UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
September 30, 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 November 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 Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Net sales $ 3,423,000 $ 3,976,600 $10,819,700 $12,114,100
Operating costs
and expenses:
Cost of sales 2,023,800 2,247,000 6,272,900 6,957,600
Advertising 94,900 67,800 245,500 276,000
Selling 1,016,200 1,207,000 3,043,900 3,868,100
General and
administrative 615,200 638,900 1,858,200 2,168,700
----------- ----------- ----------- -----------
3,750,100 4,160,700 11,420,500 13,270,400
----------- ----------- ----------- -----------
Loss from operations (327,100) (184,100) (600,800) (1,156,300)
Interest income 2,200 4,900 7,200 19,300
Interest expense (70,300) (63,500) (227,900) (268,700)
----------- ----------- ----------- -----------
Loss before
income taxes (395,200) (242,700) (821,500) (1,405,700)
Income tax expense
(benefit) - - - -
----------- ----------- ----------- -----------
Net loss $ (395,200) $ (242,700) $ (821,500) $(1,405,700)
=========== =========== =========== ===========
Net loss per
common share (Note 2):
Basic & Diluted $ (0.04) $ (0.02) $ (0.08) $ (0.13)
=========== =========== =========== ===========
Weighted average
shares outstanding:
Basic & Diluted 10,795,000 10,627,300 10,774,100 10,607,800
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2009 2008
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 765,300 $ 909,900
Investment securities 4,300 4,500
Trade and other receivables, net of
allowance of $62,400 and $59,800,
respectively, for doubtful accounts 262,300 570,300
Inventories, net 2,741,900 2,754,500
Prepaid expenses 193,300 120,700
----------- -----------
Total current assets 3,967,100 4,359,900
Property, plant and equipment, net 11,682,700 12,081,900
Other assets 47,800 51,100
----------- -----------
TOTAL ASSETS $15,697,600 $16,492,900
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,577,000 $ 1,348,800
Accrued payroll and benefits 692,300 691,800
Other accrued expenses 288,400 353,100
Current maturities of long-term debt 317,000 273,600
----------- -----------
Total current liabilities 2,874,700 2,667,300
Long-term debt, net of current maturities 4,115,200 4,371,300
----------- -----------
TOTAL LIABILITIES 6,989,900 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 5,244,800 5,179,700
Accumulated comprehensive income 300 500
Retained earnings 2,383,100 3,204,600
----------- -----------
Shareholders' equity 8,707,700 9,454,300
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $15,697,600 $16,492,900
=========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
--------------------------
2009 2008
----------- -----------
Cash flows from operating activities:
Net loss $ (821,500) $(1,405,700)
----------- -----------
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 401,600 471,200
Provision for doubtful accounts 2,500 -
Stock issued to ESOP 17,000 21,000
Stock-based compensation 58,100 49,300
Loss on disposal of assets 900 -
Changes in assets and liabilities:
Proceeds from sale of accounts
receivable 3,838,600 -
Trade and other receivables, net (3,533,100) 53,500
Inventories, net 12,600 73,900
Prepaid expenses (72,600) 124,500
Accounts payable and accrued expenses 164,000 18,100
----------- ----------
Total adjustments to net loss 889,600 811,500
----------- -----------
Net Cash Provided (Used) by
Operating Activities 68,100 (594,200)
----------- -----------
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:
Proceeds from exercise of stock options - 9,200
Principal payments on long-term borrowings (212,700) (165,200)
----------- -----------
Net Cash Used by
Financing Activities (212,700) (156,000)
----------- -----------
Net Decrease in Cash and
Cash Equivalents (144,600) (759,000)
Cash and Cash Equivalents,
beginning of period 909,900 1,483,300
----------- -----------
Cash and Cash Equivalents, end of period $ 765,300 $ 724,300
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 229,000 $ 270,700
=========== ===========
Income taxes $ - $ 2,300
=========== ===========
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, some of which are being
phased out through 2010. In the fourth quarter of 2009, we expect to
begin distribution of an additional product. 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 September 30, 2009, are
scheduled to mature within one year.
