UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
June 30, 2010
Commission File No. 001-13458
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
State of Incorporation I.R.S. Employer
Identification No.
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2
of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ](Do not check if a smaller reporting
company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of August 10, 2010, the Registrant had 10,795,000 of its $0.10
par value common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30,
2010 2009 2010 2009
----------- ----------- ----------- -----------
Net sales $ 3,450,800 $ 3,504,800 $ 7,050,200 $ 7,396,700
Operating costs
and expenses:
Cost of sales 1,821,200 2,003,400 3,702,300 4,249,100
Advertising 171,500 78,400 242,900 150,600
Selling 1,095,600 995,500 2,059,100 2,027,700
General and
administrative 608,400 585,400 1,217,900 1,243,000
----------- ----------- ----------- -----------
3,696,700 3,662,700 7,222,200 7,670,400
----------- ----------- ----------- -----------
Loss from
operations (245,900) (157,900) (172,000) (273,700)
Interest and
other income 32,800 2,100 67,300 5,000
Interest expense (69,800) (83,000) (139,000) (157,600)
----------- ----------- ----------- -----------
(282,900) (238,800) (243,700) (426,300)
Income tax expense
(benefit) - - - -
----------- ----------- ----------- -----------
Net loss $ (282,900) $ (238,800) $ (243,700) $ (426,300)
=========== =========== =========== ===========
Net loss per
common share (Note 2):
Basic and
Diluted $ (0.03) $ (0.02) $ (0.02) $ (0.04)
=========== =========== =========== ===========
Weighted average
shares outstanding:
Basic and
Diluted 10,795,000 10,795,000 10,795,000 10,763,500
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2010 2009
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 719,900 $ 654,100
Investment securities - 4,300
Trade receivables, net of allowance
of $60,200 and $59,800, respectively,
for doubtful accounts 581,800 314,400
Inventories, net 2,392,400 1,984,600
Prepaid expenses 127,900 142,300
----------- -----------
Total current assets 3,822,000 3,099,700
Property, plant and equipment, net 11,303,900 11,554,100
Other assets 99,600 110,000
----------- -----------
TOTAL ASSETS $15,225,500 $14,763,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Obligations collateralized
by receivables $ 504,800 $ -
Accounts payable 1,514,400 1,109,900
Accrued payroll and benefits 582,600 578,900
Other accrued expenses 279,700 370,000
Current maturities of long-term debt 324,900 319,600
----------- -----------
Total current liabilities 3,206,400 2,378,400
Long-term debt, net of current maturities 3,870,300 4,034,300
----------- -----------
TOTAL LIABILITIES 7,076,700 6,412,700
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,795,000 shares,
and 10,795,000 shares, respectively 1,079,500 1,079,500
Capital in excess of par 5,306,000 5,264,300
Accumulated comprehensive income - 300
Retained earnings 1,763,300 2,007,000
----------- -----------
Shareholders' equity 8,148,800 8,351,100
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $15,225,500 $14,763,800
=========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
--------------------------
2010 2009
----------- -----------
Cash flows from operating activities:
Net loss $ (243,700) $ (426,300)
----------- -----------
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 260,700 268,400
Provision for doubtful accounts - 2,500
Stock issued to ESOP - 17,000
Stock based compensation 41,700 38,600
Gain on sale of securities (300) -
Changes in assets and liabilities:
Proceeds from sale of accounts receivable - 2,163,800
Trade and other receivables, net 76,200 (2,035,400)
Inventories (407,800) (29,300)
Prepaid expenses and other assets 14,300 (14,400)
Accounts payable and accrued expenses 481,400 56,100
----------- -----------
Total adjustments to net loss 466,200 467,300
----------- -----------
Net Cash Provided by
Operating Activities 222,500 41,000
----------- -----------
Cash flows from investing activities:
Proceeds from sale of securities 4,300 -
Real estate brokerage costs (41,200) -
----------- -----------
Net Cash Used by
Investing Activities (36,900) -
----------- -----------
Cash flows from financing activities:
Proceeds on obligations
collateralized by receivables 38,800 -
Principal payments on long-term borrowings (158,600) (135,400)
----------- -----------
Net Cash Used by
Financing Activities (119,800) (135,400)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 65,800 (94,400)
Cash and Cash Equivalents, beginning of period 654,100 909,900
----------- -----------
Cash and Cash Equivalents, end of period $ 719,900 $ 815,500
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 139,400 $ 158,700
=========== ===========
See accompanying notes to consolidated financial statements.
