UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
September 30, 2008
Commission File No. 001-13458
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
State of Incorporation I.R.S. Employer
Identification No.
Check whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ](Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of September 30, 2008, the Registrant had 10,655,000 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 Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net sales $ 3,976,600 $ 4,644,100 $12,114,100 $12,810,100
Operating costs
and expenses:
Cost of sales 2,247,000 2,609,300 6,957,600 7,296,400
Advertising 67,800 66,700 276,000 267,800
Selling 1,207,000 1,406,900 3,868,100 4,041,300
General and
administrative 638,900 735,800 2,168,700 2,318,700
----------- ----------- ----------- -----------
4,160,700 4,818,700 13,270,400 13,924,200
----------- ----------- ----------- -----------
Loss from
operations (184,100) (174,600) (1,156,300) (1,114,100)
Interest income 4,900 16,700 19,300 60,500
Interest expense (63,500) (107,600) (268,700) (315,700)
----------- ----------- ----------- -----------
Loss before
income taxes (242,700) (265,500) (1,405,700) (1,369,300)
Income tax expense
(benefit) - - -
----------- ----------- ----------- -----------
Net loss $ (242,700) $ (265,500) $(1,405,700) $(1,369,300)
=========== =========== =========== ===========
Net loss per
common share
(Note 3):
Basic &
Diluted $ (0.02) $ (0.03) $ (0.13) $ (0.13)
=========== =========== =========== ===========
Weighted average
shares outstanding:
Basic &
Diluted 10,627,300 10,545,000 10,607,800 10,537,000
=========== =========== =========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
September 30 December 31,
2008 2007
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 724,300 $ 1,483,300
Investment securities 49,900 50,400
Trade receivables, net of allowance
for doubtful accounts of $62,800
and $62,000, respectively 961,000 1,004,900
Other receivables 22,900 32,500
Inventories, net 2,980,600 3,054,500
Prepaid expenses 113,600 238,100
----------- -----------
Total current assets 4,852,300 5,863,700
Property, plant and equipment, net 12,164,800 12,624,000
Other assets 52,200 55,400
----------- -----------
TOTAL ASSETS $17,069,300 $18,543,100
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities: (Note 5.)
Accounts payable $ 1,736,000 $ 1,560,300
Accrued payroll and benefits 777,500 866,200
Other accrued expenses 321,600 390,500
Current maturities of long-term debt 270,100 204,900
----------- -----------
Total current liabilities 3,105,200 3,021,900
Long-term debt, net of current maturities 4,441,200 4,671,600
----------- -----------
7,546,400 7,693,500
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,655,000 shares,
and 10,575,000 shares respectively 1,065,500 1,057,500
Capital in excess of par 5,161,600 5,090,100
Accumulated comprehensive income (loss) (100) 400
Retained earnings 3,295,900 4,701,600
----------- -----------
Shareholders' equity 9,522,900 10,849,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $17,069,300 $18,543,100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
--------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $(1,405,700) $(1,369,300)
----------- -----------
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 471,200 484,700
Stock issued to ESOP 21,000 25,100
Stock options granted 49,300 28,700
Gain on disposal of assets - (200)
Changes in assets and liabilities:
Trade and other receivables, net 53,500 (474,500)
Inventories, net 73,900 (232,100)
Prepaid expenses 124,500 (111,800)
Accounts payable and
accrued expenses 18,100 295,800
----------- -----------
Total adjustments to net loss 811,500 15,700
----------- -----------
Net Cash Used by Operating Activities (594,200) (1,353,600)
----------- -----------
Cash flows from investing activities:
Proceeds from disposal of assets - 200
Purchase of property, plant & equipment (8,800) (61,100)
----------- -----------
Net Cash Used by Investing Activities (8,800) (60,900)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 9,200 -
Principal payments on long-term borrowings (165,200) (141,500)
----------- -----------
Net Cash Used by Financing Activities (156,000) (141,500)
----------- -----------
Net Decrease in Cash and
Cash Equivalents (759,000) (1,556,000)
Cash and Cash Equivalents,
beginning of period 1,483,300 2,804,100
----------- -----------
Cash and Cash Equivalents, end of period $ 724,300 $ 1,248,100
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 270,700 $ 316,800
=========== ===========
Income taxes $ 2,300 $ 2,000
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was incorporated
on February 15, 1954. Scott's Liquid Gold-Inc. and its wholly owned
subsidiaries (collectively, "we" or "our") manufacture and market
quality household and skin care products, and we fill, package and
market our Mold Control 500 product. We act as the distributor in the
United States for beauty care products contained in individual sachets
and manufactured by Montagne Jeunesse. In 2006 and 2007, we began the
distribution of products from COSMEX International (Davinci & Moosehead
men's grooming products), and in 2007 from Baylis & Harding (bath,
body and hair care products). Our business is comprised of two
segments -- household products and skin care products.
In order to improve our liquidity, we are pursuing the following
steps: the sale of all or a portion of our real estate which we
continue to have listed with a real estate firm, efforts to improve
revenues, a reduction in our fixed operating expense, and potentially
additional external financing.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and
those of our subsidiaries. All intercompany accounts and transactions
have been eliminated.
(c) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates include, but are not limited to,
realizability of deferred tax assets, reserves for slow moving and
obsolete inventory, customer returns, coupon redemptions and
allowances, and bad debts.
