UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
March 31, 2007
Commission File No. 001-13458
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
State of Incorporation I.R.S. Employer
Identification No.
Check whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12-B-2 of the Exchange Act). Yes [ ] No [X]
As of March 31, 2007, the Registrant had 10,533,000 of its $0.10
par value common stock outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
2007 2006
----------- -----------
Net sales $ 4,175,800 $ 4,155,800
----------- -----------
Operating costs and expenses:
Cost of Sales 2,346,500 2,243,500
Advertising 112,300 593,700
Selling 1,255,400 1,425,500
General and administrative 814,100 912,100
----------- -----------
4,528,300 5,174,800
----------- -----------
Loss from operations (352,500) (1,019,000)
Interest income 24,200 12,600
Interest expense (103,900) (41,300)
----------- -----------
(432,200) (1,047,700)
Income tax expense (benefit) - -
----------- -----------
Net loss $ (432,200) $(1,047,700)
=========== ===========
Net loss per common share (Note 2):
Basic and Diluted $ (0.04) $ (0.10)
=========== ===========
Weighted average shares outstanding:
Basic and Diluted 10,533,000 10,503,000
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2007 2006
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,028,200 $ 2,804,100
Investment securities 50,900 51,100
Trade receivables, net of allowance
for doubtful accounts of $61,700 and
$62,000, respectively 1,407,300 743,700
Other receivables 42,000 55,500
Inventories, net 3,459,800 3,291,400
Prepaid expenses 129,800 161,600
----------- -----------
Total current assets 7,118,000 7,107,400
Property, plant and equipment, net 13,000,700 13,159,700
Other assets 58,600 59,700
----------- -----------
TOTAL ASSETS $20,177,300 $20,326,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,267,800 $ 1,893,600
Accrued payroll and benefits 863,400 866,400
Other accrued expenses 372,700 417,100
Current maturities of long-term debt 194,400 191,600
----------- -----------
Total current liabilities 3,698,300 3,368,700
Long-term debt, net of current maturities 4,824,800 4,875,500
----------- -----------
8,523,100 8,244,200
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,533,000 shares 1,053,300 1,053,300
Capital in excess of par 5,019,800 5,015,800
Accumulated comprehensive income 900 1,100
Retained earnings 5,580,200 6,012,400
----------- -----------
Shareholders' equity 11,654,200 12,082,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $20,177,300 $20,326,800
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
---------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net loss $ (432,200) $(1,047,700)
----------- -----------
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 161,600 175,800
Stock issued to ESOP - 48,700
Stock options granted 4,000 -
Changes in assets and liabilities:
Trade and other receivables, net (650,100) 633,300
Inventories (168,400) (628,200)
Prepaid expenses and
other assets 31,800 (144,400)
Accounts payable and
accrued expenses 326,800 645,400
----------- -----------
Total adjustments to net loss (294,300) 730,600
----------- -----------
Net Cash Used by
Operating Activities (726,500) (317,100)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant & equipment (1,500) (28,700)
----------- -----------
Net Cash Used by
Investing Activities (1,500) (28,700)
----------- -----------
Cash flows from financing activities:
Short-term borrowings (payments), net - 300,000
Purchase of stock for contribution
to ESOP - (48,700)
Principal payments on
long-term borrowings (47,900) (233,200)
----------- -----------
Net Cash Provided (Used)
by Financing Activities (47,900) 18,100
---------- -----------
Net Decrease in Cash and Cash Equivalents (775,900) (327,700)
Cash and Cash Equivalents, beginning of period 2,804,100 2,260,700
----------- -----------
Cash and Cash Equivalents, end of period $ 2,028,200 $ 1,933,000
=========== ===========
Supplemental disclosures:
Cash Paid during period for:
Interest $ 104,000 $ 41,300
=========== ===========
Income taxes $ 900 $ 1,100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was incorporated
on February 15, 1954. Scott's Liquid Gold-Inc. and its wholly owned
subsidiaries (collectively, "we" or "our") manufacture and market quality
household and skin care products, and we fill, package and market our Mold
Control 500 product. Since the first quarter of 2001, we have acted as a
distributor in the United States of beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse. Our business is
comprised of two segments, household products and skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and
those of our subsidiaries. All intercompany accounts and transactions
have been eliminated.
