Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendments to this Form 10-KSB. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.) YES o NO þ
The issuer’s revenues for the fiscal year ended December 31, 2007 were $17,918,500.
The aggregate market value of the common stock held by non-affiliates of the issuer, assuming
directors are affiliates, was $3,627,949 on January 31, 2008.
As of January 31, 2008, there were 10,575,000 shares of common stock, $0.10 par value per share,
outstanding.
The following documents are incorporated by reference: The Registrant’s definitive Proxy Statement
for the Annual Meeting of shareholders scheduled to be held on May 6, 2008, is incorporated by
reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes o No þ
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. Description of Business
General
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954.
Through our wholly-owned subsidiaries, we manufacture and market quality household and skin care
products and act as a distributor in the United States of beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse and of certain other products. In this
Report, collectively, the terms “we”, “us” or “our” refers to Scott’s Liquid Gold-Inc. and our
subsidiaries. Our business is comprised of two segments, household products and skin care products.
Our household products consist of (a) Scott’s Liquid Gold® for wood, a wood preservative and
cleaner, sold nationally for over 30 years; (b) a wood wash and wood wipes under the name of
Scott’s Liquid Gold; (c) Scott’s Liquid Gold Mold Control 500, a consumer product that helps rid
homes of mold, introduced in 2006; (d) Touch of Scent®, an aerosol room air freshener, distributed
nationally since 1982; and (e) an aerosol air freshener called Odor Extinguisher introduced during
2007. In early 1992, we entered into the skin care business through our subsidiary, Neoteric
Cosmetics, Inc. Our skin care products consist primarily of Alpha Hydrox® products, our Neoteric
Diabetic products, our Neoteric massage oil products, and products we distribute including the
sachets of Montagne Jeunesse and men’s grooming sachets and hair care products we import from
Australia. At the end of 2007, more than 25 skin care products were being marketed by us with our
brand name, as well as the products we distribute.
For information on our operating segments, please see Note 8, Segment Information, to our
Consolidated Financial Statements.
This report may contain “forward-looking statements” within the meaning of U.S. federal
securities laws. These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements and our performance
inherently involve risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. Factors that would cause or contribute to such differences
include, but are not limited to, continued acceptance of each of our significant products in the
marketplace; the degree of success of any new product or product line introduction by us;
uncertainty of consumer acceptance of the new Alpha Hydrox products introduced in 2005 and 2007,
and Mold Control 500 and wood wash products; competitive factors; any decrease in distribution of
(i.e., retail stores carrying) our significant products; continuation of our distributorship
agreement with Montagne Jeunesse; the need for effective advertising of our products; limited
resources available for such advertising; new competitive products and/or technological changes;
dependence upon third party vendors and upon sales to major customers; changes in the regulation of
our products, including applicable environmental regulations; continuing losses which could affect
our liquidity; the loss of any executive officer; and other matters discussed in this Report. We
undertake no obligation to revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this Report.
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Strategy
Our strategy is to manufacture and market high quality consumer products which are distinct
within each category in which we compete. Scott’s Liquid Gold for wood distinguishes itself from
competing products as a wood cleaner and preservative, not simply a polish. Mold Control 500 is
based on technology developed and patented by a national laboratory. Touch of Scent is different
from most competing aerosol air fresheners in that it need not be shaken before each use and
because it may be activated by an attractive dispenser which may be mounted on any hard, smooth
surface. It is more convenient to use than competing aerosol brands. With respect to our line of
skin care products, Alpha Hydrox was one of the first alpha hydroxy acid skin care products sold to
retailers for resale to the public at affordable prices. In 1998, we added a retinol product to
our skin care line. In the first half of 1999, we introduced Neoteric Diabetic Skin Care®. Since
2001, we have sold Montagne Jeunesse sachets which are reasonably priced and designed for single
use by the consumer. We will continue to examine other possible new products which we believe may
fit well with our expertise and financial capabilities. We have introduced other new products or
variants of products in subsequent years.
The growth in sales of Alpha Hydrox from 1992 through 1996 caused us to make substantial
investments in property, plant and equipment to handle that growth and the anticipated future
growth of our skin care products. The decline in sales of those products in 1998 through 2004 and
in 2006 and 2007, as well as declines in sales of household chemical products, has resulted in
efforts by us to maintain or increase sales of the existing products, to introduce new products,
and to decrease our costs of doing business. We introduced new products and engaged in
cost-cutting programs during 2000, 2001, 2002 and 2006. Additionally, we introduced several new
Alpha Hydrox products in 2005, two new Alpha Hydrox products in 2006, and four new Alpha Hydrox
products in 2007.
Our goal for 2008 is to resume sales growth and attain profitability. To achieve these goals,
we will continue to work on expanding the distribution of Montagne Jeunesse products and our
distribution of products manufactured by others, as well as of our newer Alpha Hydrox products,
increasing sales of Scott’s Liquid Gold for wood and our new mold remediation product “Mold Control
500” and introducing new products. Within the household product line we plan to introduce three to
four new products or items including some additions to our air fragrance product line. We will
also consider the development of new niche products, offer to manufacture private label products
for others, and explore the possibility of joint ventures and other projects which would utilize
our manufacturing or marketing capabilities.
Products
Scott’s Liquid Gold for wood, a wood cleaner and preservative, has been our core product since
our inception. It has been popular throughout the U.S. for over thirty years. Scott’s Liquid Gold
for wood, when applied to wood surfaces such as furniture, paneling, kitchen cabinets, outside
stained doors and decking, penetrates microscopic pores in the surface and lubricates beneath,
restoring moisture and, at the same time, minimizes the appearance of scratches, darkening the wood
slightly. Scott’s Liquid Gold preserves wood’s natural complexion and beauty without wax. In May
2004, we commenced the introduction of an additional wood care product in a wipe form; however,
sales have been minimal so far. In the second quarter of 2005 we introduced
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a wood wash product under the Scott’s Liquid Gold product line; however, we have obtained limited
distribution so far.
During the second quarter of 2006 we began the introduction of our mold remediation product
“Mold Control 500”. It is too early to determine if this introduction will be successful. Scott’s
Liquid Gold Mold Control 500 is an advanced restoration, remediation and antibacterial disinfectant
system designed for consumer use on mildew, fungus, mold and fungal spores.
In 1982, we added the room air freshener Touch of Scent to our line of household products.
