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
June 30, 2009
Commission File No. 001-13458
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
State of Incorporation I.R.S. Employer Identification No.
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ](Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of August 13, 2009, the Registrant had 10,795,000 of its $0.10
par value common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30,
2009 2008 2009 2008
----------- ----------- ----------- -----------
Net sales $ 3,504,800 $ 4,043,700 $ 7,396,700 $ 8,137,500
Operating costs
and expenses:
Cost of sales 2,003,400 2,508,700 4,249,100 4,710,600
Advertising 78,400 97,000 150,600 208,200
Selling 995,500 1,320,800 2,027,700 2,661,100
General and
administrative 585,400 729,800 1,243,000 1,529,800
----------- ----------- ----------- -----------
3,662,700 4,656,300 7,670,400 9,109,700
----------- ----------- ----------- -----------
Loss from operations (157,900) (612,600) (273,700) (972,200)
Interest income 2,100 5,900 5,000 14,400
Interest expense (83,000) (102,100) (157,600) (205,200)
----------- ----------- ----------- -----------
(238,800) (708,800) (426,300) (1,163,000)
Income tax expense
(benefit) - - - -
----------- ----------- ----------- -----------
Net loss $ (238,800) $ (708,800) $ (426,300) $(1,163,000)
=========== =========== =========== ===========
Net loss per common
share (Note 2):
Basic and
Diluted $ (0.02) $ (0.07) $ (0.04) $ (0.11)
=========== =========== =========== ===========
Weighted average shares
outstanding:
Basic and
Diluted 10,795,000 10,613,500 10,763,500 10,598,100
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2009 2008
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 815,500 $ 909,900
Investment securities 4,400 4,500
Trade receivables, net of allowance
of $62,300 and $59,800, respectively,
for doubtful accounts 239,400 349,600
Other receivables 200,000 220,700
Inventories, net 2,783,800 2,754,500
Prepaid expenses 135,100 120,700
----------- -----------
Total current assets 4,178,200 4,359,900
Property, plant and equipment, net 11,815,700 12,081,900
Other assets 48,900 51,100
----------- -----------
TOTAL ASSETS $16,042,800 $16,492,900
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,479,800 $ 1,348,800
Accrued payroll and benefits 744,700 691,800
Other accrued expenses 225,300 353,100
Current maturities of long-term debt 314,300 273,600
----------- -----------
Total current liabilities 2,764,100 2,667,300
Long-term debt, net of current maturities 4,195,200 4,371,300
----------- -----------
TOTAL LIABILITIES 6,959,300 7,038,600
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,795,000 shares,
and 10,695,000 shares, respectively 1,079,500 1,069,500
Capital in excess of par 5,225,300 5,179,700
Accumulated comprehensive income 400 500
Retained earnings 2,778,300 3,204,600
----------- -----------
Shareholders' equity 9,083,500 9,454,300
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $16,042,800 $16,492,900
=========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
--------------------------
2009 2008
----------- -----------
Cash flows from operating activities:
Net loss $ (426,300) $(1,163,000)
----------- -----------
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 268,400 314,200
Provision for doubtful accounts 2,500 -
Stock issued to ESOP 17,000 12,900
Stock based compensation 38,600 32,200
Changes in assets and liabilities:
Proceeds from sale of accounts receivable 2,163,800 -
Trade and other receivables, net (2,035,400) 66,900
Inventories (29,300) 112,600
Prepaid expenses and other assets (14,400) 66,300
Accounts payable and
accrued expenses 56,100 178,700
----------- -----------
Total adjustments to net loss 467,300 783,800
----------- -----------
Net Cash Provided (Used) by
Operating Activities 41,000 (379,200)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant & equipment - (8,800)
----------- -----------
Net Cash Used by
Investing Activities - (8,800)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term borrowings (135,400) (100,300)
Proceeds from exercise of stock options - 9,200
----------- -----------
Net Cash Used by
Financing Activities (135,400) (91,100)
----------- -----------
Net Decrease in Cash and
Cash Equivalents (94,400) (479,100)
Cash and Cash Equivalents, beginning
of period 909,900 1,483,300
----------- -----------
Cash and Cash Equivalents, end of period $ 815,500 $ 1,004,200
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 158,700 $ 207,300
=========== ===========
Income taxes $ - $ -
=========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was incorporated
on February 15, 1954. Scott's Liquid Gold-Inc. and its wholly owned
subsidiaries (collectively, "we" or "our") manufacture and market quality
household and skin care products, and we fill, package and market our Mold
Control 500 product. Since the first quarter of 2001, we have acted as the
distributor in the United States for beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse. In 2006 and
2007, we began the distribution of certain other products. Our business is
comprised of two segments -- household products and skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and
those of our wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
(c) Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated financial
statements in accordance with the rules and regulations of the Securities
and Exchange Commission. Such rules and regulations allow the omission
of certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles as long as the statements are not misleading.
In the opinion of management, all adjustments necessary for a fair
presentation of these interim statements have been included and are of
a normal recurring nature. These interim financial statements should
be read in conjunction with our financial statements included in our 2008
Annual Report on Form 10-K. The results of operations for the interim
period may not be indicative of the results to be expected for the full
fiscal year.
(d) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
include, but are not limited to, realizability of deferred tax assets,
reserves for slow moving and obsolete inventory, customer returns and
allowances, coupon redemptions, bad debts, and stock based compensation.
(e) Cash Equivalents
We consider all highly liquid investments with an original maturity
of three months or less at the date of acquisition to be cash equivalents.
(f) Investments in Marketable Securities
We 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, 2009, are scheduled
to mature within one year.
