R and all outstanding options granted prior to
December 31, 2006 were fully vested as of December 31, 2006.
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.
We granted no options for shares of our common stock during the
second quarter of 2007. During the first quarter of 2007, we granted
448,550 options for shares of our common stock (268,550 to employees and
180,000 to non-employee directors). 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 of $0.82 as of the
date of grant.
The weighted average fair market value of the options granted of
$0.42 was estimated on the date of grant using a Black-Scholes option
pricing model with the following assumptions.
Three and Six Months Ended
June 30, 2007
--------------------------
Expected life of options 4.5 years
Risk-free interest rate 4.46%
Expected volatility of stock 58%
Expected dividend rate None
Compensation cost related to stock options recognized in operating
results (included in general and administrative expenses) under SFAS 123R
was $16,000 in the six months ended June 30, 2007. Approximately $175,300
of total unrecognized compensation costs related to non-vested stock options
is expected to be recognized over the next forty-four 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 SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and displaying comprehensive income and
its components. Comprehensive income includes all changes in equity during
a period from non-owner sources.
The following table is a reconciliation of our net loss to our total
comprehensive loss:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ------------
Net loss $(357,600) $(859,900) $(789,800) $(1,907,600)
Unrealized loss
on investment
securities (500) (700) (600) (1,200)
---------- ---------- ---------- -----------
Comprehensive loss $(358,100) $(860,600) (790,400) $(1,908,800)
========== ========== ========== ===========
(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 $730,400 and $737,500 for the six months ended
June 30, 2007 and 2006, 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 September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("SFAS No. 157"). This
Statement defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value in generally accepted
accounting principles ("GAAP") and expands disclosure related to the use
of fair value measures in financial statements. SFAS No. 157 does not expand
the use of fair value measures in financial statements, but standardizes its
definition and guidance in GAAP. The Standard emphasizes that fair value is
a market-based measurement and not an entity-specific measurement based on
an exchange transaction in which the entity sells an asset or transfers a
liability (exit price). SFAS No. 157 establishes a fair value hierarchy
from observable market data as the highest level to fair value based on an
entity's own fair value assumptions as the lowest level. SFAS No. 157 is
effective in fiscal years beginning after November 15, 2007. Adoption of
this statement is not expected to materially impact our results of
operations or financial position.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48,)
"Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109, Accounting for Income Taxes". FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold
a tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The interpretation applies to all tax positions
related to income taxes subject to FASB Statement No. 109.
FIN 48 is effective for fiscal years beginning after December 15,
2006. Differences between amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after
adoption should be accounted for as cumulative-effect adjustment recorded
to the beginning balance of retained earnings. The adoption of FIN 48 did
not have a material impact on our 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 2006 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 1,904,650 and 1,680,600 at
June 30, 2007 and 2006, 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 June 30 follows:
2007 2006
---------- ----------
Common shares outstanding,
beginning of the year 10,533,000 10,503,000
Stock options exercised - -
---------- ----------
Weighted average number of
common shares outstanding 10,533,000 10,503,000
Dilutive effect of common share
equivalents - -
---------- ----------
Diluted weighted average number
of common shares outstanding 10,533,000 10,503,000
========== ==========
At June 30, 2007, 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 June 30, 2007.
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; "Diabetic Skin Care", a healing cream and moisturizer developed to
address skin conditions of diabetics; and beauty care sachets of Montagne
Jeunesse distributed by us.
