UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
June 30, 2007
Commission File No. 001-13458
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
State of Incorporation I.R.S. Employer Identification No.
Check whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12-B-2 of the Exchange Act. Yes [ ] No [X]
As of June 30, 2007, the Registrant had 10,533,000 of its $0.10
par value common stock outstanding.
Explanatory Note:
We are amending our Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2007 to amend and restate our consolidated
financial statements and related financial information for the quarter
ended June 30, 2007. This Form 10-QSB/A also reflects management's
assessment of disclosure controls and procedures as set forth in
Item 3A(T). This Form 10-QSB/A does not reflect events occurring
after August 10, 2007 (which is the date of filing our Form 10-QSB
for the first quarter of 2007). We are also amending our Form 10-QSB
for the quarter ended March 31, 2007.
In our Current Report on Form 8-K filed on October 25, 2007, we
announced that on October 22, 2007, the Audit Committee of our Board
of Directors concluded that our financial statements for the quarter
ended March 31, 2007 and for the quarter and six months ended June 30,
2007, included in our quarterly reports on Form 10-QSB for those
quarters, should be revised to reflect adjustments to our reserve for
promotional activities which were deducted from gross sales for the
quarter ended March 31, 2007. These adjustments reflect the cost of
an unauthorized marketing program which occurred in the first quarter
of 2007.
The restated financial statements as of June 30, 2007 in this
Form 10-QSB/A reflect these adjustments. See Note 2 to the Notes to
the Consolidated Financial Statements for more information on the
restatement. This Form 10-QSB/A also includes related changes to Item 2
concerning Management's Discussion and Analysis or Plan of Operation.
In addition, a material weakness in our disclosure controls and
procedures as of March 31, 2007 has been identified and reported to our
Audit Committee. Please see Item 3A(T) on Controls and Procedures for a
description of these matters and remedial measures which we have
implemented.
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,
2007 2006 2007 2006
----------- ----------- ----------- -----------
AS RESTATED
Net sales $ 4,304,200 $ 4,133,300 $ 8,166,000 $ 8,289,100
Operating costs
and expenses:
Cost of sales 2,340,600 2,567,400 4,687,100 4,810,900
Advertising 88,800 107,600 201,100 701,300
Selling 1,379,000 1,410,200 2,634,400 2,835,700
General and
administrative 768,800 863,200 1,582,900 1,775,300
----------- ----------- ----------- -----------
4,577,200 4,948,400 9,105,500 10,123,200
----------- ----------- ----------- -----------
Loss from
operations (273,000) (815,100) (939,500) (1,834,100)
Interest income 19,600 14,300 43,800 26,900
Interest expense (104,200) (59,100) (208,100) (100,400)
----------- ----------- ----------- -----------
(357,600) (859,900) (1,103,800) (1,907,600)
Income tax expense
(benefit) - - - -
----------- ----------- ----------- -----------
Net loss $ (357,600) $ (859,900) $(1,103,800) $(1,907,600)
=========== =========== =========== ===========
Net loss per common
share (Note 3):
Basic and
Diluted $ (0.03) $ (0.08) $ (0.10) $ (0.18)
=========== =========== =========== ===========
Weighted average
shares outstanding:
Basic and
Diluted 10,533,000 10,503,000 10,533,000 10,503,000
=========== =========== =========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2007 2006
------------ ------------
AS RESTATED
ASSETS
Current assets:
Cash and cash equivalents $ 1,836,300 $ 2,804,100
Investment securities 50,500 51,100
Trade receivables, net of allowance
for doubtful accounts of $62,800
and $62,000, respectively 829,400 743,700
Other receivables 70,400 55,500
Inventories, net 3,593,500 3,291,400
Prepaid expenses 253,800 161,600
----------- -----------
Total current assets 6,633,900 7,107,400
Property, plant and equipment, net 12,869,700 13,159,700
Other assets 57,500 59,700
----------- -----------
TOTAL ASSETS $19,561,100 $20,326,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,275,700 $ 1,893,600
Accrued payroll and benefits 1,038,200 866,400
Other accrued expenses 280,400 417,100
Current maturities of long-term debt 198,400 191,600
----------- -----------
Total current liabilities 3,792,700 3,368,700
Long-term debt, net of current maturities 4,774,200 4,875,500
----------- -----------
8,566,900 8,244,200
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,533,000 shares 1,053,300 1,053,300
Capital in excess of par 5,031,800 5,015,800
Accumulated comprehensive income 500 1,100
Retained earnings 4,908,600 6,012,400
----------- -----------
Shareholders' equity 10,994,200 12,082,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $19,561,100 $20,326,800
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
--------------------------
2007 2006
----------- -----------
AS RESTATED
Cash flows from operating activities:
Net loss $(1,103,800) $(1,907,600)
----------- -----------
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 323,200 353,300
Stock issued to ESOP - 48,700
Stock options granted 16,000 -
Gain on disposal of assets - (8,800)
Changes in assets and liabilities:
Trade and other receivables, net (100,600) 691,100
Inventories (302,100) (521,600)
Prepaid expenses and other assets (92,200) (292,500)
Accounts payable and
accrued expenses 417,200 417,200
----------- -----------
Total adjustments to net loss 261,500 687,400
----------- -----------
Net Cash Used by
Operating Activities (842,300) (1,220,200)
----------- -----------
Cash flows from investing activities:
Proceeds from disposal of assets - 8,800
Purchase of property, plant & equipment (31,000) (68,200)
----------- -----------
Net Cash Used by Investing
Activities (31,000) (59,400)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings - 5,156,600
Short-term borrowings (payments), net - (150,000)
Purchase of stock for contribution to ESOP - (48,700)
Principal payments on long-term borrowings (94,500) (1,894,400)
Loan origination fees and other costs - (64,600)
----------- -----------
Net Cash Provided (Used) by
Financing Activities (94,500) 2,998,900
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (967,800) 1,719,300
Cash and Cash Equivalents,
beginning of period 2,804,100 2,260,700
----------- -----------
Cash and Cash Equivalents,
end of period $ 1,836,300 $ 3,980,000
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 209,300 $ 101,500
=========== ===========
Income taxes $ 900 $ 1,100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was
incorporated on February 15, 1954. Scott's Liquid Gold-Inc. and its
wholly owned subsidiaries (collectively, "we" or "our") manufacture and
market quality household and skin care products, and we fill, package
and market our Mold Control 500 product. Since the first quarter of
2001, we have acted as a distributor in the United States of beauty
care products contained in individual sachets and manufactured by
Montagne Jeunesse. Our business is comprised of two segments, household
products and skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and
those of our subsidiaries. All intercompany accounts and transactions
have been eliminated.