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was incorporated
on February 15, 1954. Scott's Liquid Gold-Inc. and its wholly-owned
subsidiaries (collectively, "we" or "our") manufacture and market quality
household and skin care products, and we fill, package and market our
Mold Control 500 product. Since the first quarter of 2001, we have acted
as the distributor in the United States for beauty care products contained
in individual sachets and manufactured by Montagne Jeunesse. In 2006 and
2007, we began the distribution of certain other products. Our business
is comprised of two segments -- household products and skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and those
of our wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
(c) Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated financial
statements in accordance with the rules and regulations of the Securities
and Exchange Commission. Such rules and regulations allow the omission of
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles as long as the statements are not misleading. In the opinion of
management, all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal recurring
nature. These interim financial statements should be read in conjunction
with our financial statements included in our 2009 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 follow FASB authoritative guidance as it relates to 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. 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, 2009, are scheduled to mature within one year.
(g) Sale of Accounts Receivable
On November 3, 2008, effective as of October 31, 2008, we
established a $1,200,000 factoring line with an asset-based lender, Summit
Financial Resources ("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. During the first six months of 2010, we sold approximately
$5,452,400 of our accounts receivable invoices to the Lender under a
financing agreement for approximately $3,816,700. The Company retains an
interest equal to 30% of the total accounts receivable invoice sold to the
Lender less a collateral management fee of 0.28% for each 10-day period
that an accounts receivable invoice is uncollected plus a daily finance
fee, based on Wall Street Journal prime (3.25% at June 30, 2010) plus 1%,
imposed on (a) the net of the outstanding accounts receivable invoices
less (b) retained amounts due to us. At June 30, 2010, approximately
$695,200 of this credit line was available for future factoring of accounts
receivable invoices.
We have adopted the FASB's amended authoritative guidance which was
issued in June 2009 and which became effective January 1, 2010 as it
relates to distinguishing between transfers of financial assets that are
sales from transfers that are secured borrowings. Under this new guidance
as adopted by the Company effective January 1, 2010, the reporting of the
sale of accounts receivable is treated as a secured borrowing rather than
as a sale. As a result, affected accounts receivable are reported under
Current Assets within the Company's balance sheet as "Trade receivables,
collateralized" subject to reserves for doubtful accounts, returns and
other allowances. Similarly, the net liability owing to Summit Financial
Resources appears as "Obligations collateralized by receivables" within
the Current Liabilities section of the Company's balance sheet. Net
proceeds received from the sale of accounts receivable appear as cash
provided or used by financing activities within the Company's Consolidated
Statements of Cash Flows. Early adoption of this amended guidance was not
permitted. Under the authoritative guidance in effect prior to the
amended guidance noted above, 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.
(h) Inventories
Inventories consist of raw materials and finished goods and are
stated at the lower of cost (first-in, first-out method) or market. We
record a reserve for slow moving and obsolete products and raw materials.
We estimate reserves for slow moving and obsolete products and raw
materials based upon historical and anticipated sales.
Inventories were comprised of the following at:
June 30, 2010 December 31, 2009
-------------- -----------------
Finished goods $ 1,434,200 $ 1,244,700
Raw materials 1,374,500 1,150,500
Inventory reserve
for obsolescence (416,300) (410,600)
----------- -----------
$ 2,392,400 $ 1,984,600
=========== ===========
(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. 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 obligations collateralized by receivables,
accounts payable and accrued expenses approximate fair value due to the
short-term nature of these financial instruments. Our long-term debt bears
interest at a fixed rate that adjusts annually on the anniversary date to
a then prime rate. The carrying value of long-term debt approximates fair
value as of June 30, 2010 and December 31, 2009.
(k) Long-Lived Assets
We follow 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.
As of December 31, 2009, due to changes in the real estate market
in Denver, Colorado and the continuing economic downturn, we conducted
an evaluation into fair value impairment as regards our property, plant
and equipment with particular attention to our land and buildings
("facilities") which have an original cost of $17,485,800 and a
depreciated book value at December 31, 2009 of approximately $10,792,700.
For the facilities, we performed an evaluation utilizing an income
capitalization model employing rental, vacancy and capitalization rates
obtained from independent market data relative to our area of the Denver
market as well as the actual rental rate in effect in the current lease of
a portion of our office space. This evaluation returned a range of fair
value estimates in excess of (a) the carrying value of the facilities and
(b) the current listing price for the facilities. We currently have the
facilities listed for sale at the price of $11,500,000 for the improved
property plus an unstated amount for an unimproved, adjacent 5.5 acre
parcel of land with a value estimated by us at $1,200,000. Based upon
our evaluation, we find there to be no impairment in the carrying values
of our long-lived assets at December 31, 2009 and there have been no
events or changes in circumstances that indicate the fair value of the
facilities has declined in the six months ended June 30, 2010; however,
the valuation of our facilities can be affected by future events
including the commercial real estate market in which our facilities are
located.