The following provides information on our segments for the three and
six months ended June 30:
Three Months ended June 30,
-----------------------------------------------------
2007 2006
------------------------- --------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 1,936,200 $ 2,368,000 $ 2,561,000 $ 1,572,300
=========== =========== =========== ===========
Income(loss) before
profit sharing,
bonuses and
income taxes $ 28,200 $ (385,800) $ (46,700) $ (813,200)
=========== =========== =========== ===========
Identifiable assets $ 3,483,000 $ 6,051,800 $ 4,025,600 $ 5,995,800
=========== =========== =========== ===========
Six Months ended June 30,
-----------------------------------------------------
2007 2006
------------------------- --------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 4,241,700 $ 4,238,300 $ 4,626,000 $ 3,663,100
=========== =========== =========== ===========
Income(loss) before
profit sharing,
bonuses and
income taxes $ 88,500 $ (878,300) $ (373,800) $(1,533,800)
=========== =========== =========== ===========
Identifiable assets $ 3,483,000 $ 6,051,800 $ 4,025,600 $ 5,995,800
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three and six months ended June 30:
Three Months ended June 30, Six Months ended June 30,
--------------------------- --------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net sales to
external customers $ 4,304,200 $ 4,133,300 $ 8,480,000 $ 8,289,100
============ ============ ============ ============
Loss before
profit sharing,
bonuses and
income taxes $ (357,600) $ (859,900) $ (789,800) $(1,907,600)
============ ============ ============ ============
Identifiable
assets $ 9,534,800 $10,021,400 $ 9,534,800 $10,021,400
Corporate
assets 10,340,300 12,848,700 10,340,300 12,848,700
------------ ------------ ------------ ------------
Consolidated total
assets $19,875,100 $22,870,100 $19,875,100 $22,870,100
============ ============ ============ ============
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 half of 2007, we experienced a decrease in sales of
our Scott's Liquid Gold household chemical products, while experiencing an
increase in sales of our Montagne Jeunesse line of skin care products and
an increase in sales of our Alpha Hydrox skin care products. Our net loss
for the first half of 2007 was $789,800 versus a loss of $1,907,600 in the
first half of 2006. The decrease in our loss for the first half of 2007
compared to the first half of 2006 results from a reduction in our operating
costs and expenses, including the reduction of advertising.
Summary of Results as a Percentage of Net Sales
Year Ended Six Months Ended
December 31, June 30,
------------ -------------------
2006 2007 2006
------------ ------- --------
Net sales
Scott's Liquid Gold
household products 53.1% 50.0% 55.8%
Neoteric Cosmetics 46.9% 50.0% 44.2%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 57.4% 55.3% 58.0%
------ ------ ------
Gross profit 42.6% 44.7% 42.0%
Other revenue 1.0% 0.5% 0.3%
------ ------ ------
43.6% 45.2% 42.3%
------ ------ -----
Operating expenses 63.8% 52.1% 64.1%
Interest 2.0% 2.4% 1.2%
------ ------ ------
65.8% 54.5% 65.3%
------ ------ ------
Loss before income taxes (22.2%) (9.3%) (23.0%)
====== ======= ======
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
Six Months Ended June 30,
-----------------------------------------
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $3,654,900 $3,930,800 (7.0%)
Touch of Scent 586,800 695,200 (15.6%)
----------- ----------- ------
Total household
chemical products 4,241,700 4,626,000 (8.3%)
----------- ----------- ------
Alpha Hydrox and
other skin care 1,855,400 1,681,100 10.4%
Montagne Jeunesse
skin care 2,382,900 1,982,000 20.2%
----------- ----------- ------
Total skin care
products 4,238,300 3,663,100 15.7%
----------- ----------- ------
Total Net Sales $8,480,000 $8,289,100 2.3%
=========== =========== ======
Six Months Ended June 30, 2007
Compared to Six Months Ended June 30, 2006
Consolidated net sales for the first half of the current year were
$8,480,000 versus $8,289,100 for the first six months of 2006, an increase
of $190,900. Average selling prices were up by $104,200. Co-op
advertising, marketing funds, slotting fees, and coupons paid to retailers
are deducted from gross sales, and totaled $1,007,200 in the first half of
2007 versus $1,152,700 in the same period in 2006, a decrease of $145,500
or 12.6%. This decrease consisted of a decrease in coupon expense of
$233,100, an increase in co-op marketing funds of $138,700, and a decrease
in slotting fee expenses of $51,100.