(d) Cash Equivalents
We consider all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
(e) Investments in Marketable Securities
We account for investments in marketable securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities",
which requires that we classify investments in marketable securities
according to management's intended use of such investments. We invest
our excess cash and have established guidelines relative to
diversification and maturities in an effort to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. We consider all
investments as available for use in our current operations and,
therefore, classify them as short-term, available-for-sale
investments. Available-for-sale investments are stated at fair value,
with unrealized gains and losses, if any, reported net of tax, as a
separate component of shareholders' equity and comprehensive income
(loss). The cost of the securities sold is based on the specific
identification method. Investments in corporate and government
securities as of September 30, 2008, are scheduled to mature within
one year.
(f) Inventories
Inventories consist of raw materials and finished goods and are
stated at the lower of cost (first-in, first-out method) or market.
We record a reserve for slow moving and obsolete products and raw
materials. We estimate reserves for slow moving and obsolete products
and raw materials based upon historical and anticipated sales.
Inventories were comprised of the following at:
September 30, 2008 December 31, 2007
------------------ -----------------
Finished goods $ 2,053,000 $ 2,178,000
Raw materials 1,317,300 1,284,200
Inventory reserve
for obsolescence (389,700) (407,700)
----------- -----------
$ 2,980,600 $ 3,054,500
=========== ===========
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost.
Depreciation is provided using the straight-line method over estimated
useful lives of the assets ranging from three to forty-five years.
Building structures and building improvements are estimated to have
useful lives of 35 to 45 years and 3 to 20 years, respectively.
Production equipment and production support equipment are estimated to
have useful lives of 15 to 20 years and 3 to 10 years, respectively.
Office furniture and office machines are estimated to have useful lives
of 10 to 20 and 3 to 5 years, respectively. Carpeting, drapes and
company vehicles are estimated to have useful lives of 5 to 10 years.
Maintenance and repairs are expensed as incurred. Improvements that
extend the useful lives of the assets or provide improved efficiency are
capitalized.
(h) Financial Instruments
Financial instruments which potentially subject us to
concentrations of credit risk include cash and cash equivalents,
investments in marketable securities, and trade receivables. We
maintain our cash balances in the form of bank demand deposits with
financial institutions that management believes are creditworthy. As
of the balance sheet date and periodically throughout the year, the
Company has maintained balances in various operating accounts in excess
of federally insured limits. We establish an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. We have no
significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option contracts
or other foreign currency hedging arrangements.
The recorded amounts for cash and cash equivalents, receivables,
other current assets, and accounts payable and accrued expenses
approximate fair value due to the short-term nature of these financial
instruments. The fair value of investments in marketable securities
is based upon quoted market value. Our long-term debt bears interest
at a fixed rate that adjusts annually on the anniversary date to a
then prime rate. The carrying value of long-term debt approximates
fair value as of September 30, 2008 and
December 31, 2007.
(i) Long-Lived Assets
We account for long-lived assets in accordance with the provisions
of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
(j) Income Taxes
We account for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes", which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective income tax bases. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income
during the period in which related temporary differences become
deductible. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
(k) Revenue Recognition
Revenue is recognized when an arrangement exists to sell our
product, we have delivered such product in accordance with that
arrangement, the sales price is determinable, and collectibility is
probable. Reserves for estimated market development support, pricing
allowances and returns are provided in the period of sale as a
reduction of revenue. Reserves for returns and allowances are
recorded as a reduction of revenue, and are maintained at a level that
management believes is appropriate to account for amounts applicable to
existing sales. Reserves for coupons and certain other promotional
activities are recorded as a reduction of revenue at the later of the
date at which the related revenue is recognized or the date at which
the sales incentive is offered. At September 30, 2008 and
December 31, 2007 approximately $736,600 and $695,700, respectively,
had been reserved as a reduction of accounts receivable, and
approximately $23,000 and $27,000, respectively, had been reserved as
current liabilities. Co-op advertising, marketing funds, slotting fees
and coupons are deducted from gross sales and totaled $1,089,300, and
$1,797,000 for the nine month periods ended September 30, 2008 and
2007, respectively.
(l) Advertising Costs
We expense advertising costs as incurred.
(m) Stock-based Compensation
During the first nine months of 2008, we granted 139,000 options
for shares of our common stock to employees at an average exercise price
of $0.55 per share. The options which vest ratably over forty-eight
months, or upon a change in control, and which expire after five years,
were granted at or above the market value as of the date of grant.
The weighted average fair market value of the options granted in
the first nine months of 2008 was estimated on the date of grant using
a Black-Scholes option pricing model with the following assumptions.
Three and Nine Months Ended
September 30, 2008
--------------------------
Expected life of options 4.5 years
Average risk-free interest rate 3.0%
Average expected volatility of stock 69%
Expected dividend rate None
Compensation cost related to stock options recognized in operating
results (included in general and administrative expenses) under
SFAS 123R was $49,300 in the nine months ended September 30, 2008.
Approximately $180,800 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 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.
(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 Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2008 2007 2008 2007
---------- ---------- ----------- -----------
Net loss $ (242,700) $ (265,500) $(1,405,700) $(1,369,300)
Unrealized loss on
investment securities (100) (100) (500) (700)
---------- ---------- ----------- -----------
Comprehensive loss $ (242,800) $ (265,600) $(1,406,200) $(1,370,000)
========== ========== =========== ===========
(o) Operating Costs and Expenses Classification
Cost of sales includes costs associated with manufacturing and
distribution including labor, materials, freight-in, purchasing and
receiving, quality control, internal transfer costs, repairs,
maintenance and other indirect costs, as well as warehousing and
distribution costs. We classify shipping and handling costs comprised
primarily of freight-out and nominal outside warehousing costs as a
component of selling expense on the accompanying Consolidated Statement
of Operations. Shipping and handling costs totaled $1,188,800 and
$1,148,800 for the nine months ended September 30, 2008 and 2007,
respectively.