(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 June 30, 2010 and
December 31, 2009 approximately $325,000 and $403,000, respectively, had
been reserved as a reduction of accounts receivable, and approximately
$57,000 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 $539,000 and $674,100
in the six months ended June 30, 2010 and 2009, respectively.
(n) Advertising Costs
Advertising costs are expensed as incurred.
(o) Stock-based Compensation
During the first six months of 2010, we granted 434,000 options for
shares of our common stock to four officers, two non-employee directors
and twenty-three employees at $0.22 to $0.30 per share. The options,
which vest ratably over forty-eight months, or upon a change in control,
and which expire after five years, were granted at or above the market
value as of the date of grant.
The weighted average fair market value of the options granted in
the first half of 2010 and 2009 were estimated on the date of grant,
using a Black-Scholes option pricing model with the following assumptions:
June 30, 2010 June 30, 2009
------------- -------------
Expected life of options
(using the "simplified" method) 4.5 years 4.5 years
Risk-free interest rate 2.3% 1.9%
Expected volatility of stock 121% 75%
Expected dividend rate None None
Compensation cost related to stock options recognized in operating
results (included in general and administrative expenses) under
authoritative guidance issued by the FASB was $41,700 in the six months
ended June 30, 2010. Approximately $161,800 of total unrecognized
compensation costs related to non-vested stock options is expected to be
recognized over the next forty-four months. In accordance with this same
authoritative guidance, 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 (Loss)
We follow FASB authoritative guidance which establishes standards
for reporting and displaying comprehensive income (loss) and its
components. Comprehensive income (loss) includes all changes in equity
during a period from non-owner sources.
The following table is a reconciliation of our net loss to our total
comprehensive loss for the three and six months ended June 30, 2010 and
2009:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2010 2009 2010 2009
----------- ----------- ------------ -----------
Net loss $ (282,900) $ (238,800) $ (243,700) $ (426,300)
Unrealized loss
on investment
securities - - - (100)
----------- ----------- ----------- -----------
Comprehensive loss $ (282,900) $ (238,800) $ (243,700) $ (426,400)
=========== =========== =========== ===========
(q) Operating Costs and Expenses Classification
Cost of sales includes costs associated with manufacturing and
distribution including labor, materials, freight-in, purchasing and
receiving, quality control, internal transfer costs, repairs, maintenance
and other indirect costs, as well as warehousing and distribution costs.
We classify shipping and handling costs comprised primarily of freight-out
and nominal outside warehousing costs as a component of selling expense on
the accompanying Consolidated Statement of Operations. Shipping and
handling costs totaled $634,100 and $669,600, for the six months ended
June 30, 2010 and 2009, 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 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, changed the Company's current accounting treatment as
regards the sale of accounts receivable invoices as discussed in
Note 1(g). Early adoption of this amended guidance was not permitted.
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 1,932,650 and 1,922,900 at
June 30, 2010 and 2009, were excluded from the computation of weighted
average shares outstanding due to their anti-dilutive effect.
A reconciliation of the weighted average number of common shares
outstanding for the three and six months ended June 30, 2010 and 2009,
respectively, follows:
2010
--------------------------------------
Total
Three Months Six Months Shares
------------ ----------- -----------
Common shares outstanding
beginning of period 10,795,000 10,795,000 10,795,000
Stock issued to ESOP (a) - - -
---------- ---------- ----------
Weighted average number
of common shares outstanding 10,795,000 10,795,000 10,795,000
Dilutive effect of
common share equivalents - - -
---------- ---------- ----------
Diluted weighted average
number of common shares
outstanding 10,795,000 10,795,000 10,795,000
========== ========== ==========
2009
--------------------------------------
Three Months Six Months Shares
------------ ----------- -----------
Common shares outstanding
beginning of period 10,695,000 10,695,000 10,695,000
Stock issued to ESOP (a) 100,000 68,500 100,000
---------- ---------- ----------
Weighted average number
of common shares outstanding 10,795,500 10,763,500 10,795,000
Dilutive effect of
common share equivalents - - -
---------- ---------- ----------
Diluted weighted average
number of common shares
outstanding 10,795,500 10,763,500 10,795,000
========== ========== ==========
(a) In February 2009, the Board of Directors authorized and the
Company issued 100,000 shares of common stock to the Employee Stock
Ownership Plan at a price of $0.17 per share.
At June 30, 2010, there were authorized 50,000,000 shares of our
$.10 par value common stock and 20,000,000 shares of preferred stock
issuable in one or more series. None of the preferred stock was issued
or outstanding at June 30, 2010.
