Quarterly Report (10-q)

Date : 05/10/2019 @ 11:14AM
Source : Edgar (US Regulatory)
Stock : Scott's Liquid Gold, Inc. (PC) (SLGD)
Quote : 1.55  0.0 (0.00%) @ 7:54PM

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 March 31, 2019    

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 every Interactive Data File required to be submitted 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 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

 

  

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  

Securities registered pursuant to Section 12(b) of the Exchange Act.

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

None

 

None

 

None

 

As of May 9, 2019, the registrant had 12,422,177   shares 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 the Private Securities Litigation Reform Act of 1995, in addition to historical information. All statements, other than statements of historical facts, 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.

The forward-looking statements contained in this Report are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. 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:

 

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

 

continuation of our distributorship agreement for Montagne Jeunesse skin care products and Batiste Dry Shampoos;

 

a continued shift in the retail market from food and drug stores to mass merchandisers, club stores, dollar stores, e-commerce retailers, and subscription services;

 

competition from large consumer products companies in the United States;

 

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

 

new competitive products and/or technological changes;

 

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

 

unfavorable economic conditions;

 

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;

 

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

 

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 loss of any executive officer or other personnel;

 

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

 

future losses which could affect our liquidity;

 

other matters discussed in this Report, including the risks described in the Risk Factors section of this Report and in our Annual Report on Form 10-K for the year ended December 31, 2018 and subsequent Quarterly Reports on Form 10-Q.

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.

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Net sales

$

6,805

 

 

$

7,428

 

Cost of sales

 

4,200

 

 

 

4,407

 

Gross Profit

 

2,605

 

 

 

3,021

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Advertising

 

184

 

 

 

537

 

Selling

 

1,658

 

 

 

1,632

 

General and administrative

 

1,223

 

 

 

1,093

 

Total operating expenses

 

3,065

 

 

 

3,262

 

Income (loss) from operations

 

(460

)

 

 

(241

)

 

 

 

 

 

 

 

 

Interest income

 

31

 

 

 

-

 

Interest expense

 

(5

)

 

 

(24

)

Income (loss) before income taxes

 

(434

)

 

 

(265

)

Income tax benefit (expense)

 

104

 

 

 

69

 

Net income (loss)

$

(330

)

 

$

(196

)

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

Basic

$

(0.03

)

 

$

(0.02

)

Diluted

$

(0.03

)

 

$

(0.02

)

Weighted average shares outstanding

 

 

 

 

 

 

 

Basic

 

12,408

 

 

 

11,929

 

Diluted

 

12,408

 

 

 

11,929

 

 

 

 

 

 

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

 

 

 

1


 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except par value amounts)

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

6,608

 

 

$

6,232

 

Accounts receivable, net

 

2,969

 

 

 

3,047

 

Inventories, net

 

7,280

 

 

 

7,817

 

Income taxes receivable

 

508

 

 

 

508

 

Prepaid expenses

 

425

 

 

 

546

 

Total current assets

 

17,790

 

 

 

18,150

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

1,041

 

 

 

971

 

Deferred tax asset

 

338

 

 

 

234

 

Goodwill

 

1,521

 

 

 

1,521

 

Intangible assets, net

 

5,373

 

 

 

5,528

 

Operating lease right-of-use assets

 

2,764

 

 

 

-

 

Other assets

 

71

 

 

 

71

 

Total assets

$

28,898

 

 

$

26,475

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,756

 

 

$

1,800

 

Accrued expenses

 

578

 

 

 

593

 

Operating lease liabilities, current portion

 

913

 

 

 

-

 

Total current liabilities

 

3,247

 

 

 

2,393

 

 

 

 

 

 

 

 

 

Operating lease liabilities, net of current

 

1,857

 

 

 

-

 

Total liabilities

 

5,104

 

 

 

2,393

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

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

 

-

 

 

 

-

 

Common stock; $0.10 par value, authorized 50,000 shares; issued and outstanding 12,408 shares (2019) and 12,408 shares (2018)

