UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31 2021, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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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 |
8400 E. Crescent Parkway, Suite 450, Greenwood Village, CO | 80111 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (303) 373-4860
Securities registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol | Name of exchange on which registered | |||
None | None | None |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 Par Value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐No☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes☐No☒
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☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 | ☒ | |||
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐No☒
The aggregate market value of the common stock held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on June 30, 2021,2023, was $14,745,158.$2,510,508.
The number of shares of Registrant’s Common Stock outstanding as of March 30, 202225, 2024 was 12,734,156.13,006,162.
Certain information required by Part III is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders for fiscal year ended December 31, 2021 to be filed within 120 days after December 31, 2021.
CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K (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:
• disruptions or inefficiencies in the supply chain, including any impact of availability or costs of materials and components; • dependence on third-party vendors and on sales to major customers; • 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; • changes in the regulation of our products, including applicable environmental, U.S. and international Food and Drug Administration regulations and process-audit compliance; • the loss of any executive officer or other personnel; • future losses which could affect our liquidity; • ineffective internal controls over financial reporting caused by the existing material weakness; and • and other matters discussed in this Report, including the risks described in the Risk Factors section of this Report.
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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
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PART I | |||
Item 1. | 1 | ||
Item 1A. |
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Item 1B. |
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Item | 7 | ||
Item 2. | 8 | ||
Item 3. | 8 | ||
Item 4. | 8 | ||
PART II | |||
Item 5. | 9 | ||
Item 6. | 9 | ||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
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Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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PART III | |||
Item 10. |
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Item 11. |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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PART IV | |||
Item 15. |
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Item 16. |
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PART I
(in thousands, except per share data)
ITEM 1. BUSINESS Overview
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Overview
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954. In this Report the terms “we”, “us”“we,” “us,” or “our” refer to Scott’s Liquid Gold-Inc. and our subsidiaries, collectively. We develop, market, and sell high-quality, high-valuehigh quality products. Our business is comprised of one segment, household products. During 2023, our family of brands included:
In December 2022, we sold the Prell® brand, in January 2023 we sold the Scott’s Liquid Gold® brand, and in June 2023 we sold the BIZ® and Alpha® Skin Care brands. In September 2023 we sold our wholly owned subsidiary Neoteric Cosmetics, Inc. (“Neoteric”), which included the Neoteric Diabetic Skin Care®, Denorex®, and Zincon® brands through a stock purchase agreement. We sold each of these brands to unaffiliated buyers.
Alpha® Skin Care, Neoteric Diabetic Skin Care®, Denorex®, and Zincon®brands previously comprised our health and beauty care products. Oursegment. Upon the sale of these various brands throughout 2023, our business is divided into two operating segments; household products and health and beauty care products. Our family of brands include:
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Effective as of December 31, 2021, we sold the Dryel® brand and we are no longer distributing Batiste Dry Shampoo.
Financial Information About Segments and Principal Products
The table set forth below shows the percentage of our net sales contributed by each operating segment during 2021 and 2020:
| % of Net Sales |
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| 2021 |
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| 2020 |
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Household |
| 42.8 | % |
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| 43.9 | % |
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Health and beauty care |
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Distributed |
| 21.5 | % |
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| 22.8 | % |
Manufactured |
| 35.7 | % |
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| 33.3 | % |
Total health and beauty care |
| 57.2 | % |
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| 56.1 | % |
For more financial information on our operating segments, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 13 to our Consolidated Financial Statements in Item 8.
Household Products
The principal products in ournow operates under a single household products segment include:consisting of our Kids N Pets® and Messy Pet® product lines. Kids N Pets® and Messy Pet® represent our continuing operations in all periods presented.
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In conjunction with the sale of the Scott’s Liquid Gold® Wood Care has been our core product since our inception. It has been soldbrand, the Company may continue to use names “Scott’s Liquid Gold” and “SLG” for up to one year following the closing date of the agreement on January 23, 2023. On December 6, 2023, the Company signed a Second Amendment to the Asset Purchase Agreement which extended the use of the aforementioned names to eighteen months following the closing date of the agreement on January 23, 2023. Following this transitional name period, the Company will only be able to use the aforementioned names in the United States for over 70 years. Unlike leading furniture polishes, our higher quality product contains natural oils that penetrate the wood’s surface to clean, replace lost moisture, minimize the appearance of scratchesconnection with retaining records and bring out the natural beauty of wood. Our Scott’s Liquid Gold® Floor Restore product isother historical or archived documents and any use required by or permitted as a quick and easy way to renew and protect hardwood floors.fair use or otherwise under applicable law.
On October 1, 2019, we acquired the Kids N Pets® brands, which includesand Messy Pet®.brands. Founded in 1989, Kids N Pets® brands are award winning,award-winning, safe, stain and odor removing products targeted toward households with children and pets. These high-quality, high-value brands currently encompass six SKUs exceptionalproducts excel at controlling odor and cleaning up kid and pet accidents, and food and drink stains while being products that parents can feel safe using around their children and pets. The primary sales channels for Kids N Pets® primary sales channel isand Messy Pet® are through retail stores such as Walmart and Home Depot, and online through propertiese-commerce retailers such as such as Amazon and Chewy.Amazon.