(g) Sale of Accounts Receivable
We have adopted SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140"). SFAS 140 provides standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. On November 3, 2008, effective as of October 31, 2008, we
established a $1,200,000 factoring line with an asset-based lender
("Lender") and secured by accounts receivable, inventory, any lease in
which we are a lessor, all investment property and guarantees by our
active subsidiaries. This facility enables us to sell selected accounts
receivable invoices to the Lender with full recourse against us. These
transactions qualify for a sale of assets since (1) we have transferred
all of our rights, title and interest in the selected accounts receivable
invoices to the Lender, (2) the Lender may pledge, sell or transfer the
selected accounts receivable invoices, and (3) we have no effective
control over the selected accounts receivable invoices since we are not
entitled to or obligated to repurchase or redeem the invoices before
their maturity and we do not have the ability to unilaterally cause the
Lender to return the invoices. Under SFAS 140, after a transfer of
financial assets, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities
when extinguished. During the first half of 2009, we sold approximately
$3,091,200 of our accounts receivable invoices to the Lender under a
financing agreement for approximately $2,163,800. Pursuant to the
provisions of SFAS 140, we reflected the transaction as a sale of assets
and established an accounts receivable from the Lender for the retained
amount less the costs of the transaction and less any anticipated future
loss in the value of the retained asset. The retained amount is equal to
30% of the total accounts receivable invoice sold to the Lender less
1.12% of the total invoice as a collateral management fee plus a daily
finance fee, based on Wall Street Journal prime (3.25% at June 30, 2009)
plus 1%, imposed on (a) the net of the outstanding accounts receivable
invoices less (b) any retained amounts due to us. The estimated future
loss reserve for each receivable included in the estimated value of the
retained asset is based on the payment history of the customer. Included
in "Other receivables" at June 30, 2009, we have an outstanding retained
receivable of approximately $173,500 representing 30% of $578,300 of
unsettled receivable invoices sold to the Lender as well as $7,200 due
to us resulting from customer remittances paid direct to the Lender on
invoices which were not sold to the Lender. Also, at June 30, 2009,
approximately $823,300 of this credit line was available for future
factoring of accounts receivable invoices.
(h) Inventories
Inventories consist of raw materials and finished goods and are
stated at the lower of cost (first-in, first-out method) or market.
We record a reserve for slow moving and obsolete products and raw
materials. We estimate reserves for slow moving and obsolete products
and raw materials based upon historical and anticipated sales.
Inventories were comprised of the following at:
June 30, 2009 December 31, 2008
-------------- -----------------
Finished goods $ 1,852,700 $ 1,898,100
Raw materials 1,316,000 1,241,300
Inventory reserve
for obsolescence (384,900) (384,900)
----------- -----------
$ 2,783,800 $ 2,754,500
=========== ===========
(i) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost.
Depreciation is provided using the straight-line method over estimated
useful lives of the assets ranging from three to forty-five years.
Building structures and building improvements are estimated to have useful
lives of 35 to 45 years and 3 to 20 years, respectively. Production
equipment and production support equipment are estimated to have useful
lives of 15 to 20 years and 3 to 10 years, respectively. Office
furniture and office machines are estimated to have useful lives of
10 to 20 and 3 to 5 years, respectively. Carpeting, drapes and company
vehicles are estimated to have useful lives of 5 to 10 years. Maintenance
and repairs are expensed as incurred. Improvements that extend the
useful lives of the assets or provide improved efficiency are
capitalized.
(j) Financial Instruments
Financial instruments which potentially subject us to concentrations
of credit risk include cash and cash equivalents, investments in marketable
securities, and trade receivables. We maintain our cash balances in the
form of bank demand deposits with financial institutions that management
believes are creditworthy. 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. 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, 2009 and December 31, 2008.
Fair Value Measurements at June 30, 2009
-------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
Total For Identical Observable Unobservable
Fair Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level 3)
------------------ -------- ---------------- ----------- ------------
Available-for-sale
securities $4,400 $4,400 $ - $ -
-------- ---------------- ----------- ------------
Total $4,400 $4,400 $ - $ -
======== ================ =========== ============
(k) 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.
(l) 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.
(m) Revenue Recognition
Revenue is recognized when an arrangement exists to sell our
product, we have delivered such product in accordance with that
arrangement, the sales price is determinable, and collectibility is
probable. Reserves for estimated market development support, pricing
allowances and returns are provided in the period of sale as a reduction
of revenue. Reserves for returns and allowances are recorded as a
reduction of revenue, and are maintained at a level that management
believes is appropriate to account for amounts applicable to existing
sales. Reserves for coupons and certain other promotional activities are
recorded as a reduction of revenue at the later of the date at which the
related revenue is recognized or the date at which the sales incentive is
offered. At June 30, 2009 and December 31, 2008 approximately $440,000
and $600,000, respectively, had been reserved as a reduction of accounts
receivable, and approximately $23,000 and $23,000, respectively, had been
reserved as current liabilities. Co-op advertising, marketing funds,
slotting fees and coupons are deducted from gross sales and totaled
$674,200 and $774,700 in the six months ended June 30, 2009 and 2008,
respectively.
(n) Advertising Costs
Advertising costs are expensed as incurred.