(g) Sale of Accounts Receivable
We follow FASB authoritative guidance as it relates to
distinguishing between 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 the authoritative guidance, 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 nine
months of 2009, we sold approximately $5,483,700 of our accounts
receivable invoices to the Lender under a financing agreement for
approximately $3,838,600. 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 September 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 "Trade and other receivables"
at September 30, 2009, we have an outstanding retained receivable of
approximately $224,600 representing 30.0% of $748,700 of unsettled
receivable invoices sold to the Lender as well as $82,300 due to us
resulting from customer remittances paid direct to the Lender on
invoices which were not sold to the Lender. Also, at September 30,
2009, approximately $758,200 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:
September 30, 2009 December 31, 2008
------------------ -----------------
Finished goods $ 1,675,600 $ 1,898,100
Raw materials 1,518,200 1,241,300
Inventory reserve
for obsolescence (451,900) (384,900)
----------- -----------
$ 2,741,900 $ 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
September 30, 2009 and December 31, 2008.
Fair Value Measurements at September 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 $4,300 $4,300 $ - $ -
-------- ---------------- ----------- ------------
Total $4,300 $4,300 $ - $ -
======== ================ =========== ============
(k) Long-Lived Assets
We following FASB authoritative guidance as it relates to the
proper accounting treatment for the impairment or disposal of
long-lived assets. This guidance requires that long-lived
assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(l) Income Taxes
We follow FASB authoritative guidance for the accounting for
income taxes which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences attributable
to differences between the financial statement carrying amounts of
assets and liabilities and their respective income tax bases. A
valuation allowance is provided when it is more likely than not that
some portion or all of a deferred tax asset will not be realized.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which related
temporary differences become deductible. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
(m) Revenue Recognition
Revenue is recognized when an arrangement exists to sell our
product, we have delivered such product in accordance with that
arrangement, the sales price is determinable, and collectibility is
probable. Reserves for estimated market development support, pricing
allowances and returns are provided in the period of sale as a
reduction of revenue. Reserves for returns and allowances are recorded
as a reduction of revenue, and are maintained at a level that management
believes is appropriate to account for amounts applicable to existing
sales. Reserves for coupons and certain other promotional activities
are recorded as a reduction of revenue at the later of the date at
which the related revenue is recognized or the date at which the
sales incentive is offered. At September 30, 2009 and December 31,
2008 approximately $428,000 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 $881,600 and
$1,089,300 in the nine months ended September 30, 2009 and 2008,
respectively.
(n) Advertising Costs
Advertising costs are expensed as incurred.
(o) Stock-based Compensation
During the first nine 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 and 3,000 options for
shares of our common stock to that certain officer at $0.25 per
share. The options which vest ratably over forty-eight months, or
upon a change in control, and which expire after five years, were
granted at or above the market value as of the date of grant.
The weighted average fair market value of the options granted
in the first nine months of 2009 and 2008 were estimated on the date
of grant, using a Black-Scholes option pricing model with the
following assumptions:
September 30, 2009 September 30, 2008
------------------ ------------------
Expected life of options
(using the "simplified" method) 4.5 years 4.5 years
Risk-free interest rate 2.7% 3.0%
Expected volatility of stock 88% 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 $58,100 in the nine months ended September 30,
2009. Approximately $144,300 of total unrecognized compensation
costs related to non-vested stock options is expected to be
recognized over the next forty-four months. In accordance with
SFAS 123R, there was no tax benefit from recording the non-cash
expense as it relates to the options granted to employees, as these
were qualified stock options which are not normally tax deductible.
With respect to the non-cash expense associated with the options
granted to the non-employee directors, no tax benefit was recognized
due to the existence of as yet unutilized net operating losses.
At such time as these operating losses have been utilized and a tax
benefit is realized from the issuance of non-qualified stock
options, a corresponding tax benefit may be recognized.
(p) Comprehensive Income
We follow FASB authoritative guidance which establishes
standards for reporting and displaying comprehensive income and its
components. Comprehensive income includes all changes in equity during
a period from non-owner sources.