(c) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, realizability of
deferred tax assets, reserves for slow moving and obsolete inventory,
customer returns, coupon redemptions and allowances, and bad debts.
(d) Cash Equivalents
We consider all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
(e) Investments in Marketable Securities
We account for investments in marketable securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities",
which requires that we classify investments in marketable securities
according to management's intended use of such investments. We invest
our excess cash and have established guidelines relative to
diversification and maturities in an effort to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. We consider all
investments as available for use in our current operations and,
therefore, classify them as short-term, available-for-sale investments.
Available-for-sale investments are stated at fair value, with unrealized
gains and losses, if any, reported net of tax, as a separate component of
shareholders' equity and comprehensive income (loss). The cost of the
securities sold is based on the specific identification method.
Investments in corporate and government securities as of December 31,
2006, are scheduled to mature within one year.
(f) Inventories
Inventories consist of raw materials and finished goods and are
stated at the lower of cost (first-in, first-out method) or market. We
record a reserve for slow moving and obsolete products and raw materials.
We estimate reserves for slow moving and obsolete products and raw
materials based upon historical and anticipated sales.
Inventories were comprised of the following at:
March 31, 2007 December 31, 2006
-------------- -----------------
Finished goods $ 2,546,100 $ 2,435,400
Raw materials 1,360,900 1,337,200
Inventory reserve
for obsolescence (447,200) (481,200)
----------- -----------
$ 3,459,800 $ 3,291,400
=========== ===========
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost.
Depreciation is provided using the straight-line method over estimated
useful lives of the assets ranging from three to forty-five years.
Building structures and building improvements are estimated to have
useful lives of 35 to 45 years and 3 to 20 years, respectively.
Production equipment and production support equipment are estimated to
have useful lives of 15 to 20 years and 3 to 10 years, respectively.
Office furniture and office machines are estimated to have useful lives
10 to 20 and 3 to 5 years, respectively. Carpeting, drapes and company
vehicles are estimated to have useful lives of 5 to 10 years.
Maintenance and repairs are expensed as incurred. Improvements that
extend the useful lives of the assets or provide improved efficiency are
capitalized.
(h) Financial Instruments
Financial instruments which potentially subject us to
concentrations of credit risk include cash and cash equivalents,
investments in marketable securities, and trade receivables. We maintain
our cash balances in the form of bank demand deposits with financial
institutions that management believes are creditworthy. As of the
balance sheet date and periodically throughout the year, the Company has
maintained balances in various operating accounts in excess of
federally insured limits. We establish an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. We have no
significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option contracts
or other foreign currency hedging arrangements.
The recorded amounts for cash and cash equivalents, receivables,
other current assets, and accounts payable and accrued expenses
approximate fair value due to the short-term nature of these financial
instruments. The fair value of investments in marketable securities is
based upon quoted market value. Our long-term debt bears interest at
a fixed rate that adjusts annually on the anniversary date to a then
prime rate. The carrying value of long-term debt approximates fair
value as of March 31, 2007 and December 31, 2006.
(i) Long-Lived Assets
We account for long-lived assets in accordance with the provisions
of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(j) Income Taxes
We account for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes", which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective income tax bases. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income
during the period in which related temporary differences become
deductible. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
(k) Revenue Recognition
Revenue is generally recognized upon delivery of products to
customers, which is when title passes. Reserves for estimated market
development support, pricing allowances and returns are provided in the
period of sale as a reduction of revenue. Reserves for returns and
allowances are recorded as a reduction of revenue, and are maintained
at a level that management believes is appropriate to account for
amounts applicable to existing sales. Reserves for coupons and certain
other promotional activities are recorded as a reduction of revenue at
the later of the date at which the related revenue is recognized or the
date at which the sales incentive is offered. At March 31, 2007 and
December 31, 2006 approximately $705,000 and $649,000, respectively, had
been reserved as a reduction of accounts receivable, and approximately
$55,000 and $50,000, respectively, had been reserved as current
liabilities. Co-op advertising, marketing funds, slotting fees and
coupons are deducted from gross sales and totaled $659,100, and $630,100
at March 31, 2007 and 2006, respectively.