(c) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, realizability
of deferred tax assets, reserves for slow moving and obsolete
inventory, customer returns, coupon redemptions and allowances, and
bad debts.
(d) Cash Equivalents
We consider all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
(e) Investments in Marketable Securities
We account for investments in marketable securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities",
which requires that we classify investments in marketable securities
according to management's intended use of such investments. We invest
our excess cash and have established guidelines relative to
diversification and maturities in an effort to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. We consider all
investments as available for use in our current operations and,
therefore, classify them as short-term, available-for-sale investments.
Available-for-sale investments are stated at fair value, with unrealized
gains and losses, if any, reported net of tax, as a separate component
of shareholders' equity and comprehensive income (loss). The cost of
the securities sold is based on the specific identification method.
Investments in corporate and government securities as of June 30, 2007,
are scheduled to mature within one year.
(f) Inventories
Inventories consist of raw materials and finished goods and are
stated at the lower of cost (first-in, first-out method) or market. We
record a reserve for slow moving and obsolete products and raw
materials. We estimate reserves for slow moving and obsolete products
and raw materials based upon historical and anticipated sales.
Inventories were comprised of the following at:
June 30, 2007 December 31, 2006
-------------- -----------------
Finished goods $ 2,496,000 $ 2,435,400
Raw materials 1,505,200 1,337,200
Inventory reserve
for obsolescence (407,700) (481,200)
----------- -----------
$ 3,593,500 $ 3,291,400
=========== ===========
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost.
Depreciation is provided using the straight-line method over estimated
useful lives of the assets ranging from three to forty-five years.
Building structures and building improvements are estimated to have
useful lives of 35 to 45 years and 3 to 20 years, respectively.
Production equipment and production support equipment are estimated to
have useful lives of 15 to 20 years and 3 to 10 years, respectively.
Office furniture and office machines are estimated to have useful lives
10 to 20 and 3 to 5 years, respectively. Carpeting, drapes and company
vehicles are estimated to have useful lives of 5 to 10 years.
Maintenance and repairs are expensed as incurred. Improvements that
extend the useful lives of the assets or provide improved efficiency
are capitalized.
(h) Financial Instruments
Financial instruments which potentially subject us to
concentrations of credit risk include cash and cash equivalents,
investments in marketable securities, and trade receivables. We
maintain our cash balances in the form of bank demand deposits with
financial institutions that management believes are creditworthy.
As of the balance sheet date and periodically throughout the year,
the Company has maintained balances in various operating accounts in
excess of federally insured limits. We establish an allowance for
doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information. We have
no significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option contracts
or other foreign currency hedging arrangements.
The recorded amounts for cash and cash equivalents, receivables,
other current assets, and accounts payable and accrued expenses
approximate fair value due to the short-term nature of these financial
instruments. The fair value of investments in marketable securities is
based upon quoted market value. Our long-term debt bears interest at
a fixed rate that adjusts annually on the anniversary date to a then
prime rate. The carrying value of long-term debt approximates fair
value as of June 30, 2007 and December 31, 2006.
(i) Long-Lived Assets
We account for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
(j) Income Taxes
We account for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes", which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective income tax bases. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income
during the period in which related temporary differences become
deductible. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled.
(k) Revenue Recognition
Revenue is 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, 2007 and December 31, 2006
approximately $1,229,000 as restated and $649,000, respectively, had
been reserved as a reduction of accounts receivable, and approximately
$55,000 and $50,000, respectively, had been reserved as current
liabilities. Co-op advertising, marketing funds, slotting fees and
coupons are deducted from gross sales and totaled $1,321,200 as
restated, and $1,152,700 at June 30, 2007 and 2006, respectively.
(l) Advertising Costs
We expense advertising costs as incurred.
(m) Stock-based Compensation
At June 30, 2007, we had four stock-based employee compensation
plans. During the first quarter of fiscal 2007, we adopted the
provisions of, and account for stock-based compensation in accordance
with, the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards No. 123-revised 2004 ("SFAS 123R"),
"Share-Based Payment" which replaced Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Under the fair value recognition
provisions of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite
service period, which is the vesting period. We elected the
modified-prospective method, under which prior periods are not revised
for comparative purposes. The valuation provisions of SFAS 123R apply
to new grants and to grants that were outstanding as of the effective
date and are subsequently modified. No grants occurred in 2006
subsequent to the adoption of SFAS 123R and all outstanding options
granted prior to December 31, 2006 were fully vested as of
December 31, 2006.
