Quarterly Report (10-q)

Date : 08/13/2018 @ 11:10AM
Source : Edgar (US Regulatory)
Stock : Scott's Liquid Gold, Inc. (PC) (SLGD)
Quote : 1.6  -0.01 (-0.62%) @ 3:04PM

Quarterly Report (10-q)

 

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018    

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number: 001-13458

 

SCOTT’S LIQUID GOLD-INC.

(Exact name of registrant as specified in its charter)

 

 

Colorado

 

84-0920811

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

4880 Havana Street, Suite 400, Denver, CO

 

80239

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (303) 373-4860

 

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       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 (§ 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.    Yes       No  

As of August 10, 2018, the Registrant had 12,054,350   of its common stock, $0.10 par value per share, outstanding.  

 

 

 

 

 


CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of U.S. federal securities laws. All statements, other than statements of historical fact, included in this Report that address activities, events, or developments with respect to our financial condition, results of operations, or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. You can typically identify forward-looking statements by the use of words, such as “may,” “could,” “should,” “assume,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” and other similar words. 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 risk and uncertainty 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:

 

changing consumer preferences and the 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;

 

competitive factors, including any decrease in distribution of (i.e., retail stores carrying) our significant products;

 

continuation of our distributorship agreements for 7 th Heaven (previously known as Montagne Jeunesse) skin care products and Batiste Dry Shampoos;

 

the need for effective advertising of our products and limited resources available for such advertising;

 

new competitive products and/or technological changes;

 

dependence upon third party vendors and upon sales to major customers;

 

the availability of necessary raw materials and potential increases in the prices of these raw materials;

 

changes in the regulation of our products, including applicable environmental and U.S. Food and Drug Administration (“FDA”) regulations;

 

the degree of success of the integration of product lines or businesses we may acquire;

 

future losses which could affect our liquidity;

 

the loss of any executive officer;

 

dependence on the efforts of our exclusive distributor in the People’s Republic of China (“China”) to market and sell certain of our products there; and

 

other matters discussed in this Report, including the risks described in the Risk Factors section of this Report.

We caution you that forward-looking statements are not guarantees of future performance and that actual results or performance may be materially different from those expressed or implied in the forward-looking statements. The forward-looking statements in this Report speak as of the filing date of this Report. Although we may from time to time voluntarily update our prior forward-looking statements, 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.

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

 


 

P ART I

 

ITEM  1.

FINANCIAL STATEMENTS.

Condensed Consolidated Statements of Income (Unaudited)

Scott’s Liquid Gold-Inc. & Subsidiaries

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

$

10,806,600

 

 

$

9,873,800

 

 

$

18,234,600

 

 

$

20,316,400

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

5,429,000

 

 

 

5,606,800

 

 

 

9,836,500

 

 

 

11,229,000

 

Advertising

 

344,700

 

 

 

138,700

 

 

 

881,900

 

 

 

421,300

 

Selling

 

1,841,400

 

 

 

1,679,300

 

 

 

3,473,100

 

 

 

3,295,200

 

General and administrative

 

1,431,200

 

 

 

1,023,300

 

 

 

2,524,500

 

 

 

2,103,600

 

Total operating costs and expenses

 

9,046,300

 

 

 

8,448,100

 

 

 

16,716,000

 

 

 

17,049,100

 

Income from operations

 

1,760,300

 

 

 

1,425,700

 

 

 

1,518,600

 

 

 

3,267,300

 

Interest expense

 

(47,700

)

 

 

(33,200

)

 

 

(71,800

)

 

 

(75,100

)

Income before income taxes

 

1,712,600

 

 

 

1,392,500

 

 

 

1,446,800

 

 

 

3,192,200

 

Income tax expense

 

(428,700

)

 

 

(517,200

)

 

 

(359,300

)

 

 

(1,235,800

)

Net income

$

1,283,900

 

 

$

875,300

 

 

$

1,087,500

 

 

$

1,956,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.11

 

 

$

0.07

 

 

$

0.09

 

 

$

0.17

 

Diluted

$

0.10

 

 

$

0.07

 

 

$

0.09

 

 

$

0.16

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

12,023,935

 

 

 

11,859,927

 

 

 

11,976,761

 

 

 

11,818,143

 

Diluted

 

12,548,947

 

 

 

12,286,256

 

 

 

12,577,916

 

 

 

12,158,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).