Selling expenses consist primarily of shipping and handling
costs, wages and benefits for sales and sales support personnel,
travel, brokerage commissions, promotional costs, as well as other
indirect costs.
General and administrative expenses consist primarily of wages
and benefits associated with management and administrative support
departments, business insurance costs, professional fees, office
facility related expenses and other general support costs.
(p) Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141R, "Business Combinations" ("SFAS No.
141R"). This statement replaces SFAS 141 and defines the acquirer in
a business combination as the entity that obtains control of one or
more businesses in a business combination and establishes the
acquisition date as the date that the acquirer achieves control.
SFAS No. 141R requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of
that date. SFAS No. 141R also requires the acquirer to recognize
contingent consideration at the acquisition date, measured at its fair
value at that date. This statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The adoption of
this statement is not expected to have a material effect on the
Company's financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51"
("SFAS No. 160"). This statement amends ARB 51 to establish accounting
and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This statement
is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. The adoption of this statement is not expected to have a
material effect on the Company's future reported financial position or
results of operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of SFAS
No. 115" ("SFAS No. 159"). This statement permits entities to choose to
measure certain financial instruments and liabilities at fair value.
Most of the provisions of SFAS No. 159 apply only to entities that
elect the fair value option. However, the amendment to SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities"
applies to all entities with available-for-sale and trading securities.
SFAS No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. The adoption of this
statement did not have a material effect on the Company's financial
statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No.
157"). This Statement defines fair value as used in numerous accounting
pronouncements, establishes a framework for measuring fair value in
generally accepted accounting principles ("GAAP") and expands
disclosure related to the use of fair value measures in financial
statements. SFAS No. 157 does not expand the use of fair value measures
in financial statements, but standardizes its definition and guidance
in GAAP. The Standard emphasizes that fair value is a market-based
measurement and not an entity-specific measurement based on an exchange
transaction in which the entity sells an asset or transfers a liability
(exit price). SFAS No. 157 establishes a fair value hierarchy from
observable market data as the highest level to fair value based on an
entity's own fair value assumptions as the lowest level. SFAS No. 157
is effective in fiscal years beginning after November 15, 2007.
Adoption of this statement did not have a material impact on our
results of operations or financial position.
Note 2. Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated financial
statements in accordance with the rules and regulations of the
Securities and Exchange Commission. Such rules and regulations allow
the omission of certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles as long as the statements are not
misleading. In the opinion of management, all adjustments necessary
for a fair presentation of these interim statements have been included
and are of a normal recurring nature. These interim financial
statements should be read in conjunction with our financial statements
included in our 2007 Annual Report on Form 10-KSB.
Note 3. Earnings Per Share
Per share data was determined by using the weighted average
number of common shares outstanding. Potentially dilutive securities,
including stock options, are considered only for diluted earnings per
share, unless considered anti-dilutive. The potentially dilutive
securities, which are comprised of outstanding stock options of
1,927,150 and 1,994,200 at September 30, 2008 and 2007, 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 and nine months ended September 30, 2008 and
2007, respectively, follows:
2008
--------------------------------------
Total
Three Months Nine Months Shares
----------- ----------- -----------
Common shares
outstanding
beginning of period 10,625,000 10,575,000 10,575,000
Stock issued to ESOP 2,300 16,900 60,000
Stock option exercise - 15,900 20,000
----------- ----------- -----------
Weighted average number
of common shares
outstanding 10,627,300 10,607,800 10,655,000
Dilutive effect of
common share
equivalents - - -
----------- ----------- -----------
Diluted weighted
average number of
common shares
outstanding 10,627,300 10,607,800 10,655,000
=========== =========== ===========
2007
--------------------------------------
Total
Three Months Nine Months Shares
----------- ----------- -----------
Common shares
outstanding
beginning of period 10,533,000 10,533,000 10,533,000
Stock issued to ESOP 12,000 4,000 27,000
----------- ----------- -----------
Weighted average number
of common shares
outstanding 10,545,000 10,537,800 10,560,000
Dilutive effect of
common share
equivalents - - -
----------- ----------- -----------
Diluted weighted
average number of
common shares
outstanding 10,545,000 10,537,000 10,560,000
=========== =========== ===========
At September 30, 2008, there were authorized 50,000,000 shares of
our $.10 par value common stock and 20,000,000 shares of preferred stock
issuable in one or more series. None of the preferred stock was issued
or outstanding at September 30, 2008.
Note 4. Segment Information
We operate in two different segments: household products and
skin care products. Our products are sold nationally and internationally
(primarily Canada), directly and through independent brokers, to mass
merchandisers, drug stores, supermarkets, wholesale distributors and
other retail outlets. Management has chosen to organize our business
around these segments based on differences in the products sold. The
household products segment includes "Scott's Liquid Gold" for wood, a
wood cleaner and preservative treatment, and Wood Wash, a cleaner for
wood, Mold Control 500, a mold remediation product, and "Touch of
Scent" and "Cube Scents", 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, and
Neoteric massage oils. We also distribute skin care and other sachets
of Montagne Jeunesse, Davinci and Moosehead men's grooming products,
and bath, body and hair care products from Baylis & Harding.