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, 2004 through end of last quarter June 30, 2007, our
product returns (as a percentage of gross revenue) have averaged as follows:
household products 0.5%, Montagne Jeunesse products 2.9%, and our Alpha
Hydrox and other skin care products 6.1%. 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 fiscal year to date
(indicated as a percentage of gross revenues) were: household products
0.3%, Montagne Jeunesse products 1.7%, and our Alpha Hydrox and other skin
care products 7.9%. 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 half of 2007, net sales of skin care products
accounted for 50.0% of consolidated net sales compared to 44.2% for the
same period of 2006. Net sales of these products for that period were
$4,238,300 in 2007 compared to $3,663,100 in 2006, an increase of $575,200
or 15.7%. Our increase in sales of Alpha Hydrox and other skin care was
due to the first half 2007 introduction of the line Neoteric Massage Oils,
including the initial, first quarter, "pipeline" orders so that the massage
oils are on the shelves of retailers. With only the introduction underway,
it is too early to tell about consumer acceptance of Neoteric Massage
Oils. This increase was somewhat offset by a decrease in sales of our
Alpha Hydrox products introduced in 2005. 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 half of 2007, the sales of our Alpha Hydrox
products accounted for 22.7% of net sales of skin care products and 11.3%
of total net sales, compared to 30.7% of net sales of skin care products
and 13.6% of total net sales in 2006.
Net sales of Montagne Jeunesse products were $2,382,900 in the first
half of 2007 versus $1,982,000 for the comparable period of 2006, an
increase of $400,900 or 20.2%. The increase reflects the product placement
in additional Wal-Mart stores which began late in the first quarter. This
placement included significantly more stores and more sachet variants in
the stores. We are expecting to return to two more retail chains with
placement of Montagne Jeunesse in the second half of 2007.
Sales of household products for the first half of this year
accounted for 50.0% of consolidated net sales compared to 55.8% for the
same period in 2006. These products are comprised of Scott's Liquid Gold
wood care products (Scott's Liquid Gold for wood, a wood wash and wood
wipes), mold remediation products and Touch of Scent. During the six months
ended June 30, 2007 sales of household products were $4,241,700 as compared
to $4,626,000 for the same period in 2006, a decrease of $384,300, or 8.3%.
Sales of Scott's Liquid Gold wood care products decreased by $315,100 in
2007 versus 2006. We believe this reduction to be a result of a decrease
in media advertising of our wood care products in 2007 versus 2006. Mold
Control 500 sales, which are shown in the sales for Scott's Liquid Gold and
other household products, were $472,000 for the first half of 2007 versus
$432,800 in the same period of 2006. Sales of "Touch of Scent" were down
by $108,400 or 15.6%, primarily due to a decrease in distribution in past
quarters. We anticipate that there will be further reductions in
distribution of our older Touch of Scent products in the fourth quarter
of 2007.
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 or "Touch of Scent", could have a significant
adverse impact on our revenues and operating results. We believe that our
future success is highly dependent on favorable acceptance and sales in the
marketplace of Montagne Jeunesse products, our newer Alpha Hydrox products
and 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 2006, we introduced two new items within our Alpha
Hydrox cosmetic line of products. We currently plan to introduce four new
items to the Alpha Hydrox cosmetic line plus a line of health and beauty
care products under the Neoteric cosmetic label. Within the household
product line we plan to introduce three to four new products or items
including some additions to our Touch of Scent air fragrance product
line. 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 $4,687,100 during
the first half of 2007 compared to $4,810,900 for the same period of 2006,
a decrease of $123,800 or 2.6%, on a sales increase of 2.3%. As a
percentage of consolidated net sales, cost of goods sold was 55.3% in 2007
versus 58.0% in 2006, a decrease of about 2.7%, which reflects primarily
the decrease in sales promotion expenses, particularly in the household
chemical line of products, which are offset against sales, which increased
our margins.
Operating Expenses, Interest Expense and Other Income
Six Months ended June 30,
---------------------------------------
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 201,100 $ 701,300 (71.3%)
Selling 2,634,400 2,835,700 (7.1%)
General & Administrative 1,582,900 1,775,300 (10.8%)
----------- ----------- ------
Total operating expenses $ 4,418,400 $ 5,312,300 (16.8%)
=========== =========== ======
Interest Income $ 43,800 $ 26,900 62.8%
Interest Expense $ 208,100 $ 100,400 107.3%
Operating expenses, comprised primarily of advertising, selling and
general and administrative expenses, decreased $893,900 in the first half
of 2007, when compared to the first half of 2006. The various components
of operating expenses are discussed below.