Prior to January 1, 2006, we accounted for the plans described
above under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is
reflected in net income prior to January 1, 2006, as all options
granted under those plans had an exercise price not less than the
market value of the underlying common stock on the date of grant.
We granted no options for shares of our common stock during the
second quarter of 2007. During the first quarter of 2007, we granted
448,550 options for shares of our common stock (268,550 to employees
and 180,000 to non-employee directors). The options which vest
ratably over forty-eight months, or upon a change in control, and
which expire after five years, were granted at or above the market
value of $0.82 as of the date of grant.
The weighted average fair market value of the options granted
of $0.42 was estimated on the date of grant using a Black-Scholes
option pricing model with the following assumptions.
Three and Six Months Ended
June 30, 2007
--------------------------
Expected life of options 4.5 years
Risk-free interest rate 4.46%
Expected volatility of stock 58%
Expected dividend rate None
Compensation cost related to stock options recognized in
operating results (included in general and administrative expenses)
under SFAS 123R was $16,000 in the six months ended June 30, 2007.
Approximately $175,300 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 relates to the
options granted to employees as these were qualified stock options
which are not normally tax deductible. With respect to the non-cash
expense associated with the options granted to the non-employee
directors, no tax benefit was recognized due to the existence of as
yet unutilized net operating losses. At such time as these operating
losses have been utilized and a tax benefit is realized from the
issuance of non-qualified stock options, a corresponding tax benefit
may be recognized.
(n) Comprehensive Income
We follow SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and displaying comprehensive
income and its components. Comprehensive income includes all changes
in equity during a period from non-owner sources.
The following table is a reconciliation of our net loss to
our total comprehensive loss:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------------
2007
2007 2006 As Restated 2006
---------- ---------- ------------ -----------
Net loss $(357,600) $(859,900) $(1,103,800) $(1,907,600)
Unrealized loss
on investment
securities (500) (700) (600) (1,200)
---------- ---------- ---------- ------------
Comprehensive loss $(358,100) $(860,600) $(1,104,400) $(1,908,800)
========== ========== ============ ===========
(o) Operating Costs and Expenses Classification
Cost of sales includes costs associated with manufacturing and
distribution including labor, materials, freight-in, purchasing and
receiving, quality control, internal transfer costs, repairs,
maintenance and other indirect costs, as well as warehousing and
distribution costs. We classify shipping and handling costs comprised
primarily of freight-out and nominal outside warehousing costs as a
component of selling expense on the accompanying Consolidated
Statement of Operations. Shipping and handling costs totaled
$730,400 and $737,500 for the six months ended June 30, 2007 and 2006,
respectively.
Selling expenses consist primarily of shipping and handling
costs, wages and benefits for sales and sales support personnel,
travel, brokerage commissions, promotional costs, as well as other
indirect costs.
General and administrative expenses consist primarily of wages
and benefits associated with management and administrative support
departments, business insurance costs, professional fees, office
facility related expenses and other general support costs.
(p) Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No.
157"). This Statement defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring fair
value in generally accepted accounting principles ("GAAP") and expands
disclosure related to the use of fair value measures in financial
statements. SFAS No. 157 does not expand the use of fair value
measures in financial statements, but standardizes its definition
and guidance in GAAP. The Standard emphasizes that fair value is a
market-based measurement and not an entity-specific measurement based
on an exchange transaction in which the entity sells an asset or
transfers a liability (exit price). SFAS No. 157 establishes a fair
value hierarchy from observable market data as the highest level to
fair value based on an entity's own fair value assumptions as the
lowest level. SFAS No. 157 is effective in fiscal years beginning
after November 15, 2007. Adoption of this statement is not expected to
materially impact our results of operations or financial position.
In July 2006, the FASB issued FASB Interpretation No. 48
(FIN 48,) "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income Taxes".
FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
The interpretation applies to all tax positions related to income
taxes subject to FASB Statement No. 109.
FIN 48 is effective for fiscal years beginning after December 15,
2006. Differences between amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts
reported after adoption should be accounted for as cumulative-effect
adjustment recorded to the beginning balance of retained earnings.
The adoption of FIN 48 did not have a material impact on our
financial position.
Note 2. Restatement of Financial Statements
The adjustment reflects the cost of an unauthorized marketing
program which occurred in the first quarter of 2007 which was not
discovered until the third quarter of 2007. The marketing
program was a 100% rebate program for purchases of certain Alpha
Hydrox products sold during a one-week period in March 2007 at
a retail drug store chain. The total obligation under the
rebate program was approximately $314,000, which reduced net sales
by that amount. The effect of the adjustment resulted in the
following changes as of and for the six months ended June 30, 2007:
As Previously As
Reported Restated
------------- -----------
Statement of Operations
Net sales $ 8,480,000 $ 8,166,000
Loss from operations $ (625,500) $ (939,500)
Net loss $ (789,800) $(1,103,800)
Net loss per common share -
Basic and Diluted $ (0.07) $ (0.10)
Balance Sheet
Trade receivables, net $ 1,143,400 $ 829,400
Total Current assets $ 6,947,900 $ 6,663,900
Total assets $19,875,100 $19,561,100
Retained earnings $ 5,222,600 $ 4,908,600
Total stockholders' equity $11,308,200 $10,994,200
Statement of Cash Flows
Net loss $ (789,800) $(1,103,800)
Trade and other receivables, net $ (414,600) $ (100,600)
Note 3. Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated financial
statements in accordance with the rules and regulations of the
Securities and Exchange Commission. Such rules and regulations allow
the omission of certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles as long as the statements are not
misleading. In the opinion of management, all adjustments necessary
for a fair presentation of these interim statements have been included
and are of a normal recurring nature. These interim financial
statements should be read in conjunction with our financial statements
included in our 2006 Annual Report on Form 10-KSB.