 

 

 

1


 

Condensed Consolidated Balance Sheets (Unaudited)

Scott’s Liquid Gold-Inc. & Subsidiaries

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,004,400

 

 

$

4,113,800

 

Accounts receivable, net

 

4,012,100

 

 

 

3,104,200

 

Inventories, net

 

7,730,900

 

 

 

8,786,700

 

Income taxes receivable

 

203,400

 

 

 

-

 

Prepaid expenses

 

365,400

 

 

 

285,100

 

Total current assets

 

17,316,200

 

 

 

16,289,800

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

863,900

 

 

 

908,800

 

Deferred tax asset

 

499,100

 

 

 

384,200

 

Goodwill

 

1,520,600

 

 

 

1,520,600

 

Intangible assets, net

 

5,838,000

 

 

 

6,148,400

 

Other assets

 

49,100

 

 

 

49,100

 

Total assets

$

26,086,900

 

 

$

25,300,900

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,537,300

 

 

$

1,655,900

 

Accrued expenses

 

811,900

 

 

 

935,400

 

Income taxes payable

 

-

 

 

 

365,900

 

Contract liability

 

259,300

 

 

 

-

 

Current maturities of long-term debt

 

-

 

 

 

800,000

 

Total current liabilities

 

3,608,500

 

 

 

3,757,200

 

 

 

 

 

 

 

 

 

Long-term debt, net of current maturities and debt issuance costs

 

-

 

 

 

362,400

 

Total liabilities

 

3,608,500

 

 

 

4,119,600

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, no par value, authorized 20,000,000 shares; no shares issued and outstanding

 

-

 

 

 

-

 

Common stock; $0.10 par value, authorized 50,000,000 shares; issued and outstanding 12,023,965 shares (2018) and 11,885,839 shares (2017)

 

1,202,400

 

 

 

1,188,600

 

Capital in excess of par

 

6,637,100

 

 

 

6,441,300

 

Retained earnings

 

14,638,900

 

 

 

13,551,400

 

Total shareholders’ equity

 

22,478,400

 

 

 

21,181,300

 

Total liabilities and shareholders’ equity

$

26,086,900

 

 

$

25,300,900

 

 

 

 

 

 

See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).

 

 

 

2


 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Scott’s Liquid Gold-Inc. & Subsidiaries

 

 

Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

1,087,500

 

 

$

1,956,400

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

433,200

 

 

 

388,500

 

Stock-based compensation

 

120,800

 

 

 

112,000

 

Deferred income taxes

 

(114,900

)

 

 

576,700

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(907,900

)

 

 

(41,800

)

Inventories

 

1,055,800

 

 

 

(794,600

)

Prepaid expenses and other assets

 

(80,300

)

 

 

(228,400

)

Income taxes (receivable) payable

 

(569,300

)

 

 

611,600

 

Accounts payable and accrued expenses

 

757,900

 

 

 

(799,800

)

Contract liability

 

259,300

 

 

 

-

 

Total adjustments to net income

 

954,600

 

 

 

(175,800

)

Net cash provided by operating activities

 

2,042,100

 

 

 

1,780,600

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(40,300

)

 

 

(124,700

)

Net cash used by investing activities

 

(40,300

)

 

 

(124,700

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayments under line-of-credit

 

-

 

 

 

(750,000

)

Repayments of long-term debt

 

(1,200,000

)

 

 

(400,000

)

Proceeds from exercise of stock options

 

88,800

 

 

 

34,800

 

Net cash used by financing activities

 

(1,111,200

)

 

 

(1,115,200

)

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

890,600

 

 

 

540,700

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

4,113,800

 

 

 

2,097,300

 

Cash and cash equivalents, end of period

$

5,004,400

 

 

$

2,638,000

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for interest

$

34,200

 

 

$

75,100

 

Cash paid during the period for income taxes

$

1,043,500

 

 

$

-

 

 

 

 

 

 

 

See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).