(l) Advertising Costs
We expense advertising costs as incurred.
(m) Stock-based Compensation
At March 31, 2007, we had four stock-based employee compensation
plans. During the first quarter of fiscal 2007, we adopted the
provisions of, and account for stock-based compensation in accordance
with, the Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards No. 123-revised 2004 ("SFAS 123R"),
"Share-Based Payment" which replaced Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured
at the grant date based on the fair value of the award and is recognized
as expense on a straight-line basis over the requisite service period,
which is the vesting period. We elected the modified-prospective method,
under which prior periods are not revised for comparative purposes. The
valuation provisions of SFAS 123R apply to new grants and to grants
that were outstanding as of the effective date and are subsequently
modified. No grants occurred in 2006 subsequent to the adoption of
SFAS 123R and all outstanding options granted prior to December 31, 2006
were fully vested as of December 31, 2006.
Prior to January 1, 2006, we accounted for the plans described
above under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected
in net income prior to January 1, 2006, as all options granted under
those plans had an exercise price not less than the market value of the
underlying common stock on the date of grant.
We granted 448,550 options for shares of our common stock
(268,550 to employees and 180,000 to non-employee directors) during
the first quarter of 2007. The options which vest ratably over
forty-eight months, or upon a change in control, and which expire
after five years, were granted at or above the market value of $0.82
as of the date of grant.
The weighted average fair market value of the options granted of
$0.42 was estimated on the date of grant using a Black-Scholes option
pricing model with the following assumptions.
Three Months Ended
March 31, 2007
------------------
Expected life of options 4.5 years
Risk-free interest rate 4.46%
Expected volatility of stock 58%
Expected dividend rate None
Compensation cost related to stock options recognized in
operating results (included in general and administrative expenses)
under SFAS 123R was $3,900 in the three months ended March 31,
2007. Approximately $186,200 of total unrecognized compensation
costs related to non-vested stock options is expected to be recognized
over the next forty-seven months. In accordance with SFAS 123R,
there was no tax benefit from recording the non-cash expense as relates
to the options granted to employees as these were qualified stock
options which are not normally tax deductible. With respect to
the non-cash expense associated with the options granted to the
non-employee directors, no tax benefit was recognized due to the
existence of as yet unutilized net operating losses. At such
time as these operating losses have been utilized and a tax benefit
is realized from the issuance of non-qualified stock options, a
corresponding tax benefit may be recognized.
(n) Comprehensive Income
We follow 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 quarters ended March 31, 2007 and 2006:
2007 2006
----------- -----------
Net loss $ (432,200) $(1,047,700)
Unrealized gain (loss) on
investment securities (200) (500)
----------- -----------
Comprehensive loss $ (432,400) $(1,048,200)
=========== ===========
(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 $345,000 and
$387,700 for the quarters ended March 31, 2007 and 2006, respectively.
Selling expenses consist primarily of shipping and handling
costs, wages and benefits for sales and sales support personnel,
travel brokerage commissions, promotional costs, as well as other
indirect costs.
General and administrative expenses consist primarily of wages
and benefits associated with management and administrative support
departments, business insurance costs, professional fees, office
facility related expenses and other general support costs.
(p) Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements"
("SFAS No. 157"). This Statement defines fair value as used in
numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles
("GAAP") and expands disclosure related to the use of fair value
measures in financial statements. SFAS No. 157 does not expand the
use of fair value measures in financial statements, but standardizes
its definition and guidance in GAAP. The Standard emphasizes that fair
value is a market-based measurement and not an entity-specific
measurement based on an exchange transaction in which the entity sells
an asset or transfers a liability (exit price). SFAS No. 157 establishes
a fair value hierarchy from observable market data as the highest level
to fair value based on an entity's own fair value assumptions as the
lowest level. SFAS No. 157 is effective in fiscal years beginning
after November 15, 2007. Adoption of this statement is not expected to
materially impact our results of operations or financial position.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48,)
"Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109, Accounting for Income Taxes". FIN 48 clarifies
the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in
the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The interpretation applies
to all tax positions related to income taxes subject to FASB Statement
No. 109.