The following table is a reconciliation of our net loss to our
total comprehensive loss for the three and nine months ended
September 30, 2009 and 2008:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2009 2008 2009 2008
---------- ---------- ----------- -----------
Net loss $ (395,200) $ (242,700) $ (821,500) $(1,405,700)
Unrealized loss on
on investment
securities (100) (100) (200) (500)
---------- ---------- ----------- -----------
Comprehensive loss $ (395,300) $ (242,800) $ (821,700) $(1,406,200)
========== ========== =========== ===========
(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 $983,800
and $1,188,800, for the nine months ended September 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 FASB issued new accounting guidance related
to the accounting for business combinations and related disclosures.
This new guidance addresses the recognition and accounting for
identifiable assets acquired, liabilities assumed, and noncontrolling
interests in business combinations. The guidance also establishes
expanded disclosure requirements for business combinations. The guidance
was effective on January 1, 2009, and the Company will apply this new
guidance prospectively to all business combinations subsequent to the
effective date.
In December 2007, the FASB issued new accounting guidance related
related to the accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary.
The guidance was effective January 1, 2009 and did not have a material
effect on the Company's consolidated financial statements.
In September 2006, the Financial Accounting Standards Board (FASB)
issued new accounting guidance related to fair value measurements and
related disclosures. This new guidance defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The Company adopted
this new guidance on January 1, 2008, as required for its
financial assets and financial liabilities. However, the
FASB deferred the effective date of this new guidance for one
year as it relates to fair value measurement requirements
for nonfinancial assets and nonfinancial liabilities that are
not recognized or disclosed at fair value on a recurring
basis. The Company adopted these remaining provisions on
January 1, 2009. The adoption of this accounting guidance
did not have a material impact on the Company's
consolidated financial statements.
In May 2009, the FASB issued authoritative guidance which
establishes general standards of accounting for, and disclosures
of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
It requires disclosure of the date through which an entity has
evaluated subsequent events. In accordance with this guidance, the
Company's management has evaluated events subsequent to September 30,
2009 through November 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 an amendment to its
pre-existing guidance as relates to accounting for transfers
of financial assets and extinguishments of liabilities.
This new guidance, which is effective January 1, 2010, may
impact the Company's current accounting treatment as
regards the sale of accounts receivable as discussed in
Note 1(g). If impacted by this amended guidance, the
reporting of the sale of accounts receivable would be
treated as a secured borrowing rather than as a sale.
As a result, both current assets and current liabilities
would be increased in like amounts and the net proceeds
received from the sale of accounts receivable would
appear as cash provided or used by financing activities
rather than as an adjustment to cash provided or used by
operating activities. Early adoption of this amended
guidance is not permitted.
In June 2009, the FASB established the FASB Accounting Standards
Codification (ASC or Codification), officially released on July 1,
2009, as the sole source of authoritative generally accepted accounting
principles used by nongovernmental entities in the preparation of
financial statements. The Codification is meant to simplify the
authoritative accounting guidance by reorganizing US GAAP pronouncements
into roughly 90 accounting topics within a consistent structure. The
Codification supersedes all existing non-SEC accounting and reporting
standards and was effective for the Company beginning July 1, 2009. The
FASB will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates. The FASB will not consider
Accounting Standards Updates as authoritative in their own right; these
updates will serve only to update the Codification, provide background
information about the guidance, and provide the bases for conclusions
on the change(s) in the Codification.
Other Accounting Standards Updates not effective until after
September 30, 2009 are not expected to have a significant effect on
the Company's consolidated financial position or results of operations.
(s) Reclassifications
Certain amounts in the 2008 financial statements have been
reclassified to conform to the 2009 presentation.