Touch of Scent, available in many fragrances, is intended to be used in conjunction with a
decorative dispenser which can be mounted on any hard surface and into which the consumer inserts
an aerosol refill unit. At a touch, the dispenser propels the fragrance from a refill unit into
the air, masking unpleasant odors and refreshing the air with a pleasant scent. We manufacture the
refill unit. Unlike some competitive aerosol air fresheners, Touch of Scent is extremely dry and,
therefore, leaves practically no residue after use. Touch of Scent sales have not been strong in
recent years. In 2007, we introduced Odor Extinguisher which is a room air freshener and is sold
in containers in the shape of a fire extinguisher.
Household products accounted for 44.9% of our consolidated net sales in 2007 and 53.1% in
2006.
In early 1992, we began to market two skin care products under the trade name of Alpha Hydrox.
Since that time we have made additions to our skin care products, some of which were discontinued.
In 2005, we introduced four new Alpha Hydrox products with refined formulas, and in 2007 we
introduced a value priced Alpha Hydrox White line of products. At the end of 2007, our skin care
line consisted of over 15 products. Our Alpha Hydrox skin care products are sold through a
wholly-owned subsidiary, Neoteric® Cosmetics, Inc. Except for the Montagne Jeunesse sachets and
other products noted below which are distributed by us, our skin care products are manufactured by
Neoteric Cosmetics. Several of the Alpha Hydrox products contain alpha hydroxyethanoic acids in
low but effective concentrations. Properly blended with a carrier, alpha hydroxyethanoic acids
gently slough off dead skin cells to promote a healthier, more youthful appearance and diminish
fine lines and wrinkles. Our products with alpha hydroxy acids (“AHAs”) include facial care
products, a body lotion and a foot crème. Our other skin care products do not contain AHAs. These
products include Neoteric Diabetic Skin Care, which is a healing crème and a therapeutic
moisturizer developed by us to address the skin conditions of diabetics, caused by poor blood
circulation, and which contains a patented oxygenated oil technology; an Alpha Hydrox Oxygenated
Moisturizer, which is our second skin care product based on the oxygenated oil technology; a
Retinol product containing a patented Microsponge technology that softens fine lines and wrinkles;
and a body wash. The Montagne Jeunesse sachets, described more below, do not contain AHAs.
In April of 2001, we made our first sale of skin care sachets under a distributorship
agreement with Montagne Jeunesse. Our agreement covers sales in the United States. Montagne
Jeunesse is a trading division of Medical Express (UK) Ltd., a company located in England.
Montagne Jeunesse sachet products are currently sold by others in the United Kingdom, Holland,
Italy, Ireland, Canada, Australia, Germany and Austria. Examples of the Montagne Jeunesse products
are a facial scrub, a mud pack, face masks, a cream for foot rubs, and “one night” hair color. A
significant portion of our sales are now generated through the distribution of the Montagne
Jeunesse products
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and, therefore, are dependent on the agreement under which they are purchased by us. See
“Manufacturing and Suppliers” below.
Other
products distributed in the United States by us as of December 31, 2007 and the date of this Report are DaVinci and Moosehead men’s grooming products
(introduced in 2006 and 2007), Neoteric massage oils for bath, body and massage (introduced in
2007) and bath, body and hair care products of Baylis & Harding (introduced in 2007).
Our business is seasonal to some extent. Sales of Montagne Jeunesse products have been higher
in the fourth quarter than other quarters because of holiday promotions.
Through our research and development group, we continually consider and evaluate possible new
products to be manufactured or sold by us. Generally these products involve household products or
skin care products. However, the Company will also consider consumer products in other areas.
Marketing and Distribution
All of our products are sold nationally, directly and through independent brokers, to mass
marketers, drugstores, supermarkets, and other retail outlets and to wholesale distributors. In
both 2007 and 2006, Wal-Mart Stores, Inc. (“Wal-Mart”) accounted for approximately 28% of our sales
of household products. With regard to our skin care products, Wal-Mart accounted for approximately
35% of 2007 sales (23% in 2006), and Rite-Aid accounted for approximately 13% of 2007 sales
(7% in 2006). Wal-Mart and Rite-Aid accounted for approximately 34% and 8%, respectively, of the
combined sales of household products and skin care products in 2007. No long-term contracts exist
between us and Wal-Mart, Rite Aid or any other customer. We permit returns of our products by our
customers, a common industry practice. A recent practice of retailers has been to return products
that have either been discontinued or not sold after a period of time. We subtract any returns
from gross sales in determining our net sales and provide a reserve for such returns which is
netted against accounts receivable and gross sales on our financial statements.
During the years 2001 through 2004, and again in 2006 and 2007, we experienced a decrease in
the distribution of the Alpha Hydrox products as a result of slowing sales. In 2005, we introduced
four new items in our Alpha Hydrox line of cosmetics, which resulted in some increased distribution
by selling those products to retail store chains not carrying any of our other Alpha Hydrox
products. If sales of one of our products continue to decline, other retail stores, including
potentially Wal-Mart and Rite-Aid, may discontinue the product. One of our strategies is to
maintain or increase sales of products through limited television advertising. The level of
advertising for our products is constrained by our size and financial resources. Any significant
decrease in the distribution of Alpha Hydrox or Scott’s Liquid Gold products at retail stores could
have a material adverse effect on our sales and operating results.
Our Scott’s Liquid Gold wood care products, Mold Control 500 product, and Alpha Hydrox
products have been advertised nationally on network television, on cable television, and, at times,
in print media. Expenditures for these purposes in 2007 were a small amount relative to net sales
and these expenditures in prior years. In the past, we have also used radio advertising in
selected areas and may do so in the future. To date, we have not used television advertising for
the Montagne Jeunesse products. We
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periodically review our advertising plans and may revise planned advertising expenditures based
upon actual sales results and competitive conditions.
To enable consumers to make informed decisions, our containers and promotional materials note
the concentration of alpha hydroxy acid contained in each of our Alpha Hydrox products which
contain such acids. We recommend the use of sunscreen in our written directions contained in every
box of Alpha Hydrox products with such acids. We do not exaggerate benefits to be expected from
the use of our products. We also maintain a 24-hour, toll free telephone number and website for
use by consumers of our products.
Our household (except for the Mold Control 500 product) and skin care products are sold in
Canada and other foreign countries. Please see Note 8, Segment Information, to the Consolidated
Financial Statements for information regarding sales in foreign countries. Currently, foreign
sales are made to distributors who are responsible for the marketing of the products, and we are
paid for these products in United States currency.
Manufacturing and Suppliers
We own and operate our manufacturing facilities and equipment. With the exception of the
other products mentioned below, our wood wipes, and our Mold Control 500 product, we manufacture
all of our products, maintaining a high quality standard. Products manufactured by others include
Montagne Jeunesse sachets, our wood wipes, our Mold Control 500 product, Odor Extinguisher, the
DaVinci and Moosehead men’s products, and the Baylis & Harding products. We fill and package our
Mold Control 500 product at our facilities. For all of our products, we must maintain sufficient
inventories to ship most orders as they are received.