 

 

3


 

Notes to Condensed Consolidated Financial Statements (Unaudited)

Scott’s Liquid Gold-Inc. & Subsidiaries

 

Note 1.

Organization and 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, the “Company,” “we,” “our,” or “us”) develop, manufacture, market and sell quality household and skin and hair care products. We are also a distributor in the United States of 7 th Heaven face masque sachets and Batiste Dry Shampoo manufactured by two other companies. Our business is comprised of two segments, household products and skin and hair care products.

(b)

Principles of Consolidation

Our Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

(c)

Basis of Presentation

The Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets, and the Condensed Consolidated Statements of Cash Flows included in this Report have been prepared by the Company. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at June 30, 2018 and results of operations and cash flows for all periods have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for the period ended June 30, 2018 are not necessarily indicative of the operating results for the full year.

(d)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts in our financial statements 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. Significant estimates include, but are not limited to, the realization of deferred tax assets, reserves for slow moving and obsolete inventory, customer returns and allowances, intangible asset useful lives and amortization method, and stock-based compensation. Actual results could differ from our estimates.

(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) Inventories Valuation and Reserves

Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We estimate an inventory reserve for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.

4


 

Inventories were comprised of the following at:

 

 

June 30, 2018

 

 

December 31, 2017

 

Finished goods

$

5,504,300

 

 

$

6,983,600

 

Raw materials

 

2,242,900

 

 

 

1,811,200

 

Inventory reserve for obsolescence

 

(16,300

)

 

 

(8,100

)

 

$

7,730,900

 

 

$

8,786,700

 

(g)

Property and Equipment

Property and equipment are recorded at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from three to 20 years. Production equipment and production support equipment are estimated to have useful lives of 15 to 20 years and three to 10 years, respectively. Office furniture and office machines are estimated to have useful lives of 10 to 20 years and three to five years, respectively. Maintenance and repairs are expensed as incurred. Improvements that extend the useful lives of the asset or provide improved efficiency are capitalized.

(h)

Intangible Assets

Intangible assets consist of customer relationships, trade names, formulas and batching processes and a non-compete agreement. The fair value of the intangible assets is amortized over their estimated useful lives and range from a period of five to 15 years and are reviewed for impairment when changes in market circumstances occur and written down to fair value if impaired.

(i)

Goodwill

Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests at the reporting unit level, which include the review of factors to determine if it is more-likely-than-not that the fair value of its reporting units were below carrying value. In certain circumstances these assets are written down to fair value if impaired.

(j)

Financial Instruments

Financial instruments which potentially subject us to concentrations of credit risk include cash and cash equivalents and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. During the six months ended June 30, 2018, we have 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, accounts payable, accrued expenses, and current maturities of long-term debt approximate fair value due to the short-term nature of these financial instruments. The recorded amount of long-term debt approximates fair value and is estimated primarily based on current market rates for debt with similar terms and remaining maturities. At June 30, 2018, we had no outstanding balances on our long-term debt or on our line-of-credit. At December 31, 2017, we had long-term debt of $1,200,000 and no outstanding balance on our line-of-credit.

 


5


 

(k)

Income Taxes

Income taxes reflect the tax effects of transactions reported in the financial statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing 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.

Taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. We classify penalty and interest expense related to income tax liabilities as an income tax expense. There are no significant interest and penalties recognized in the Condensed Consolidated Statements of Income or accrued on the Condensed Consolidated Balance Sheets.