Advertising expenses for the first six months of 2007 were $201,100
compared to $701,300 for the comparable period of 2006, a decrease of
$500,200 or 71.3%. A majority of that decrease was due to decrease in
television advertising expenses applicable to our Alpha Hydrox skin care
products.
Selling expenses for the first half of 2007 were $2,634,400 compared
to $2,835,700 for the comparable six months of 2006, a decrease of $201,300
or 7.1%. That decrease was comprised of a decrease in salaries, fringe
benefits and related travel expense of $138,000 primarily because of a
decrease in personnel in 2007 versus 2006, a decrease in freight and
brokerage expenses of $63,700, offset by a net increase in other selling
expense, none of which by itself is significant, of $400.
General and administrative expenses for the first six months of 2007
were $1,582,900 compared to $1,775,300 for the comparable period of 2006, a
decrease of $192,400 or 10.8%. That decrease was primarily attributable
to a decrease in salaries and fringe benefits and related travel expense
resulting from a reduction in salaries and personnel of $180,700, and a net
decrease in other general and administrative expenses of $11,700.
Interest expense for the first half of 2007 was $208,100 versus
$100,400 for the comparable period of 2006. Interest expense increased
because of higher interest rates and increased borrowing levels. Interest
income for the six months ended June 30, 2007 was $43,800 compared to
$26,900 for the same period of 2006, which consists of interest earned on
our cash reserves in 2007 and 2006.
During the first half of 2007 and of 2006, expenditures for research
and development were not material (under 2% of revenues).
Three Months Ended June 30, 2007
Compared to Three Months Ended June 30, 2006
Comparative Net Sales
Three Months Ended June 30,
-----------------------------------------
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 1,694,800 $ 2,249,600 (24.7%)
Touch of Scent 241,400 311,400 (22.5%)
----------- ----------- ------)
Total household
products 1,936,200 2,561,000 (24.4%)
----------- ----------- ------
Alpha Hydrox and
other skin care 681,000 652,400 4.4%
Montagne Jeunesse
skin care 1,687,000 919,900 83.4%
----------- ----------- ------
Total skin care
products 2,368,000 1,572,300 50.6%
----------- ----------- ------
Total Net Sales $ 4,304,200 $ 4,133,300 4.1%
=========== =========== ======
Consolidated net sales for the second quarter of the current year
were $4,304,200 versus $4,133,300 for the comparable quarter of 2006, an
increase of $170,900 or about 4.1%. Average selling prices for the second
quarter of 2007 were up by $62,900 over those of the comparable period of
2006, prices of household products being up by $26,300, while average
selling prices of skin care products were up by $36,600. Co-op
advertising, marketing funds, slotting fees and coupon expenses paid to
retailers were subtracted from gross sales in accordance with current
accounting policies totaling $348,100 in the second quarter of 2007 versus
$522,600 in the same period in 2006, a decrease of $174,500 or about
33.4%. This decrease consisted of a decrease in coupon expenses of
$183,400, a decrease in co-op advertising of $20,200, offset by an
increase in slotting of $29,100.
During the second quarter of 2007, net sales of skin care products
accounted for 55.0% of consolidated net sales compared to 38.0% for the
second quarter of 2006. Net sales of these products for those periods
were $2,368,000 in 2007 compared to $1,572,300 in 2006, an increase of
$795,700 or about 50.6%. Net sales of Montagne Jeunesse were approximately
$1,687,000 in the second quarter of 2007 compared to $919,900 in the second
quarter of 2006. Please see the discussion above for the first half of 2007
for additional information regarding sales of skin care products, which is
also applicable to sales of skin care products in the second quarter of 2007.