Quality control is enforced at all stages of production, as well as upon the receipt of raw
materials from suppliers. Raw materials are purchased from a number of suppliers and, at the
present time, are readily available. In 2007, E.I. DuPont became our sole supplier of glycolic
acid, which is the most common type of alpha hydroxy acid used by us in our Alpha Hydrox products.
Our sole supply for the oxygenated oil used in Neoteric Diabetic Skin Care products is a French
company with which we have a non-exclusive supply agreement. Relations with this and other
suppliers are satisfactory.
Most of our manufacturing operations, including most packaging, are highly automated, and, as
a result, our manufacturing operations are not labor intensive, nor, for the most part, do they
involve extensive training. An addition to our plant facilities, completed in early 1996, greatly
increased our capacity to produce skin care products. We currently operate on a one-shift basis.
Our manufacturing facilities are capable of producing substantially more quantities of our products
without any expansion, and, for that reason, we believe that our physical plant facilities are
adequate for the foreseeable future.
In 2001, we commenced purchases of the skin care sachets from Montagne Jeunesse under a
distributorship agreement covering the United States. On May 4, 2005, our wholly-owned subsidiary,
Neoteric Cosmetics, Inc. (“Neoteric”), entered into a new distribution agreement with Montagne
Jeunesse International Ltd (“Montagne Jeunesse”) covering our distribution of Montagne Jeunesse
products. It replaces a distribution agreement in effect since 2000. In the new agreement,
Montagne Jeunesse appoints Neoteric as its exclusive distributor to market and distribute Montagne
Jeunesse products in the United States of America. The appointment had an initial term of 18
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months, commencing May 3, 2005, and continues in force until terminated by either party by giving
to the other party no less than three or six months’ notice in writing of a termination.
In the agreement, Neoteric agrees, among other things: Not to distribute during the duration
of the agreement and for 36 months thereafter any goods of the same description as and which
compete with the Montagne Jeunesse products; to use its best endeavors to develop, promote and sell
the products in the United States and to expand the sale of the products to all potential
purchasers by all reasonable and proper means; to purchase certain core products; to maintain an
inventory of the products for Neoteric’s own account at a level which is based on three months
agreed forecasted sales for the products throughout the United States; and to submit projections of
product requirements on a rolling six month basis. Montagne Jeunesse undertakes to use all
reasonable endeavors to meet all orders for the products to the extent that such orders do not
exceed the forecast for each type of the products. Both parties agree to suggested targeted sales
for the first five years of the agreement as stated in the agreement. The prices for our purchases
of these products are the published list prices as established by Montagne Jeunesse from time to
time, with three months written notice of any change in the published list prices. No party may
assign or transfer any rights or obligations under the agreement or subcontract the performance of
any obligation.
The agreement may also be terminated for a material breach if the breaching party has failed
to remedy the breach within 30 days after receipt of notice in writing and for certain other
events. Montagne Jeunesse may terminate the agreement (1) if Neoteric changes its organization or
methods of business in a way viewed by Montagne Jeunesse as less effective or (2) if there is a
change in control of Neoteric.
The principal and controlling owner of Montagne Jeunesse, Gregory Butcher, owned beneficially,
to the best of our knowledge, during 2005 more than 5% of our outstanding common stock; to the best
of our knowledge, at February 15, 2008, he owned beneficially less than 5.0% of our outstanding
common stock.
On April 4, 2006, we entered into a Product Development, Production and Marketing Agreement
with Modec, Inc., a Colorado corporation. Pursuant to this Agreement, we purchase from Modec a
product for the treatment of mold; we sell this product as Mold Control 500. We fill and package
the product at our facilities and market the product to retail stores in North America. The
Agreement provides us with a license for this purpose. We are required to use our commercially
reasonable efforts to develop a consumer market for the product in the territory. The initial term
of the Agreement was until December 31, 2007, and is automatically renewable for successive
one-year terms.
In July, 2006, we entered into a Supply Agreement with Keltec Dispensing Systems USA, Inc.,
pursuant to which Keltec manufactured and supplied to us certain plastic components used on our
product containers. The initial term of the Supply Agreement was for a period of 18 months, with a
pricing adjustment possible for the last six months of the term. In addition, the Supply Agreement
was renewable for an additional twelve months upon mutual consent of the parties provided the
parties agree to renewal pricing based on guidelines in the Supply Agreement. The Supply Agreement
could also be terminated by mutual agreement, upon a material breach of the
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terms, or upon 30-days notice by either party during any renewal period. This agreement was
terminated by mutual agreement in late 2007, and thus we are manufacturing the plastic components.
Competition
Our business is highly competitive in both household and skin care products. The wood care,
air freshener, and mold treatment product categories are dominated by three to five companies
significantly larger than us, each of which produce several products. Irrespective of the
foregoing, we maintain a visible position in the wood care category, but do not have sufficient
information to make an accurate representation as to the market share of our products. Over the
last several years, sales of our air freshener products have fallen off significantly and may
continue to do so in the future.
The skin care category is also highly competitive. Several competitors are significantly
larger than Scott’s Liquid Gold-Inc., and each of these competitors produces several products.
Some of these companies also produce retinol and alpha hydroxy acid products with which Alpha
Hydrox must compete. Because of the number of varied products produced by competitors, we cannot
make an accurate representation as to the market share of our skin care products. Irrespective of
the foregoing, we currently have a national base of distribution for our Alpha Hydrox and other
skin care products.
Conforming to our corporate philosophy, we compete on the basis of quality and distinguishing
characteristics of our products.
Regulation
We are subject to various federal, state and local laws and regulations that pertain to the
type of products we manufacture and sell. Our skin care products containing Alpha Hydroxy Acids
(AHAs) are cosmetics within the definition of the Federal Food Drug and Cosmetic Act (FFDCA). The
FFDCA defines cosmetics as products intended for cleansing, beautifying, promoting attractiveness
or altering the appearance. Our cosmetic products are subject to regulation under the FFDCA and
the Fair Packaging and Labeling Act (FPLA), and the regulations promulgated under these acts. The
relevant laws and regulations are enforced by the U.S. Food and Drug Administration (FDA). Such
laws and regulations govern the ingredients and labeling of cosmetic products and set forth good
manufacturing practices for companies to follow. Although FDA regulations require that the safety
of a cosmetic ingredient be substantiated prior to marketing, there is no requirement that a
company submit the results of any testing performed or any other data or information with respect
to any ingredient to the FDA. Prior to marketing our products, we conduct studies to demonstrate
that our Alpha Hydrox products do not irritate the skin or eyes. Consistent with regulations, we
do not submit the results of our studies to the FDA.