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 six months ended June 30:
Three Months ended June 30,
-----------------------------------------------------
2010 2009
------------------------- --------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 1,776,100 $ 1,674,700 $ 1,677,600 $ 1,827,200
=========== =========== =========== ===========
Loss before
profit sharing,
bonuses and
income taxes $ (131,300) $ (151,600) $ (35,500) $ (203,300)
=========== =========== =========== ===========
Identifiable assets $ 2,791,200 $ 4,126,900 $ 2,610,000 $ 4,492,600
=========== =========== =========== ===========
Six Months ended June 30,
-----------------------------------------------------
2010 2009
------------------------- --------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 3,742,800 $ 3,307,400 $ 3,504,300 $ 3,892,400
=========== =========== =========== ===========
Income (loss) before
profit sharing,
bonuses and
income taxes $ 22,800 $ (266,500) $ (175,900) $ (250,400)
=========== =========== =========== ===========
Identifiable assets $ 2,791,200 $ 4,126,900 $ 2,610,000 $ 4,492,600
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three and six months ended June 30:
Three Months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
2010 2009 2010 2009
----------- ----------- ----------- -----------
Net sales to
external customers $ 3,450,800 $ 3,504,800 $ 7,050,200 $ 7,396,700
=========== =========== =========== ===========
Loss before
profit sharing,
bonuses and
income taxes $ (282,900) $ (238,800) $ (243,700) $ (426,300)
=========== ============ =========== ===========
Identifiable
assets $ 6,918,100 $ 7,102,600 $ 6,918,100 $ 7,102,600
Corporate
assets 8,307,400 8,940,200 8,307,400 8,940,200
----------- ------------ ----------- -----------
Consolidated total
assets $15,225,500 $16,042,800 $15,225,500 $16,042,800
=========== =========== =========== ===========
Corporate assets noted above are comprised primarily of our cash
and investments, and property and equipment not directly associated with
the manufacturing, warehousing, shipping and receiving activities.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
During the first half of 2010, we experienced an overall decrease
in net sales of $346,500 as compared to the first half of 2009. Our net
loss for the first half of 2010 was $243,700 versus a loss of $426,300 in
the first half of 2009. The decrease in our loss for the first half of
2010 compared to the first half of 2009 results primarily from improved
gross margins across all product lines offset in part by an increase in
advertising and selling expenses.
Summary of Results as a Percentage of Net Sales
Year Ended Six Months Ended
December 31, June 30,
------------ -------------------
2009 2010 2009
------------ ------- --------
Net sales
Scott's Liquid Gold
household products 50.6% 53.1% 47.4%
Neoteric Cosmetics 49.4% 46.9% 52.6%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 58.0% 52.5% 57.4%
------ ------ ------
Gross profit 42.0% 47.5% 42.6%
Other revenue 0.2% 0.9% -
------ ------ ------
42.2% 48.4% 42.6%
------ ------ ------
Operating expenses 48.5% 49.9% 46.3%
Interest 2.1% 2.0% 2.1%
------ ------ ------
50.6% 51.9% 48.4%
------ ------ ------
Loss before income taxes (8.4%) (3.5%) (5.8%)
====== ======= ======
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.
Six Months Ended June 30, 2010
Compared to Six Months Ended June 30, 2009
Comparative Net Sales
Six Months Ended June 30,
-----------------------------------------
Percentage
Increase
2010 2009 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 3,484,700 $ 3,139,900 11.0%
Touch of Scent 258,100 364,400 (29.2%)
----------- ----------- ------
Total household products 3,742,800 3,504,300 6.8%
----------- ----------- ------
Alpha Hydrox and
other skin care 1,826,900 1,900,200 (3.9%)
Montagne Jeunesse and other
distributed skin care 1,480,500 1,992,200 (25.7%)
----------- ----------- ------
Total skin care products 3,307,400 3,892,400 (15.0%)
----------- ----------- ------
Total Net Sales $ 7,050,200 $ 7,396,700 (4.7%)
=========== =========== ======
Consolidated net sales for the first half of the current year were
$7,050,200 versus $7,396,700 for the first six months of 2009, a decrease
of $346,500. Average selling prices for the first half of 2010 were down
by $78,500 over the first half of 2009. Average selling prices of
household products were down by $90,700, while average selling prices of
skin care products were up by $12,200. This overall decrease in selling
prices reflects an increase in coupon usage on household products in 2010
versus 2009. Co-op advertising, marketing funds, slotting fees, and
coupons paid to retailers are deducted from gross sales, and totaled
$539,000 in the first half of 2010 versus $674,100 in the same period in
2009, a decrease of $135,100 or 20.0%. This decrease consisted of a
decrease in coupon expense of $400, a decrease in co-op advertising funds
of $75,600, and an increase in slotting fee expenses of $59,100.