Sales of household products for the second quarter of this year
accounted for 45.0% of consolidated net sales compared to 62.0% for the
same period of 2006. These products are comprised of Scott's Liquid Gold
wood care and mold remediation products, and "Touch of Scent", a room air
freshener. During the second quarter of 2007, sales of household products
were $1,936,200, as compared to sales of $2,561,000 for the same three
months of 2006. Sales of Scott's Liquid Gold wood care and other household
products were down by $554,800, a decrease of 24.7%. Sales of "Touch of
Scent" were down by $70,000 or 22.5%. During the second quarter of 2006 we
began the introduction of our mold remediation product "Mold Control 500"
with sales of $432,800 during this period. Sales of Mold Control 500 were
$258,900 during the second quarter of 2007, with 2007 sales being less then
2006 because the second quarter of 2006 was the introduction of our Mold
Control 500 product and included initial "pipeline" orders to stock
retailer shelves. Please see the discussion above for the first half of
2007 for additional information regarding sales of household products,
which is also applicable to sales of household products in the second
quarter of 2007.
On a consolidated basis, cost of goods sold was $2,340,600 during
the second quarter of 2007 compared to $2,567,400 for the same period of
2006, a decrease of $226,800 (8.8%), on a sales increase of 4.1%. As a
percentage of consolidated net sales for the second quarter of 2007, cost
of goods sold was 54.4% compared to 62.1% in 2006, a decrease of 7.7%,
which reflects primarily the decrease in sales promotion expenses,
particularly in the skin care line of products, which are offset against
sales, which increased our margins.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 88,800 $ 107,600 (17.5%)
Selling 1,379,000 1,410,200 (2.2%)
General & Administrative 768,800 863,200 (10.9%)
----------- ----------- ------
Total operating expenses $ 2,236,600 $ 2,381,000 (6.1%)
=========== =========== ======
Interest Income $ 19,600 $ 14,300 37.1%
Interest Expense $ 104,200 $ 59,100 76.3%
Operating expenses, comprised primarily of advertising, selling and
general and administrative expenses, decreased $144,400 in the second
quarter of 2007, when compared to the same period during 2006. The
various components of operating expenses are discussed below.
Advertising expenses for the second quarter of 2007 were $88,800
compared to $107,600 for the comparable quarter of 2006, a decrease of
$18,800 or 17.5%.
Selling expenses for the three months ended June 30, 2007 were
$1,379,000 compared to $1,410,200 for the comparable three months of 2006,
a decrease of $31,200 or 2.2%. That decrease was primarily because of a
decrease in salaries, fringe benefits and related travel expense of
$61,700 resulting from a decrease in personnel in 2007 versus 2006, offset
by a net increase in other selling expenses, none of which by itself is
significant, of $30,200.
General and administrative expenses for the second quarter of 2007
were $768,800 compared to $863,200 for the comparable period of 2006, a
decrease of $94,400 or 10.9%. That decrease was primarily attributable to
a decrease in salaries and fringe benefits resulting from a reduction in
salaries and personnel of $86,700, and a net decrease in other general and
administrative expenses of $7,700.
Interest expense for the second quarter of 2007 was $104,200 versus
$59,100 for the comparable period of 2006. Interest expense increased
because of higher interest rates and borrowing levels. Interest income
for the three months ended June 30, 2007 was $19,600 compared to $14,300
for the same period of 2006.
During the second quarter of 2007 and of 2006, expenditures for
research and development were not material (under 2% of revenues).
Liquidity and Capital Resources
On June 28, 2006, we entered into a new loan with a fifteen year
amortization with Citywide Banks for $5,156,600 secured by the land,
building and fixtures at our Denver, Colorado facilities. This loan
replaced the bank loan with Citywide Banks, secured by the facilities,
in the principal amount of approximately $1,582,900. Interest on the bank
loan (8.0% at December 31, 2006) is at the prime rate as published in
The Wall Street Journal, adjusted annually each June (8.25% at June 30,
2007). Part of the proceeds of the new loan were used to pay off the
prior loan, and the remaining proceeds have been or will be used in
business operations, including the development and introduction of new
products. This loan requires 180 monthly payments of approximately
$49,500, which commenced on July 28, 2006. As did the prior bank loan,
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 half of 2007.