In July 1997, because of questions raised earlier by the FDA and as requested by the FDA, the
Cosmetic Ingredient Review Expert Panel(“CIR”) sponsored by the cosmetic industry issued a report
concerning the safety of alpha hydroxy acids. The final report, among other things, concluded that
glycolic acid(the most common type of alpha hydroxy acid that we currently use) is safe for use at
concentrations of up to 10%, with a pH level of no less than 3.5 and when directions for use
includes the daily use of sun protection. In January 2005, the FDA issued a final guidance that
products containing AHA’s alert users that those products may increase skin
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sensitivity to sun and possible sunburn and the steps to avoid such consequences. All of our
labeling reflects this guidance.
Since 2003, the FDA’s National Center for Toxicological Research has been investigating the
effect of long term exposure to AHAs. On December 31, 2003, the FDA published a call for data on
certain ingredients in various products, including AHAs that are part of wrinkle remover products.
Manufacturers were asked to submit any data supporting the reclassification of these cosmetic
products as over-the-counter drugs. The study results were due in December 2004; however, these
results have not yet been published. If the FDA should change the regulatory classification of our
AHA products, there would be additional regulatory requirements applicable to our operation. The
financial impact, if any, of additional regulatory requirements cannot be determined at this time.
Our advertising is subject to regulation under the Federal Trade Commission Act and related
regulations, which prohibit false and misleading claims in advertising. Our labeling and
promotional materials are believed to be in full compliance with applicable regulations.
Many chemicals used in consumer products, some of which are used in several of our product
formulations, have come under scrutiny by various state governments and the Congress of the United
States in connection with clean air laws. These chemicals are volatile organic compounds (VOCs)
that are contained in various categories of consumer products. As a result of these VOC
regulations, it has been necessary for us to reformulate some of our products, such as Touch of
Scent, Scott’s Liquid Gold Aerosol and Pourable, to conform to certain limits set by the California
Air Resources Board (CARB), other states and the Environment Protection Agency. Our household
chemical products currently meet the most stringent VOC regulations. CARB, in 2007, adopted
changes to California’s consumer product regulations that reduce VOC limits for Scott’s Liquid Gold
pourable formula from 7% to 3%, effective December 31, 2008. Therefore, this product is currently
undergoing reformulation to comply with the new limit.
The CARB regulations concerning VOC content are relevant to our household products, and it
appears that one of skin care products will be affected by new limits under CARB. CARB has
proposed a VOC limit of 10% on skin toners/astringents which are not regulated by the FDA. If this
limit is approved, it will go into effect on December 31, 2010. This will affect Alpha Hydrox
Toner.
In the fall of 2007, Scott’s Liquid Gold-Inc. was required to submit a consumer product survey
to CARB, based on 2006 sales information. Scott’s Liquid Gold-Inc. had to provide information for
one product, Scott’s Liquid Gold Aerosol. It is possible that CARB may require further VOC
reductions for this aerosol product and/or for Touch of Scent (single phase air freshener). Any
new or revised regulations of CARB could apply to our products and could potentially require
additional reformulation of those products.
Limitations regarding the VOC content of consumer products by both state and federal agencies
will continue to be a part of regulatory efforts to achieve compliance for ozone at or near ground
level. Under the Clean Air Act Amendments of 1990, the Environmental Protection Agency (EPA)
conducted a study on the contribution of consumer products to ozone problems and published
regulations in 1998 designed to reduce the VOC content of consumer products. Various states, in
addition to California, have enacted or are
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considering VOC regulations for consumer products. We are unable to predict how many or which
other states might enact legislation regulating the VOC content of consumer products or what effect
such legislation might have on our household products.
A group of twelve northeastern states and the District of Columbia collectively drafted the
Ozone Transport Commission (OTC) Model Consumer Products Rule in 2001, which is a model that
members may choose to adopt and which has standards that are substantially the same as the CARB
consumer product VOC regulations. More than a majority of the OTC members have adopted the model
rule. In September 2006, the OTC released a new draft model consumer products rule with an
effective date of January 1, 2009. Scott’s Liquid Gold products would not be affected by the
changes in this new model rule, if states were to adopt the changes.
There are also potential regulations in a five state region covered by the Lake Michigan Air
Directors Consortium (LADCO), which released an interim report detailing possible strategies for
reducing VOC emissions. These states include Illinois, Michigan, Wisconsin, Ohio and Indiana.
Michigan and Ohio are the two states in the LADCO group that have promulgated such regulations.
Both Michigan’s and Ohio’s final rules were promulgated in 2007 and both are consistent with the
OTC Model Rule.
In January 2008, Illinois EPA submitted a proposed consumer products regulation to the
Illinois Pollution Control Board. This proposed regulation appears to be consistent with the OTC
Model Rule and other states’ regulations based on that model.
We believe that we have done all that is necessary to satisfy the current requirements of the
Clean Air Act and laws of various state governments. Currently, all of our products may be sold in
all areas of the United States.
Employees
We employ 77 persons (compared to 78 persons at the end of 2006), 37 in plant and production
related functions and 40 in administrative, sales and advertising functions. No contracts exist
between us and any union. We monitor wage and salary rates in the Rocky Mountain area and pursue a
policy of providing competitive compensation to our employees. The compensation of our executive
officers is under the review of the Compensation Committee of our Board of Directors. Fringe
benefits for our employees include a medical and dental plan, life insurance, a 401(k) plan with
matching contributions for lower paid employees (those earning $35,000 or less per annum), an
employee stock ownership (ESOP) plan, and a profit sharing plan. We consider our employee
relations to be satisfactory.
Patents and Trademarks
At present, we own one patent covering an ingredient used in some of our skin care products.
Additionally, we actively use our registered trademarks for Scott’s Liquid Gold, Liquid Gold, Touch
of Scent, Alpha Hydrox, TriOxygenC®, and Neoteric in the United States and have
registered trademarks in a number of additional countries. Our registered trademarks and pending
trademark applications concern names and logos relating to our products as well as the design of
boxes for certain of our products.
In December 2000 (amended October 1, 2003), we entered into a license agreement with TriStrata
Technology, Inc. which owns patents dealing with the
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use of alpha hydroxy acids for the purpose of reducing the appearance of wrinkles or fine lines.
