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CAW > SEC Filings for CAW > Form 10-Q on 15-Apr-2013All Recent SEC Filings

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Form 10-Q for CCA INDUSTRIES INC


15-Apr-2013

Quarterly Report


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management's plans and objectives, future contracts, and forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as "anticipate", "intends", "estimate", "expect", "believe", "will likely result", "outlook", "project" and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statement will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. The cautionary statements made in this Quarterly Report on Form 10-Q should be read as being applicable to all forward-looking statements whenever they appear in this report. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act. In addition to the information in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and risks and uncertainties included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012 and other periodic reports filed with the United States Securities and Exchange Commission.
OVERVIEW
For the three month period ended February 28, 2013, the Company had revenues of $11,799,649 and a net loss of $1,015,390 after a income tax benefit of $657,730. For the same period of 2012, the Company had revenues of $13,688,247 and net income of $87,534 after a provision for income taxes of $66,912. The basic and fully diluted loss per share for the first quarter of 2013 was $0.14 as compared to a basic and fully diluted earnings per share of $0.01 for same period of 2012. As of February 28, 2013 the Company had $31,258,667 in current assets and $10,069,263 in current liabilities. The Company does not have any loan or line of credit bank debt.
OPERATING RESULTS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2013 For the three-month period ended February 28, 2013, the Company had total revenues of $11,799,649 and a net loss of $1,015,390 after a tax benefit of $657,730. For the same three month period in 2012, total revenues were $13,688,247 and net income was $87,534 after a provision for income taxes of $66,912. Basic and fully diluted loss per share was $0.14 for the first quarter of fiscal 2013 as compared to earnings of $0.01 per share for the first quarter of fiscal 2012. In accordance with ASC Topic 605-10-S99, "Revenue Recognition", the Company has accounted for certain sales incentives offered to customers by charging them directly to sales as opposed to advertising and promotional expenses. Net sales for the first quarter of fiscal 2013 were reduced by $1,527,950 and offset by an equal reduction of trade promotional expenses, which were included in the Company's advertising expense. In the same period of the prior year, net sales were reduced by $1,355,838 and trade promotion was offset by an equal reduction of that amount. These accounting adjustments under ASC Topic 605-10-S99 do not affect net income.
The Company's net sales of health and beauty aid products decreased $1,734,119 to $11,796,951 for the three month period ended February 28, 2013 from $13,531,070 for the three month period ended February 29, 2012, a decrease of 12.8%. Sales returns and allowances, not including sales incentives, were 12.2% of gross sales or $1,884,207 for the three month period ended February 28, 2013 as compared to 5.6% or $910,176 for the same period last year. Sales incentives consist of co-operative advertising with the Company's retail partners and coupons. The amount of co-operative advertising included in sales incentives increased by $172,112 to $1,527,950 in the first quarter 2013 as compared to $1,355,838 in the same period in 2012. The cost of the coupons issued by the Company was $250,714 for the first quarter 2013 as compared to $402,922 for the same period in 2012. The Company uses a national clearing house for the receipt and processing of coupons from our retail partners. The national clearing house renders invoices to the Company on a weekly basis for coupons that they have processed which are recorded as an expense in the period for which the invoice is dated. The Company also records an expense accrual at the end of each period equal to the prior six weeks of invoices rendered based on information from the national clearing house that there is an average lag time of six weeks between the time that the retailer receives the coupon and when the Company receives the invoice. The amount recorded as an expense or an accrual includes the retailer cost of the coupon in addition to any processing


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

charges by the national coupon clearing house. Coupons are issued by the Company
to be used with the purchase of specific products, with an expiration date noted
on the coupon.
The Company's net sales by category for the first quarter 2013 as compared to
the first quarter of fiscal 2012 were:

                       Three Months Ended        Three Months Ended
                        February 28, 2013         February 29, 2012
Category               Net Sales      % TTL      Net Sales      % TTL
Nail Care            $  3,696,481     31.3 %   $  4,144,939     30.6 %
Skin Care               3,546,652     30.1 %      3,957,421     29.2 %
Oral Care               2,512,008     21.3 %      2,342,405     17.3 %
Dietary Supplement      1,717,269     14.6 %      2,639,615     19.5 %
Miscellaneous             324,541      2.8 %        446,690      3.3 %
                     $ 11,796,951    100.0 %   $ 13,531,070    100.0 %

The following were factors that affected net sales for the three months ended February 28, 2013:

         Net sales of nail care products decreased $448,458 for the three months
          ended February 28, 2013, as compared to the same period in fiscal 2012.
          Increased distribution of the Company's Gel Perfect nail polish product
          line was offset by higher product returns related to promotional
          displays sold in 2012 and planogram resets at our major customers.