(o) Stock-based Compensation
During the first six months of 2009, we granted 90,000 options for
shares of our common stock to a certain officer and two non-employee
directors at $0.17 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 half of 2009 and 2008 were estimated on the date of grant,
using a Black-Scholes option pricing model with the following assumptions:
June 30, 2009 June 30, 2008
------------- -------------
Expected life of options
(using the "simplified" method) 4.5 years 4.5 years
Risk-free interest rate 1.9% 3.0%
Expected volatility of stock 75% 69%
Expected dividend rate None None
Compensation cost related to stock options recognized in operating
results (included in general and administrative expenses) under SFAS 123R
was $38,600 in the six months ended June 30, 2009. Approximately $163,400
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.
(p) Comprehensive Income
We follow SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and displaying comprehensive income
and its components. Comprehensive income includes all changes in equity
during a period from non-owner sources.
The following table is a reconciliation of our net loss to our
total comprehensive loss for the three and six months ended June 30,
2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Net loss $ (238,800) $ (708,800) $ (426,300) $(1,163,000)
Unrealized loss
on investment
securities - (500) (100) (400)
----------- ----------- ----------- -----------
Comprehensive loss $ (238,800) $ (709,300) $ (426,400) $(1,163,400)
=========== =========== =========== ===========
(q) Operating Costs and Expenses Classification
Cost of sales includes costs associated with manufacturing and
distribution including labor, materials, freight-in, purchasing and
receiving, quality control, internal transfer costs, repairs, maintenance
and other indirect costs, as well as warehousing and distribution costs.
We classify shipping and handling costs comprised primarily of
freight-out and nominal outside warehousing costs as a component of
selling expense on the accompanying Consolidated Statement of Operations.
Shipping and handling costs totaled $669,600 and $798,200, for the six
months ended June 30, 2009 and 2008, respectively.
Selling expenses consist primarily of shipping and handling costs,
wages and benefits for sales and sales support personnel, travel,
brokerage commissions, promotional costs, as well as other indirect costs.
General and administrative expenses consist primarily of wages and
benefits associated with management and administrative support
departments, business insurance costs, professional fees, office facility
related expenses, and other general support costs.
(r) Recently Issued Accounting Pronouncements
In December 2007 the Financial Accounting Standards Board (FASB)
issued SFAS No. 141R, "Business Combinations". 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 its fair
value 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 was prohibited. The adoption
of this statement did not have a material effect on the Company's
financial statements.
In December 2007, the Financial Accounting Standards Board (FASB)
issued SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements - an Amendment of ARB No. 51". 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 did not
have a material effect on the Company's financial statements.
In February 2008, the FASB issued FASB Staff Position 157-2,
Effective Date of FASB Statement No. 157, which delays the effective date
of SFAS No. 157, Fair Value Measurements ("SFAS No. 157"), for
nonfinancial assets and liabilities to fiscal years beginning after
November 15, 2008. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair
value measurements. SFAS No. 157 applies to other accounting
pronouncements that require or permit fair value measurements and does
not any new fair value measurements. On January 1, 2009, we adopted
SFAS No. 157-2 for nonfinancial assets and liabilities and it did not
have a material effect on the Company's financial statements.
In May 2009, the FASB issued SFAS 165. SFAS 165 establishes
general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial
statements are issued or are available to be issued. Although the
standard is based on the same principles as those that currently exist
in the auditing standards, it includes a new required disclosure of
the date through which an entity has evaluated subsequent events. In
accordance with SFAS 165, the Company's management has evaluated events
subsequent to June 30, 2009 through August 13, 2009 which is the issuance
date of this report. There has been no material event noted in this period
which would either impact the results reflected in this report or the
Company's results going forward..
In June 2009, the FASB issued SFAS No. 168 "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles - A Replacement of FASB Statement No. 162" ("SFAS 168").
Statement 168 establishes the FASB Accounting Standards CodificationTM
(Codification) as the single source of authoritative U.S. generally
accepted accounting principles (U.S. GAAP) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. SFAS 168 and the Codification
are effective for financial statements issued for interim and annual
periods ending after September 15, 2009. When effective, the Codification
will supersede all existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. Following SFAS 168, the FASB
will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will
issue Accounting Standards Updates, which will serve only to: (a) update
the Codification; (b) provide background information about the guidance;
and (c) provide the bases for conclusions on the change(s) in the
Codification. The adoption of SFAS 168 will not have an impact on our
consolidated financial statements.
Note 2. Earnings per Share
Per share data was determined by using the weighted average number
of common shares outstanding. Potentially dilutive securities, including
stock options, are considered only for diluted earnings per share, unless
considered anti-dilutive. The potentially dilutive securities, which are
comprised of outstanding stock options of 1,922,900 and 1,927,150 at
June 30, 2009 and 2008, 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 six months ended June 30, 2009 and 2008,
respectively, follows:
2009
-------------------------------------
Total
Three Months Six Months Shares
------------ ----------- ----------
Common shares outstanding
beginning of period 10,695,000 10,695,000 10,695,000
Stock issued to ESOP (a) 100,000 68,500 100,000
Stock option exercises - - -
---------- ---------- ----------
Weighted average
number of common
shares outstanding 10,795,500 10,763,500 10,795,000
Dilutive effect of
common share
equivalents - - -
---------- ---------- ----------
Diluted weighted
average number of
common shares
outstanding 10,795,500 10,763,500 10,795,000
========== ========== ==========
2008
-------------------------------------
Total
Three Months Six Months Shares
------------ ----------- ----------
Common shares outstanding
beginning of period 10,595,000 10,575,000 10,575,000
Stock issued to ESOP 18,500 9,300 30,000
Stock option exercises - 13,800 20,000
---------- ---------- ----------
Weighted average
number of common
shares outstanding 10,613,500 10,598,100 10,625,000
Dilutive effect of
common share
equivalents - - -
---------- ---------- ----------
Diluted weighted
average number of
common shares
outstanding 10,613,500 10,598,100 10,625,000
========== ========== ==========
(a) In February 2009, the Board of Directors authorized and the
Company issued 100,000 shares of common stock to the Employee Stock
Ownership Plan at a price of $0.17 per share.