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 September 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 nine months ended September 30,
2009 and 2008, respectively, follows:
2009
------------------------------------------
Total
Three Months Nine Months Shares
------------ ----------- -----------
Common shares outstanding
beginning of period 10,795,000 10,695,000 10,695,000
Stock issued to ESOP (a) - 79,100 100,000
Stock option exercises - - -
------------ ----------- -----------
Weighted average number
of common shares
outstanding 10,795,000 10,774,100 10,795,000
Dilutive effect of common
share equivalents - - -
------------ ----------- -----------
Diluted weighted
average number of
common shares outstanding 10,795,000 10,774,100 10,795,000
=========== =========== ===========
2008
------------------------------------------
Total
Three Months Nine Months Shares
------------ ----------- -----------
Common shares
outstanding
beginning of period 10,625,000 10,575,000 10,575,000
Stock issued to ESOP 2,300 16,900 60,000
Stock option exercise - 15,900 20,000
----------- ------------ -----------
Weighted average number
of common shares
outstanding 10,627,300 10,607,800 10,655,000
Dilutive effect of
common share equivalents - - -
----------- ----------- ----------
Diluted weighted
average number of
common shares
outstanding 10,627,300 10,607,800 10,655,000
=========== =========== ===========
(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 September 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 September 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" wood care
products including a cleaner that preserves as it cleans and a wood
wash product; Mold Control 500, a mold remediation product; "Clean
Screen," a surface cleaner for sensitive electronic televisions and
other devices; and "Touch of Scent" room air fresheners. The skin care
segment includes: "Alpha Hydrox," alpha hydroxy acid cleansers and
lotions; a retinol product; and "Diabetic Skin Care", a healing cream
and moisturizer developed to address skin conditions of diabetics.
In the skin care segment, we also distribute skin care and other
sachets of Montagne Jeunesse and certain other products.
The following provides information on our segments for the three
and nine months ended September 30:
Three Months Ended September 30,
-----------------------------------------------------
2009 2008
------------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 1,873,000 $ 1,550,000 $ 1,908,700 $ 2,067,900
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses, and
income taxes $ 15,700 $ (410,900) $ 33,400 $ (276,100)
=========== =========== =========== ===========
Identifiable Assets $ 2,877,700 $ 4,181,600 $ 3,030,700 $ 5,160,900
=========== =========== =========== ===========
Nine Months Ended September 30,
-----------------------------------------------------
2009 2008
------------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ---------- -----------
Net sales to
external customers $ 5,377,300 $ 5,442,400 $ 5,608,400 $ 6,505,700
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ (160,200) $ (661,300) $ (397,300) $(1,008,400)
=========== =========== =========== ===========
Identifiable Assets $ 2,877,700 $ 4,181,600 $ 3,030,700 $ 5,160,900
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three and nine months ended
September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Net sales to
external customers $ 3,423,000 $ 3,976,600 $10,819,700 $12,114,100
=========== =========== =========== ===========
Loss before profit
sharing, bonuses
and income taxes $ (395,200) $ (242,700) $ (821,500) $(1,405,700)
=========== =========== =========== ===========
Identifiable assets $ 7,059,300 $ 8,191,600 $ 7,059,300 $ 8,191,600
Corporate assets 8,638,300 8,877,700 8,638,300 8,877,700
----------- ----------- ----------- -----------
Consolidated total
assets $15,697,600 $17,069,300 $15,697,600 $17,069,300
=========== =========== =========== ===========
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 nine months of 2009, we experienced a decrease in
sales across all of our product lines. Our net loss for the first nine
of 2009 was $821,500 versus a loss of $1,405,700 in the first nine
months of 2008. The decrease in our loss for the first nine months of
2009 compared to the first nine months of 2008 results primarily from
a decrease in our operating expenses.