On July 1, 2020, we acquired BIZ® and Dryel® brands. BIZ is the top performing detergent in the market, utilizing a proprietary enzyme-based formula to fight stains and eliminate odors. It was established by Proctor & Gamble in 1968 and is sold in Powder, Liquid, and Liquid Booster Pack for a total of seven SKUs. Dryel is the market leader in the at-home dry cleaning category, representing approximately 65% of the at-home dry cleaning market in 2019. It was established by Proctor & Gamble in 1998 and is sold primarily in a consumer starter kit with refills.
On December 23, 2021, we sold19, 2023, Scott’s Liquid Gold-Inc. (the “Company”), Horizon Kinetics LLC (“Horizon Kinetics”) and HKNY ONE, LLC, a wholly-owned subsidiary of the Dryel® brandCompany (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for the acquisition of Horizon Kinetics by the Company. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, upon obtaining the requisite shareholder approval, (i) the Company will convert from a Colorado to a company that marketsDelaware corporation, increase its authorized shares of common stock and distributes household cleaning products. We have reflectedchange its name and (ii) Merger Sub will be merged with and into Horizon Kinetics, with Horizon Kinetics being the operations of Dryel as discontinued operations for all periods presented. See Note 2 - “Discontinued Operations” insurviving entity (collectively, the Notes to Consolidated Financial Statements for further information.“Merger”).
Health and Beauty Care Products1
The principal products in our health and beauty care products segment include:
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Our Alpha® Skin Care brand was one of the first to use alpha hydroxy acids (“AHAs”) in lines of facial care products, body lotion, and body wash. Products containing AHAs gently slough off dead skin cells to promote a healthier, more youthful appearance and help to diminish fine lines and wrinkles.
In 2016, we acquired the Prell®, Denorex® and Zincon® brands of hair and scalp care products. Prell® Shampoo, an iconic brand since 1947, is a classic clean shampoo for healthy hair. Our Denorex® products are dermatologist-recommended medicated hair care products to control the symptoms of dandruff and other scalp conditions. Our Zincon® product is a medicated anti-dandruff shampoo.
We were a distributor in the United States for Batiste Dry Shampoo from 2009 through 2021. Under our distribution agreement with the manufacturer of Batiste Dry Shampoo, Church & Dwight Co. Inc. (“Church & Dwight”), we were the exclusive specialty retail distributor in the United States of Batiste Dry Shampoo until our agreement expired on December 31, 2021.
Marketing and Distribution
We primarily market our products through: (1) trade promotions to support price features, displays, slotting fees and other merchandising of our products by our retail customers; (2) consumer marketing in print, social and digital media and television advertising;media; and (3) to a lesser extent, consumer incentives such as coupons and rebates.
Our products are sold nationally through our sales force and internationally (Canada and China) through independent distributors, to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, and other retail outlets and to wholesale distributors.
The table set forth below shows net sales to our significant customers from continuing operations as a percentage of consolidated net sales during 20212023 and 2020:2022:
| % of Net Sales |
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| 2022 |
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Customer 1 |
| 66.3 | % |
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| 74.5 | % |
Customer 2 |
| 18.1 | % |
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| 8.4 | % |
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| 2021 |
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| 2020 |
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Walmart Inc. ("Walmart") |
| 30.9 | % |
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| 29.2 | % |
Ulta |
| 18.8 | % |
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| 15.8 | % |
As is typical in our industry, we do not have long-term contracts with Walmart, Ulta, or any other retail customer.
Historically, we have used our websites for sales of our products directly to consumers. Beginning in January 2022, our websites redirect consumers to our e-commerce retail partners to fulfill sales of our products directly to our consumers.
Currently, our internationalInternational sales arewere historically made to distributors who arewere responsible for the selling and marketing of the products. With the sale of the Scott’s Liquid Gold® brand in January 2023, we no longer have any products and we are paiddistributed internationally.
We terminated our exclusive distribution agreement for these productssales in United States dollars.China with HK NFS Limited (“HK NFS”) on July 12, 2022 due to breaches of the distribution agreement by HK NFS.
From time to time, our customers return products to us. For our household products, we permit returns only for a limited time. For our health and beauty care products, returns are accepted for a greater period of time in order to maintain or enhance our relationship with the customer. Typically, customers are granted a credit equal to the original sale price plus a handling charge.
Manufacturing and Suppliers
On March 10, 2020, we consummated an agreement with Colorado Quality Products LLC (“Elevation”), pursuant to which Elevation (i) acquired certain of our assets, which included all fixed assets utilized in the manufacturing and warehouse operations of the Company, (ii) assumed all of the Company’s obligations under its existing real property leases, (iii) manufactured certain products of the Company for a transitional period, and (iv) paid cash consideration of $500,000 (collectively, the “Elevation Transaction”).