The following provides information on our segments for the three
and nine months ended September 30:
Three Months Ended September 30,
-----------------------------------------------------
2008 2007
------------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external
customers $ 1,908,700 $ 2,067,900 $ 1,941,700 $ 2,702,400
=========== =========== =========== ===========
Income (loss)
before profit
sharing, bonuses,
and income taxes $ 33,400 $ (276,100) $ 85,400 $ (350,900)
=========== =========== =========== ===========
Identifiable
Assets $ 3,030,700 $ 5,160,900 $ 3,333,300 $ 6,114,800
=========== =========== =========== ===========
Nine Months Ended September 30,
-----------------------------------------------------
2008 2007
------------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ---------- -----------
Net sales to
external
customers $ 5,608,400 $ 6,505,700 $ 6,183,400 $ 6,626,700
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ (397,300) $(1,008,400) $ 173,900 $(1,543,200)
=========== =========== =========== ===========
Identifiable Assets $ 3,030,700 $ 5,160,900 $ 3,333,300 $ 6,114,800
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three and nine months ended
September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net sales to
external customers $ 3,976,600 $ 4,644,100 $12,114,100 $12,810,100
=========== =========== =========== ===========
Loss before profit
sharing, bonuses
and income taxes $ (242,700) $ (265,500) $(1,405,700) $(1,369,300)
=========== =========== =========== ===========
Identifiable
assets $ 8,191,600 $ 9,448,100 $ 8,191,600 $ 9,448,100
Corporate assets 8,877,700 9,716,800 8,877,700 9,716,800
----------- ----------- ----------- -----------
Consolidated total
assets $17,069,300 $19,164,900 $17,069,300 $19,164,900
=========== =========== =========== ===========
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.
Note 5. Subsequent Event
On November 3, 2008, effective as of October 31, 2008, we entered
into a Financing Agreement with Summit Financial Resources, L.P. (the
"Financing Agreement") providing for a line of credit up to $1,200,000
secured primarily by accounts receivable, inventory, any lease in which
we are a lessor, all investment property and guarantees by the 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 lender
in its discretion), and (b) based on Acceptable Inventory not to exceed
certain amounts, including an aggregate maximum of $250,000. We
obtained the line of credit to improve working capital.
The line of credit is for a term of one year, renewable for
additional one- year terms unless we or the lender provides written
notice of non-renewal at least 60 days prior to the end of the current
Financing Period. We may also elect to terminate a Financing Period
earlier and pay the lender a supplemental fee of the number of months
remaining in the Financing Period multiplied by a monthly minimum fee
which is $1,800 per month (based on the current maximum credit line).
The line of credit bears interest at a rate of 1% over the prime
rate (as published in the Wall Street Journal) for the accounts
receivable portion of the line of credit and 3% over the prime rate for
the inventory portion of the line of credit. The prime rate 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 Financing 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, a failure to make a payment when due or to
perform an obligation under the Financing Agreement, or a default
occurring on any of indebtedness of ours or any guarantor.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
During the first nine months of 2008, we experienced a decrease
in sales of both our Scott's Liquid Gold household chemical products,
and our Montagne Jeunesse line of skin care products and a slight
increase in sales of our value-priced line of Alpha Hydrox skin care
products. Our net loss for the first nine months of 2008 was $1,405,700
versus a loss of $1,369,300 in the first nine months of 2007. The slight
increase in our loss for the first nine months of 2008 compared to the
first nine months of 2007 results from a decrease in sales, mitigated
somewhat by a reduction in our operating costs and expenses.
Summary of Results as a Percentage of Net Sales
Year Ended Nine Months Ended
December 31, September 30,
------------ -------------------
2007 2008 2007
------------ ------- --------
Net sales
Scott's Liquid Gold
household products 44.9% 46.3% 48.3%
Neoteric Cosmetics 55.1% 53.7% 51.7%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 56.5% 57.4% 57.0%
------ ------ ------
Gross profit 43.5% 42.6% 43.0%
Other revenue 0.4% 0.1% 0.5%
------ ------ ------
43.9% 42.7% 43.5%
------ ------ -----
Operating expenses 48.9% 52.1% 51.7%
Interest 2.3% 2.2% 2.5%
------ ------ ------
51.2% 54.3% 54.2%
------ ------ ------
Loss before income taxes (7.3%) (11.6%) (10.7%)
====== ======= ======
Our gross margins may not be comparable to those of other
entities, because some entities include all of the costs related to
their distribution network in cost of sales and others, like us, exclude
a portion of them (freight out to customers and nominal outside
warehouse costs) from gross margin, including them instead in the
selling expense line item. See Note 1(o), Operating Costs and Expenses
Classification, to the unaudited Consolidated Financial Statements in
this Report.