Note 4. 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
1,904,650 and 1,680,600 at June 30, 2007 and 2006, were excluded from
the computation of weighted average shares outstanding due to their
anti-dilutive effect.
A reconciliation of the weighted average number of common shares
outstanding for the three months ended June 30 follows:
2007 2006
---------- ----------
Common shares outstanding,
beginning of the year 10,533,000 10,503,000
Stock options exercised - -
---------- ----------
Weighted average number of
common shares outstanding 10,533,000 10,503,000
Dilutive effect of common share
equivalents - -
---------- ----------
Diluted weighted average number
of common shares outstanding 10,533,000 10,503,000
========== ==========
At June 30, 2007, there were authorized 50,000,000 shares of our
$.10 par value common stock and 20,000,000 shares of preferred stock
issuable in one or more series. None of the preferred stock was issued
or outstanding at June 30, 2007.
Note 5. Segment Information
We operate in two different segments: household products and
skin care products. Our products are sold nationally and
internationally (primarily Canada), directly and through independent
brokers, to mass merchandisers, drug stores, supermarkets, wholesale
distributors and other retail outlets. Management has chosen to
organize our business around these segments based on differences in
the products sold. The household products segment includes "Scott's
Liquid Gold" for wood, a wood cleaner which preserves as it cleans,
Mold Control 500, a mold remediation product, and "Touch of Scent,"
a room air freshener. The skin care segment includes "Alpha Hydrox,"
alpha hydroxy acid cleansers and lotions; a retinol product;
"Diabetic Skin Care", a healing cream and moisturizer developed to
address skin conditions of diabetics; and beauty care sachets of
Montagne Jeunesse distributed by us.
The following provides information on our segments for the three
and six months ended June 30:
Three Months ended June 30,
-----------------------------------------------------
2007 2006
------------------------- --------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external
customers $ 1,936,200 $ 2,368,000 $ 2,561,000 $ 1,572,300
=========== =========== =========== ===========
Income(loss)
before profit
sharing,
bonuses and
income taxes $ 28,200 $ (385,800) $ (46,700) $ (813,200)
=========== =========== =========== ===========
Identifiable
assets $ 3,483,000 $ 6,051,800 $ 4,025,600 $ 5,995,800
=========== =========== =========== ===========
Six Months ended June 30,
-----------------------------------------------------
2007 2006
------------------------- --------------------------
Skin Care
Household Products Household Skin Care
Products As Restated Products Products
----------- ----------- ----------- -----------
Net sales to
external
customers $ 4,241,700 $ 3,924,300 $ 4,626,000 $ 3,663,100
=========== =========== =========== ===========
Income(loss)
before profit
sharing,
bonuses and
income taxes $ 88,500 $(1,192,300) $ (373,800) $(1,533,800)
=========== =========== =========== ===========
Identifiable
assets $ 3,483,000 $ 5,737,800 $ 4,025,600 $ 5,995,800
=========== =========== =========== ===========
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,
--------------------------- -------------------------
2007
2007 2006 As Restated 2006
------------ ------------ ------------ -----------
Net sales to
external
customers $ 4,304,200 $ 4,133,300 $ 8,166,000 $ 8,289,100
============ ============ ============ ===========
Loss before
profit sharing,
bonuses and
income taxes $ (357,600) $ (859,900) $(1,103,800) $(1,907,600)
============ ============ ============ ===========
Identifiable
assets $ 9,220,800 $10,021,400 $ 9,220,800 $10,021,400
Corporate
assets 10,340,300 12,848,700 10,340,300 12,848,700
------------ ------------ ------------ ------------
Consolidated
total assets $19,561,100 $22,870,100 $19,561,100 $22,870,100
============ ============ ============ ===========
Corporate assets noted above are comprised primarily of our cash
and investments, and property and equipment not directly associated
with the manufacturing, warehousing, shipping and receiving activities.
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
This Management's Discussion and Analysis or Plan of Operation has
been revised to reflect changes in our restated financial statements as
of June 30, 2007. See Note 2 of Consolidated Financial Statements in
this Report for more information about the restatement.
During the first half of 2007, we experienced a decrease in sales
of our Scott's Liquid Gold household chemical products, while
experiencing an increase in sales of our Montagne Jeunesse line of skin
care products and an increase in sales of our Alpha Hydrox skin care
products. Our net loss for the first half of 2007 was $1,103,800 as
restated versus a loss of $1,907,600 in the first half of 2006. The
decrease in our loss for the first half of 2007 compared to the first
half of 2006 results from a reduction in our operating costs and
expenses, including the reduction of advertising.
Summary of Results as a Percentage of Net Sales
Year Ended Six Months Ended
December 31, June 30,
------------ -------------------
2007
2006 As Restated 2006
------------ ----------- --------
Net sales
Scott's Liquid Gold
household products 53.1% 51.9% 55.8%
Neoteric Cosmetics 46.9% 48.1% 44.2%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 57.4% 57.4% 58.0%
------ ------ ------
Gross profit 42.6% 42.6% 42.0%
Other revenue 1.0% 0.5% 0.3%
------ ------ ------
43.6% 43.1% 42.3%
------ ------ ------
Operating expenses 63.8% 54.1% 64.1%
Interest 2.0% 2.5% 1.2%
------ ------ ------
65.8% 56.6% 65.3%
------ ------ ------
Loss before income taxes (22.2%) (13.5%) (23.0%)
====== ======= ======
Our gross margins may not be comparable to those of other
entities, because some entities include all of the costs related to
their distribution network in cost of sales and others, like us,
exclude a portion of them (freight out to customers and nominal outside
warehouse costs) from gross margin, including them instead in the
selling expense line item. See Note 1(o), Operating Costs and Expenses
Classification, to the unaudited Consolidated Financial Statements in
this Report.