FIN 48 is effective for fiscal years beginning after December 15,
2006. Differences between amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts
reported after adoption should be accounted for as cumulative-effect
adjustment recorded to the beginning balance of retained earnings.
The adoption of FIN 48 did not have a material impact on our financial
position.
Note 2. Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated financial
statements in accordance with the rules and regulations of the
Securities and Exchange Commission. Such rules and regulations allow
the omission of certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles as long as the statements are not
misleading. In the opinion of management, all adjustments necessary
for a fair presentation of these interim statements have been included
and are of a normal recurring nature. These interim financial
statements should be read in conjunction with our financial statements
included in our 2006 Annual Report on Form 10-KSB.
Note 3. Earnings per Share
Per share data was determined by using the weighted average number
of common shares outstanding. Potentially dilutive securities, including
stock options, are considered only for diluted earnings per share, unless
considered anti-dilutive. The potentially dilutive securities, which are
comprised of outstanding stock options of 1,944,650 and 1,680,600 at
March 31, 2007 and 2006, were excluded from the computation of weighted
average shares outstanding due to their anti-dilutive effect.
A reconciliation of the weighted average number of common shares
outstanding for the three months ended March 31 follows:
2007 2006
---------- ----------
Common shares outstanding,
beginning of the year 10,533,000 10,503,000
Stock options exercised - -
---------- ----------
Weighted average number of
common shares outstanding 10,533,000 10,503,000
Dilutive effect of common share
equivalents - -
---------- ----------
Diluted weighted average number
of common shares outstanding 10,533,000 10,503,000
========== ==========
At March 31, 2007, there were authorized 50,000,000 shares of our
$.10 par value common stock and 20,000,000 shares of preferred stock
issuable in one or more series. None of the preferred stock was issued
or outstanding at March 31, 2007.
Note 4. Segment Information
We operate in two different segments: household products and
skin care products. Our products are sold nationally and internationally
(primarily Canada), directly and through independent brokers, to mass
merchandisers, drug stores, supermarkets, wholesale distributors and
other retail outlets. Management has chosen to organize our business
around these segments based on differences in the products sold. The
household products segment includes "Scott's Liquid Gold" for wood, a
wood cleaner which preserves as it cleans, Mold Control 500, a mold
remediation product, and "Touch of Scent," a room air freshener. The
skin care segment includes "Alpha Hydrox," alpha hydroxy acid cleansers
and lotions; a retinol product; "Diabetic Skin Care", a healing cream
and moisturizer developed to address skin conditions of diabetics; and
beauty care sachets of Montagne Jeunesse distributed by us.
The following provides information on our segments for the three
months ended March 31:
2007 2006
----------------------- ------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 2,305,500 $ 1,870,300 $ 2,065,000 $ 2,090,800
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ 60,300 $ (492,500) $ (327,100) $ (720,600)
=========== =========== =========== ===========
Identifiable assets $ 3,599,000 $ 5,978,600 $ 3,660,700 $ 6,401,800
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three months ended March 31:
2007 2006
------------ -----------
Net sales to external customers $ 4,175,800 $ 4,155,800
=========== ===========
Loss before profit sharing,
bonuses and income taxes $ (432,200) $(1,047,700)
=========== ===========
Identifiable assets $ 9,577,600 $10,062,500
Corporate assets 10,599,700 10,851,000
----------- -----------
Consolidated total assets $20,177,300 $20,913,500
=========== ===========
Corporate assets noted above are comprised primarily of our cash
and investments, and property and equipment not directly associated
with the manufacturing, warehousing, shipping and receiving activities.