Summary of Results as a Percentage of Net Sales
Year Ended Nine Months Ended
December 31, September 30,
------------ -------------------
2008 2009 2008
------------ ------- --------
Net sales
Scott's Liquid Gold
household products 45.8% 49.7% 46.3%
Neoteric Cosmetics 54.2% 50.3% 53.7%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 56.9% 58.0% 57.4%
------ ------ ------
Gross profit 43.1% 42.0% 42.6%
Other revenue 0.2% 0.1% 0.1%
------ ------ ------
43.3% 42.1% 42.7%
------ ------ -----
Operating expenses 50.6% 47.6% 52.1%
Interest 2.1% 2.1% 2.2%
------ ------ ------
52.7% 49.7% 54.3%
------ ------ ------
Loss before income taxes (9.4%) (7.6%) (11.6%)
====== ======= ======
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
Nine Months Ended Percentage
September 30, Increase
2009 2008 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 4,876,300 $ 4,883,800 (0.2%)
Touch of Scent 501,000 724,600 (30.9%)
----------- ----------- ------
Total household
chemical products 5,377,300 5,608,400 (4.1%)
----------- ----------- ------
Alpha Hydrox and
other skin care 2,922,300 2,756,100 6.0%
Montagne Jeunesse and other
distributed skin care 2,520,100 3,749,600 (32.8%)
----------- ----------- ------
Total skin care product 5,442,400 6,505,700 (16.3%)
----------- ----------- ------
Total net sales $10,819,700 $12,114,100 (10.7%)
=========== =========== ======
Nine Months Ended September 30, 2009
Compared to Nine Months Ended September 30, 2008
Consolidated net sales for the first nine months of the current
year were $10,819,700 versus $12,114,100 for the first nine months of
2008, a decrease of $1,294,400. Average selling prices for the first
nine months of 2009 were up by $91,800 over the first nine months of
2008. Average selling prices of household products were up by
$133,700 reflecting the impact of the new Clean Screen product line,
while average selling prices of skin care products were down by
$41,900 reflecting the discounting of distributed products (other
than Montagne Jeunesse) in 2009 tempered by 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 $881,600 in the first nine months of 2009 versus
$1,089,300 in the same period in 2008, a decrease of $207,700 or
19.1%. This decrease consisted of a decrease in coupon expense of
$91,100, a decrease in co-op advertising funds of $171,800, and an
increase in slotting fee expenses of $55,200.
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 September 30, 2009, our product
returns (as a percentage of gross revenue) have averaged as follows:
household products 0.3%, Montagne Jeunesse products 4.3%, and our
Alpha Hydrox and other skin care products 4.8%. The level of
returns as a percentage of gross revenue for the household products
and Montagne Jeunesse products have remained fairly constant as a
percentage of sales over that period while the Alpha Hydrox and other
skin care products return levels have fluctuated. More recently, as
our sales of the 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 nine months of
2009 (indicated as a percentage of gross revenues) were: household
products 0.8%, Montagne Jeunesse products 9.8%, and our Alpha Hydrox
and other skin care products 1.1%. The level of Montagne Jeunesse
returns during the first nine months of 2009 results from the
returns by one retailer in the second quarter; the returns of this
product have been at more normal levels since that time. 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 nine months of 2009, net sales of skin care
products accounted for 50.3% of consolidated net sales compared to
53.7% for the same period of 2008. Net sales of these products for
that period were $5,442,400 in 2009 compared to $6,505,700 in 2008,
a decrease of $1,063,300 or 16.3%. Our decrease in net sales of
skin care was comprised of a decrease of $1,229,500 in sales of
products for which we act as a distributor and an increase of
$166,200 in our manufactured skin care product lines.
In the first nine 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, and sales of Montagne Jeunesse
sachets experienced a slight decrease in 2009, resulting in a
comparative decline in sales during the first nine months of 2009
in distributed skin care products. Overall, net sales of our line-up
of distributed products, including Montagne Jeunesse, totaled
$2,520,100 in the first nine months of 2009 as compared to net sales
of $3,749,600 in the same period of 2008, a decrease of $1,229,500
or 32.8%.