 

1,241

 

 

 

1,241

 

Capital in excess of par

 

7,105

 

 

 

7,063

 

Retained earnings

 

15,448

 

 

 

15,778

 

Total shareholders’ equity

 

23,794

 

 

 

24,082

 

Total liabilities and shareholders’ equity

$

28,898

 

 

$

26,475

 

 

 

 

 

 

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

 

 

2


 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

 

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(in thousands)

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital in Excess of Par

 

 

Retained Earnings

 

 

Total

 

Balance, December 31, 2018

 

12,408

 

 

$

1,241

 

 

$

7,063

 

 

$

15,778

 

 

$

24,082

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

42

 

 

 

-

 

 

 

42

 

Net income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

(330

)

 

 

(330

)

Balance, March 31, 2019

 

12,408

 

 

$

1,241

 

 

$

7,105

 

 

$

15,448

 

 

$

23,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

11,886

 

 

$

1,189

 

 

$

6,441

 

 

$

13,551

 

 

$

21,181

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

60

 

 

 

-

 

 

 

60

 

Stock options exercised

 

138

 

 

 

14

 

 

 

74

 

 

 

-

 

 

 

88

 

Net income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

(196

)

 

 

(196

)

Balance, March 31, 2018

 

12,024

 

 

$

1,203

 

 

$

6,575

 

 

$

13,355

 

 

$

21,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

3


 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(330

)

 

$

(196

)

Adjustments to reconcile net income to net cash provided (used) by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

186

 

 

 

206

 

Stock-based compensation

 

42

 

 

 

60

 

Deferred income taxes

 

(104

)

 

 

(69

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

78

 

 

 

206

 

Inventories

 

537

 

 

 

352

 

Prepaid expenses and other assets

 

121

 

 

 

(42

)

Accounts payable and accrued expenses

 

(53

)

 

 

(622

)

Total adjustments to net income (loss)

 

807

 

 

 

91

 

Net cash provided (used) by operating activities

 

477

 

 

 

(105

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

(101

)

 

 

-

 

Net cash used by investing activities

 

(101

)

 

 

-

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayments of long-term debt

 

-

 

 

 

(200

)

Proceeds from exercise of stock options

 

-

 

 

 

88

 

Net cash used by financing activities

 

-

 

 

 

(112

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

376

 

 

 

(217

)

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

6,232

 

 

 

4,114

 

Cash and cash equivalents, end of period

$

6,608

 

 

$

3,897

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for interest

$

5

 

 

$

18

 

 

 

 

 

 

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

 

 

4


 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except per share data)

 

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 skin and hair care products 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 unaudited Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets, and 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 March 31, 2019 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 (“GAAP”) 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, 2018. The results of operations for the period ended March 31, 2019 are not necessarily indicative of the operating results for the full year.

Due to changes in our business as we acquired and began manufacturing new products in recent periods, the Company implemented a change in the allocation of certain operational and administrative expenses between our two operating segments to more accurately reflect our operational activity. For comparison purposes, the Company presented 2018 results to reflect the revised allocation of these costs. This segment reporting change has no impact on our operating results. See Note 4 “Segment Information,” of the Notes to the Condensed Consolidated Financial Statements for further information.

(d)

Use of Estimates

The preparation of financial statements in conformity with GAAP 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.

5


 

(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, which is generally not material to our financial statements, 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.

Inventories were comprised of the following at:

 

 

March 31, 2019

 

 

December 31, 2018

 

Finished goods

$

4,740

 

 

$

5,448

 

Raw materials

 

2,598

 

 

 

2,414

 

Inventory reserve for obsolescence

 

(58

)

 

 

(45

)

 

$

7,280

 

 

$

7,817

 

(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)

Leases

Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

Certain nonlease components, such as maintenance and other services provided by the lessor, are included in the valuation of the lease. Leases with an initial term of 12 months or less, which are not material to our financial statements, are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term. Lease agreements with lease and nonlease components are combined as a single lease component.