Under the license agreement, Neoteric Cosmetics and its affiliates were granted a non-exclusive
license for the life of the patents to make and sell skin care products using alpha hydroxy acids
for, among other things, the reduction of the appearance of skin wrinkles and the reduction in the
appearance of skin changes associated with aging. The license agreement covered a territory which
includes the United States and certain foreign countries. In accordance with the license
agreement, Neoteric Cosmetics paid a royalty on net sales of products covered by the agreement.
This license agreement was part of the settlement of a lawsuit brought by TriStrata Technology
against us and others alleging infringement of patents in selling and promoting skin care products
which contain alpha hydroxy acid. By a notice sent to TriStrata Technology, we terminated this
license agreement in October of 2007. We rely on a pass-through license from E.I. DuPont (our
supplier) for our uses of glycolic acid regarding wrinkle reduction and anti-aging. The
pass-through license applies to customers of DuPont. Although DuPont is a long-time supplier of
ours, we have no contracts with DuPont other than orders for our purchases.
Available Information and Code of Ethics
We will make available free of charge through the website
http://www.businesswire.com/cnn/slgd.htm, this annual report, our quarterly reports on Form 10-Q,
our current reports on Form 8-K, and amendments to such reports, as soon as reasonably practicable
after we electronically file or furnish such material with the Securities and Exchange Commission.
These reports are also available through a link on our website. We will provide upon request and
at no charge electronic or paper copies of these filings with the Securities and Exchange
Commission (excluding exhibits).
We will provide to any person without charge, upon request, a copy of the code of business
conduct and ethics which has been adopted by us and which applies to our principal executive
officer, principal financial officer and principal accounting officer, among others.
A request for reports filed with the SEC or the code of business conduct and ethics may be
made to: Corporate Secretary, Scott’s Liquid
Gold-Inc., 4880 Havana Street, Denver, Colorado 80239.
Risk Factors
The following is a discussion of certain risks that may affect our business. These risks may
negatively impact our existing business, future business opportunities, our financial condition or
our financial results. In such case, the trading price of our common stock could also decline.
Additional risks and uncertainties not presently known to us, or that we currently see as
immaterial, may also negatively impact our business.
We need to increase our revenues in order to become profitable under our present cost structure.
We have experienced net losses in nine of our last ten years. These losses result primarily
from declining sales of our skin care products and our primary household products. Maintaining or
increasing our revenues is uncertain and involves a number of factors including consumer acceptance
of our products, distribution of our products and other matters described below.
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Our cash flow is dependent upon operating cash flow.
Because we are dependent on our operating cash flow, any loss of a significant customer, any
further decreases in the distribution of our skin care or household chemical products, new
competitive products affecting sales levels of our products or any significant expense not included
in our internal budget could result in the need to raise cash, such as through additional bank
financing. Except for the existing bank debt, we have no arrangements for an external financing of
debt or equity, and we are not certain whether any such financing would be available on acceptable
terms. In order to improve our operating cash flow, we need to achieve profitability or change
significantly our cost structure.
Sales of our existing products are affected by changing consumer preferences.
Our primary market is retail stores in the United States which sell to consumers or end users
in the mass market. Consumer preferences can change rapidly and are affected by new competitive
products. This situation is true for both skin care and household products and has affected our
established products, most significantly our earlier established Alpha Hydrox products. For
example, in the skin care area, we believe that our products with AHAs are effective in diminishing
fine lines and wrinkles, but consumers may change permanently or temporarily to other products
using other technologies or otherwise viewed as “new.” Any changes in consumer preferences can
affect materially the sales and distribution of our products and thereby our revenues and results
of operation.
In both skin care and household products, we compete every day against the largest consumer product
companies in the United States.
Our large competitors regularly introduce new products and spend multiples of dollars more
than we do on advertising, particularly television advertising. The distribution of our product
and sales can be adversely impacted by the actions of our competitors.
We have limited resources to promote our products with effective advertising.
We sell our products in the consumer retail marketplace. Advertising, particularly television
advertising, can be important in reaching consumers, although the effectiveness of any particular
advertisement cannot be predicted.
Maintaining or increasing our revenues is dependent on the introduction of new products that are
successful in the marketplace.
Sales of our Alpha Hydrox products, Scott’s Liquid Gold for wood and Touch of Scent have
declined in recent years, except for a small increase in the sale of Scott’s Liquid Gold for wood
in 2004 when we sold the product to additional retail stores. In order to address these declines,
we have introduced new products, including Montagne Jeunesse sachets in 2001, the wood wipe and
wood wash products in 2004 and 2005, our new Alpha Hydrox products in 2005, a value priced Alpha
Hydrox White line in 2007, and our mold remediation product “Mold Control 500” during the second
quarter of 2006. We plan the introduction of additional products. If we are not successful in
making ongoing sales of our newer products to retail store chains or these products are not well
received by consumers, our revenues could be materially and adversely affected.
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A loss of one or more of our major customers could have a material adverse effect on our product
sales.
For more than a majority of our sales, we are dependent upon sales to major customers,
including Wal-Mart which is our largest customer. The easy access of consumers to our products is
dependent upon major retail stores and other retail stores carrying our products, particularly mass
merchandisers. The willingness of these customers (i.e., retail stores) to carry any of our
products depends on various matters, including the level of sales of the product at the stores.
Any declines in sales of a product to consumers can result in the loss of retail stores as our
customers and the corresponding decreases in the distribution of the product. It is uncertain
whether the consumer base served by these stores would purchase our products at other retail
outlets. In the past, sales of our products have been affected by retail store chains which
discontinue a product or carry the product in a lesser number of stores.
More than a majority of our sales of skin care product are represented by the Montagne Jeunesse
products which depend upon the continuation of our distributorship agreement with Montagne
Jeunesse.
Our distributorship agreement with Montagne Jeunesse is for a period of 18 months that ended
in November, 2006 and continues in force after this initial term subject to the right of either
party to terminate the agreement with three or six months notice. As a practical matter, we also
believe that the distribution of Montagne Jeunesse sachets is dependent upon our good relationship
with Montagne Jeunesse.
We face the risk that raw materials for our products may not be available or that costs for these
materials will increase, thereby affecting our ability to either manufacture the products or our
gross margin on the products.
We obtain our raw materials from third party suppliers, some of which are sole source
suppliers. While there are two suppliers of glycolic acid, we use one supplier. We have no long
term contracts with our suppliers; and, if a contract exists, it is subject to termination or cost
increases. We may not have sufficient raw materials for production of products manufactured by us
if there is a shortage in raw materials or one of our suppliers terminates our relationship. In
addition, changing suppliers could involve delays that restrict our ability to manufacture or buy
products in a timely manner to meet delivery requirements of our customers. Our suppliers of
products which we distribute can also be subject to the same risk with their vendors.
Our sales are affected adversely by returns.