During the first half of 2007, our working capital decreased by
$583,500, and concomitantly, our current ratio (current assets divided by
current liabilities) decreased from 2.1:1 at December 31, 2006 to 1.8:1
at June 30, 2007. This decrease in working capital is attributable to a
net loss in the first half of 2007 of $789,800, reduction in long-term debt
of $101,300, offset by depreciation in excess of capital additions of
$290,000.
At June 30, 2007, trade accounts receivable were $1,143,400 versus
$743,700 at the end of 2006, largely because sales in the last two months
of the quarter ended June 30, 2007 were more than those of the last two
months of the quarter ended December 31, 2006. Accounts payable increased
from the end of 2006 through June of 2007 by $382,100 corresponding
primarily with the increase and timing of purchases of inventory over that
period. At June 30, 2007 inventories were $302,100 more than at
December 31, 2006, due to the increase in cosmetic product inventory to
support our new products, including new product introductions in the
upcoming months. Prepaid expenses increased from the end of 2006 by
$92,200 primarily due to an increase in prepaid promotional expenses.
Accrued payroll and benefits increased $171,800 from December 31, 2006
to June 30, 2007 primarily because of the increase in accrued employee
fringe benefits. Other Accrued liabilities decreased by $136,700
primarily because of a decrease in accrued property taxes.
We have no significant capital expenditures planned for 2007 and
have no current plans for any external financing, other than our existing
bank loans. We expect that our available cash flows from operating
activities will fund the next twelve months' cash requirements.
Our dependence on operating cash flow means that risks involved in
our business can significantly affect our liquidity. Any loss of a
significant customer, any further decreases in distribution of our skin
care or household products, any new competitive products affecting sales
levels of our products, or any significant expense not included in our
internal budget could result in the need to raise cash, such as through a
bank financing. We have no arrangements for any additional external
financing of debt or equity, and we are not certain whether any such
financing would be available on acceptable terms. In order to improve our
operating cash flow, we need to achieve profitability.
As we have indicated in previous public reports, the Company uses less
than the capacity of its facilities and is also interested in
reducing its expenses. As part of this process, the Company has
engaged a commercial real estate broker to explore alternatives. These
alternatives include the sale of all or part of the facilities, a sale of
all or part of the facilities combined with a leaseback by the Company of
the facilities, or a lease of all or part of the facilities by the Company
to a third party. There is, however, no assurance that acceptable
transactions will be offered or completed.
Forward-Looking Statements
This report may contain "forward-looking statements" within the
meaning of U.S. federal securities laws. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements and our performance
inherently involve risks and uncertainties that could cause actual results
to differ materially from the forward-looking statements. Factors that
would cause or contribute to such differences include, but are not limited
to, continued acceptance of each of our significant products in the
marketplace; the degree of success of any new product or product line
introduction by us; the uncertainty of consumer acceptance of the new
Alpha Hydrox introduced in 2005, mold control 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 our 2006 Annual Report on Form 10-KSB. 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 3A(T). Controls and Procedures
As of June 30, 2007, we conducted an evaluation, under the
supervision and with the participation of the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange
Commission rules and forms as of June 30, 2007. There was no change in our
internal control over financial reporting during the quarter ended June 30,
2007 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. Submission of Matters to a Vote of Security Holders
On May 2, 2007, we held our 2007 Annual Meeting of
Shareholders. At that meeting, the seven existing directors were
nominated and re-elected as our directors. These seven persons constitute
all members of our Board of Directors. These directors and the votes for
and withheld for each of them were as follows:
For Withheld
--------- --------
Mark E. Goldstein 8,706,284 337,779
Jeffrey R. Hinkle 8,793,321 250,742
Jeffry B. Johnson 8,768,821 275,242
Dennis P. Passantino 8,789,284 254,779
Carl A. Bellini 8,805,899 238,164
Dennis H. Field 8,764,899 279,164
Gerald J. Laber 8,766,521 277,542
Item 5. 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
In accordance with 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.
August 10, 2007 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
August 10, 2007 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