( i )

Intangible Assets and Goodwill

Intangible assets consist of customer relationships, trade names, formulas, 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. 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, and 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 three months ended March 31, 2019, we have maintained balances in various operating accounts in excess of federally insured limits. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, 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.

6


 

The recorded amounts for cash and cash equivalents, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.

( k )

Income Taxes

Income taxes reflect the tax effects of transactions reported in the Condensed Consolidated 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 established 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 three months ended March 31, 2019 and 2018 was 24.1% and 26.0% respectively, which differs from the statutory income tax rate due to permanent book to tax differences.

( 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. 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.

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 both 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.

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 information from customers and assessments of historical trends. 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.

7


 

We have also established an allowance for doubtful accounts. We estimate this allowance based upon, among other thi ngs, 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 fu ture periods may be impacted.

At March 31, 2019 and December 31, 2018 approximately $983 and $1,184, 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 $714 and $600 for the three months ended March 31, 2019 and 2018, 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, which approximates the service period.

( 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, repairs, maintenance, and other indirect costs, as well as warehousing and distribution costs. We classify freight-out as selling expenses. Other selling expenses consist primarily of costs for sales and sales support personnel, brokerage commissions, and promotional costs. Freight-out costs included in selling expenses totaled $666 and $621 for the three months ended March 31, 2019 and 2018, 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.

( p )

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) . This guidance, as amended by subsequent ASUs on the topic, requires 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. This guidance is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. ASU 2016-13 is not expected to have a material impact on our financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “ Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The new guidance modifies disclosure requirements related to fair value measurement.  The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Implementation on a prospective or retrospective basis varies by specific disclosure requirement.  Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. ASU 2018-13 is not expected to have a material impact on our financial statements.

8


 

In August 2018, the FASB issued ASU No. 2018-15, “ Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ” (“ASU 2018-15”). The new guidance reduces complexity for the accounting for costs of implementing a cloud compu ting service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use s oftware (and hosting arrangements that include an internal use software license).  For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. ASU 2018-15 is not expected to have a material impact on our financial statements.

( q )

Recently Adopted 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.

Effective January 1, 2019, we adopted the guidance and elected the option not to restate comparative periods. We also elected the package of practical expedients within the standard which permits us not to reassess prior conclusions about lease identification, lease classification, and initial direct costs. Additionally, we elected not to separate lease and non-lease components for all leases. The adoption of the new standard resulted in the recognition of operating lease liabilities on January 1, 2019 of approximately $141, with corresponding right of use assets, and no material cumulative effect adjustment to our Consolidated Balance Sheets, and $2,862 of net assets obtained in exchange for new operating lese liabilities during the three months ended March 31, 2019. Adoption of the new standard did not have a material impact on our Consolidated Statements of Income or Cash Flows.

 

 

Note 2.

Stock-Based Compensation

During the three months ended March 31, 2019, we did not grant any options to acquire shares of our common stock.

During the three months ended March 31, 2018, we granted options to acquire 15 thousand shares of our common stock to an employee at a price of $3.15 per share.

The weighted average fair market value of the options granted during the three months ended March 31, 2018 were estimated on the date of grant, using a Black-Scholes option pricing model with the following assumptions:

 

March 31, 2018

 

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

6 years

 

Average risk-free interest rate

2.18%

 

Average expected volatility of stock

92%

 

Expected dividend rate

None

 

Fair value of options granted

$

36

 

 

Compensation cost related to stock options recognized in operating results (included in general and administrative expenses) totaled $42 and $60 in the three months ended March 31, 2019 and 2018, respectively. Approximately $292 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.

 

 

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.