         Net sales of skin care products decreased $410,769 for the three months
          ended February 28, 2013, as compared to the same period in fiscal 2012.
          New product launch of "Hand Perfection" was offset by higher returns of
          seasonal products.


         Net sales of the Company's diet products decreased $922,346 in the
          first quarter of 2013 as compared to the first quarter of fiscal 2012.
          The decrease in net sales of diet products was due to lower gross sales
          and higher returns as a result of decreased distribution of certain
          items and decreased promotional activity, reflective of the continued
          overall industry category decline. The Company is increasing its
          marketing efforts with the introduction of new diet products in order
          to effectuate a positive impact on future sales.


         Sales returns and allowances increased to 12.2% of gross sales for the
          first quarter of fiscal 2013 as compared to 5.6% of gross sales for the
          same period last year. The higher returns in the 2013 period relate
          primarily to the Gel Perfect nail polish line as mentioned above. The
          Company, on an ongoing basis, has returns of products that have been
          phased out and replaced by new items as part of its marketing plan.


                                                                 Three Months Ended
                                                      February 28, 2013      February 29, 2012
Sales of health and beauty aid products - Net        $       11,796,951     $       13,531,070
Cost of Sales                                                 5,530,303              6,008,346
Gross Margin                                         $        6,266,648     $        7,522,724
                                                                   53.1 %                 55.6 %

The gross margin percentage for the first quarter 2013 decreased to 53.1%, as compared to 55.6% for the first quarter of fiscal 2012. The decrease of gross margin percentage in the first quarter of fiscal 2013 is related to the high volume of product returns mentioned above. Approximately 25% of returns received are placed back into inventory for sale after inspection and refurbishment. Selling, general and administrative expenses increased to $5,779,409 for the three months ended February 28, 2013 as compared to $5,284,653 for the same period in 2012, or an increase of $494,756. The increase was due in part to a one-time death benefit payment of $356,731 per the employment contract with Dunnan D. Edell, the Company's previous President and Chief Executive Officer. Under the terms of Mr. Edell's employment agreement, his estate is entitled to a single sum payment of equal to his base salary and a single sum payment equal to the value of the highest


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

bonus earned in the one year period preceding the date of death, prorated for the number of days served in that fiscal year. The balance of the increase in sales and administrative expenses are due to the timing of smaller expenses. Advertising expense was $2,025,103 for the quarter ended February 28, 2013 as compared to $2,083,592 for the quarter ended February 29, 2012, or a decrease of $58,489. The Company's advertising expense changes from quarter to quarter based on the timing of the Company's promotions.
Loss before the benefit from income taxes was $1,673,120 for the quarter ended February 28, 2013 as compared to a income before provision for income taxes of $154,446 for the quarter ended February 29, 2012.
The effective tax rate for the first quarter of fiscal 2013 was 39.3% versus 43.3% for the first quarter of fiscal 2012. The fiscal 2013 effective tax rate was lower due to a change in the allocation of state income taxes.
FINANCIAL POSITION AS OF FEBRUARY 28, 2013 The Company's financial position as of February 28, 2013 consisted of current assets of $31,258,667 and current liabilities of $10,069,263, or a current ratio of 3.1 to 1. The Company's cash and cash equivalents were $6,294,108 as of February 28, 2013, a decrease of $3,534,573 from November 30, 2012. Included in this decrease was net cash used in operating activities of $2,891,035, net cash used in investing activities of $148,551 and net cash used in financing activities of $494,987. Included in the net cash used in financing activities was $493,811 of dividends paid.
Accounts receivable increased to $9,324,732 as of February 28, 2013 from $8,073,398 as of November 30, 2012. The increase was due to gross sales volume which was $2,759,418 higher in February and January 2013 as compared to gross sales in October and November 2012. There has been no significant change in the accounts receivable aging and days outstanding.
The reserve for returns and allowances is based on the historical returns as a percentage of sales in the five preceding months, adjusting for returns that can be put back into inventory, and a specific reserve based on customer circumstances. This allowance decreased to $1,686,984 as of February 28, 2013, from $1,798,745 as of November 30, 2012. Of this amount, allowances and reserves in the amount of $586,369, which are anticipated to be deducted from future invoices, were included in accrued liabilities as of February 28, 2013 as compared to $665,184 as of November 30, 2012. Gross receivables were further reduced by $1,259,987, which were reclassified from accrued liabilities, as an estimate of the co-operative advertising that will be taken as a credit against payments. In addition, accrued liabilities include $2,982,925, which is an estimate of co-operative advertising expense relating to fiscal 2013 sales which are anticipated to be deducted from future invoices rather than against the current accounts receivable. The allowance for doubtful accounts decreased to $23,966 as of February 28, 2013 as compared to $26,340 as of November 30, 2012. The Company had no material overdue accounts receivable balances as of February 28, 2013.
Inventory increased to $10,364,698 as of February 28, 2013 from $9,794,448 as of November 30, 2012. The inventory increased in order to support the sales of Gel Perfect as well as the promotional sales to take place in the second quarter of fiscal 2013. The inventory obsolescence reserve decreased to $598,526 as of February 28, 2013 from $671,609 as of November 30, 2012 as a result of scrapping obsolete inventory.
The Company received insurance proceeds of $800,000 in December 2012 for insurance claims related to Superstorm Sandy. The Company had a $1,000,000 flood policy loss limit and received $200,000 in November 2012.
The deferred income tax asset increased to $1,824,721 as of February 28, 2013 from $1,242,484 as of November 30, 2012. The increase was due primarily to the deferred tax benefit of $684,015 on the loss carry forward as of February 28, 2013.
Accounts payable and accrued liabilities decreased $197,591 to $10,065,359 as of February 28, 2013 from $10,262,950 as of November 30, 2012. The decrease was due to the normal course of business. There has been no significant change in the aging of the accounts payable.
Shareholders' equity decreased to $23,281,990 as of February 28, 2013 from $24,247,976 as of November 30, 2012. The decrease was due to the net loss of $1,015,390 and unrealized gains, net of deferred income tax, on marketable