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, 2007 through June 30, 2010, our product returns (as
a percentage of gross revenue) have averaged as follows: household
products 0.5%, Montagne Jeunesse products 2.8%, and our Alpha Hydrox and
other skin care products 3.7%. The level of returns as a percentage of
gross revenue for the household products and Montagne Jeunesse products
have remained fairly constant as a percentage of sales over that period
while the Alpha Hydrox and other skin care products return levels have
fluctuated. More recently, as our sales of the Alpha Hydrox skin care
products have declined we have seen a decrease in returns of these
products as a percentage of gross revenues. The products returned in the
first half of 2010 (indicated as a percentage of gross revenues) were:
household products 1.5%, Montagne Jeunesse products 1.0%, and our Alpha
Hydrox and other skin care products 0.4%. We are not aware of any
industry trends, competitive product introductions or advertising
campaigns at this time which would cause returns as a percentage of gross
sales to be materially different for the current fiscal year than for the
above averages. Furthermore, our management is not currently aware of
any changes in customer relationships that we believe would adversely
impact anticipated returns. However, we review our reserve for returns
quarterly and we regularly face the risk that the existing conditions
related to product returns will change.
During the first half of 2010, net sales of skin care products
accounted for 46.9% of consolidated net sales compared to 52.6% for the
same period of 2009. Net sales of these products for that period were
$3,307,400 in 2010 compared to $3,892,400 in 2009, a decrease of $585,000
or 15.0%. Our decrease in net sales of skin care was comprised of a
decrease of $511,700 in sales of products for which we act as a
distributor and a decrease of $73,300 in our manufactured skin care
product lines.
Overall, net sales of our line-up of distributed products, including
Montagne Jeunesse, totaled $1,480,500 in the first half of 2010 as
compared to net sales of $1,992,200 in the same period of 2009, a decrease
of $511,700 or 25.7%. This sales decrease is primarily the result of a
reduced selection of the Montagne Jeunesse products with our largest
retail customer; which began in the third quarter of 2009, offset in part
by sales of Batiste dry shampoo, which was first introduced in November
2009. Net sales of other distributed skin care products were nominal in
the first half of both 2010 and 2009.
Similarly, net sales of our Alpha Hydrox and other manufactured
skin care products declined $73,300, or 3.9%, from $1,900,200 in the
first half of 2009 to $1,826,900 for the same period of 2010. This sales
decrease was attributable to the discontinued sale of our Massage Oils by
our largest retail customer.
Sales of household products for the first half of 2010 accounted
for 53.1% of consolidated net sales compared to 47.4% for the same period
in 2009. These products are comprised of Scott's Liquid Gold wood care
products, Mold Control 500, Clean Screen, and Touch of Scent. During the
six months ended June 30, 2010 sales of household products were $3,742,800
as compared to $3,504,300 for the same period in 2009, an increase of
$238,500, or 6.8%. Sales of Scott's Liquid Gold products increased by
$454,500, or 15.4%, in 2010 versus 2009 while Mold Control 500 sales were
down by $109,700, or 60.5%, and sales of Touch of Scent products declined
$106,300, or 29.2%, in the same comparative periods. The increase in
sales of Scott's Liquid Gold products is primarily attributable to the
introduction of "Clean Screen," a surface cleaner for sensitive
electronics including HDTV screens, computer monitors and other such
devices, coupled with an increase in sales of wood care products. The
decrease in sales of Touch of Scent products is attributable to the
discontinuation of the air freshener products Cube Scents and Odor
Extinguisher in 2008 and 2009 along with a reduction in sales through our
online store.
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 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. In the second
quarter of 2009, we introduced, with limited sales to date, "Clean
Screen", a new household product under the Scott's Liquid Gold brand.
Additionally, in the fourth quarter of 2009 we introduced Batiste dry
shampoo for distribution 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 $3,702,300 during
the first six months of 2010 compared to $4,249,100 for the same period
of 2009, a decrease of $546,800 or 12.9%, against a sales decrease of
4.7%. As a percentage of consolidated net sales, cost of goods sold was
52.5% in 2010 versus 57.4% in 2009, a decrease of about 8.5%. With
respect to our skin care products, the cost of goods dropped to 55.1% in
first half of 2010 as compared to 58.1% in the first half of 2009 as a
result of our decision in 2009 to discontinue our business relationship
with a retail chain where excessive retail support in the form of product
returns, marketing co-op funds, coupons and promotion programs and damage
claims had made such business unprofitable. Likewise, household products
experienced a decline in cost of goods sold from 56.7% in the first six
months in 2009 compared to 50.2% for the same period in 2010. In 2009,
cost of goods sold reflected the sale of discontinued products at below
our cost of approximately $300,000 as well as higher steel can costs
which were subsequently negotiated down in mid 2009 and again in early
2010. Further contributing to the lower overall cost of goods sold
percentage is the decrease in sales promotion expenses which favorably
impacts our net revenues and thus affected our margins.