9


 

Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weight ed-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 (in thousands) is as follows:

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

Common shares outstanding, beginning of the period

 

12,408

 

 

 

11,886

 

Weighted average common shares issued

 

-

 

 

 

43

 

Weighted average number of common shares outstanding

 

12,408

 

 

 

11,929

 

Dilutive effect of common share equivalents

 

-

 

 

 

-

 

Diluted weighted average number of common shares outstanding

 

12,408

 

 

 

11,929

 

 

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

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

Stock options

 

760

 

 

 

1,154

 

 

 

Note 4.

Segment Information

We operate in two different segments: household products and skin and hair care products. 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.

 

Due to changes in our business as we acquired and began to manufacture additional products in recent periods under our Skin and Hair Care Products segment, the Company implemented a change in the allocation of certain operational and administrative expenses to more accurately reflect our operational activity. For comparison purposes, the Company presented 2018 results to reflect the revised allocation of these costs.

The following provides information on our segments for the three months ended March 31:

 

 

2019

 

 

Household Products

 

 

Skin and Hair Care Products

 

 

Total

 

Net sales

$

1,205

 

 

$

5,600

 

 

$

6,805

 

Income (loss) from operations

 

(170

)

 

 

(290

)

 

 

(460

)

Capital and intangible asset expenditures

 

101

 

 

 

-

 

 

 

101

 

Depreciation and amortization

 

22

 

 

 

164

 

 

 

186

 

 

 

2018

 

 

Household Products

 

 

Skin and Hair Care Products

 

 

Total

 

Net sales

$

1,351

 

 

$

6,077

 

 

$

7,428

 

Income (loss) from operations

 

(106

)

 

 

(135

)

 

 

(241

)

Depreciation and amortization

 

36

 

 

 

170

 

 

 

206

 

10


 

 

 

Note 5.

Goodwill and Intangible Assets

Goodwill and intangible assets, which are related to our acquisition of our Prell ® and Denorex ® brands, consisted of the following:

 

 

As of March 31, 2019

 

 

As of December 31, 2018

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

4,022

 

 

$

1,106

 

 

$

2,916

 

 

$

4,022

 

 

$

1,005

 

 

$

3,017

 

Trade names

 

2,362

 

 

 

433

 

 

 

1,929

 

 

 

2,362

 

 

 

393

 

 

 

1,969

 

Formulas and batching processes

 

669

 

 

 

153

 

 

 

516

 

 

 

669

 

 

 

140

 

 

 

529

 

Non-compete agreement

 

26

 

 

 

14

 

 

 

12

 

 

 

26

 

 

 

13

 

 

 

13

 

 

 

7,079

 

 

 

1,706

 

 

 

5,373

 

 

 

7,079

 

 

 

1,551

 

 

 

5,528

 

Goodwill

 

 

 

 

 

 

 

 

 

1,521

 

 

 

 

 

 

 

 

 

 

 

1,521

 

Total intangible assets

 

 

 

 

 

 

 

 

$

6,894

 

 

 

 

 

 

 

 

 

 

$

7,049

 

 

Amortization expense for the three months ended March 31, 2019 and 2018 was $155, respectively.

 

Estimated amortization expense for 2019 and subsequent years is as follows:

 

2019 (remaining)

$

465

 

2020

 

620

 

2021

 

618

 

2022

 

616

 

2023

 

616

 

Thereafter

 

2,438

 

Total

$

5,373

 

 

Note 6.

Long-Term Debt and Line-of-Credit

 

On June 30, 2016, the Company and Neoteric Cosmetics, Inc., a wholly-owned subsidiary of the Company, collectively 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 that were related to our acquisition of the Prell ® , Denorex ® , and Zincon ® brands.

 

In June 2018, we paid the remaining principal balance of the term loan in the amount of $1,000. 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 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.

 

The Credit Agreement subjects the Company to affirmative, negative, and financial covenants on a quarterly basis. The Company was in compliance with the covenants in the Credit Agreement as of March 31, 2019 and December 31, 2018, respectively.

 

In May 2019, we entered into an amendment to renew our revolving credit facility with Chase. See Note 8, “Subsequent Events,” for more information.