Comparative Net Sales
Nine Months Ended Percentage
September 30, Increase
2008 2007 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 4,883,800 $ 5,384,700 (9.3%)
Touch of Scent 724,600 798,700 (9.3%)
----------- ----------- ------
Total household
chemical products 5,608,400 6,183,400 (9.3%)
----------- ----------- ------
Alpha Hydrox and
other skin care 2,756,100 2,310,900 19.3%
Montagne Jeunesse and other
distributed skin care 3,749,600 4,315,800 (13.1%)
----------- ----------- ------
Total skin care product 6,505,700 6,626,700 (1.8%)
----------- ----------- ------
Total net sales $12,114,100 $12,810,100 (5.4%)
=========== =========== ======
Nine Months Ended September 30, 2008
Compared to Nine Months Ended September 30, 2007
Consolidated net sales for the first nine months of the current
year were $12,114,100 versus $12,810,100 for the first nine months of
2007, a decrease of $696,000. Average selling prices were up by
$783,500. Average selling prices of household products were up by
$300,100 while average selling prices of skin care products were up by
$483,400. This increase in selling prices was primarily due to a
decrease in coupon usage in 2008 versus 2007 and previously announced
price increases for our products. Co-op advertising, marketing funds,
slotting fees, and coupons paid to retailers are deducted from gross
sales, and totaled $1,089,300 in the first nine months of 2008 versus
$1,797,000 in the same period of 2007, a decrease of $707,700 or
39.4%. This decrease consisted of a decrease in coupon expense of
$404,500 (included in the 2007 coupon expense was a one-time charge
from a retailer of $314,000), a decrease in co-op marketing funds of
$251,900, and a decrease in slotting fee expenses of $51,300. In the
first three months of 2008 we announced price increases for the majority
of our product lines.
From time to time, our customers return product to us. For our
household chemicals products, we permit returns only for a limited
time, and generally only if there is a manufacturing defect. With
regard to our skin care products, returns are more frequent under an
unwritten industry standard that permits returns for a variety of
reasons. In the event a skin care customer requests a return of
product, the Company will consider the request, and may grant such
request in order to maintain or enhance relationships with customers,
even in the absence of an enforceable right of the customer to do so.
Some retailers have not returned products to us. Return price credit
(used in exchanges typically, or rarely, refunded in cash), when
authorized, is based on the original sale price plus a handling charge
of the retailer that ranges from 8-10%. The handling charge covers
costs associated with the return and shipping of the product.
Additions to our reserves for estimated returns are subtracted from
gross sales.
From January 1, 2006 through September, 2008, our product returns
(as a percentage of gross revenue) have averaged as follows: household
products 0.2%, Montagne Jeunesse products 3.0%, and our Alpha Hydrox and
other skin care products 5.8%. The level of returns as a percentage of
gross revenue for the household products and Montagne Jeunesse products
have remained fairly constant as a percentage of sales over that period
while the Alpha Hydrox and other skin care products return levels have
fluctuated. More recently, as our sales of the skin care products have
declined we have seen a decrease in returns as a percentage of gross
revenues. The products returned in the nine months ended September 30,
2008 (indicated as a percentage of gross revenues) were: household
products 0.1%, Montagne Jeunesse products 2.0%, and our Alpha Hydrox
and other skin care products 1.1%. We are not aware of any industry
trends, competitive product introductions or advertising campaigns at
this time which would cause returns as a percentage of gross sales to be
materially different for the current fiscal year than for the above
averages. Furthermore, the Company's management is not currently aware
of any changes in customer relationships that we believe would adversely
impact anticipated returns. However, we review our reserve for returns
quarterly and we regularly face the risk that the existing conditions
related to product returns will change.
During the first nine months of 2008, net sales of skin care
products accounted for 53.7% of consolidated net sales compared to
51.7% for the same period of 2007. Net sales of these products for
that period were $6,505,700 in 2008 compared to $6,626,700 in 2007, a
decrease of $121,000 or 1.8%. Our decrease in net sales of Alpha
Hydrox and other skin care products was due primarily to decreases across
all of these products offset by a slight increase in our value-priced
Alpha Hydrox line which was introduced during 2007, and a decrease in
promotions to retailers, which are deducted from gross sales, in 2008
versus 2007. 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, and intense competition from producers of similar or
alternative products, many of which are considerably larger than
Neoteric Cosmetics, Inc. For the first nine months of 2008, the sales
of our Alpha Hydrox products accounted for 20.9% of net sales of skin
care products and 11.2% of total net sales, compared to 12.7% of net
sales of skin care products and 6.6% of total net sales in 2007.
For 2008, net sales of Montagne Jeunesse and other distributed
skin care products were $3,749,600 in the first nine months of 2008
versus $4,315,800 for the comparable period of 2007, a decrease of
$566,200 or 13.1%. This sales decrease was due primarily to the
decrease in sales of Montagne Jeunesse sachets (the first half of 2007
includes this product's placement in additional stores), offset somewhat
by increased sales of Moosehead men's grooming products and bath, body
and hair care products of Baylis & Harding, which were not sold during
the first half of 2007 or only had nominal sales during that period.
Sales of household products for the first nine months of this year
accounted for 46.3% of consolidated net sales compared to 48.3% for the
same period in 2007. 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 nine
months ended September 30, 2008 sales of household products were
$5,608,400 as compared to $6,183,400 for the same period in 2007, a
decrease of $575,000, or 9.3%. Sales of Scott's Liquid Gold wood care
products decreased by $135,900 in 2008 versus 2007. We believe this
reduction to be a result of a decrease in media advertising of our wood
care products in the last two years. Mold Control 500 sales, which are
shown in the sales for Scott's Liquid Gold and other household products,
were $376,000 for the first nine months of 2008 versus $741,000 in the
same period of 2007. Sales of "Touch of Scent" were down by $74,100 or
9.3%, primarily due to a decrease in distribution in past quarters.
In the third quarter of 2008 we introduced a line of air fresheners
called "Cube Scents". It is too early to tell about the consumer
acceptance of this addition.