The effective tax rate for the six months ended June 30, 2018 and 2017 was 24.8% and 38.7% respectively, which differs from the statutory income tax rate due to permanent book to tax differences. The decrease in the effective tax rate is a result of the enactment of the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017 which, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.

(l)

Revenue Recognition

Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.

Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns.

Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted. Adjustments to the costs of customer allowances and promotional programs for consumers in subsequent periods are generally not material, as our promotions are typically of short duration, thereby reducing the uncertainty inherent in such estimates.

Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce our revenue in that period.

Sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.

6


 

We have also e stablished an allowance for doubtful accounts. We estimate this allowance based upon, among other things, an assessment of the credit risk of specific customers and historical trends. We believe our allowance for doubtful accounts is adequate to absorb any losses which may arise. In the event that actual losses differ from our estimates, the results of future periods may be impacted.

At June 30, 2018 and December 31, 2017 approximately $834,200 and $1,069,700, respectively, had been reserved as a reduction of accounts receivable. Trade promotions to our customers and incentives such as coupons to our consumers are deducted from gross sales and totaled $1,272,100 and $1,331,800 for the six months ended June 30, 2018 and 2017, and totaled $671,700 and $712,100 for the three months ended June 30, 2018 and 2017 respectively.

(m)

Advertising Costs

We expense advertising costs as incurred.

(n)

Stock-based Compensation

We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the vesting period using the straight-line method.

(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 as selling expenses. Other selling expenses consist primarily of wages, benefits, and travel expenses for sales and sales support personnel, brokerage commissions and promotional costs, as well as certain other indirect costs. Shipping and handling costs totaled $1,159,800 and $1,253,200 for the six months ended June 30, 2018 and 2017, and totaled $538,400 and $621,600 for the three months ended June 30, 2018 and 2017 respectively.

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.

The Company entered into a confidential separation agreement, waiver and release with the former Chief Financial Officer of the Company effective June 1, 2018 (the “Separation Agreement”). The Company agreed to pay the former Chief Financial Officer severance pay over nine months in conjunction with terms set forth in the Separation Agreement. Severance costs of $287,200 were recognized in the second quarter of 2018 and are included in general and administrative expenses for the six months ended June 30, 2018. Accrued severance costs are included in accrued expenses on the Condensed Consolidated Balance Sheets as of June 30, 2018.

(p)

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). This guidance, as amended by subsequent ASUs on the topic, requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with such classification affecting the pattern of expense recognition in the income statement. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We anticipate that most of our operating leases will result in recognition of additional assets and the corresponding liabilities on the Consolidated Balance Sheets. We have not determined the amount of these transactions or the final impact to our earnings as the actual impact will depend on the Company’s lease portfolio at the time of adoption.

7


 

In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instr uments” (“ASU 2016-13”) . Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts . Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2 019. ASU 2016-13 is not expected to have a material impact on our financial statements.

 

Note 2.

Stock-Based Compensation

During the six months ended June 30, 2018, we granted options to acquire: (i) 40,056 shares of our common stock to employees at prices ranging between $2.17 to $3.35 per share; (ii) 105,000 shares of our common stock to executive officers at prices ranging between $2.09 to $2.17 per share; and (iii) 90,000 shares of our common stock to non-employee board members at a price of $2.17 per share. During the six months ended June 30, 2017, we granted options to acquire 7,536 shares of our common stock to an employee at a price of $1.80 per share.