 

11


 

 

Note 7.

Leases

 

We have entered into leases for our corporate headquarters, manufacturing and warehouse operations, and office equipment with remaining lease terms up to 3 years. Some of these leases include both lease and nonlease components, which are accounted for as a single lease component as we have elected the practical expedient to combine these components for all leases. As most of the leases do not provide an implicit rate, we calculated the right-of-use assets and lease liabilities using our secured incremental borrowing rate at the lease commencement date. We currently do not have any finance leases outstanding.

 

Information related to leases was as follows:

 

 

Three Months Ended March 31, 2019

 

Operating lease information:

 

 

 

Operating lease cost

$

261

 

Operating cash flows from operating leases

 

258

 

Net assets obtained in exchange for new operating lease liabilities

 

2,862

 

 

 

 

 

Weighted average remaining lease term in years

 

2.82

 

Weighted average discount rate

 

5.0

%

 

Future minimum annual lease payments are as follows:

 

2019 (remaining)

$

770

 

2020

 

1,048

 

2021

 

1,071

 

2022

 

88

 

Total minimum lease payments

$

2,977

 

Less imputed interest

 

(207

)

 

 

 

 

Total operating lease liability

$

2,770

 

 

 

Note 8.

Subsequent Events

 

In May 2019, we entered into an amendment to renew our revolving credit facility with Chase. Under the terms of this arrangement, the revolving credit facility amount is $4 million with interest of the one month LIBO Rate + 2.25%, and will terminate on June 30, 2021. We are obligated to pay quarterly an unused commitment fee equal to 0.25% per annum on the daily amount of the undrawn portion of the revolving line-of-credit, and are subject to affirmative, negative, and financial covenants on a quarterly basis. The revolving credit facility is collateralized by all of the assets of the Company.

 

12


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA TIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018. This Item 2 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please refer to "Item 1A. Risk Factors" in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of the uncertainties, risks and assumptions associated with these statements.

Executive Overview

Our Business

Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve while creating shareholder value. We develop, manufacture, market, and sell quality household and skin and hair care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors.

 

Results of Operations

Three months ended March 31, 2019 compared to three months ended March 31, 2018

 

 

Three Months Ended March 31, (in thousands)

 

 

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Net sales

$

6,805

 

 

$

7,428

 

 

$

(623

)

 

 

(8.4

%)

Cost of sales

 

4,200

 

 

 

4,407

 

 

 

(207

)

 

 

(4.7

%)

Gross profit

 

2,605

 

 

 

3,021

 

 

 

(416

)

 

 

(13.8

%)

Gross margin

 

38.3

%

 

 

40.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

184

 

 

 

537

 

 

 

(353

)

 

 

(65.7

%)

Selling

 

1,658

 

 

 

1,632

 

 

 

26

 

 

 

1.6

%

General and administrative

 

1,223

 

 

 

1,093

 

 

 

130

 

 

 

11.9

%

Total operating expenses

 

3,065

 

 

 

3,262

 

 

 

(197

)

 

 

(6.0

%)

Income (loss) from operations

 

(460

)

 

 

(241

)

 

 

(219

)

 

 

(90.9

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

31

 

 

 

-

 

 

 

31

 

 

 

100.0

%

Interest expense

 

(5

)

 

 

(24

)

 

 

19

 

 

 

79.2

%

Income (loss) before income taxes

 

(434

)

 

 

(265

)

 

 

(169

)

 

 

(63.8

%)

Income tax benefit

 

104

 

 

 

69

 

 

 

35

 

 

 

50.7

%

Net income (loss)

$

(330

)

 

$

(196

)

 

$

(134

)

 

 

(68.4

%)

Net loss changed primarily due to the following:

 

Lower net sales and gross profit decreased, primarily driven by lower sales of distributed skin and hair care products and an increase in sales of Prell ® , which has lower margins.

 

Advertising costs decreased, as investments in television campaigns in the first quarter of 2018 were not incurred in 2019.