Comparative Net Sales
Six Months Ended June 30,
-----------------------------------------
Percentage
2007 Increase
As Restated 2006 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $3,654,900 $3,930,800 (7.0%)
Touch of Scent 586,800 695,200 (15.6%)
----------- ----------- ------
Total household
chemical products 4,241,700 4,626,000 (8.3%)
----------- ----------- ------
Alpha Hydrox and
other skin care 1,541,500 1,681,100 (8.3%)
Montagne Jeunesse
skin care 2,382,800 1,982,000 20.2%
----------- ----------- ------
Total skin care
products 3,924,300 3,663,100 7.1%
----------- ----------- ------
Total Net Sales $8,166,000 $8,289,100 (1.5%)
=========== =========== ======
Six Months Ended June 30, 2007
Compared to Six Months Ended June 30, 2006
Consolidated net sales for the first half of the current year
were $8,166,000 as restated versus $8,289,100 for the first six months
of 2006, a decrease of $123,100. Average selling prices were up by
$104,200. Co-op advertising, marketing funds, slotting fees, and
coupons paid to retailers are deducted from gross sales, and totaled
$1,321,200 in the first half of 2007 versus $1,152,700 in the same
period in 2006, an increase of $168,500 or 14.6%. This increase
consisted of an increase in coupon expense of $80,900 because of a
$314,000 one-time rebate program in March 2007, an increase in co-op
marketing funds of $138,700, and a decrease in slotting fee expenses
of $51,100.
From time to time, our customers return product to us. For our
household chemicals products, we permit returns only for a limited time,
and generally only if there is a manufacturing defect. With regard to
our skin care products, returns are more frequent under an unwritten
industry standard that permits returns for a variety of reasons. In
the event a skin care customer requests a return of product, the
Company will consider the request, and may grant such request in order
to maintain or enhance relationships with customers, even in the
absence of an enforceable right of the customer to do so. Some
retailers have not returned products to us. Return price credit (used
in exchanges typically, or rarely, refunded in cash) when authorized is
based on the original sale price plus a handling charge of the retailer
that ranges from 8-10%. The handling charge covers costs associated
with the return and shipping of the product. Additions to our reserves
for estimated returns are subtracted from gross sales.
From January 1, 2004 through end of last quarter June 30, 2007,
our product returns (as a percentage of gross revenue) have averaged
as follows: household products 0.5%, Montagne Jeunesse products 2.9%,
and our Alpha Hydrox and other skin care products 6.1%. The level of
returns as a percentage of gross revenue for the household products
and Montagne Jeunesse products have remained fairly constant as a
percentage of sales over that period while the Alpha Hydrox and other
skin care products return levels have fluctuated. More recently, as
our sales of the skin care products have declined we have seen a
decrease in returns as a percentage of gross revenues. The products
returned in the fiscal year to date (indicated as a percentage of gross
revenues) were: household products 0.3%, Montagne Jeunesse products
1.7%, and our Alpha Hydrox and other skin care products 7.9%. We are
not aware of any industry trends, competitive product introductions or
advertising campaigns at this time which would cause returns as a
percentage of gross sales to be materially different for the current
fiscal year than for the above averages. Furthermore, the Company's
management is not currently aware of any changes in customer
relationships that we believe would adversely impact anticipated
returns. However, we review our reserve for returns quarterly and we
regularly face the risk that the existing conditions related to
product returns will change.
During the first half of 2007, net sales of skin care products
accounted for 48.1% of consolidated net sales compared to 44.2% for the
same period of 2006. Net sales of these products for that period were
$3,924,300 as restated in 2007 compared to $3,663,100 in 2006, an
increase of $261,200 or 7.1%. Our increase in sales of Alpha Hydrox
and other skin care was due to the first half 2007 introduction of the
line Neoteric Massage Oils, including the initial, first quarter,
"pipeline" orders so that the massage oils are on the shelves of
retailers. With only the introduction underway, it is too early to
tell about consumer acceptance of Neoteric Massage Oils. This
increase was offset in part by a decrease in sales of our Alpha
Hydrox products introduced in 2005. We have continued to experience
a drop in unit sales of our more recently introduced Alpha Hydrox
products and our earlier-established alpha hydroxy acid-based
products due primarily to maturing in the market for alpha hydroxy
acid-based skin care products, intense competition from producers of
similar or alternative products, many of which are considerably
larger than Neoteric Cosmetics, Inc. and reduced distribution of
these products at retail stores in current and prior periods. Sales
of these products also decreased in the first six months of 2007
because of the impact on net sales of the one-time rebate program in
March, 2007. For the first half of 2007, the sales of our Alpha
Hydrox products accounted for 16.5% of net sales of skin care
products and 7.9% of total net sales, compared to 30.7% of net sales
of skin care products and 13.6% of total net sales in 2006.
Net sales of Montagne Jeunesse products were $2,382,900 in the
first half of 2007 versus $1,982,000 for the comparable period of
2006, an increase of $400,900 or 20.2%. The increase reflects the
product placement in additional Wal-Mart stores which began late in
the first quarter. This placement included significantly more stores
and more sachet variants in the stores. We are expecting to return to
two more retail chains with placement of Montagne Jeunesse in the
second half of 2007.