At June 30, 2009, 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, 2009.
Note 3. Segment Information
We operate in two different segments: household products and skin
care products. Our products are sold nationally and internationally
(primarily Canada), directly and through independent brokers, to mass
merchandisers, drug stores, supermarkets, wholesale distributors and other
retail outlets. Management has chosen to organize our business around
these segments based on differences in the products sold. The household
products segment includes "Scott's Liquid Gold" for wood, a wood cleaner
which preserves as it cleans, Mold Control 500, a mold remediation
product, and "Touch of Scent" room air fresheners. The skin care segment
includes "Alpha Hydrox," alpha hydroxy acid cleansers and lotions, a
retinol product, and "Diabetic Skin Care", a healing cream and moisturizer
developed to address skin conditions of diabetics. We also distribute
skin care and other sachets of Montagne Jeunesse and certain other products.
The following provides information on our segments for the three
and six months ended June 30:
Three Months ended June 30,
-----------------------------------------------------
2009 2008
------------------------- --------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external
customers $ 1,677,600 $ 1,827,200 $ 1,967,400 $ 2,076,300
=========== =========== =========== ===========
Loss before
profit sharing,
bonuses and
income taxes $ (35,500) $ (203,300) $ (206,600) $ (502,200)
=========== =========== =========== ===========
Identifiable
assets $ 2,610,000 $ 4,492,600 $ 3,168,200 $ 5,113,500
=========== =========== =========== ===========
Six Months ended June 30,
-----------------------------------------------------
2009 2008
------------------------- --------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external
customers $ 3,504,300 $ 3,892,400 $ 3,699,700 $ 4,437,800
=========== =========== =========== ===========
Loss before
profit sharing,
bonuses and
income taxes $ (175,900) $ (250,400) $ (430,700) $ (732,300)
=========== =========== =========== ===========
Identifiable
assets $ 2,610,000 $ 4,492,600 $ 3,168,200 $ 5,113,500
=========== =========== =========== ===========
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,
--------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Net sales to
external
customers $ 3,504,800 $ 4,043,700 $ 7,396,700 $ 8,137,500
=========== =========== =========== ===========
Loss before
profit sharing,
bonuses and
income taxes $ (238,800) $ (708,800) $ (426,300) $(1,163,000)
=========== =========== =========== ===========
Identifiable
assets $ 7,102,600 $ 8,281,700 $ 7,102,600 $ 8,281,700
Corporate
assets 8,940,200 9,230,700 8,940,200 9,230,700
----------- ----------- ----------- -----------
Consolidated
total assets $16,042,800 $17,512,400 $16,042,800 $17,512,400
=========== =========== =========== ===========
Corporate assets noted above are comprised primarily of our cash
and investments, and property and equipment not directly associated with
the manufacturing, warehousing, shipping and receiving activities.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
During the first half of 2009, we experienced a decrease in sales
across all of our product lines. Our net loss for the first half of 2009
was $426,300 versus a loss of $1,163,000 in the first half of 2008. The
decrease in our loss for the first half of 2009 compared to the first
half of 2008 results primarily from a decrease in our operating expenses.
Summary of Results as a Percentage of Net Sales
Year Ended Six Months Ended
December 31, June 30,
------------ -------------------
2008 2009 2008
------------ ------- --------
Net sales
Scott's Liquid Gold
household products 45.8% 47.4% 45.5%
Neoteric Cosmetics 54.2% 52.6% 54.5%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 56.9% 57.4% 57.9%
------ ------ ------
Gross profit 43.1% 42.6% 42.1%
Other revenue 0.2% - 0.2%
------ ------ ------
43.3% 42.6% 42.3%
------ ------ ------
Operating expenses 50.6% 46.3% 54.1%
Interest 2.1% 2.1% 2.5%
------ ------ ------
52.7% 48.4% 56.6%
------ ------ ------
Loss before income taxes (9.4%) (5.8%) (14.3%)
====== ======= ======
Our gross margins may not be comparable to those of other
entities, because some entities include all of the costs related to their
distribution network in cost of sales and others, like us, exclude a
portion of them (freight out to customers and nominal outside warehouse
costs) from gross margin, including them instead in the selling expense
line item. See Note 1(q), Operating Costs and Expenses Classification,
to the unaudited Consolidated Financial Statements in this Report.
Comparative Net Sales
Six Months Ended June 30,
-----------------------------------------
Percentage
Increase
2009 2008 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 3,139,900 $ 3,345,800 (6.2%)
Touch of Scent 364,400 353,900 3.0%
----------- ----------- ------
Total household products 3,504,300 3,699,700 (5.3%)
----------- ----------- ------
Alpha Hydrox and
other skin care 1,900,200 1,912,900 (0.7%)
Montagne Jeunesse and other
distributed skin care 1,992,200 2,524,900 (21.1%)
----------- ----------- ------
Total skin care
products 3,892,400 4,437,800 (12.3%)
----------- ----------- ------
Total Net Sales $ 7,396,700 $ 8,137,500 (9.1%)
=========== =========== ======
Six Months Ended June 30, 2009
Compared to Six Months Ended June 30, 2008
Consolidated net sales for the first half of the current year were
$7,396,700 versus $8,137,000 for the first six months of 2008, a decrease
of $740,800. Average selling prices for the first half of 2009 were up by
$312,200 over the first half of 2008. Average selling prices of household
products were up by $113,100, while average selling prices of skin care
products were up by $199,100. This increase in selling prices reflects
discounting of certain Montagne Jeunesse sachets in 2008 coupled with a
decrease in coupon usage in 2009 versus 2008. Co-op advertising, marketing
funds, slotting fees, and coupons paid to retailers are deducted from gross
sales, and totaled $674,100 in the first half of 2009 versus $774,700 in
the same period in 2008, a decrease of $100,600 or 13.0%. This decrease
consisted of a decrease in coupon expense of $4,000, a decrease in co-op
advertising funds of $131,100, and an increase in slotting fee expenses of
$34,500.