Operating Expenses, Interest Expense and Other Income
Six Months ended June 30,
---------------------------------------
Percentage
Increase
2010 2009 (Decrease)
----------- ----------- -----------
Operating Expenses
Advertising $ 242,900 $ 150,600 61.3%
Selling 2,059,100 2,027,700 1.5%
General & Administrative 1,217,900 1,243,000 (2.0%)
----------- ----------- -----------
Total operating expenses $3,519,900 $3,421,300 2.9%
=========== =========== ===========
Interest and Other Income $ 67,300 $ 5,000 1,246.0%
Interest Expense $ 139,000 $ 157,600 11.8%
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, increased $98,600 in the first
half of 2010, when compared to the first half of 2009. The various
components of operating expenses are discussed below.
Advertising expenses for the first six months of 2010 were $242,900
compared to $150,600 for the comparable period of 2009, an increase of
$92,300 or 61.3%. This increase reflects coupon campaigns for our
household products directed nationwide as well as retailer-specific
programs.
Selling expenses for the first half of 2010 were $2,059,100
compared to $2,027,700 for the comparable six months of 2009, an increase
of $31,400 or 1.5%. This increase was comprised of a decrease in freight
expenses of $37,800 largely resulting from declining fuel prices and the
utilization of a third-party logistics firm as well as the overall
reduction in sales in the first six months of 2010 compared to 2009
offset by an increase in promotional selling expenses of $59,900 related
to efforts to support our diabetic products and a net increase in other
selling expenses, none of which by itself is significant, of $9,300.
General and administrative expenses for the first six months of
2010 were $1,217,900 compared to $1,243,000 for the comparable period of
2009, a decrease of $25,100 or 2.0%. That decrease resulted from a
decrease in salaries, fringe benefits and related travel expense of
$51,900 associated with a reduction in personnel and fees paid to outside
directors offset by an increase in professional fees and reporting costs
of $14,900 and a net increase in various other expense items, none of
which by itself is significant, of $11,900.
Interest expense for the first half of 2010 was $139,000 and
included $51,400 in collateral management fees incurred relative to the
sale of accounts receivable invoices to Summit Financial Resources.
Interest expense for the first half of 2009 was $157,600 and included
$29,300 in collateral management fees. The decrease in interest expense
reflects the combined effect of a decrease in the outstanding mortgage
liability from 2009 to 2010 and the reduction in the interest rate in
effect on that mortgage from 5.0% prior to June 28, 2009 to 3.25%
effective after that date.
Interest and other income for the first six months of 2010 of
$67,300 included $62,700 of net rental receipts from the rental of a
portion of our headquarters building, which we own, and $4,600 in
interest earned on our cash reserves as compared to $5,000 in interest
earned on our cash reserves in the first six months of 2009. There were
no rental receipts in the first six months of 2009.
Three Months Ended June 30, 2010
Compared to Three Months Ended June 30, 2009
Comparative Net Sales
Three Months Ended June 30,
-----------------------------------------
Percentage
Increase
2010 2009 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 1,636,600 $ 1,534,300 6.7%
Touch of Scent 139,500 143,300 (2.7%)
----------- ----------- ------
Total household
products 1,776,100 1,677,600 5.9%
----------- ----------- ------
Alpha Hydrox and
other skin care 1,024,700 870,300 17.7%
Montagne Jeunesse and other
distributed skin care 650,000 956,900 (32.1%)
----------- ----------- ------
Total skin care
products 1,674,700 1,827,200 (8.3%)
----------- ----------- ------
Total Net Sales $ 3,450,800 $ 3,504,800 (1.5%)
=========== =========== ======
Consolidated net sales for the second quarter of the current year
were $3,450,800 versus $3,504,800 for the comparable quarter of 2009, a
decrease of $54,000 or 1.5%. Average selling prices for the second
quarter of 2010 were down by $64,700 over those of the comparable period
of 2009, with prices of household products being down by $121,000, while
average selling prices of skin care products were up by $56,300. 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 $336,200 in the second quarter of 2010
versus $317,900 in the same period in 2009, an increase of $18,300 or
5.8%. This increase consisted of an increase in coupon expenses of
$3,500, an increase in co-op advertising of $19,200, and a decrease in
slotting of $4,400.