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
During the first quarter of 2007, we experienced an increase in
sales of our Scott's Liquid Gold household products and our Neoteric
line of skin care products, while experiencing a decrease in sales of
our Montagne Jeunesse line of skin care products and a decrease in
sales of our Touch of Scent air freshener line of products. Our net
loss for the first quarter of 2007 was $432,200 versus a loss of
$1,047,700 in the first quarter of 2006. The loss for 2007 was
primarily due to lower sales of the Montagne Jeunesse product line and
our Alpha Hydrox skin care line. The decrease in our loss for the
first quarter of 2007 compared to the first quarter of 2006 results
from a reduction in our operating costs and expenses, including the
reduction of advertising.
Summary of Results as a Percentage of Net Sales
Year Ended Three Months Ended
December 31, March 31,
2006 2007 2006
----------- -------- --------
Net sales
Scott's Liquid Gold
household products 53.1% 55.2% 49.7%
Neoteric Cosmetics 46.9% 44.8% 50.3%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 57.4% 56.2% 54.0%
------ ------ ------
Gross profit 42.6% 43.8% 46.0%
Other revenue 1.0% 0.6% 0.3%
------ ------ ------
43.6% 44.4% 46.3%
------ ------ ------
Operating expenses 63.8% 52.2% 70.5%
Interest expense 2.0% 2.5 1.0%
------ ------ ------
65.8% 54.7% 71.5%
------ ------ ------
Loss before income taxes (22.2%) (10.3%) (25.2%)
====== ====== ======
Our gross margins may not be comparable to those of other entities,
because some entities include all of the costs related to their
distribution network in cost of sales and others, like us, exclude a
portion of them (freight out to customers and nominal outside warehouse
costs) from gross margin, including them instead in the selling expense
line item. See Note 1(o), Operating Costs and Expenses Classification,
to the unaudited Consolidated Financial Statements in this Report.
Comparative Net Sales
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and other
household products $ 1,960,100 $ 1,681,200 16.6%
Touch of Scent 345,400 383,800 (10.0%)
----------- ----------- ----------
Total household
chemical products 2,305,500 2,065,000 11.6%
----------- ----------- ----------
Alpha Hydrox and other skin care 1,174,400 1,028,700 14.2%
Montagne Jeunesse skin care 695,900 1,062,100 (34.5%)
----------- ----------- ----------
Total skin care products 1,870,300 2,090,800 (10.5%)
----------- ----------- ----------
Total Net Sales $ 4,175,800 $ 4,155,800 0.5%
=========== =========== ==========
Three Months Ended March 31, 2006
Compared to Three Months Ended March 31, 2005
Consolidated net sales for the first quarter of the current year
were $4,175,800 versus $4,155,800 for the first three months of 2006, an
increase of $20,000. Average selling prices were up by $41,300. Co-op
advertising, marketing funds, slotting fees, and coupons paid to retailers
are deducted from gross sales, and totaled $659,100 in the first quarter
of 2007 versus $630,100 in the same quarter in 2006, an increase of
$29,000 or 4.6%. This increase consisted of a decrease in coupon expense
of $49,700, an increase in co-op marketing funds of $159,000, and a
decrease in slotting fee expenses of $80,300.
During the first quarter of 2007, net sales of skin care products
accounted for 44.8% of consolidated net sales compared to 50.3% for the
same quarter of 2006. Net sales of these products for that period were
$1,870,300 in 2007 compared to $2,090,800 in 2006, a decrease of $220,500
or 10.5%. Our increase in sales of Alpha Hydrox and other skin care was
due to the first quarter 2007 introduction of a line of Neoteric Massage
Oils, including the initial "pipeline" orders so that the massage oils
are on the shelves of retailers. With only the introduction underway,
it is too early to tell about consumer acceptance of the Neoteric
Massage Oils. This increase was somewhat offset by a decrease in sales
of our Alpha Hydrox products introduced in 2005. We have continued to
experience a drop in unit sales of our more recently introduced 2005
Alpha Hydrox products and our earlier-established alpha hydroxy
acid-based products due primarily to maturing in the market for alpha
hydroxy acid-based skin care products, intense competition from
producers of similar or alternative products, many of which are
considerably larger than Neoteric Cosmetics, Inc. and reduced
distribution of these products at retail stores in current and prior
periods. For the first quarter of 2007, the sales of our Alpha Hydrox
products accounted for 33.0% of net sales of skin care products and
14.8% of total net sales, compared to 32.9% of net sales of skin care
products and 16.6% of total net sales in 2006.