Sales of household products for the first half of this year
accounted for 51.9% of consolidated net sales compared to 55.8% for
the same period in 2006. These products are comprised of Scott's
Liquid Gold wood care products (Scott's Liquid Gold for wood, a wood
wash and wood wipes), mold remediation products and Touch of Scent.
During the six months ended June 30, 2007 sales of household products
were $4,241,700 as compared to $4,626,000 for the same period in 2006,
a decrease of $384,300, or 8.3%. Sales of Scott's Liquid Gold wood
care products decreased by $315,100 in 2007 versus 2006. We believe
this reduction to be a result of a decrease in media advertising of
our wood care products in 2007 versus 2006. Mold Control 500 sales,
which are shown in the sales for Scott's Liquid Gold and other household
products, were $472,000 for the first half of 2007 versus $432,800 in
the same period of 2006. Sales of "Touch of Scent" were down by
$108,400 or 15.6%, primarily due to a decrease in distribution in past
quarters. We anticipate that there will be further reductions in
distribution of our older Touch of scent products in the fourth quarter
of 2007.
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 or "Touch of Scent", could have
a significant adverse impact on our revenues and operating results.
We believe that our future success is highly dependent on favorable
acceptance and sales in the marketplace of Montagne Jeunesse
products, our newer Alpha Hydrox products and our "Scott's Liquid
Gold" wood care and mold remediation products.
We also believe that the introduction of successful new products,
including line extensions of existing products, such as the wood wash
and our new mold remediation product, using the name "Scott's Liquid
Gold", are important in our efforts to maintain or grow our revenue.
Late in the fourth quarter of 2006, we introduced two new items within
our Alpha Hydrox cosmetic line of products. We currently plan to
introduce four new items to the Alpha Hydrox cosmetic line plus a line
of health and beauty care products under the Neoteric cosmetic label.
Within the household product line we plan to introduce three to four
new products or items including some additions to our Touch of Scent
air fragrance product line. To the extent that we manufacture a new
product rather than purchase it from external parties, we are also
benefited by the use of existing capacity in our facilities. We are
using our facilities to fill and package the mold control products.
The actual introduction of additional products, the timing of any
additional introductions and any revenues realized from new products
is uncertain.
On a consolidated basis, cost of goods sold was $4,687,100
during the first half of 2007 compared to $4,810,900 for the same
period of 2006, a decrease of $123,800 or 2.6%, on a sales decrease
of 1.5%. As a percentage of consolidated net sales, cost of goods
sold was 57.4% in 2007 versus 58.0% in 2006, a decrease of about 1.1%.
Operating Expenses, Interest Expense and Other Income
Six Months ended June 30,
---------------------------------------
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 201,100 $ 701,300 (71.3%)
Selling 2,634,400 2,835,700 (7.1%)
General & Administrative 1,582,900 1,775,300 (10.8%)
----------- ----------- ------
Total operating
expenses $ 4,418,400 $ 5,312,300 (16.8%)
=========== =========== ======
Interest Income $ 43,800 $ 26,900 62.8%
Interest Expense $ 208,100 $ 100,400 107.3%
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased $893,900 in the
first half of 2007, when compared to the first half of 2006. The
various components of operating expenses are discussed below.
Advertising expenses for the first six months of 2007 were
$201,100 compared to $701,300 for the comparable period of 2006, a
decrease of $500,200 or 71.3%. A majority of that decrease was due
to decrease in television advertising expenses applicable to our
Alpha Hydrox skin care products.
Selling expenses for the first half of 2007 were $2,634,400
compared to $2,835,700 for the comparable six months of 2006, a
decrease of $201,300 or 7.1%. That decrease was comprised of a
decrease in salaries, fringe benefits and related travel expense of
$138,000 primarily because of a decrease in personnel in 2007 versus
2006, a decrease in freight and brokerage expenses of $63,700, offset
by a net increase in other selling expense, none of which by itself
is significant, of $400.
General and administrative expenses for the first six months of
2007 were $1,582,900 compared to $1,775,300 for the comparable period
of 2006, a decrease of $192,400 or 10.8%. That decrease was primarily
attributable to a decrease in salaries and fringe benefits and related
travel expense resulting from a reduction in salaries and personnel
of $180,700, and a net decrease in other general and administrative
expenses of $11,700.
Interest expense for the first half of 2007 was $208,100 versus
$100,400 for the comparable period of 2006. Interest expense increased
because of higher interest rates and increased borrowing levels.
Interest income for the six months ended June 30, 2007 was $43,800
compared to $26,900 for the same period of 2006, which consists of
interest earned on our cash reserves in 2007 and 2006.
During the first half of 2007 and of 2006, expenditures for
research and development were not material (under 2% of revenues).
Three Months Ended June 30, 2007
Compared to Three Months Ended June 30, 2006
Comparative Net Sales
Three Months Ended June 30,
-----------------------------------------
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold and
other household products $ 1,694,800 $ 2,249,600 (24.7%)
Touch of Scent 241,400 311,400 (22.5%)
----------- ----------- ------)
Total household
products 1,936,200 2,561,000 (24.4%)
----------- ----------- ------
Alpha Hydrox and
other skin care 681,000 652,400 4.4%
Montagne Jeunesse
skin care 1,687,000 919,900 83.4%
----------- ----------- ------
Total skin care
products 2,368,000 1,572,300 50.6%
----------- ----------- ------
Total Net Sales $ 4,304,200 $ 4,133,300 4.1%
=========== =========== ======
Consolidated net sales for the second quarter of the current year
were $4,304,200 versus $4,133,300 for the comparable quarter of 2006,
an increase of $170,900 or about 4.1%. Average selling prices for the
second quarter of 2007 were up by $62,900 over those of the comparable
period of 2006, prices of household products being up by $26,300, while
average selling prices of skin care products were up by $36,600. 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 $348,100 in the second quarter of 2007
versus $522,600 in the same period in 2006, a decrease of $174,500 or
about 33.4%. This decrease consisted of a decrease in coupon expenses
of $183,400, a decrease in co-op advertising of $20,200, offset by an
increase in slotting of $29,100.