From time to time, our customers return product to us. For our
household products, we permit returns only for a limited time, and
generally only if there is a manufacturing defect. With regard to our
skin care products, returns are more frequent under an unwritten industry
standard that permits returns for a variety of reasons. In the event a
skin care customer requests a return of product, the Company will
consider the request, and may grant such request in order to maintain or
enhance relationships with customers, even in the absence of an
enforceable right of the customer to do so. Some retailers have not
returned products to us. Return price credit (used in exchanges
typically, or rarely, refunded in cash) when authorized is based on the
original sale price plus a handling charge of the retailer that ranges
from 8-10%. The handling charge covers costs associated with the return
and shipping of the product. Additions to our reserves for estimated
returns are subtracted from gross sales.
From January 1, 2006 through June 30, 2009, our product returns
(as a percentage of gross revenue) have averaged as follows: household
products 0.3%, Montagne Jeunesse products 4.4%, and our Alpha Hydrox and
other skin care products 5.1%. 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 Alpha Hydrox skin care
products have declined we have seen a decrease in returns of these
products as a percentage of gross revenues. The products returned in
the first half of 2009 (indicated as a percentage of gross revenues)
were: household products 0.8%, Montagne Jeunesse products 12.1%, and our
Alpha Hydrox and other skin care products 1.4%. The level of Montagne
Jeunesse returns during the first six months of 2009 results from the
returns by one retailer; we expect that returns of this product will be
at more normal levels in future quarters of 2009. We are not aware of any
industry trends, competitive product introductions or advertising
campaigns at this time which would cause returns as a percentage of
gross sales to be materially different for the current fiscal year than
for the above averages. Furthermore, our management is not currently
aware of any changes in customer relationships that we believe would
adversely impact anticipated returns. However, we review our reserve
for returns quarterly and we regularly face the risk that the existing
conditions related to product returns will change.
During the first half of 2009, net sales of skin care products
accounted for 52.6% of consolidated net sales compared to 54.5% for the
same period of 2008. Net sales of these products for that period were
$3,892,400 in 2009 compared to $4,437,800 in 2008, a decrease of $545,400
or 12.3%. Our decrease in net sales of skin care was comprised of a
decrease of $532,700 in sales of products for which we act as a
distributor and a decrease of $12,700 in our manufactured skin care
product lines.
In the first six months of 2008 we experienced introduction orders
related to a line of products that were new to our line-up of distributed
products as well as a promotional event that raised sales levels of
another line of distributed products. These sales volumes were not
achieved in 2009, resulting in a comparative decline in sales in the first
half of 2009 of other distributed skin care products which exceeded an
increase in sales of Montagne Jeunesse sachets. Overall, net sales of
our line-up of distributed products, including Montagne Jeunesse, totaled
$1,992,200 in the first six months of 2009 as compared to net sales of
$2,524,900 in the same period of 2008, a decrease of $532,700 or 21.1%.
Net sales of our Alpha Hydrox and other manufactured skin care
products declined $12,700, or 0.7%, from $1,912,900 in the first half
of 2008 to $1,900,200 for the same period of 2009. In the recent years
preceding 2009, there had been a contraction in distribution of Alpha
Hydrox products at drug stores and grocery chains, where retail support
in the form of product returns, marketing co-op funds, coupon and
promotion programs, damage claims and similar matters were expensive.
With reduced levels of these expenses and with sales of Alpha Hydrox
products now based in large part on our website, we appear to be
experiencing stabilization of sales of these products.
Sales of household products for the first half of this year
accounted for 47.4% of consolidated net sales compared to 45.5% for the
same period in 2008. 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, 2009 sales of household products were $3,504,300 as
compared to $3,699,700 for the same period in 2008, a decrease of
$195,400 or 5.3%. Sales of Scott's Liquid Gold wood care products
decreased by $132,800 or 4.3%, in 2009 versus 2008, while Mold Control
500 sales decreased by $73,100 or 28.7%, and sales of Touch of Scent
products rose $10,500, or 3.0%, in the same comparative periods. The
increase in sales of Touch of Scent products is attributable entirely
to the introduction in July of 2008 of a new line of air fresheners
(Cube Scents) designed primarily for use in small places such as office
cubicles. The Cube Scents line is being discontinued in 2009.
As sales of a consumer product decline, there is the risk that
retail stores will stop carrying the product. The loss of any significant
customer for any skin care products, "Scott's Liquid Gold" wood care or
mold remediation products could have a significant adverse impact on our
revenues and operating results. We believe that our future success is
highly dependent on favorable acceptance in the marketplace of Montagne
Jeunesse products, of our Alpha Hydrox products and of our "Scott's
Liquid Gold" wood care and mold remediation products.