As sales of a consumer product decline, there is the risk that
retailers will stop carrying the product. The loss of any significant
customer for any skin care products, "Scott's Liquid Gold" wood care or
mold remediation products could have a significant adverse impact on our
revenues and operating results. We believe that our future success is
highly dependent on favorable acceptance in the marketplace of Montagne
Jeunesse products, of our new Alpha Hydrox products introduced in 2005
and 2007 and of our "Scott's Liquid Gold" wood care and mold remediation
products.
We also believe that the introduction of successful new products,
including line extensions of existing products such as the wood wash
and our new mold remediation product, using the name "Scott's Liquid
Gold", are important in our efforts to maintain or grow our revenue.
Late in the fourth quarter of 2007, we introduced new items within the
Moosehead men's grooming products and bath, body and hair care products
of Baylis & Harding. We regularly review possible additional products
to sell through distribution agreements or to manufacture ourselves.
To the extent that we manufacture a new product rather than purchase it
from external parties, we are also benefited by the use of existing
capacity in our facilities. We are using our facilities to fill and
package the mold control products. The actual introduction of
additional products, the timing of any additional introductions and
any revenues realized from new products is uncertain.
On a consolidated basis, cost of goods sold was $6,957,600 during
the first nine months of 2008 compared to $7,296,400 for the same period
of 2007, a decrease of $338,800 or 4.6%, on a sales decrease of 5.4%.
As a percentage of consolidated net sales, cost of goods sold was 57.4%
in 2008 versus 57.0% in 2007, an increase of about 0.7%. The cost of
goods reflects the increase in the costs of steel cans and
petroleum-based raw materials and lower plant utilization, offset by a
decrease in sales promotion expenses which are deducted from gross
sales. We are seeing indications from steel can suppliers that we
should be expecting significant increases in steel can costs beginning
in 2009.
Operating Expenses, Interest Expense and Other Income
Nine Months Ended Percentage
September 30, Increase
2008 2007 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 276,000 $ 267,800 3.1%
Selling 3,868,100 4,041,300 (4.3%)
General & Administrative 2,168,700 2,318,700 (6.5%)
----------- ----------- ------
Total operating expenses $ 6,312,800 $ 6,627,800 (4.8%)
=========== =========== ======
Interest and Other Income $ 19,300 $ 60,500 (68.1%)
=========== =========== ======
Interest Expense $ 268,700 $ 315,700 (14.9%)
=========== =========== ======
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased $315,100 in the first
nine months of 2008, when compared to the first nine months of 2007.
The various components of operating expenses are discussed below.
Advertising expenses for the first nine months of 2008 were
$276,000 compared to $267,800 for the comparable period of 2007, an
increase of $8,200 or 3.1%.
Selling expenses for the first nine months of 2008 were $3,868,100
compared to $4,041,300 for the comparable nine months of 2007, a
decrease of $173,200 or 4.3%. That decrease was primarily attributable
to a decrease in royalty fee expenses and a decrease in telephone and
consumer telephone answering expenses.
General and administrative expenses for the first nine months of
2008 were $2,168,700 compared to $2,318,700 for the comparable period
of 2007, a decrease of $150,100 or 6.5%. That decrease was primarily
attributable to a decrease in legal and professional fees of $128,400
and a net decrease in other general and administrative expenses of
$21,700. See discussion below of operating expenses for the three
months ended September 30, 2008 for information on anticipated
reductions in selling and general administrative costs.
Interest expense for the first nine months of 2008 was $268,700
versus $315,700 for the comparable period of 2007. Interest expense
decreased because of lower interest rates and decreased borrowing
levels. Interest expense will increase in future periods with the
addition of a line of credit established on November 3, 2008.
See "Liquidity and Capital Resources" below. Interest income for the
nine months ended September 30, 2008 was $19,300 compared to $60,500
for the same period of 2007, which consists of interest earned on our
cash reserves in 2007 and 2006.
During the first nine months of 2008 and of 2007, expenditures
for research and development were not material (under 2% of revenues).
Three Months Ended September 30, 2008
Compared to Three Months Ended September 30, 2007
Comparative Net Sales
Three Months Ended September 30,
-----------------------------------------
Percentage
Increase
2008 2007 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 1,538,000 $ 1,729,800 (11.1%)
Touch of Scent 370,700 211,900 174.9%
----------- ----------- ------
Total household products 1,908,700 1,941,700 (1.7%)
----------- ----------- ------
Alpha Hydrox and
other skin care 843,200 764,900 9.6%
Montagne Jeunesse and other
distributed skin care 1,224,700 1,937,500 (36.6%)
----------- ----------- ------
Total skin care
products 2,067,900 2,702,400 (23.5%)
----------- ----------- ------
Total net sales $ 3,976,600 $ 4,644,100 (14.4%)
=========== =========== ======
Consolidated net sales for the third quarter of the current year
were $3,976,600 versus $4,644,100 for the comparable quarter of 2007, a
decrease of $667,500 or about 14.4%. Average selling prices for the
third quarter of 2008 were up by $244,800 over those of the comparable
period of 2007, prices of household products being up by $122,600, while
average selling prices of skin care products were up by $122,200.
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 $314,600 in the third quarter of
2008 versus $475,800 in the same period in 2007, a decrease of $161,200
or about 33.9%. This decrease consisted of a decrease in slotting
expenses of $72,000, a decrease in co-op advertising of $120,500, and
an increase in coupon expense of $31,300.