During the second quarter of 2010, net sales of skin care products
accounted for 48.5% of consolidated net sales compared to 52.1% for the
same quarter in 2009. Net sales of these products for that period were
$1,674,700 in 2010 compared to $1,827,200 in 2009, a decrease of $152,500
or 8.3%. Our decrease in net sales of skin care products was comprised
of a decrease of $306,900 in sales of products for which we act as a
distributor and an increase of $154,400 in our manufactured skin care
product lines.
Overall, net sales of our line-up of distributed products,
including Montagne Jeunesse, totaled $650,000 in the second quarter of
2010 as compared to net sales of $956,900 in the same period of 2009, a
decrease of $306,900 or 32.1%. This sales decrease is primarily the
result of a reduced selection of the Montagne Jeunesse products with our
largest retail customer, which began in the third quarter of 2009, offset
in part by sales of Batiste dry shampoo, which was first introduced in
November 2009. Net sales of other distributed skin care products were
nominal in the second quarter of both 2010 and 2009.
Conversely, net sales of our Alpha Hydrox and other manufactured
skin care products rose $154,400, or 17.7%, from $870,300 in the second
quarter of 2009 to $1,024,700 for the same period of 2010. This sales
increase was attributable primarily to expanded distribution.
Sales of household products for the second quarter of 2010
accounted for 51.5% of consolidated net sales compared to 47.9% for the
same period in 2009. These products are comprised of Scott's Liquid Gold
wood care products, Mold Control 500, Clean Screen, and Touch of Scent.
During the quarter ended June 30, 2010 sales of household products were
$1,776,100 as compared to $1,677,600 for the same period in 2009, an
increase of $98,500, or 5.9%. Sales of Scott's Liquid Gold products
increased by $208,000, or 14.3%, in 2010 versus 2009 while Mold
Control 500 sales were down by $105,700, or 130.8%, and sales of Touch of
Scent products declined $3,800, or 2.7%, in the same comparative
periods. The increase in sales of Scott's Liquid Gold products is
attributable to both promotional efforts involving coupons and to the
introduction of "Clean Screen," a surface cleaner for sensitive
electronics including HDTV screens, computer monitors and other such
devices.
On a consolidated basis, cost of goods sold was $1,821,200 during
the second quarter of 2010 compared to $2,003,400 for the same period of
2009, a decrease of $182,200 or 9.1%, against a sales decrease of 1.5%.
As a percentage of consolidated net sales, cost of goods sold was 52.8%
in 2010 versus 57.2% in 2009, a decrease of about 7.7%. With respect to
our skin care products, the cost of goods declined to 54.0% in second
quarter of 2010 as compared to 61.8% in the second quarter of 2009 as a
result of our decision in 2009 to discontinue our business relationship
with a retail chain where excessive retail support in the form of product
returns, marketing co-op funds, coupons and promotion programs and
damage claims had made such business unprofitable. With respect to
household products, the cost of goods sold declined nominally during the
second quarter of 2010 to 51.6% as compared to 52.1% for the second
quarter of 2009.
Operating Expenses, Interest Expense and Other Income
Three Months Ended June 30,
---------------------------------------
Percentage
Increase
2010 2009 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 171,500 $ 78,400 118.8%
Selling 1,095,600 995,500 10.1%
General & Administrative 608,400 585,400 3.9%
----------- ----------- ----------
Total operating expenses $ 1,875,500 $ 1,659,300 13.0%
=========== =========== ==========
Interest Income $ 32,800 $ 2,100 1,461.9%
Interest Expense $ 69,800 $ 83,000 (15.9%)
Operating expenses, comprised primarily of advertising, selling and
general and administrative expenses, increased $216,200 in the second
quarter of 2010, when compared to the same period during 2009. The
various components of operating expenses are discussed below.
Advertising expenses for the second quarter of 2010 were $171,500
compared to $78,400 for the comparable quarter of 2009, an increase of
$93,100 or 118.8%. This increase reflects coupon campaigns for our
household products directed nationwide as well as retailer-specific programs.
Selling expenses for the second quarter of 2010 were $1,095,600
compared to $995,500 for the comparable three months of 2009, an increase
of $100,100 or 10.1%. This increase was comprised of an increase in
freight expense of $14,100 related to increased sales of household
products which are more costly to ship due to product weight, an increase
in promotional selling expense of $80,000 related to efforts to support
our diabetic products and a net increase in other selling expenses, none
of which by itself is significant, of $6,000
General and administrative expenses for the second quarter of 2010
were $608,400 compared to $585,400 for the comparable period of 2009, an
increase of $23,000 or 3.9%. That increase resulted from a decrease in
salaries, fringe benefits and related travel expense of $26,400 associated
with a reduction in personnel and fees paid to outside directors offset
by an increase in professional fees and reporting costs of $39,900 and a
net increase in various other expense items, none of which by itself is
significant, of $9,500.