We also believe that the introduction of successful new products,
including line extensions of existing products, such as the wood wash
and our mold remediation product, using the name "Scott's Liquid Gold",
are important in our efforts to maintain or grow our revenue. We have
introduced, in the first half of 2009 and with limited sales to date, a
new household product under the Scott's Liquid Gold brand which is
designed for use in cleaning the screens of today's sensitive electronics
including televisions, computer monitors and more. Additionally, we
regularly review possible additional products to sell through distribution
agreements or to manufacture ourselves. To the extent that we manufacture
a new product rather than purchase it from external parties, we are also
benefited by the use of existing capacity in our facilities. The actual
introduction of additional products, the timing of any additional
introductions and any revenues realized from new products is uncertain.
On a consolidated basis, cost of goods sold was $4,249,100 during
the first half of 2009 compared to $4,710,600 for the same period of 2008,
a decrease of $461,500 or 9.8%, against a sales decrease of 9.1%. As a
percentage of consolidated net sales, cost of goods sold was 57.4% in 2009
versus 57.9% in 2008, a decrease of about 0.8%. With respect to our skin
care products, the cost of goods sold improved marginally in the first six
months of 2009, declining to 58.1% from 60.6% for the same period in 2008,
as manufactured skin care products comprised a greater share of our
overall skin care sales mix. Household products, however, experienced a
rise in cost of goods sold from 54.6% for the first six months in 2008
compared to 56.7% for the same period in 2009. This rise on household
products is primarily reflective of the combined effects of the higher
cost of oil carried over from 2008, the price increase on steel cans in
2009 and the impact of the clearance sales in 2009 of a line of aerosol
air freshener product introduced in 2007.
Operating Expenses, Interest Expense and Other Income
Six Months ended June 30,
---------------------------------------
Percentage
Increase
2009 2008 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 150,600 $ 208,200 (27.7%)
Selling 2,027,700 2,661,100 (23.8%)
General & Administrative 1,243,000 1,529,800 (18.7%)
----------- ----------- ------
Total operating expenses $ 3,421,300 4,399,100 (22.2%)
=========== =========== ======
Interest Income $ 5,000 14,400 (65.3%)
Interest Expense $ 157,600 205,200 (23.2%)
Operating expenses, comprised primarily of advertising, selling and
general and administrative expenses, decreased $977,800 in the first
half of 2009, when compared to the first half of 2008. The various
components of operating expenses are discussed below.
Advertising expenses for the first six months of 2009 were $150,600
compared to $208,200 for the comparable period of 2008, a decrease of
$57,600 or 27.7%. This decrease reflects a reduction in the amount of
television advertising spots purchased in 2009 as compared to 2008 and
is part of our cost reduction efforts.
Selling expenses for the first half of 2009 were $2,027,700 compared
to $2,661,000 for the comparable six months of 2008, a decrease of
$633,400 or 23.8%. This decrease was comprised of a decrease in salaries,
fringe benefits and related travel expense of $308,900, primarily because
of a decrease in personnel in 2009 versus 2008, a decrease in freight
expenses of $128,300, a decrease in promotional selling expenses of
$123,600, a decrease in commissions of $25,100, a decrease in insurance
premiums of $35,500, and a net decrease in other selling expenses
of $12,000.
General and administrative expenses for the first six months of
2009 were $1,243,000 compared to $1,529,800 for the comparable period of
2008, a decrease of $286,800 or 18.7%. This decrease resulted primarily
from a decrease in salaries, fringe benefits and related travel expense of
$165,800, a decrease in professional fees and reporting costs of
approximately $59,200, a decrease in insurance expense of $21,100, reduced
depreciation expense of $10,200 and a net decrease in various other expense
items totaling $30,500.
Interest expense for the first half of 2009 was $157,600 and
included $29,300 in collateral management fees incurred relative to the
sale of accounts receivable invoices to Summit Financial Resources.
Interest expense for the first half of 2008 was $205,200. The decrease
in interest expense reflects the combined effect of a decrease in the
outstanding mortgage liability during the six months ended June 30, 2009
versus the same period in 2008 and the reduction in the interest rate in
effect on that mortgage from 8.25% in 2008 to 5.0% effective beginning
on June 28, 2008. The interest rate on the mortgage loan decreased to
3.25% as of June 28, 2009. Interest income for the first half of 2009
was $5,000 compared to $14,400 for the same period of 2008, which
consists of interest earned on our cash reserves in 2009 and 2008.
Please see Note 1(g) to the unaudited Condensed Consolidated Financial
Statements in this Report for information on the accounting for the sale
of selected accounts receivable.
During the first half of 2009 and of 2008, expenditures for research
and development were not material (under 2% of revenues).
Three Months Ended June 30, 2009
Compared to Three Months Ended June 30, 2008
Comparative Net Sales
Three Months Ended June 30,
-----------------------------------------
Percentage
Increase
2009 2008 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 1,534,300 $ 1,792,700 (14.4%)
Touch of Scent 143,300 174,700 (18.0%)
----------- ----------- ------
Total household
products 1,677,600 1,967,400 (14.7%)
----------- ----------- ------
Alpha Hydrox and
other skin care 870,300 932,700 (6.7%)
Montagne Jeunesse and other
distributed skin care 956,900 1,143,600 (16.3%)
----------- ----------- ------
Total skin care
products 1,827,200 2,076,300 (12.0%)
----------- ----------- ------
Total Net Sales $ 3,504,800 $ 4,043,700 (13.3%)
=========== =========== ======
Consolidated net sales for the second quarter of the current year
were $3,504,800 versus $4,043,700 for the comparable quarter of 2008, a
decrease of $538,900 or 13.3%. Average selling prices for the second
quarter of 2009 were up by $195,100 over those of the comparable period
of 2008, prices of household products being up by $101,600, while average
selling prices of skin care products were up by $93,500. 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 $317,900 in the second quarter of 2009
versus $396,400 in the same period in 2008, a decrease of $78,500 or
19.8%. This decrease consisted of an increase in coupon expenses of
$28,500, a decrease in co-op advertising of $94,600, and a decrease in
slotting of $12,400.