In our industry, retail stores have the ability to return products. These returns result in
refunds, a reduction of our revenues and usually the need to dispose of the resulting inventory at
discounted prices. Accordingly, the level of returns can significantly impact our revenues and
cash flow. See information about returns in Note 12 to our Consolidated Financial Statements in
this Report.
Changes in the regulation of our products, including environmental regulations, could have an
adverse effect on the distribution, cost or function of our products.
Regulations affecting our products include requirements of the FDA for cosmetic products and
environmental regulations affecting emissions from our products. The FDA has mentioned the
treatment of AHA products as drugs,
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which could make more expensive or prohibitive our production and sale of certain Alpha Hydrox
products. Also, in the past, we have changed the formulation of our household products to satisfy
environmental regulations and will continue to do so as required.
Any adverse developments in litigation could have a material impact on us.
We are subject to lawsuits from time to time in the ordinary course of business. While we
expect those lawsuits not to have a material effect on us, an adverse development in any such
lawsuit or the insurance coverage for a lawsuit could materially and adversely affect our financial
condition and cash flow.
Any loss of our key executives or other personnel could harm our business.
Our success has depended on the experience and continued service of our executive officers and
key employees. If we fail to retain these officers, our ability to continue our business and
effectively compete may be substantially diminished. Because of our size, we must rely in many
departments within our company on one or two managers; the loss of any one of those could slow our
product development, production of a product, and sale and distribution of a product.
Our stock price can be volatile and can decline substantially.
Our stock is traded on the OTC Bulletin Board. The volume of our stock varies but is
relatively limited. As a result, any events affecting us can result in volatile movements in the
price of our stock and can result in significant declines in the market price of our stock.
Item 2. Description of Property
Our facilities, located in Denver, Colorado, are currently comprised of three connected
buildings and a parking garage (approximately 261,100 square feet in total) and about 16.2 acres of
land, of which approximately 6 acres are available for future expansion. These buildings range in
age from approximately 10 to 35 years (126,600 square feet having been added in 1995 and 1996).
The Denver facility houses our corporate headquarters and all of our operations, and serves as one
of several distribution points. We believe that our current space will provide capacity for growth
for the foreseeable future. All of our land and buildings serve as collateral under a deed of
trust for a $5.2 million bank loan ($4.9 million at December 31, 2007) consummated by us on June
26, 2006.
As indicated in this Report, the Company uses less than the capacity of its facilities and is
also interested in reducing its expenses. As part of this process, starting as of July 2007, the
Company has engaged a commercial real estate broker, The Staubach Company, in Denver to explore
alternatives. These alternatives include the sale of all or part of the facilities, a sale of all
or part of the facilities combined with a leaseback by the Company of the facilities, or a lease of
all or part of the facilities by the Company to a third party. There is, however, no assurance
that acceptable transactions will be offered or completed.
On March 28, 2006, we entered into a Lease Agreement with Keltec Dispensing Systems USA, Inc.,
a Delaware corporation, pursuant to which we leased to Keltec the space that is located in our
Denver facility and had been used for the operations of the plastics equipment. The lease also
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included the use of certain common areas and equipment. The term of the Lease was three years
beginning July 1, 2006. Keltec would have been able to renew the lease for an additional term of
three years upon advance written notice under the same terms and conditions, except that during the
renewal term the rent would have been increased by the same percentage as the increase in the
CPI-Denver from the commencement date to the initial expiration date. This lease was terminated by
mutual agreement at the end of 2007.
Item 3. Legal Proceedings
We are subject to incidental litigation in the ordinary course of our business. We expect
that no pending legal proceeding will have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
Our $0.10 par value common stock is listed on the OTC Bulletin Board (a regulated quotation
service) under the ticker symbol “SLGD”. The high and low prices of Scott’s Liquid
Gold-Inc. common stock as traded on the OTC Bulletin Board were as follows. The
over-the-counter market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
| 2007 | 2006 | |||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||
| High | Low | High | Low | |||||||||||||||||
March 31 |
$ | 0.87 | $ | 0.75 | March 31 | $ | 1.15 | $ | 0.66 | |||||||||||
June 30 |
$ | 0.95 | $ | 0.73 | June 30 | $ | 1.01 | $ | 0.78 | |||||||||||
September 30 |
$ | 1.12 | $ | 0.72 | September 30 | $ | 1.00 | $ | 0.80 | |||||||||||
December 31 |
$ | 0.95 | $ | 0.54 | December 31 | $ | 0.94 | $ | 0.73 | |||||||||||
Shareholders
As of January 23, 2008, we had approximately 950 shareholders of record.
Dividends
We did not pay any cash dividends during the two most recent fiscal years. No decision has
been made as to future dividends. See “Management’s Discussion and Analysis or Plan of
Operation — Liquidity and Capital Resources” for information concerning restrictions on
dividends.
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Other
Current stock quotes, our SEC filings, quarterly earnings and press releases can be found
at: http://www.businesswire.com/cnn/slgd.htm.
Equity Plans
The following table provides, as of December 31, 2007, information regarding our equity
compensation plans, which consist of the 1993, 1997, 1998, and 2005 Stock Option Plans. We also
have an Employee Stock Ownership Plan which invests only in our common stock, but which is not
included in the table below.
| Number of | ||||||||||||
| securities | ||||||||||||
| remaining | ||||||||||||
| available for | ||||||||||||
| Number of | future issuance | |||||||||||
| securities to be | under equity | |||||||||||
| issued upon | Weighted-average | compensation plans | ||||||||||
| exercise of | exercise price of | (excluding | ||||||||||
| outstanding | outstanding | securities | ||||||||||
| options, warrants | options, warrants | reflected in | ||||||||||
| and rights | and rights | column (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation
plans approved by
security holders |
1,942,150 | $ | 0.69 | 43,600 | ||||||||
Equity compensation
plans not approved
by security holders |
— | — | — | |||||||||
Total |
1,942,150 | $ | 0.69 | 43,600 | ||||||||
Stock Purchases
We did not make any repurchases of our outstanding shares during the fourth quarter of 2007.
Pursuant to board resolutions, on August 21, 2007 and November 29, 2007, we issued and
contributed 27,000 shares and 15,000 shares, respectively, of our common stock to our Employee
Stock Ownership Plan (the “Plan”). No consideration was paid by the Plan for these contributions.
We believe that these contributions were not subject to the securities registration requirements of
the Securities Act of 1933 because they did not involve a sale. The contributions of the shares to
the Plan may also be exempt from such securities registration as a non-public offering under
Section 4(2) of the Securities Act of 1933.