During the third quarter of 2008, net sales of skin care products
accounted for 52.0% of consolidated net sales compared to 41.8% for the
third quarter of 2007. Net sales of these products for those periods
were $2,076,300 in 2008 compared to $2,368,000 in 2007, a decrease of
$291,700 or about 12.3%. This decrease was primarily a result of a
decrease in Montagne Jeunesse skin care sales in the third quarter of
2008 versus the third quarter of 2007, offset slightly by sale of our
Baylis and Harding line of products which were just being introduced
to stores in the third quarter of 2007. There was also in the third
quarter of 2008 a slight increase in certain skin care products.
Sales of Scott's Liquid Gold wood care and other household
products were down by $191,800, a decrease of 11.1%. This decrease was
primarily due to a decrease in sales of our Mold Control 500 product and
a slight decrease in sales of our Scott's Liquid Gold Wood care
products. Sales of products in the "Touch of Scent" line were up by
$158,800 or about 74.9%, as a result of our introduction of our new air
freshener "Cube Scents". For additional information on the decrease
in the sales of household products, see the discussion above for the
nine months ended September 30, 2008.
On a consolidated basis, cost of goods sold was $2,247,000 during
the third quarter of 2008 compared to $2,609,300 for the same period of
2007, a decrease of $362,300 or 13.9%, on a sales decrease of 14.4%.
As a percentage of consolidated net sales for the third quarter of 2008,
cost of goods sold was 56.5% compared to 56.2% in 2007, an increase of
0.5%. This was essentially due to the increased costs of steel cans and
petroleum-based raw materials and lower plant utilization, offset by a
decrease in sales and promotion expenses, which are deducted from gross
sales, and thus affected our margins particularly in the skin care line
of products.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2008 2007 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 67,800 $ 66,700 1.6%
Selling 1,207,700 1,406,900 (14.2%)
General & Administrative 638,900 735,800 (13.2%)
----------- ----------- ---------
Total operating expenses $ 1,913,700 $ 2,209,400 (13.4%)
=========== =========== =========
Interest and Other Income $ 4,900 $ 16,700 (70.7%)
Interest Expense $ 63,500 $ 107,600 (41.0%)
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased $295,700 in the third
quarter of 2008, when compared to the same period during 2007. Early in
the fourth quarter of 2008 we reduced our selling and general
administrative staff and decreased the compensation of some of our
executive officers. We expect this cost cutting to save the company
approximately $225,000 on an annual basis. The various components of
operating expenses are discussed below.
Advertising expenses for the third quarter of 2008 were $67,800
compared to $66,700 for the comparable quarter of 2007, an increase of
$1,100 or 1.6%.
Selling expenses for the three months ended September 30, 2008
were $1,207,000 compared to $1,406,900 for the comparable three months
of 2007, a decrease of $199,900 or 14.2%. That decrease was primarily
because of a decrease in salary, fringe benefits and related travel
expenses of $57,000, a decrease in royalty fee expenses of $31,200, a
decrease in promotional materials expense of $59,500, a decrease in
freight and brokerage expenses of $33,500 and a net decrease in other
selling expenses of $18,700.
General and administrative expenses for the third quarter of 2008
were $638,900 compared to $735,800 for the comparable period of 2007, a
decrease of $96,900 or 13.2%. That decrease was primarily because of a
decrease in salary, fringe benefits and related travel expenses of
$33,800, a decrease in legal and professional fees of $53,900 and a net
decrease in other general and administrative expense of $9,200.
Interest expense for the third quarter of 2008 was $63,500 versus
$107,600 for the comparable period of 2007. Interest expense decreased
because of decreased borrowing levels. Interest income for the three
months ended September, 2008 was $4,900 compared to $16,700 for the
same period of 2007.
During the third quarter of 2008 and of 2007, expenditures for
research and development were not material (under 2% of revenues).
Liquidity and Capital Resources
Citywide Loan
On June 28, 2006, we entered into a loan with a fifteen year
amortization with Citywide Banks for $5,156,600 secured by the land,
building and fixtures at our Denver, Colorado facilities. Interest on
the bank loan (5.0% at September 30, 2008) is at the prime rate as
published in The Wall Street Journal, adjusted annually each June.
This loan requires 180 monthly payments, currently of approximately
$42,000, which commenced on July 28, 2006. The loan agreement contains
a number of covenants, including the requirement for maintaining a
current ratio of at least 1:1 and a ratio of consolidated long-term
debt to consolidated net worth of not more than 1:1. We may not
declare any dividends that would result in a violation of either of
these covenants. The foregoing requirements were met at the end of
the first nine months of 2008.
Sale of Vacant Land
We own approximately 5.5 acres of vacant land north of and
adjacent to the Company's facilities in Denver, Colorado. On
September 15, 2008, we entered into a purchase agreement with an
unrelated party providing for the sale of the vacant land for $1,209,700
in cash. After real estate commissions and other expenses, this price
would result in estimated net proceeds of approximately $1,100,000.
The sale of the land is subject to a number of conditions, including
the purchaser's satisfaction with its due diligence investigation of
the property to determine in the opinion of the purchaser whether the
property is suitable for the purchaser's intended use. The purchaser
has 60 days from September 15, 2008 to complete its due diligence
investigation. The closing of the sale of the land is to take place
within 15 days after the expiration of this due diligence period.