Net sales of our Alpha Hydrox and other manufactured skin care
products increased $166,200 or 6.0%, from $2,756,100 in the
first nine months of 2008 to $2,922,300 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 first nine of this year
accounted for 49.7% of consolidated net sales compared to 46.3% for
the same period in 2008. These products are comprised of Scott's
Liquid Gold wood care products, Mold Control 500, Clean Screen, and
Touch of Scent. During the nine months ended September 30, 2009
sales of household products were $5,377,300 as compared to $5,608,400
for the same period in 2008, a decrease of $231,100 or 4.1%. Sales
of Scott's Liquid Gold products increased by $59,900 or 1.3%, in 2009
versus 2008, while Mold Control 500 sales decreased by $67,400 or
17.9%, and sales of Touch of Scent products decreased $223,600 or
30.9%, in the same comparative periods. The increase in sales of
Scott's Liquid Gold products is attributable to the introduction of
"Clean Screen," a surface cleaner for sensitive electronics including
HDTV screens computer monitors and other such devices, offset in part
by minor decreases in sales of the wood care products. The decrease
in sales of Touch of Scent products is attributable primarily to the
introduction in July of 2008 of a new line of air fresheners (Cube S
cents) designed 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 nine months of 2009 and with limited sales to
date, "Clean Screen", a new household product under the Scott's Liquid
Gold brand. In the fourth quarter of 2009 we expect to commence
sales of dry shampoo products for which we will act as a distributor
in the United States. Additionally, we regularly review possible
additional products to sell through distribution agreements or to
manufacture ourselves. To the extent that we manufacture a new product
rather than purchase it from external parties, we are also benefited
by the use of existing capacity in our facilities. The actual
introduction of additional products, the timing of any additional
introductions and any revenues realized from new products is
uncertain.
On a consolidated basis, cost of goods sold was $6,272,900
during the first nine months of 2009 compared to $6,957,600 for the
same period of 2008, a decrease of $684,700 or 9.8%, against a sales
decrease of 10.7%. As a percentage of consolidated net sales, cost
of goods sold was 58.0% in 2009 versus 57.4% in 2008, an increase of
about 1.0%. With respect to our skin care products, the cost of
goods sold deteriorated marginally in the first nine months of 2009,
rising to 61.5% from 60.5% for the same period in 2008, because of
pricing on some distributed products which have been discontinued
from our line. Household products also experienced a rise in cost
of goods sold from 53.9% for the first nine months in 2008 compared
to 54.4% 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
Nine Months Ended Percentage
September 30, Increase
2009 2008 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 245,500 $ 276,000 (11.1%)
Selling 3,043,900 3,868,100 (21.3%)
General & Administrative 1,858,200 2,168,700 (14.3%)
----------- ----------- ------
Total operating expenses $ 5,147,600 $ 6,312,800 (18.5%)
=========== =========== ======
Interest and Other Income $ 7,200 $ 19,300 (62.7%)
=========== =========== ======
Interest Expense $ 227,900 $ 268,700 (15.2%)
=========== =========== ======
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased $1,165,200 in the
first nine months of 2009, when compared to the first nine months of
2008. The various components of operating expenses are discussed below.
Advertising expenses for the first nine months of 2009 were
$245,500 compared to $276,000 for the comparable period of 2008, a
decrease of $30,500 or 11.1%. 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 nine months of 2009 were
$3,043,900 compared to $3,868,100 for the comparable nine months of
2008, a decrease of $824,200 or 21.3%. This decrease was comprised
of a decrease in salaries, fringe benefits and related travel expense
of $361,800, primarily because of a decrease in personnel in 2009
versus 2008, a decrease in freight expenses of $197,100, a decrease
in promotional selling expenses of $163,600, a decrease in commissions
of $47,700, a decrease in insurance premiums of $59,800, and a net
increase in other selling expenses of $5,800.
General and administrative expenses for the first nine months
of 2009 were $1,858,200 compared to $2,168,700 for the comparable
period of 2008, a decrease of $310,500 or 14.3%. This decrease
resulted primarily from a decrease in salaries, fringe benefits and
related travel expense of $152,000, a decrease in professional fees
and reporting costs of approximately $57,700, a decrease in insurance
expense of $32,200, a decrease in postage and office supplies of
$29,600, a decrease in utilities of $13,600, reduced depreciation
expense of $15,400 and a net decrease in various other expense items
totaling $10,000.
Interest expense for the first nine months of 2009 was $227,900
and included $53,300 in collateral management fees incurred relative
to the sale of accounts receivable invoices to Summit Financial
Resources. Interest expense for the first nine months of 2008 was
$268,700. The decrease in interest expense reflects the combined
effect of a decrease in the outstanding mortgage liability during
the nine months ended September 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 and further reduced to 3.25% as of June 28, 2009.
Interest income for the first nine months of 2009 was $7,200 compared
to $19,300 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 nine months of 2009 and of 2008, expenditures
for research and development were not material (under 2% of revenues).