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Item 6. Management’s Discussion & Analysis or Plan of Operation
General
We manufacture and market both household and skin care products. Our products are sold
throughout the United States and Canada and insignificantly in other countries.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and the
understanding of our results of operations. These policies involve significant judgments,
estimates and assumptions by our management. For a detailed discussion on the application of these
and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements.
Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue
is a key component of our results of operations. We follow the guidance of Staff Accounting
Bulletin No. 104 (“SAB 104”), which requires that a strict series of criteria are met in
order to recognize revenue related to product shipment. If these criteria are not met, the
associated revenue is deferred until the criteria are met. Generally, these criteria are
that there be an arrangement to sell the product, we have delivered the product in
accordance with that arrangement, the sales price is determinable, and collectibility is
probable.
Our reserves for accounts receivable consist of a bad debt reserve and reserves for
returns and customer allowances. Reserves for marketing rebates, pricing allowances and
returns, coupons and certain other promotional activities involve estimates made by
management based upon an assessment of historical trends, information from customers, and
anticipated returns and allowances related to current sales activity. The level of returns
and allowances are impacted by, among other things, promotional efforts performed by
customers, changes in customers, changes in the mix of products sold, and the stage of the
relevant product life cycle. Changes in estimates may occur based on actual results and
consideration of other factors that cause returns and allowances. In the event that actual
results differ from these estimates, results of future periods may be impacted.
Reserves for bad debts ($62,900 at December 31, 2007 and
$62,000 at December 31, 2006) are recorded based on estimates by management including
factors surrounding the credit risk of specific customers and historical trends. We have
been exposed to potential losses on receivables due from specific customers that have
suffered financial difficulties. We have provided reserves against certain receivables from
such customers in addition to amounts related to unidentified losses. Those reserves are
reduced as those accounts are settled or written off. In the event that actual losses
differ from these estimates or there is an increase in exposure relating to sales to
specific customers, results of future periods may be impacted.
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Income Taxes
As of December 31, 2007, we have net deferred income tax assets of $2,451,800 which
primarily relate to net operating loss carryforwards, expenses that are not yet deductible
for tax purposes and tax credit carryforwards, offset by deferred income tax liabilities for
differences in the book and tax bases of property and equipment. The net deferred tax asset
is fully reserved by a valuation allowance. The valuation allowance represents management’s
determination that we will more likely than not be unable to realize the value of such
assets due to the uncertainty of future profitability.
Inventory Valuation and Reserves
Our inventory is a significant component of our total assets. In addition, the
carrying value of such inventory directly impacts the gross margins that we recognize when
we sell the inventory and record adjustments to carrying values. Our inventory is valued at
the lower of cost or market, cost being determined under the first-in, first-out method. We
estimate reserves for slow moving and obsolete products and raw materials based upon
historical and anticipated sales. In the event that actual results differ from these
estimates, results of future periods may be impacted.
Recently Issued Accounting Pronouncements
Please see Note 1 (p) of our Consolidated Financial Statements.
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Results of Operations
During 2007, we experienced a decrease in sales of our household chemical products, while
experiencing an increase in sales of our Montagne Jeunesse line of skin care products and a
decrease in sales of our Alpha Hydrox skin care products. Our net loss for 2007 was $1,310,800
versus a net loss of $3,586,600 for 2006. The decrease in our loss for 2007 compared to 2006
results from an increase in sales, and a reduction in our operating costs and expenses, primarily
the reduction of advertising.
Summary of Results as a Percentage of Net Sales
| Year Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
Net sales |
||||||||
Scott’s Liquid Gold household products |
44.9 | % | 53.1 | % | ||||
Skin care products |
55.1 | % | 46.9 | % | ||||
Total net sales |
100.0 | % | 100.0 | % | ||||
Cost of sales |
56.5 | % | 57.4 | % | ||||
Gross profit |
43.5 | % | 42.6 | % | ||||
Other revenue |
0.4 | % | 1.0 | % | ||||
| 43.9 | % | 43.6 | % | |||||
Operating expenses |
48.9 | % | 63.8 | % | ||||
Interest expense |
2.3 | % | 2.0 | % | ||||
| 51.2 | % | 65.8 | % | |||||
Loss before income taxes |
(7.3 | %) | (22.2 | %) | ||||
Our gross margins may not be comparable to those of other entities because some entities
include all of the costs related to their distribution network in cost of sales and others, like
us, exclude a portion of them (freight out to customers and nominal outside warehouse costs) from
gross margin, including them instead in the selling expense line item. See Note 1(o), Operating
Costs and Expenses Classification, to the Consolidated Financial Statements in this Report.
Year Ended December 31, 2007
Compared to Year Ended December 31, 2006
Compared to Year Ended December 31, 2006
Comparative Net Sales
| Percentage | ||||||||||||
| Increase | ||||||||||||
| 2007 | 2006 | (Decrease) | ||||||||||
Scott’s Liquid Gold and
other household products |
$ | 7,021,800 | $ | 7,238,700 | (3.0 | %) | ||||||
Touch of Scent |
1,029,900 | 1,341,200 | (23.2 | %) | ||||||||
Total household products |
8,051,700 | 8,579,900 | (6.2 | %) | ||||||||
Alpha Hydrox and other skin care |
3,302,100 | 3,396,500 | (2.8 | %) | ||||||||
Montagne Jeunesse and other skin care |
6,564,700 | 4,167,200 | 57.5 | % | ||||||||
Total skin care products |
9,866,800 | 7,563,700 | 30.4 | % | ||||||||
Total net sales |
$ | 17,918,500 | $ | 16,143,600 | 11.0 | % | ||||||
Consolidated net sales for 2007 were $17,918,500 versus $16,143,600 for 2006, an increase of
$1,774,900 or about 11.0%. Average selling prices for 2007 were down by $54,700 over those of the
comparable period of 2006, prices
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of household products being up by $114,400, while average selling prices of skin care products were
down by $169,100. This decrease was primarily due to price promotions on selected cosmetic
products. Co-op advertising, marketing funds, slotting fees and coupon expenses (promotional
allowances) paid to retailers were subtracted from gross sales in accordance with current
accounting policies totaling $2,294,700 in 2007 versus $2,391,300 in 2006, a decrease of $96,600 or
about 4.0%. This decrease consisted of a decrease in coupon expense of $110,700, an increase in
co-op marketing funds of $66,300 and a decrease in slotting fee expenses of $52,200.
From time to time, our customers return product to us. For our household chemicals products,
we permit returns only for a limited time, and generally only if there is a manufacturing defect.