During the second quarter of 2007, net sales of skin care
products accounted for 55.0% of consolidated net sales compared to
38.0% for the second quarter of 2006. Net sales of these products for
those periods were $2,368,000 in 2007 compared to $1,572,300 in 2006,
an increase of $795,700 or about 50.6%. Net sales of Montagne Jeunesse
were approximately $1,687,000 in the second quarter of 2007 compared to
$919,900 in the second quarter of 2006. Please see the discussion above
for the first half of 2007 for additional information regarding sales
of skin care products, which is also applicable to sales of skin care
products in the second quarter of 2007.
Sales of household products for the second quarter of this year
accounted for 45.0% of consolidated net sales compared to 62.0% for
the same period of 2006. These products are comprised of Scott's Liquid
Gold wood care and mold remediation products, and "Touch of Scent", a
room air freshener. During the second quarter of 2007, sales of
household products were $1,936,200, as compared to sales of $2,561,000
for the same three months of 2006. Sales of Scott's Liquid Gold wood
care and other household products were down by $554,800, a decrease of
24.7%. Sales of "Touch of Scent" were down by $70,000 or 22.5%. During
the second quarter of 2006 we began the introduction of our mold
remediation product "Mold Control 500" with sales of $432,800 during
this period. Sales of Mold Control 500 were $258,900 during the second
quarter of 2007, with 2007 sales being less then 2006 because the
second quarter of 2006 was the introduction of our Mold Control 500
product and included initial "pipeline" orders to stock retailer
shelves. Please see the discussion above for the first half of 2007
for additional information regarding sales of household products,
which is also applicable to sales of household products in the second
quarter of 2007.
On a consolidated basis, cost of goods sold was $2,340,600
during the second quarter of 2007 compared to $2,567,400 for the same
period of 2006, a decrease of $226,800 (8.8%), on a sales increase of
4.1%. As a percentage of consolidated net sales for the second quarter
of 2007, cost of goods sold was 54.4% compared to 62.1% in 2006, a
decrease of 12.5%, which reflects primarily the decrease in sales
promotion expenses, particularly in the skin care line of products,
which are offset against sales, which increased our margins.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2007 2006 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 88,800 $ 107,600 (17.5%)
Selling 1,379,000 1,410,200 (2.2%)
General & Administrative
expenses 768,800 863,200 (10.9%)
----------- ----------- ------
Total operating
Expenses $ 2,236,600 $ 2,381,000 (6.1%)
=========== =========== ======
Interest Income $ 19,600 $ 14,300 37.1%
Interest Expense $ 104,200 $ 59,100 76.3%
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased $144,400 in the
second quarter of 2007, when compared to the same period during 2006.
The various components of operating expenses are discussed below.
Advertising expenses for the second quarter of 2007 were $88,800
compared to $107,600 for the comparable quarter of 2006, a decrease of
$18,800 or 17.5%.
Selling expenses for the three months ended June 30, 2007 were
$1,379,000 compared to $1,410,200 for the comparable three months of
2006, a decrease of $31,200 or 2.2%. That decrease was primarily
because of a decrease in salaries, fringe benefits and related travel
expense of $61,700 resulting from a decrease in personnel in 2007
versus 2006, offset by a net increase in other selling expenses, none
of which by itself is significant, of $30,200.
General and administrative expenses for the second quarter of
2007 were $768,800 compared to $863,200 for the comparable period of
2006, a decrease of $94,400 or 10.9%. That decrease was primarily
attributable to a decrease in salaries and fringe benefits resulting
from a reduction in salaries and personnel of $86,700, and a net
decrease in other general and administrative expenses of $7,700.
Interest expense for the second quarter of 2007 was $104,200
versus $59,100 for the comparable period of 2006. Interest expense
increased because of higher interest rates and borrowing levels.
Interest income for the three months ended June 30, 2007 was $19,600
compared to $14,300 for the same period of 2006.
During the second quarter of 2007 and of 2006, expenditures for
research and development were not material (under 2% of revenues).
Liquidity and Capital Resources
On June 28, 2006, we entered into a new loan with a fifteen year
amortization with Citywide Banks for $5,156,600 secured by the land,
building and fixtures at our Denver, Colorado facilities. This loan
replaced the bank loan with Citywide Banks, secured by the facilities,
in the principal amount of approximately $1,582,900. Interest on the
bank loan (8.0% at December 31, 2006) is at the prime rate as
published in The Wall Street Journal, adjusted annually each June
(8.25% at June 30, 2007). Part of the proceeds of the new loan were
used to pay off the prior loan, and the remaining proceeds have been or
will be used in business operations, including the development and
introduction of new products. This loan requires 180 monthly payments
of approximately $49,500, which commenced on July 28, 2006. As did the
prior bank loan, the loan agreement contains a number of covenants,
including the requirement for maintaining a current ratio of at least
1:1 and a ratio of consolidated long-term debt to consolidated net
worth of not more than 1:1. We may not declare any dividends that
would result in a violation of either of these covenants. The
foregoing requirements were met at the end of the first half of 2007.