The weighted average fair market value of the options granted in the six months ended June 30, 2018 and 2017 was estimated on the date of grant, using a Black-Scholes option pricing model with the following assumptions:

 

June 30, 2018

 

 

June 30, 2017

Expected life of options (using the “simplified” method)

4 years

 

 

6 years

Average risk-free interest rate

2.63%

 

 

1.82%

Average expected volatility of stock

69%

 

 

107%

Expected dividend rate

None

 

 

None

Fair value of options granted

$246,300

 

 

$11,100

 

Compensation cost related to stock options recognized in operating results (included in general and administrative expenses) totaled $120,800 and $112,000 in the six months ended June 30, 2018 and 2017, respectively. Approximately $597,600 of total unrecognized compensation costs related to non-vested stock options is expected to be recognized over the next four years, depending on the vesting provisions of the options. 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.

 

In 2005, we adopted a stock option plan for our employees, officers and directors (the “2005 Plan”). In 2015, we adopted a stock option plan for our employees, officers and directors (the “2015 Plan”) to replace the 2005 Plan, which expired on March 31, 2015.

 

Activity under our two stock option plans is as follows:

 

 

Number of Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Life

 

Aggregate Intrinsic Value

 

2005 Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2017

 

492,063

 

 

$

0.73

 

 

3.8 years

 

$

1,067,000

 

Granted

 

-

 

 

$

-

 

 

 

 

 

 

 

Exercised

 

(101,563

)

 

$

0.42

 

 

 

 

 

 

 

Cancelled/Expired

 

-

 

 

$

-

 

 

 

 

 

 

 

Outstanding, June 30, 2018

 

390,500

 

 

$

0.81

 

 

4.2 years

 

$

522,600

 

Exercisable, June 30, 2018

 

327,897

 

 

$

0.80

 

 

3.8 years

 

$

442,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2017

 

784,684

 

 

$

1.32

 

 

6.4 years

 

$

1,238,200

 

Granted

 

235,056

 

 

$

2.26

 

 

 

 

 

 

 

Exercised

 

(36,563

)

 

$

1.25

 

 

 

 

 

 

 

Cancelled/Expired

 

-

 

 

$

-

 

 

 

 

 

 

 

Outstanding, June 30, 2018

 

983,177

 

 

$

1.55

 

 

5.7 years

 

$

624,000

 

Exercisable, June 30, 2018

 

471,805

 

 

$

1.32

 

 

5.5 years

 

$

397,400

 

8


 

 

Note 3.

Earnings per Share

Per share data is determined by using the weighted average number of common shares outstanding. Common equivalent shares are considered only for diluted earnings per share, unless considered anti-dilutive. Common equivalent shares, determined using the treasury stock method, result from stock options with exercise prices that are below the average market price of the common stock.

Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in our earnings.

A reconciliation of the weighted average number of common shares outstanding is as follows:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Common shares outstanding, beginning of the period

 

12,023,716

 

 

 

11,857,026

 

 

 

11,885,839

 

 

 

11,749,589

 

Weighted average common shares issued

 

219

 

 

 

2,901

 

 

 

90,922

 

 

 

68,554

 

Weighted average number of common shares outstanding

 

12,023,935

 

 

 

11,859,927

 

 

 

11,976,761

 

 

 

11,818,143

 

Dilutive effect of common share equivalents

 

525,012

 

 

 

426,329

 

 

 

601,155

 

 

 

339,974

 

Diluted weighted average number of common shares outstanding

 

12,548,947

 

 

 

12,286,256

 

 

 

12,577,916

 

 

 

12,158,117

 

 

Common stock equivalents that have been excluded from the calculation of earnings per share because they would have been anti-dilutive:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock options

 

251,600

 

 

 

7,500

 

 

 

251,600

 

 

 

525,600

 

 

 

Note 4.

Segment Information

We operate in two different segments: household products and skin and hair care products. Our products are sold nationally and internationally (primarily China and Canada), directly through our sales force (or pursuant to an exclusive distribution agreement in the case of sales to China) and indirectly through independent brokers and manufacturer’s representatives, to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, and other retail outlets and to wholesale distributors. We have chosen to organize our business around these segments based on differences in the products sold.

Accounting policies for our segments are the same as those described in Note 1. We evaluate segment performance based on segment income or loss before income taxes.