In October of 2009, we entered into a long-term lease of the
second floor of our five-story office building to an established
subsidiary of an international company with rental receipts commencing
in November 2009.
Three Months Ended September 30, 2009
Compared to Three Months Ended September 30, 2008
Comparative Net Sales
Three Months Ended September 30,
-----------------------------------------
Percentage
Increase
2009 2008 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 1,736,400 $ 1,538,000 12.9%
Touch of Scent 136,600 370,700 (63.2%)
----------- ----------- ------
Total household products 1,873,000 1,908,700 (1.9%)
----------- ----------- ------
Alpha Hydrox and
other skin care 1,022,100 843,200 21.2%
Montagne Jeunesse and other
distributed skin care 527,900 1,224,700 (56.9%)
----------- ----------- ------
Total skin care
products 1,550,000 2,067,900 (25.0%)
----------- ----------- ------
Total net sales $ 3,423,000 $ 3,976,600 (13.9%)
=========== =========== ======
Consolidated net sales for the third quarter of the current year
were $3,423,000 versus $3,976,600 for the comparable quarter of 2008, a
decrease of $553,600 or 13.9%. Average selling prices for the third
quarter of 2009 were down by $220,400 over those of the comparable
period of 2008. Average selling prices of household products were up
by $20,600 reflecting while average selling prices of skin care
products were down by $241,000 reflecting the discounting of
distributed products (other than Montage Jeunesse) in 2009 tempered
by a decrease in coupon usage in 2009 versus 2008. 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 $207,500 in the third quarter of 2009 versus
$314,600 in the same period in 2008, a decrease of $107,100 or 34.0%.
This decrease consisted of a decrease in coupon expenses of $87,100, a
decrease in co-op advertising of $40,700, and an increase in slotting
of $20,700.
During the third quarter of 2009, net sales of skin care products
accounted for 45.3% of consolidated net sales compared to 52.0% for the
third quarter of 2008. Net sales of these products for those periods
were $1,550,000 in 2009 compared to $2,076,300 in 2008, a decrease of
$517,900 or 25.0%. Net sales of Montagne Jeunesse and other distributed
skin care were approximately $527,900 in the third quarter of 2009
compared to $1,224,700 in the third 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 third quarter of 2009 versus
the third quarter of 2008.
Net sales of our Alpha Hydrox and other manufactured skin care
products rose $178,900 or 21.2%, from $843,200 in the third quarter of
2008 to $1,022,100 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 third quarter of this year
accounted for 54.7% of consolidated net sales compared to 48.0% for
the same period of 2008. These products are comprised of Scott's
Liquid Gold wood care products, Mold Control 500, Clean Screen, and
Touch of Scent. During the third quarter of 2009, sales of household
products were $1,873,000, as compared to sales of $1,908,700 for the
same three months of 2008. Sales of Scott's Liquid Gold wood care and
other household products were down by $35,700, a decrease of 1.9%.
This decrease was due to a decline in sales of Touch of Scent of
$234,100 offset by an increase in Scott's Liquid Gold wood care
products of $192,700 and a $5,700 increase in sales of our Mold
Control 500. The decline in sales of Touch of Scent is primarily the
result of discontinuation in 2009 of the Cube Scent line originally
introduced in July of 2008. The increase in sales of Scott's Liquid
Gold products is attributable to the introduction of Clean Screen,
offset in part by minor decreases in sales of the wood care products.
On a consolidated basis, cost of goods sold was $2,023,800
during the third quarter of 2009 compared to $2,247,000 for the same
period of 2008, a decrease $223,200 or 9.9%, on a sales decrease of
13.9%. As a percentage of consolidated net sales for the third
quarter of 2009, cost of goods sold was 59.1% compared to 56.5% in
2008, an increase of 4.6%. This increase in cost of goods sold as a
percentage of sales was due to the pricing on some distributed
products which have been discontinued from our line.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2009 2008 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 94,900 $ 67,800 40.0%
Selling 1,016,200 1,207,000 (15.8%)
General & Administrative 615,200 638,900 (3.7%)
----------- ----------- ---------
Total operating expenses $ 1,726,300 $ 1,913,700 (9.8%)
=========== =========== =========
Interest and Other Income $ 2,200 $ 4,900 (55.1%)
Interest Expense $ 70,300 $ 63,500 10.7%
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased $187,400 in the third
quarter of 2009, when compared to the same period during 2008. The
various components of operating expenses are discussed below.