During the first half of 2007, our working capital decreased by
$897,500, and concomitantly, our current ratio (current assets divided
by current liabilities) decreased from 2.1:1 at December 31, 2006 to
1.7:1 at June 30, 2007. This decrease in working capital is
attributable to a net loss in the first half of 2007 of $1,103,800,
reduction in long-term debt of $101,300, offset by depreciation in
excess of capital additions of $290,000.
At June 30, 2007, trade accounts receivable were $829,400 as
restated versus $743,700 at the end of 2006, largely because sales
in the last two months of the quarter ended June 30, 2007 were more
than those of the last two months of the quarter ended December 31,
2006. Accounts payable increased from the end of 2006 through June
of 2007 by $382,100 corresponding primarily with the increase and
timing of purchases of inventory over that period. At June 30, 2007
inventories were $302,100 more than at December 31, 2006, due to the
increase in cosmetic product inventory to support our new products,
including new product introductions in the upcoming months. Prepaid
expenses increased from the end of 2006 by $92,200 primarily due to
an increase in prepaid promotional expenses. Accrued payroll and
benefits increased $171,800 from December 31, 2006 to June 30, 2007
primarily because of the increase in accrued employee fringe
benefits. Other Accrued liabilities decreased by $136,700 primarily
because of a decrease in accrued property taxes.
We have no significant capital expenditures planned for 2007 and
have no current plans for any external financing, other than our
existing bank loans. We expect that our available cash flows from
operating activities will fund the next twelve months' cash
requirements.
Our dependence on operating cash flow means that risks involved
in our business can significantly affect our liquidity. Any loss of a
significant customer, any further decreases in distribution of our
skin care or household products, any new competitive products affecting
sales levels of our products, or any significant expense not included
in our internal budget could result in the need to raise cash, such as
through a bank financing. We have no arrangements for any additional
external financing of debt or equity, and we are not certain whether
any such financing would be available on acceptable terms. In order
to improve our operating cash flow, we need to achieve profitability.
As we have indicated in previous public reports, the Company
uses less than the capacity of its facilities and is also interested
in reducing its expenses. As part of this process, the Company has
engaged a commercial real estate broker to explore alternatives. These
alternatives include the sale of all or part of the facilities, a sale
of all or part of the facilities combined with a leaseback by the
Company of the facilities, or a lease of all or part of the facilities
by the Company to a third party. There is, however, no assurance that
acceptable transactions will be offered or completed.
Forward-Looking Statements
This report may contain "forward-looking statements" within the
meaning of U.S. federal securities laws. These statements are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements and our
performance inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking
statements. Factors that would cause or contribute to such differences
include, but are not limited to, continued acceptance of each of our
significant products in the marketplace; the degree of success of any
new product or product line introduction by us; the uncertainty of
consumer acceptance of the new Alpha Hydrox introduced in 2005, mold
control and wood wash products; competitive factors; any decrease in
distribution of (i.e., retail stores carrying) our significant
products; continuation of our distributorship agreement with Montagne
Jeunesse; the need for effective advertising of our products; limited
resources available for such advertising; new competitive products
and/or technological changes; dependence upon third party vendors and
upon sales to major customers; changes in the regulation of our
products, including applicable environmental regulations; continuing
losses which could affect our liquidity; the loss of any executive
officer; and other matters discussed in our 2006 Annual Report on
Form 10-KSB. We undertake no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise
after the date of this report.
Item 3A(T). Controls and Procedures
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 as of June 30, 2007. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not effective
to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms as of
June 30, 2007. The reason is a material weakness relating to an
unauthorized marketing program in March 2007 as discussed in Note 2
to the Consolidated Financial Statements in this Report. There was
no change in our internal control over financial reporting during the
quarter ended June 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
In September and October 2007, we made the following changes to
our disclosure controls and procedures in an effort to remediate the
material weakness indicated above:
.. The addition of a National Sales Director as an additional level
of review and approval over promotional budgets and program spending.
.. Enhanced budgeting procedures and additional periodic reviews of
our promotional programs by our National Sales Director and executive
management.
.. Enhanced follow up by our National Sales Director and corporate
headquarters to insure that the Company has received all pertinent
documentation for sales promotional proposals, commitments and contracts.
.. Required sales call reports, in written form, shortly after
sales appointments between Company personnel and our customer's buyer
and/or purchasing personnel. This report would, among other things,
summarize any commitments made on behalf of the Company or customer.
.. Quarterly, or more often if warranted, review by sales
management and executive management of promotional commitments to
insure accurate financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable.
Item 3. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 2, 2007, we held our 2007 Annual Meeting of
Shareholders. At that meeting, the seven existing directors were
nominated and re-elected as our directors. These seven persons
constitute all members of our Board of Directors. These directors
and the votes for and withheld for each of them were as follows:
For Withheld
--------- --------
Mark E. Goldstein 8,706,284 337,779
Jeffrey R. Hinkle 8,793,321 250,742
Jeffry B. Johnson 8,768,821 275,242
Dennis P. Passantino 8,789,284 254,779
Carl A. Bellini 8,805,899 238,164
Dennis H. Field 8,764,899 279,164
Gerald J. Laber 8,766,521 277,542
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
In accordance with the requirements of the Exchange Act, the
Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
SCOTT'S LIQUID GOLD-INC.
November 1, 2007 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
November 1, 2007 BY: /s/ Jeffry B. Johnson
Date --------------------------------------
Jeffry B. Johnson
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