The following provides information on our segments for the three and six months ended June 30:

 

 

Three Months Ended June 30, 2018

 

 

Household Products

 

 

Skin and Hair Care Products

 

 

Total

 

Net sales

$

1,364,200

 

 

$

9,442,400

 

 

$

10,806,600

 

Operating (loss) income

 

(449,800

)

 

 

2,210,100

 

 

 

1,760,300

 

Capital and intangible asset expenditures

 

17,700

 

 

 

22,600

 

 

 

40,300

 

Depreciation and amortization

 

31,700

 

 

 

195,000

 

 

 

226,700

 

 

 

Three Months Ended June 30, 2017

 

 

Household Products

 

 

Skin and Hair Care Products

 

 

Total

 

Net sales

$

1,330,700

 

 

$

8,543,100

 

 

$

9,873,800

 

Operating (loss) income

 

(130,300

)

 

 

1,556,000

 

 

 

1,425,700

 

Capital and intangible asset expenditures

 

80,300

 

 

 

-

 

 

 

80,300

 

Depreciation and amortization

 

30,100

 

 

 

166,800

 

 

 

196,900

 

 

9


 

 

Six Months Ended June 30, 2018

 

 

Household Products

 

 

Skin and Hair Care Products

 

 

Total

 

Net sales

$

2,715,400

 

 

$

15,519,200

 

 

$

18,234,600

 

Operating (loss) income

 

(895,300

)

 

 

2,413,900

 

 

 

1,518,600

 

Capital and intangible asset expenditures

 

17,700

 

 

 

22,600

 

 

 

40,300

 

Depreciation and amortization

 

68,400

 

 

 

364,800

 

 

 

433,200

 

 

 

Six Months Ended June 30, 2017

 

 

Household Products

 

 

Skin and Hair Care Products

 

 

Total

 

Net sales

$

2,780,300

 

 

$

17,536,100

 

 

$

20,316,400

 

Operating (loss) income

 

(209,200

)

 

 

3,476,500

 

 

 

3,267,300

 

Capital and intangible asset expenditures

 

124,700

 

 

 

-

 

 

 

124,700

 

Depreciation and amortization

 

54,000

 

 

 

334,500

 

 

 

388,500

 

 

 

Note 5.

Goodwill and Intangible Assets

Intangible assets consisted of the following:

 

 

As of June 30, 2018

 

 

As of December 31, 2017

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

4,022,100

 

 

$

804,400

 

 

$

3,217,700

 

 

$

4,022,100

 

 

$

603,300

 

 

$

3,418,800

 

Trade names

 

2,362,400

 

 

 

314,800

 

 

 

2,047,600

 

 

 

2,362,400

 

 

 

236,100

 

 

 

2,126,300

 

Formulas and batching processes

 

668,600

 

 

 

111,600

 

 

 

557,000

 

 

 

668,600

 

 

 

83,700

 

 

 

584,900

 

Non-compete agreement

 

26,300

 

 

 

10,600

 

 

 

15,700

 

 

 

26,300

 

 

 

7,900

 

 

 

18,400

 

 

 

7,079,400

 

 

 

1,241,400

 

 

 

5,838,000

 

 

 

7,079,400

 

 

 

931,000

 

 

 

6,148,400

 

Goodwill

 

 

 

 

 

 

 

 

 

1,520,600

 

 

 

 

 

 

 

 

 

 

 

1,520,600

 

Total intangible assets

 

 

 

 

 

 

 

 

$

7,358,600

 

 

 

 

 

 

 

 

 

 

$

7,669,000

 

 

The amortization expense for the six months ended June 30, 2018 and 2017 was $310,400, respectively. The amortization expense for the three months ended June 30, 2018 and 2017 was $155,200, respectively.