Advertising expenses for the third quarter of 2009 were $94,900
compared to $67,800 for the comparable quarter of 2008, an increase
of $27,100 or 40.0%, resulting primarily from television media
placements.
Selling expenses for the three months ended September 30, 2009
were $1,016,200 compared to $1,207,000 for the comparable three
months of 2008, a decrease of $190,800 or 15.8%. This decrease was
comprised of a decrease in salaries, fringe benefits and related
travel expense of $52,900 primarily because of a decrease in personnel
in 2009 versus 2008, a decrease in freight expense of $68,800, a
decrease in promotional selling expenses of $40,100, a decrease in
commissions of $22,900, a decrease in insurance premiums of $24,300,
and a net increase in other selling expenses of $18,200.
General and administrative expenses for the third quarter of
2009 were $615,200 compared to $638,900 for the comparable period of
2008, a decrease of $23,700 or 3.7%. This decrease resulted primarily
from reductions in salaries and benefits of approximately $45,00 as a
result of layoffs in September 2008 and the retirement of the former
Chief Financial Officer in January 2009 offset by various factors.
The overall reduction in general and administrative expenses also
benefits from decreases in insurance, utilities, and depreciation
expenses.
Interest expense for the third quarter of 2009 was $70,300 and
included $24,000 in collateral management fees incurred relative to
the sale of accounts receivable invoices to Summit Financial
Resources. Interest expense for the third quarter of 2008 was
$63,500. The increase in interest expense reflects the combined
effects of the financing costs associated with the sale of accounts
receivable noted above offset in part by a decrease in the outstanding
mortgage liability during the quarter ended September 30, 2009 versus
the same period in 2008 and the reduction in the interest rate in
effect on that mortgage from 5.0% in 2008 to 3.25% in 2009. Interest
income for the three months ended September 30, 2009 was $2,200
compared to $4,900 for the same period of 2008.
During the third 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 September 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 nine 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 September 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 nine months of 2009 our working capital
decreased by $600,200, and concomitantly, our current ratio (current
assets divided by current liabilities) decreased from 1.6:1 at
December 31, 2008 to 1.4:1 at September 30, 2009. This decrease in
working capital is attributable to a net loss in the first nine
months of 2009 of $821,500 and a reduction in long-term debt of
$256,100, offset by depreciation and amortization in excess of
capital additions of $402,500, stock option grants of $58,100 and
shares issued to the ESOP valued at $17,000.
At September 30, 2009, trade and other receivables were
$262,300 versus $570,300 at the end of 2008 largely because a greater
share of accounts receivable invoices had been sold as of September
30, 2009 as compared to December 31, 2008 (see Note 1(g)). 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 nine months ended
September 30, 2009, separately reflected the proceeds of $3,838,600
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 $164,000.
At September 30, 2009 inventories were $12,600 less than at
December 31, 2008. Prepaid expenses increased from the end of 2008
by $72,600.
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 operations such that we will be able to fund
the twelve months' cash requirements ending September 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 or
lease of all or a portion of our real estate which we have listed
with a real estate firm, efforts to improve revenues, a further
possible reduction in our fixed operating expense, if needed, and
potentially the addition of external financing. As indicated
above, in October 2009 we entered into a long-term lease of the
second floor of our five-story office building to an established
subsidiary of an international company. Our officers and employees
now occupy three other floors of the office building.
Our dependence on operating cash flow 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. Not applicable.
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
As of September 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 September 30, 2009.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting during the quarter ended September 30, 2009 that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits
31.1 Rule 13a-14(a) Certification of the Chief Executive
Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial
Officer
32.1 Section 1350 Certification
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
SCOTT'S LIQUID GOLD-INC.
November 13, 2009 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
November 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