For 2007, net sales of Montagne Jeunesse products were $695,900
in the first quarter versus $1,062,100 for the comparable quarter of
2006, a decrease of $366,200 or 34.5%. The decrease reflects changes
in product positioning at several key retailers in 2006 as they had
revised the amount of shelf and floor space allocated to these types
of products, including the elimination in the first quarter of 2006 at
approximately 1,500 Wal-Mart Stores of the department where Montagne
Jeunesse products were previously displayed. However, late in the
first quarter of 2007 Wal-Mart began the ordering Montagne Jeunesse
sachets for placement in significantly more stores including the
stores we lost in 2006.
Sales of household products for the first quarter of this year
accounted for 55.2% of consolidated net sales compared to 49.7% for
the same period in 2006. These products are comprised primarily of
Scott's Liquid Gold wood care products (Scott's Liquid Gold for wood,
a wood wash and wood wipes), mold remediation products and Touch of
Scent. During the quarter ended March 31, 2007 sales of household
products were $2,305,500 as compared to $2,065,000 for the same quarter
in 2006, an increase of $240,500, or 11.6%. Sales of Scott's Liquid
Gold wood care and other household products increased from $1,681,200
in 2006 to $1,960,100 in 2007 an increase of $278,900, or 16.6%.
This increase is primarily due to sales of our mold remediation product
Mold Control 500 in 2007 which are included in the sales shown for
Scott's Liquid Gold and other household products. Mold Control 500
sales were $213,100 for the first quarter of 2007, with Mold Control 500
continuing to be carried in some stores of national retail chains.
In the second quarter of 2006 we began introducing Mold Control 500
under the Scott's Liquid Gold product line. It is too early to
determine if this introduction will be successful. Sales of "Touch
of Scent" were down by $38,400, or 10.0%, primarily due to a decrease
in distribution in past quarters.
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 or "Touch of Scent", could have a significant
adverse impact on our revenues and operating results. We believe that
our future success is highly dependent on favorable acceptance in the
marketplace of Montagne Jeunesse products, of our new Alpha Hydrox
products and of our "Scott's Liquid Gold" wood care and mold remediation
products.
We also believe that the introduction of successful new products,
including line extensions of existing products, such as the wood wash
and our new mold remediation product, using the name "Scott's Liquid
Gold", are important in our efforts to maintain or grow our revenue.
Late in the fourth quarter of 2006, we introduced two new items within
our Alpha Hydrox cosmetic line of products. We currently plan to
introduce four new items to the Alpha Hydrox cosmetic line plus a line
of health and beauty care products under the Neoteric cosmetic label.
Within the household product line we plan to introduce three to four
new products or items including some additions to our Touch of Scent air
fragrance product line. To the extent that we manufacture a new product
rather than purchase it from external parties, we are also benefited by
the use of existing capacity in our facilities. We are using our
facilities to fill and package the mold control products. The actual
introduction of additional products, the timing of any additional
introductions and any revenues realized from new products is uncertain.
On a consolidated basis, cost of goods sold was $2,346,500 during
the first three months of 2007 compared to $2,243,500 for the same
period of 2006, an increase of $103,000 or 4.6%, on a sales increase
of 0.5%. As a percentage of consolidated net sales, cost of goods sold
was 56.2% in 2007 versus 54.0% in 2006, an increase of about 4.1%.
This was essentially due to our decrease in plant utilization, and the
increase in sales promotion expenses which lowered our revenues and thus
affected our margins particularly in the skin care line of products.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 112,300 $ 593,700 (81.8%)
Selling 1,255,400 1,425,500 (11.9%)
General & Administrative 814,100 912,100 (10.7%)
----------- ----------- ---------
Total operating
expenses $ 2,181,800 $ 2,931,300 (25.6%)
=========== =========== =========
Interest Income $ 24,200 $ 12,600 92.1%
Interest Expense $ 103,900 $ 41,300 151.6%
Operating expenses, comprised of advertising, selling and general
and administrative expenses, decreased by $749,500 in the first quarter
of 2007 when compared to first quarter of 2006. The various components
of operating expenses are discussed below.