 

Estimated amortization expense for 2018 and subsequent years is as follows:

 

2018 (remaining)

$

310,300

 

2019

 

620,700

 

2020

 

620,700

 

2021

 

617,600

 

Thereafter

 

3,668,700

 

Total

$

5,838,000

 

 

Note 6.

Long-Term Debt and Line-of-Credit

 

On June 30, 2016, Neoteric Cosmetics, Inc., a wholly-owned subsidiary of the Company, and the Company, as borrowers, entered into a credit agreement, as amended (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“Chase”), as lender, pursuant to which Chase provided a term loan and a revolving credit facility.

 

In June 2018, we paid the remaining principal balance of the term loan in the amount of $1,000,000. There were no additional costs incurred associated with the prepayment of the term loan.

 

The revolving credit facility amount is $4 million with interest of: (i) the LIBO Rate + 2.5%; or (ii) the Prime Rate, with a floor of the one month LIBO Rate + 2.5%, and will terminate on June 30, 2019 or any earlier date on which the revolving commitment is otherwise terminated pursuant to the Credit Agreement. Under the Credit Agreement we are obligated to pay quarterly an unused

10


 

commitment fee equal to 0.5% per annum on the daily amount of the undrawn portion of the revolving line-of-credit. The loans are collateralized by all of the assets of the Company and its subsidiaries.

 

The Credit Agreement requires, among other things, that beginning on December 31, 2016 and subsequently on a quarterly basis, the Company is subject to affirmative, negative, and financial covenants. The Company was in compliance with the covenants in the Credit Agreement as of June 30, 2018 and December 31, 2017.

 

Debt issuance costs recognized as a component of interest expense for the six months ended June 30, 2018 and 2017 were $37,600 and $12,500, respectively. Debt issuance costs recognized as a component of interest expense for the three months ended June 30, 2018 and 2017 were $31,300 and $6,200, respectively. In conjunction with the prepayment of the remaining principal balance of the term loan, $25,100 of unamortized debt issuance costs were recognized as a component of interest expense. Prior to the prepayment of the term loan, these costs were amortized using the effective interest method over the term of the Credit Agreement.

 

 

11


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF O PERA TIONS

Results of Operations

Three months

Our net income for the second quarter of 2018 was $1,283,900 versus net income of $875,300 in the second quarter of 2017. This increase is primarily due to: (1) an increase in net sales; and (2) decreases in cost of sales and income tax expense, and was offset by an increase in operating expenses.

Summary of Results as a Percentage of Net Sales

 

 

Year Ended December 31,

 

 

Three Months Ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Household products

 

13.4

%

 

 

12.6

%

 

 

13.5

%

Skin and hair care products

 

86.6

%

 

 

87.4

%

 

 

86.5

%

Total net sales

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

54.1

%

 

 

50.2

%

 

 

56.8

%

Gross profit

 

45.9

%

 

 

49.8

%

 

 

43.2

%

Expenses

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

27.8

%

 

 

33.5

%

 

 

28.8

%

Interest expense

 

0.3

%

 

 

0.4

%

 

 

0.3

%

Total expenses

 

28.1

%

 

 

33.9

%

 

 

29.1

%

Income before income taxes

 

17.8

%

 

 

15.9

%

 

 

14.1

%

 

Comparative Net Sales

 

 

Three Months Ended June 30,

 

 

Percentage Increase

 

 

2018

 

 

2017

 

 

(Decrease)

 

Total household products

$

1,364,200

 

 

$

1,330,700

 

 

 

2.5

%

Total skin and hair care products

 

9,442,400

 

 

 

8,543,100

 

 

 

10.5

%

Total net sales

$

10,806,600

 

 

$

9,873,800

 

 

 

9.4

%

Sales of household products for the second quarter of 2018 were consistent compared to the same period in 2017, with slight increases in Scott’s Liquid Gold ®  Floor Restore and Wood Care products offset by the discontinuance of sales of our Touch of Scent ® Air Freshener products in the second quarter of 2018 .