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

securities of $49,404 during the three months ended February 28, 2013. Unrealized holding gains or losses are recorded as other comprehensive income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate adequate amounts of cash to meet short-term and long-term business needs. We assess our liquidity in terms of our total cash flow and the amounts of cash, short-term and long-term marketable securities on hand. Significant factors that could affect our liquidity include the following:
Cash flow generated or used by operating activities;

Dividend payments;

Capital expenditures;

Acquisitions.

Our primary capital needs are seasonal working capital requirements and dividend payments. In addition, funds are kept on hand for any potential acquisitions, which the Company continues to explore. As of February 28, 2013, the Company had cash and cash equivalents of $6,294,108 and short term marketable securities of $2,115,099. Please refer to Note No. 4 of the unaudited consolidated financial statements for further information regarding the Company's investments. The Company's long term liabilities, as of February 28, 2013, consist of a deferred tax liability of $46,400. The Company does not have any bank debt or a bank line of credit. Due to the amount of cash and marketable securities on-hand, the Company does not believe that it needs the availability of a bank line of credit at this time. The Company anticipates that it will have sufficient liquidity to finance anticipated working capital requirements for at least the next twelve months.
Critical Accounting Estimates
Our consolidated financial statements include the use of estimates, which management believes are reasonable. The process of preparing financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accounting estimates and assumptions are those management considers to be most critical to the financial statements because they inherently involve significant judgment and uncertainties. All of these estimates and assumptions reflect management's best judgment about current economic and market conditions and their effects on the information available as of the date of the consolidated financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. An accounting estimate is deemed to be critical if it is reasonably possible that it subsequent correction could have a material effect on future operating results or financial condition. The following are estimates that management has deemed to be critical:
1.Reserve for Returns and Allowances - The allowances and reserves which are anticipated to be deducted from future invoices are included in accrued liabilities. The estimated reserve is based in part on historical returns as a percentage of gross sales. The current estimated return rate is 6.9% of gross sales. Management estimates that 25% of returns received are placed back into inventory, and the estimate for returns is adjusted to reflect the value of the returns placed into inventory. Any changes in this accrued liability are recorded as a debit or credit to the reserve for returns and allowances account.
2.Allowance for Doubtful Accounts - The allowance for doubtful accounts is an estimate of the loss that could be incurred if our customers do not make required payments. Trade receivables are periodically evaluated by management for collectability based on past credit history with customers and their current financial condition. Changes in the estimated collectability of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Estimates are made based on specific disputes and additional reserves for bad debt based on the accounts receivable aging ranging from 0.35% for invoices currently due to 2.0% for invoices more than ninety-one days overdue. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.
3.Inventory Obsolescence Reserve - Management reviews the inventory records on a monthly basis. Management deems to be obsolete finished good items that are no longer being sold, and have no possibility of sale within the ensuing twelve months. Components and raw materials are deemed to be obsolete if


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

management has no planned usage of those items within the ensuing twelve months. In addition, management conducts periodic testing of inventory to make sure that the value reflects the lower of cost or market. If the value is below market, a provision is made within the inventory obsolescence reserve. This reserve is adjusted monthly, with changes recorded as part of cost of sales in the results of operations.


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