With regard to our skin care products, returns are more frequent under an unwritten industry
standard that permits returns for a variety of reasons. In the event a skin care customer requests
a return of product, the Company will consider the request, and may grant such request in order to
maintain or enhance relationships with customers, even in the absence of an enforceable right of
the customer to do so. Some retailers have not returned products to us. Return price credit (used
in exchanges typically, or rarely, refunded in cash) when authorized is based on the original sale
price plus a handling charge of the retailer that ranges from 8-10%. The handling charge covers
costs associated with the return and shipping of the product. Additions to our reserves for
estimated returns are subtracted from gross sales.
From January 1, 2005 through December 31, 2007, our product returns (as a percentage of gross
revenue) have averaged as follows: household products 0.3%, Montagne Jeunesse products 3.4%, and
our Alpha Hydrox and other skin care products 5.9%. The level of returns as a percentage of gross
revenue for the household products and Montagne Jeunesse products have remained fairly constant as
a percentage of sales over that period while the Alpha Hydrox and other skin care products return
levels have fluctuated. More recently, as our sales of the skin care products have declined we
have seen a decrease in returns as a percentage of gross revenues. The products returned in 2007
(indicated as a percentage of gross revenues) were: household products 0.1%, Montagne Jeunesse
products 3.0%, and our Alpha Hydrox and other skin care products 7.3%. We are not aware of any
industry trends, competitive product introductions or advertising campaigns at this time which
would cause returns as a percentage of gross sales to be materially different for the current
fiscal year than for the above averages. Furthermore, the Company’s management is not currently
aware of any changes in customer relationships that we believe would adversely impact anticipated
returns. However, we review our reserve for returns quarterly and we regularly face the risk that
the existing conditions related to product returns will change.
During 2007, net sales of skin care products accounted for 55.1% of consolidated net sales
compared to 46.9% for 2006. Net sales of these products for those periods were $9,866,800 in 2007
compared to $7,563,700 in 2006, an increase of $2,303,100 or about 30.4%.
Our decrease in sales of Alpha Hydrox and other skin care products was due to a decrease in
distribution in 2007; however, this decrease was offset somewhat by the sales of our line of
Neoteric Massage Oils, introduced earlier in 2007. With only the introduction underway, it is too
early to tell about consumer acceptance of Neoteric Massage Oils. We have continued to experience a
drop in unit sales of our more recently introduced Alpha Hydrox products and our
earlier-established alpha hydroxy acid-based products due primarily to maturing in the market for
alpha hydroxy acid-based skin care products, intense competition from producers of similar or
alternative
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products, many of which are considerably larger than Neoteric Cosmetics, Inc.
and reduced distribution of these products at retail stores in current and prior periods. For 2007,
the sales of our Alpha Hydrox products accounted for 20.7% of net sales of skin care products and
11.4% of total net sales, compared to 13.4% of net sales of skin care products and 28.6% of total
net sales in 2006. During 2007 we introduced four new items to the Alpha Hydrox line of products,
it is too early to tell about consumer acceptance of these additions.
Net sales of Montagne Jeunesse products were $6,564,700 in 2007 versus $4,167,200 for the
comparable period of 2006, an increase of $2,397,500 or 57.5%. The increase reflects the product
placement and sales in additional Wal-Mart stores which began late in the first quarter. This
placement included significantly more stores and more sachet variants in the stores. We returned
to two more national retail chains with placement of Montagne Jeunesse in the second half of 2007.
Sales of household products for 2007 accounted for 44.9% of consolidated net sales compared to
53.1% for the same period in 2006. These products are comprised of Scott’s Liquid Gold wood care
products (Scott’s Liquid Gold for wood, a wood wash and wood wipes), mold remediation products,
Touch of Scent and Odor Extinguisher. During 2007 sales of household products were $8,051,700 as
compared to $8,579,900 for the same period in 2006, a decrease of $528,200, or 6.2%. Sales of
Scott’s Liquid Gold wood care products decreased by $173,100 in 2007 versus 2006. We believe this
reduction to be a result of a decrease in media advertising of our wood care products in 2007
versus 2006. Mold Control 500 sales, which are shown in the sales for Scott’s Liquid Gold and
other household products, were $849,700 for 2007 versus $893,500 in 2006. Sales of air fresheners
were down by $311,300 or 23.2%, primarily due to a decrease in distribution in present and past
quarters. During the third quarter of 2007, we introduced the Odor Extinguisher air fragrance
product line; it is too early to tell about consumer acceptance of this addition.
As sales of a consumer product decline, there is the risk that retail stores will stop
carrying the product. The loss of any significant customer for any skin care products, “Scott’s
Liquid Gold” wood care or mold remediation products, could have a significant adverse impact on our
revenues and operating results. We believe that our future success is highly dependent on
favorable acceptance and sales in the marketplace of Montagne Jeunesse products, our Alpha Hydrox
products and our “Scott’s Liquid Gold” wood care and mold remediation products.
We also believe that the introduction of successful new products, including line extensions of
existing products, such as the wood wash and our new mold remediation product, using the name
“Scott’s Liquid Gold”, are important in our efforts to maintain or grow our revenue. Late in the
fourth quarter of 2006, we introduced two new items within our Alpha Hydrox cosmetic line of
products. We have introduced, as mentioned above, new products in 2007. We do not have any
additional products scheduled for introduction in early 2008. However, we review regularly
possible additional products to sell through distribution agreements or to manufacture ourselves.
To the extent that we manufacture a new product rather than purchase it from external parties, we
are also benefited by the use of existing capacity in our facilities. The actual introduction of
additional products, the timing of any additional introductions and any revenues realized from new
products is uncertain.
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On a consolidated basis, cost of goods sold was $10,117,600 for 2007 compared to $9,270,000
for 2006, an increase of $847,600 or 9.1%, on a sales increase of 11.0%. As a percentage of
consolidated net sales, cost of goods
sold was 56.5% in 2007 versus 57.4% in 2006. This decrease was the result of the decrease in sales
promotion expenses which increased our revenues and thus affected our margins.
Operating Expenses, Interest Expense and Other Income
| Percentage | ||||||||||||
| Increase | ||||||||||||
| 2007 | 2006 | (Decrease) | ||||||||||
Operating Expenses |
||||||||||||
Advertising |
$ | 332,800 | $ | 1,558,800 | (78.7 | %) | ||||||
Selling |
5,433,500 | 5,516,300 | (1.5 | %) | ||||||||
General & Administrative |
2,994,800 | 3,228,500 | (7.2 | %) | ||||||||
Total operating expenses |
$ | 8,761,100 | $ | 10,303,600 | (15.0 | %) | ||||||
Interest Income and Other |
$ | 72,300 | $ | 161,300 | (55.2 | %) | ||||||