Sales of skin and hair care products for the second quarter of 2018 significantly increased by $899,300 or 10.5% compared to the same period in 2017. This increase was primarily the result of an increase in sales of our Alpha ® Skin Care products internationally and to e-commerce retailers. This was offset by a decrease in the net sales of 7 th Heaven and Batiste Dry Shampoo. The decrease in net sales of 7 th Heaven face masque sachets is due primarily to a substantial increase in competitive products. The decrease in net sales of Batiste Dry Shampoo is due to changes in our distribution arrangement with Church & Dwight, which eliminated sales to TJ Maxx.

On a consolidated basis, cost of sales was $5,429,000 during the second quarter of 2018 compared to $5,606,800 for the same period in 2017, a decrease of $177,800 or 3.2%, on a net sales increase of 9.4%. As a percentage of consolidated net sales, cost of sales was 50.2% in the second quarter of 2018 compared to 56.8% for the same period in 2017.

As a percentage of net sales of our household products, the costs of sales for our household products increased to 53.6% in the second quarter of 2018 compared to 52.0% for the same period in 2017 due to slight increases in the underlying production costs.

12


 

As a percentage of net sales of our skin and hair care products, the cost of sales for our skin and hair care products decreased to 49.8% in the second quarter of 20 18 compared to 57.5% for the same period in 2017. This change varies from period to period based on sales mix and trade promotions of the products we make versus the products we distribute for other companies. The decrease is primarily attributable to an i ncrease in sales of our Alpha ® Skin Care products internationally and to e-commerce retailers, and offset by: (1) increased trade promotions related to Batiste Dry Shampoo; and (2) an increase in the costs of Prell ® Shampoo, which we began manufacturing du ring the fourth quarter of 2017.

Operating Expenses, Interest Expense and Other Income

 

 

Three Months Ended June 30,

 

 

Percentage Increase

 

 

2018

 

 

2017

 

 

(Decrease)

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Advertising

$

344,700

 

 

$

138,700

 

 

 

148.5

%

Selling

 

1,841,400

 

 

 

1,679,300

 

 

 

9.7

%

General and administrative

 

1,431,200

 

 

 

1,023,300

 

 

 

39.9

%

Total operating expenses

$

3,617,300

 

 

$

2,841,300

 

 

 

27.3

%

Interest expense

$

47,700

 

 

$

33,200

 

 

 

43.7

%

Advertising expenses for the second quarter of 2018 increased by $206,000 compared to the same period in 2017 primarily due to investments in: (1) airing a national television campaign for Scott’s Liquid Gold ® Wood Care products; and (2) airing a national television campaign for Prell ® Shampoo during the second quarter of 2018.

Selling expenses for the second quarter of 2018 increased by $162,100 compared to the same period in 2017 primarily due to an increase in brokerage commissions. The increase in brokerage commissions is due to an increase in sales of Alpha ® Skin Care to China, which have higher brokerage commission rates than sales to other customers.

General and administrative expenses for the second quarter of 2018 increased by $407,900 compared to the same period in 2017, primarily due to the incurrence of severance costs related to the Separation Agreement and recruiting fees to fill positions across the Company.

Interest expense for the second quarter of 2018 increased by $14,500 compared to the same period in 2017, primarily due to the recognition of the unamortized debt issuance costs upon the prepayment of the remaining balance of the term loan in June 2018.

 

Six months

Our net income for the first six months of 2018 was $1,087,500 compared to  $1,956,400 in the first six months of 2017. This decrease is primarily due to a decrease in net sales and was offset by decreases in: (1) cost of sales; (2) operating expenses; and (3) income tax expense.

13


 

Summary of Results as a Percentage of Net Sales

 

 

Year Ended December 31,

 

 

Six Months Ended June 30,

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Household products

 

13.4

%

 

 

14.9

%

 

 

13.7

%

Skin and hair care products

 

86.6

%

 

 

85.1

%