On November 12, 2008, the proposed purchaser requested that we
provide an additional 45 days for the due diligence condition and the
purchaser's obtaining financing. According to the information provided
to us, the proposed purchaser has not been able to secure financing for
the purchase of the vacant land. We have granted their request.
The land is part of the collateral for our loan with Citywide
Banks. The current outstanding amount of the bank loan is approximately
$4,711,300. The Bank has approved of the sale of the vacant land free
of the Bank's lien based on:
. the proposed sale resulting in net proceeds of approximately
$1,100,000;
. the immediate principal reduction at the time of the sale
in the amount of $700,000; and
. the placement of the balance of the proceeds, estimated at
approximately $400,000, in a reserve account to be applied
to future monthly principal and interest payments on the
bank loan.
If the sale of vacant land occurs on this basis, the $400,000
reserve would help our cash flow by its use to make required monthly
payments.
At the same time as approving the sale of vacant land, the Bank
stated that it would not stand in the way of our obtaining outside
financing for a $1,200,000 line of credit secured by accounts
receivable and inventory.
Line of Credit
Please see Note 5 to the unaudited Consolidated Financial
Statements in this Report for information on a line of credit
established in November 2008.
Liquidity
During the first nine months of 2008 our working capital decreased
by $1,094,700, and concomitantly, our current ratio (current assets
divided by current liabilities) decreased from 1.9:1 at December 31,
2007 to 1.6:1 at September 30, 2008. This decrease in working capital
is attributable to a net loss in the first nine months of 2008 of
$1,405,700, and a reduction in long-term debt of $230,400, offset by
depreciation in excess of capital additions of $459,200.
At September 30, 2008, trade accounts receivable were $961,000
versus $1,004,900 at the end of 2007, largely because sales in the last
two months of the quarter ended September 30, 2008 were less than those
of the last two months of the quarter ended December 31, 2007. Accounts
payable increased from the end of 2007 through September of 2008 by
$175,700 corresponding primarily with the timing and payment of
purchases. At September 30, 2008 inventories were $73,900 less than at
December 31, 2007. Prepaid expenses decreased from the end of 2007 by
$124,500 due in part to a decrease in prepaid promotional expenses.
Accrued payroll and benefits decreased $88,700 from December 31, 2007
to September 30, 2008 primarily because of a decrease in accrued
payroll. Other Accrued liabilities decreased by $68,900 primarily
because of a decrease in accrued property taxes.
We have no significant capital expenditures planned for the
remainder of 2008.
We expect that our available cash, projected cash flows from
operating activities, borrowing available under the Summit Financial
Resources line of credit will fund the next twelve months' cash
requirements, ending September 30, 2009. If the sale of vacant land,
north of our facilities in Denver, occurred under the existing purchase
agreement and on the currently proposed basis as described above, it
would benefit our cash flow during the next 12 months; however, the
closing of that transaction is uncertain at this time.
In order to improve our liquidity and our operating results, we
will also continue to pursue the following steps: the sale of all or a
portion of our real estate which we have listed with a real estate
firm, efforts to improve revenues, a reduction in our fixed operating
expense, and potentially the addition of external financing.
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. 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 and as indicated above,
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; uncertainty of consumer
acceptance of the new Alpha Hydrox products introduced in 2005 and
2007, and Mold Control 500 and wood wash products; competitive factors;
any decrease in distribution of (i.e., retail stores carrying) our
significant products; continuation of our distributorship agreement
with Montagne Jeunesse; the need for effective advertising of our
products; limited resources available for such advertising; new
competitive products and/or technological changes; dependence upon
third party vendors and upon sales to major customers; changes in the
regulation of our products, including applicable environmental
regulations; continuing losses which could affect our liquidity; the
loss of any executive officer; and other matters discussed in this
Report. We undertake no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise
after the date of this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
As of September 30, 2008, we conducted an evaluation, under the
supervision and with the participation of the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective
as of September 30, 2008.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting during the quarter ended September 30, 2008 that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable.
Item 3. Not Applicable.
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits
10.1 Financing Agreement and Addendum to Financing
Agreement, both dated October 31, 2008, between
Summit Financial Resources, L.P. and the Company,
incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K filed with the
Commission on November 4, 2008.
10.2 Guarantees, dated October 31, 2008, by SLG Plastics,
Inc. Advertising Promotions Incorporated, Colorado
Product Concepts, Inc., Neoteric Cosmetics, Inc.,
and SLG Chemicals, Inc., incorporated by reference to
Exhibit 10.2 of the Company's Current Report on
Form 8-K filed with the Commission on November 4, 2008.
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.
November 14, 2008 BY: /s/ Mark E. Goldstein
Date --------------------------------
Mark E. Goldstein
President and Chief Executive
Officer
November 14, 2008 BY: /s/ Jeffry B. Johnson
Date --------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial
Officer
EXHIBIT INDEX
Exhibit No. Document
10.1 Financing Agreement and Addendum to Financing
Agreement, both dated October 31, 2008, between
Summit Financial Resources, L.P. and the Company,
incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K filed with the
Commission on November 4, 2008.
10.2 Guarantees, dated October 31, 2008, by SLG Plastics,
Inc. Advertising Promotions Incorporated, Colorado
Product Concepts, Inc., Neoteric Cosmetics, Inc.,
and SLG Chemicals, Inc., incorporated by reference to
Exhibit 10.2 of the Company's Current Report on
Form 8-K filed with the Commission on November 4, 2008.
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