During the second quarter of 2009, net sales of skin care products
accounted for 52.1% of consolidated net sales compared to 51.3% for the
second quarter of 2008. Net sales of these products for those periods
were $1,827,200 in 2009 compared to $2,076,300 in 2008, a decrease of
$249,100 or about 12.0%. Net sales of Montagne Jeunesse and other
distributed skin care were approximately $956,900 in the second quarter
of 2009 compared to $1,143,600 in the second quarter of 2008. This
decrease was primarily a result of a decrease in sales of distributed
products other than Montagne Jeunesse skin care in the second quarter
of 2009 versus the second quarter of 2008.
Net sales of our Alpha Hydrox and other manufactured skin care
products declined $62,400, or 6.7%, from $932,700 in the second quarter
of 2008 to $870,300 for the same period of 2009. In the recent years
preceding 2009, there had been a contraction in distribution of Alpha
Hydrox products at drug stores and grocery chains, where retail support
in the form of product returns, marketing co-op funds, coupon and
promotion programs, damage claims and similar matters were expensive.
With reduced levels of these expenses and with sales of Alpha Hydrox
products now based in large part on our website, we appear to be
experiencing stabilization of sales of these products.
Sales of household products for the second quarter of this year
accounted for 47.9% of consolidated net sales compared to 48.7% for the
same period of 2008. 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 2009, sales of household products
were $1,677,700, as compared to sales of $1,967,400 for the same three
months of 2008. Sales of Scott's Liquid Gold wood care and other
household products were down by $289,800, a decrease of 14.7%. This
decrease was primarily due to a decrease in Scott's Liquid Gold Wood care
products, a slight increase in promotional costs in the second quarter
of 2009 versus the second quarter of 2008 (these costs are deducted from
gross sales to arrive at net sales) coupled with a decrease in sales of
our Mold Control 500 product. Sales of "Touch of Scent" were down by
$31,400 or about 18.0% for the reasons stated above in regard to the
first half of 2009.
On a consolidated basis, cost of goods sold was $2,003,400 during
the second quarter of 2009 compared to $2,508,700 for the same period of
2008, a decrease of $505,300 or 20.1%, on a sales decrease of 13.3%.
As a percentage of consolidated net sales for the second quarter of
2009, cost of goods sold was 57.2% compared to 62.0% in 2008, a decrease
of 7.7%. This reduction in cost of goods sold as a percentage of sales
is the combined effect of the declining cost of oil in 2009 flowing
through production in the second quarter of 2009 and the reduction in
display and other promotional costs associated with a decline in sales of
distributed products.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2009 2008 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 78,400 $ 97,000 (19.2%)
Selling 995,500 1,320,800 (24.6%)
General & Administrative 585,400 729,800 (19.8%)
----------- ----------- ------
Total operating expenses $ 1,659,300 $ 2,147,600 (22.7%)
=========== =========== ======
Interest Income $ 2,100 $ 5,900 (64.4%)
Interest Expense $ 83,000 $ 102,100 (18.7%)
Operating expenses, comprised primarily of advertising, selling and
general and administrative expenses, decreased $488,300 in the second
quarter of 2009, when compared to the same period during 2008. The
various components of operating expenses are discussed below.
Advertising expenses for the second quarter of 2008 were $78,400
compared to $97,000 for the comparable quarter of 2008, a decrease of
$18,600 or 19.2%
Selling expenses for the three months ended June 30, 2009 were
$995,500 compared to $1,320,800 for the comparable three months of 2008,
a decrease of $325,300 or 24.6%. This decrease was comprised of a
decrease in salaries, fringe benefits and related travel expense of
$146,200 primarily because of a decrease in personnel in 2009 versus
2008, a decrease in freight expense of $69,900, a decrease in promotional
selling expenses of $65,100, a decrease in commissions of $13,400, a
decrease in insurance premiums of $22,600, and a net decrease in other
selling expenses of $8,100.
General and administrative expenses for the second quarter of 2009
were $585,400 compared to $729,800 for the comparable period of 2008, a
decrease of $144,400 or 19.8%. This decrease resulted primarily from a
decrease in salaries, fringe benefits and related travel expense of
$79,400 resulting from a reduction in force and further wage concessions
by executive management in the fourth quarter of 2008, as well as from a
temporary vacancy in the accounting department.
Interest expense for the second quarter of 2009 was $83,000 and
included $18,400 in collateral management fees incurred relative to the
sale of accounts receivable invoices to Summit Financial Resources.
Interest expense for the second quarter of 2008 was $102,100. The
decrease in interest expense reflects the combined effect of a decrease
in the outstanding mortgage liability during the quarter ended June 30,
2009 versus the same period in 2008 and the reduction in the interest rate
in effect on that mortgage from 8.25% in 2008 to 5.0% effective beginning
on June 28, 2008. Interest income for the three months ended June 30,
2008 was $2,100 compared to $5,900 for the same period of 2008.
During the second quarter of 2009 and of 2008, 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 (3.25% at June 30, 2009) is at the prime rate as published
in The Wall Street Journal, adjusted annually each June. This loan
requires 180 monthly payments of approximately $38,200. Monthly payments
commenced on July 28, 2006. The loan agreement contains a number of
covenants, including the requirement for maintaining a current ratio of
at least 1:1 and a ratio of consolidated long-term debt to consolidated
net worth of not more than 1:1. 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 six months of 2009.