 

Selling costs, which can fluctuate based on sales volume, remained consistent due to severance costs and due to a slight rise in shipping rates.

 

General and administrative costs increased due to additional professional fees incurred for routine legal costs related to our products and costs related to the preparation of our annual proxy statement, as well as a slight increase in compensation costs for administrative personnel.

13


 

 

Income tax benefit increased due to the increase in our net loss before income taxes.

 

Segment Results

Due to changes in our business as we acquired and began to manufacture additional products in recent periods under our Skin and Hair Care Products segment, we implemented a change in the allocation of certain operational and administrative expenses to more accurately reflect our operational activity. For comparison purposes, we presented 2018 results to reflect the revised allocation of these costs.

Household Products

The following table shows comparative net sales, gross margin, gross profit, income (loss) from operations, volume and percentage changes for household products between periods:

 

 

Three Months Ended March 31, (in thousands)

 

 

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Net sales

$

1,205

 

 

$

1,351

 

 

$

(146

)

 

 

(10.8

%)

Gross profit

$

536

 

 

$

747

 

 

$

(211

)

 

 

(28.2

%)

Gross margin

 

44.5

%

 

 

55.3

%

 

 

 

 

 

 

 

 

Income (loss) from operations

$

(170

)

 

$

(106

)

 

$

(64

)

 

 

(60.4

%)

 

Net sales of household products decreased primarily from lower sales of the Scott’s Liquid Gold ® Wood Care product line due to increased competition and the discontinuation of sales of our Touch of Scent ® Air Freshener products in the second quarter of 2018.

 

Loss from operations increased due to lower gross profit from lower sales, which also caused a decrease in gross margin, and was partially offset by a reduction in advertising in 2019 from the television campaign for Scott’s Liquid Gold ® Wood Care products that was produced and aired in 2018.

 

Skin and Hair Care Products

The following table shows comparative net sales, gross margin, gross profit, income (loss) from operations, volume and percentage changes for skin and hair care products between periods:

 

 

Three Months Ended March 31, (in thousands)

 

 

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Skin and hair care net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed products

$

2,336

 

 

$

3,298

 

 

$

(962

)

 

 

(29.2

%)

Manufactured products

 

3,264

 

 

 

2,779

 

 

 

485

 

 

 

17.5

%

Total skin and hair care net sales

$

5,600

 

 

$

6,077

 

 

$

(477

)

 

 

(7.8

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$

2,069

 

 

$

2,274

 

 

$

(205

)

 

 

(9.0

%)

Gross margin

 

36.9

%

 

 

37.4

%

 

 

 

 

 

 

 

 

Income (loss) from operations

$

(290

)

 

$

(135

)

 

$

(155

)

 

 

(114.8

%)

 

Net sales of distributed skin and hair care products decreased due to lower sales of Batiste Dry Shampoo after a strong fourth quarter of 2018. 7 th Heaven skin care products also decreased from a substantial increase in competitive products for 7 th Heaven skin care products in 2018.

 

Net sales of manufactured skin and hair care products increased due to higher sales of Alpha ® Skin Care.

 

Loss from operations increased due to lower sales and gross profit but was partially offset by the increase in sales of Alpha ® Skin Care products. Gross margins also decreased due to lower sales. Freight-out costs also increased due a

14


 

 

slight rise in shipping rates. This was partially offset by a reduction in advertising spending in 2019 from the television campaign for Prell ® Shampoo in the first quarter of 2018.

 

Liquidity and Capital Resources

Financing Agreements

Please see Note 6 to our Condensed Consolidated Financial Statements for information on our Credit Agreement with Chase.

Liquidity and Capital Resources

At March 31, 2019, we had $4,000 available on our revolving credit facility, and approximately $6,608 in cash on hand, which was $376 more compared to December 31, 2018.

 

The following is a summary of cash provided by or used in each of the indicated types of activities:

 

 

Three Months Ended March 31, (in thousands)