Advertising expenses for the first three months of 2007 were
$112,300 compared to $593,700 for the comparable quarter of 2006, a
decrease of $481,400 or 81.8%. A majority of that decrease was due
to a decrease in advertising expenses applicable to our Alpha Hydrox
skin care products.
Selling expenses for the first quarter of 2007 were $1,255,400
compared to $1,425,500 for the comparable three months of 2006, a
decrease of $170,100 or 11.9%. That decrease was comprised of a
decrease in salaries and fringe benefits and related travel expense
of $76,300 primarily because of a decrease in personnel in 2007 versus
2006, a decrease in freight and brokerage expenses of $69,400, a
decrease in promotional selling expenses of $23,300 and a net decrease
in other selling expenses of $1,100.
General and administrative expenses for the first three months
of 2007 were $814,100 compared to $912,100 for the same period of 2006,
a decrease of $98,000 or 10.7%. That decrease was primarily attributable
to a decrease in salaries and fringe benefits of $91,300 resulting from a
reduction in salaries and personnel, and a net decrease in other general
and administrative expenses of $6,700.
Interest expense for the first quarter of 2007 was $103,900 versus
$41,300 for the comparable quarter of 2006. Interest expense increased
because of higher interest rates and increased borrowing levels. Interest
income for the three months ended March 31, 2007 was $24,200 compared to
$12,600 for the same period of 2006, which consists of interest earned
on our cash reserves in 2007 and 2006.
During the first quarter of 2007 and of 2006, expenditures for
research and development were not material (under 2% of revenues).
Liquidity and Capital Resources
On June 28, 2006, we entered into a new loan with a fifteen year
amortization with Citywide Banks for $5,156,600 secured by the land,
building and fixtures at our Denver, Colorado facilities. This loan
replaces the bank loan with Citywide Banks, secured by the facilities,
in the principal amount of approximately $1,582,900. Interest on the
bank loan (8.0% at December 31, 2006) is at the prime rate as published
in The Wall Street Journal, adjusted annually each June. Part of the
proceeds of the new loan was used to pay off the prior loan, and the
remaining proceeds have been or will be used in business operations,
including the development and introduction of new products. This loan
requires 180 monthly payments of approximately $49,500, which commenced
on July 28, 2006. As did the prior bank loan, the loan agreement
contains a number of covenants, including the requirement for
maintaining a current ratio of at least 1:1 and a ratio of consolidated
long-term debt to consolidated net worth of not more than 1:1. We may
not declare any dividends that would result in a violation of either of
these covenants. The foregoing requirements were met at the end of the
first three months of 2007.
During the first quarter of 2007 our working capital decreased by
$319,000, and concomitantly, our current ratio (current assets divided by
current liabilities) decreased from 2.1:1 at December 31, 2006 to 1.9:1
at March 31, 2007. This decrease in working capital is attributable to
a net loss in the first three months of 2007 of $432,200, and a reduction
in long-term debt of $47,900, offset by depreciation in excess of capital
additions of $159,000.
At March 31, 2007, trade accounts receivable were $1,407,300 versus
$743,700 at the end of 2006, largely because sales in the last two months
of the quarter ended March 31, 2007 were more than those of the last two
months of the quarter ended December 31, 2006. Accounts payable
increased from the end of 2006 through March of 2007 by $374,200
corresponding primarily with the increase and timing of purchases of
inventory over that period. At March 31, 2007 inventories were $168,400
more than at December 31, 2006, due to the increase in cosmetic product
inventory, resulting partially from lower than anticipated sales in the
first quarter, anticipated increases in sales of the Montagne Jeunesse
sachets and our proposed new product introductions in the upcoming
months. Prepaid expenses decreased from the end of 2006 by $31,800
primarily due to a decrease in prepaid insurance expenses.
We have no significant capital expenditures planned for 2007 and
have no current plans for any external financing, other than our
existing bank loan. We expect that our available cash and cash flows
from operating activities will fund the next twelve months' cash
requirements.