Financing Agreement
On November 3, 2008, effective as of October 31, 2008, we entered
into a financing agreement with an "asset-based" lender for the purpose
of improving working capital. An amendment to this agreement was
executed March 12, 2009 extending the initial anniversary date to
March 12, 2010. The agreement provides for up to $1,200,000 and is
secured primarily by accounts receivable, inventory, any lease in which
we are a lessor, all investment property and guarantees by our active
subsidiaries. Under the financing agreement, the lender will make loans
at our request and in the lender's discretion (a) based on purchases of
our Accounts by the lender, with recourse against us and an advance rate
of 70% (or such other percentage determined by the lender in its
discretion), and (b) based on Acceptable Inventory not to exceed certain
amounts, including an aggregate maximum of $250,000. The term of the
agreement is one year, renewable for additional one-year terms unless
either party provides written notice of non-renewal at least 60 days
prior to the end of the current financing period. Advances under the
agreement bear interest at a rate of 1% over the prime rate (as published
in the Wall Street Journal) for the accounts receivable portion of the
advances and 3% over the prime rate for the inventory portion of the
borrowings. The prime rate (3.25% as of June 30, 2009) adjusts with
changes to the rate. In addition there are collateral management fees
of 0.28% for each 10-day period that an advance on an accounts receivable
invoice remains outstanding and a 1.35% collateral management fee on the
average monthly loan outstanding on the inventory portion of any
advance. The agreement provides that no change in control concerning us
or any of our active subsidiaries shall occur except with the prior
written consent of the lender. Events of default include, but are not
limited to, the failure to make a payment when due or a default occurring
on any indebtedness of ours. See Note 1(g) regarding the accounting
treatment of funds obtained under this agreement.
Liquidity
During the first half of 2009 our working capital decreased by
$278,500, and concomitantly, our current ratio (current assets divided
by current liabilities) decreased from 1.6:1 at December 31, 2008 to
1.5:1 at June 30, 2009. This decrease in working capital is
attributable to a net loss in the first six months of 2009 of $426,300
and a reduction in long-term debt of $176,100, offset by depreciation and
amortization in excess of capital additions of $268,400, stock option
grants of $38,600 and shares issued to the ESOP valued at $17,000.
At June 30, 2009, trade and other receivables were $439,400 versus
$570,300 at the end of 2008 largely because sales in June 2009 were less
than those in December 2008. As a result of the accounting treatment
relative to the sale of accounts receivable as discussed in Note 1(g), we
have, within the Consolidated Statement of Cash Flows for the six months
ended June 30, 2009, separately reflected the proceeds of $2,163,800 from
such sales and have concurrently excluded said proceeds from the "change
in trade and other receivables." Accounts payable, accrued payroll and
other accrued expenses increased by $56,100. At June 30, 2009 inventories
were $29,300 more than at December 31, 2008. Prepaid expenses increased
from the end of 2008 by $14,400.
We have no significant capital expenditures planned for 2009.
As a result of the foregoing, we expect that our available cash
along with borrowing available under the Summit Financial Resources
agreement will be sufficient to supplement our projected negative cash
flow from operating activities such that we will be able to fund the
twelve months' cash requirements ending June 30, 2010.
The Summit Financial Resources line of credit is expected to
provide working capital which may be necessary to meet the needs of the
Company over the next 12 months. The Company, in general, has high
quality accounts receivable which may be sold pursuant to the line of
credit. The agreement for the line of credit has a term of one year
expiring March 12, 2010; it is automatically renewed for 12 months
unless either party elects to cancel in writing at least 60 days prior
to the anniversary date. The Company has no intention to exercise this
cancellation right, and the lender has not given indication that they
have any such intention.
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 further possible reduction in our fixed
operating expense, if needed, and potentially the addition of external
financing.
Our dependence on operating cash flow which has been negative in
recent periods and on outside borrowing such as we have through the Summit
Financial Resources agreement 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.
Forward-Looking Statements
This report may contain "forward-looking statements" within the
meaning of U.S. federal securities laws. These statements are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements and our
performance inherently involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements.
Factors that would cause or contribute to such differences include, but
are not limited to, continued acceptance of each of our significant
products in the marketplace; the degree of success of any new product
or product line introduction by us; limited consumer acceptance of the
Alpha Hydrox products introduced in 2005 and 2007; uncertainty of
consumer acceptance of Mold Control 500, wood wash products and other
products recently introduced or being introduced in 2009; 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 Annual
Report on Form 10-K for the year ended December 31, 2008 and this
Report. We undertake no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise
after the date of this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
As of June 30, 2009, 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 June 30, 2009.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting during the quarter ended June 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. Submission of Matters to a Vote of Security Holders
On May 12, 2009, we held our 2009 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:
Shares For Shares Withheld
---------- ---------------
Mark E. Goldstein 8,895,150 553,026
Jeffrey R. Hinkle 8,894,919 553,257
Dennis P. Passantino 8,895,919 552,257
Carl A. Bellini 9,054,989 393,187
Dennis H. Field 9,014,727 433,449
Jeffry B. Johnson 9,012,457 435,719
Gerald L. Laber 9,053,589 394,587
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
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.
August 13, 2009 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
August 13, 2009 BY: /s/ Brian L. Boberick
Date --------------------------------------
Brian L. Boberick
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Document
31.1 Rule 13a-14(a) Certification of the Chief Executive
Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial
Officer
32.1 Section 1350 Certification