Interest expense for the second quarter of 2010 was $69,800 and
included $26,400 in collateral management fees incurred relative to the
sale of accounts receivable invoices to Summit Financial Resources.
Interest expense for the second quarter of 2009 was $83,000 including
$18,400 in collateral management fees. The resulting decrease in
interest expense reflects the combined effect of a decrease in the
outstanding mortgage liability from 2009 to 2010 and the reduction in the
interest rate in effect on that mortgage from 5.0% prior to June 28, 2009
to 3.25% effective after that date.
Interest and other income for the second quarter of 2010 of $32,800
included $30,600 of net rental receipts from the rental of a portion of
our headquarters building, which we own, and $2,200 in interest earned on
our cash reserves as compared to $2,100 in interest earned on our cash
reserves in the same period of 2009. There were no rental receipts in
the first six months of 2009.
Liquidity and Capital Resources
Citywide Loan
On June 28, 2006, we entered into a loan with a fifteen year
amortization with Citywide Banks (the "Bank") for $5,156,600 secured by
the land, building and fixtures at our Denver, Colorado facilities.
Interest on the bank loan (3.25% at June 30, 2010) 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, the aforementioned ratios
to be calculated in accordance with U.S. generally accepted accounting
principles. We may not declare any dividends that would result in a
violation of either of these covenants. Affirmative covenants in the
loan agreement concern, among other things, compliance in all material
respects with applicable laws and regulations and compliance with our
agreements with other parties which materially affect our financial
condition. Negative covenants require that we not do any of the
following, among other things, without the consent of the Bank: Sell,
lease or grant a security interest in assets; engage in any business
activity substantially different than those in which we are presently
engaged; sell assets out of the ordinary course of business; or purchase
another entity or an interest in another entity. The foregoing
requirements were met at the end of quarter ending June 30, 2010.
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 term of the agreement is one year and is automatically renewed for
12 months unless either party elects to cancel in writing at least 60 days
prior to the anniversary date. Neither party sent such a notice of
non-renewal, and therefore the term of the financing agreement has
automatically been extended to March 12, 2011. 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.
Advances under the agreement bear interest at a rate of 1% over the prime
rate (as published in the Wall Street Journal) for the accounts receivable
portion of the advances and 3% over the prime rate for the inventory
portion of the borrowings. The prime rate (3.25% as of June 30, 2010)
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.
Liquidity
During the first half of 2010 our working capital decreased by
$105,700 resulting in a current ratio (current assets divided
by current liabilities) of 1.2:1 at June 30, 2010, compared to 1.3:1 at
December 31, 2009. The decrease in working capital is attributable
primarily to the principal reduction in our long-term debt of $158,600.
At June 30, 2010, trade and other receivables were $581,800 versus
$314,400 at the end of 2009. As discussed in Note 1(g), on January 1,
2010 the Company adopted new authoritative guidance which prospectively
modified the presentation of transferred trade receivables and the
related securitized obligation. Had early adoption been permitted then
trade and other receivables at December 31, 2009 would have increased
$343,700 to $658,100 along with a corresponding increase in current
liabilities. Accounts payable, accrued payroll and other accrued
expenses increased by $317,900 from the end of 2009 through June of 2010
corresponding with the increase and timing of purchases of inventory and
rise in receivables over that period. At June 30, 2010 inventories were
$407,800 more than at December 31, 2009, due primarily to an increase in
anticipated sales of distributed products. Prepaid expenses decreased
from the end of 2009 by $14,400.
We have no significant capital expenditures planned for 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 Summit Financial Resources agreement has a term of one
year which expires March 12, 2011 and is automatically renewed for
12 months unless either party elects to cancel in writing at least
60 days prior to the anniversary date.
As a result of the foregoing, we expect that our available cash,
projected cash flows from operating activities, and borrowing available
under the Summit Financial Resources agreement (assuming no cancellation
of the agreement) will fund the twelve months' cash requirements, ending
June, 2011.
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 reduction in our
fixed operating expense if needed, and potentially the addition of
external financing. 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 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. Any external debt financing could require the
cooperation and approval of existing lenders. 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 products
recently introduced or being introduced in 2010; 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; additional net 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, 2009 and this Report. We undertake no obligation to revise
any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
As of June 30, 2010, we conducted an evaluation, under the
supervision and with the participation of the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective as
of June 30, 2010.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting during the quarter ended June 30, 2010 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.
August 12, 2010 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
August 12, 2010 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