Our dependence on operating cash flow means that risks involved
in our business can significantly affect our liquidity. Any loss of a
significant customer, any further decreases in distribution of our skin
care or household products, any new competitive products affecting
sales levels of our products, or any significant expense not included
in our internal budget could result in the need to raise cash, such as
through a bank financing. We have no arrangements for any additional
external financing of debt or equity, and we are not certain whether
any such financing would be available on acceptable terms. In order
to improve our operating cash flow, we need to achieve profitability.
Forward-Looking Statements
This report may contain "forward-looking statements" within the
meaning of U.S. federal securities laws. These statements are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements and our
performance inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking
statements. Factors that would cause or contribute to such differences
include, but are not limited to, continued acceptance of each of our
significant products in the marketplace; the degree of success of any
new product or product line introduction by us; the uncertainty of
consumer acceptance of the new Alpha Hydrox introduced in 2005, mold
control and wood wash products; competitive factors; any decrease in
distribution of (i.e., retail stores carrying) our significant products;
continuation of our distributorship agreement with Montagne Jeunesse;
the need for effective advertising of our products; limited resources
available for such advertising; new competitive products and/or
technological changes; dependence upon third party vendors and upon
sales to major customers; changes in the regulation of our products,
including applicable environmental regulations; continuing losses
which could affect our liquidity; the loss of any executive officer;
and other matters discussed in our 2006 Annual Report on Form 10-KSB.
We undertake no obligation to revise any forward-looking statements in
order to reflect events or circumstances that may arise after the date
of this report.
Item 3A(T). Controls and Procedures
As of March 31, 2007, we conducted an evaluation, under the
supervision and with the participation of the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in reports that
we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms as of
March 31, 2007. There was no change in our internal control over
financial reporting during the quarter ended March 31, 2007 that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable.
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Other Information
As reported in our proxy statement for the 2007 Annual Meeting of
Shareholders, on February 27, 2007, we granted stock options to executive
officers, employees and non-employee directors for a total of 448,550
shares of common stock at an exercise price of $0.82 per share (the
closing price on February 27, 2007) except that the exercise price was
$0.902 for Mark E. Goldstein. These options were issued under revised
option agreements which provide for vesting at 1/48th per month from
the date of grant or upon a change of control. Previously, options
were 100% vested at the date of grant. Concurrently, we refined one
provision of our 2005 Stock Incentive Plan regarding acceleration of
vesting. Attached as exhibits to this Form 10-QSB Report are the
forms of stock option agreements and the revised 2005 Plan.
The number of shares subject to the options granted on
February 27, 2007 were: 16,200 for each of Mark E. Goldstein,
Jeffrey R. Hinkle and Jeffry B. Johnson; 25,200 shares for Dennis P.
Passantino; 50,000 for Carl A. Bellini (replacing an expired option);
100,000 shares for Dennis H. Field (replacing an expired option); and
30,000 for Gerald J. Laber.
Item 6. Exhibits
10.1 2005 Stock Incentive Plan, as amended.
10.2 Form of 1997 Stock Option Plan Incentive Stock Option
Agreement
10.3 Form of 1998 Stock Option Plan Incentive Stock Option
Agreement
10.4 Form of 2005 Stock Option Plan Incentive Stock Option
Agreement
10.5 Form of 1998 Stock Option Plan Nonqualified Stock
Option Agreement
10.6 Form of 2005 Stock Incentive Plan Nonqualified Stock
Option Agreement
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certification
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCOTT'S LIQUID GOLD-INC.
May 4, 2007 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
May 4, 2007 BY: /s/ Jeffry B. Johnson
Date --------------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Document
10.1 2005 Stock Incentive Plan, as amended.
10.2 Form of 1997 Stock Option Plan Incentive Stock Option Agreement
10.3 Form of 1998 Stock Option Plan Incentive Stock Option Agreement
10.4 Form of 2005 Stock Option Plan Incentive Stock Option Agreement
10.5 Form of 1998 Stock Option Plan Nonqualified Stock Option Agreement
10.6 Form of 2005 Stock Incentive Plan Nonqualified Stock Option
Agreement
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