Subsequent to the Elevation Transaction, we identified third-party logistics and contract manufacturing partners for our product lines, and we no longer manufacture or ship any of our products directly to our retail partners.
Under our distribution agreement with Church & Dwight, we were the exclusive distributor of Batiste Dry Shampoo products in the specialty retailer channel in the United States through December 31, 2021.
Almost all of the raw and packaging materials used by the Company are purchased from third parties, some of whom are single-source suppliers. The prices we pay for materials and other commodities are subject to fluctuation. Due primarily to weather and COVID-19 related supply chain disruptions combined with increased demandthat have continued as the economy re-opens, we experienced limited supply constraints and commodity costs increases for certain raw materials and finished goods. When prices for these items change, we may or may not be able to pass the change to our customers. The Company expects continued volatility and increased cost pressures in both commodities and transportation to continue in fiscal year 2022.2024.
Competition
Both theThe household and health and beauty care product categories arecategory is highly competitive and innovative. We compete in both categories against a range of competitors, most of which are significantly larger and have greater financial resources, name recognition, innovation capabilities, and product and market diversification than us. We compete in both categories primarily on the basis of quality, brand recognition, and the distinguishing characteristics of our products. The wood care and laundry care product categories are dominated by a small number of companies that are significantly larger than us and each of these competitors produces several competing products. In the health and beauty care category, several of our competitors are also significantly larger than us and each of these competitors produces several competing products.product.
Regulation
We are subject to various federal, state and local laws and regulations that pertain to the types of consumer products that we manufacture and sell. 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 federal government. These chemicals are called volatile organic compounds (“VOCs”). All of our products currently meet the most stringent VOC regulations and may be sold throughout the United States. Many of our skin care products, several of which contain AHAs, are considered cosmetics within the definition of the Federal Food Drug and Cosmetic Act (the “FFDCA”). Our cosmetic products are subject to the regulations under the FFDCA and the Fair Packaging and Labeling Act. The relevant laws and regulations are enforced by the FDA. We believe that we are producing and marketing all of our products in compliance with all applicable laws and regulations in the markets in which we participate.
Prior to the Elevation Transaction, our production facility was subject to federal, state, and local regulations governing water quality, air quality, and waste related to stationary sources and we held required permits from the state of Colorado, which implements the delegated federal programs. These programs regulate the emissions, discharges, and waste generated in the production of our products.
The laws and regulations applicable to our production facility will no longer impact us following the consummation of the Elevation Transaction.
Our advertising is subject to regulation under the Federal Trade Commission Act and related regulations, which prohibit false and misleading claims in advertising. Private and derivative labeling claims are common in this industry and can result in costly settlements and distraction of management. Changes in these regulations, or interpretations or enforcement of these regulations, could adversely affect our profitability, result in regulatory actions, or private or derivative claims.
Our international sales are primarily conducted in China and we rely on the efforts of our exclusive distributor in the PRC to market and sell our products there. As such, we may be impacted by regulations, economic conditions, and tariffs imposed by the PRC. In 2019, we were impacted by regulatory changes imposed on over-the-counter (“OTC”) products by the PRC’s National Medical Products Administration (“NMPA”).2
Employees
Employees
As of December 31, 2021,2023, we employed 278 people, who work in administrative, sales, advertising, marketing and operational functions. Through our history, we appreciate the importance of retention, growth and development of our employees. We believe we offer competitive compensation (including salary, incentive bonus, and equity) and benefits packages to our employees. We are also focused on understanding our diversity and inclusion strengths and opportunities and executing on a strategy to support further progress. We continue to focus on building a pipeline for talent to create more opportunities for workplace diversity and to support greater representation within the Company.
On December 21, 2023, the Board and the Company’s President and Principal Executive Officer, Tisha Pedrazzini, agreed that Ms. Pedrazzini would resign as the Company’s Principal Executive Officer and a director effective December 31, 2023. On December 21, 2023, the Board reduced the size of the Board to three seats and appointed David M. Arndt to the hold the position of President and Principal Executive Officer in addition to continuing to serve as the Company’s Chief Financial Officer.
No contracts exist between us and any union. The compensation of our executive officers is subject to annual review by the Compensation Committee of our Board of Directors.
Patents and Trademarks
At present, we own one patent for our Neoteric Diabetic® Healing Cream. Additionally, weWe actively use our registered trademarks for Scott’s Liquid Gold®, Alpha® Skin Care, Prell®, Denorex®, Zincon®,Neoteric Diabetic Skin Care®, Neoteric®,Kids N Pets®,and Messy Pet®, and BIZ® in the United States and have registered trademarks in a number of additional countries. Our registered trademarks protect names and logos relating to our products as well as the design of boxes for certain of our products. We transferred all registered trademarks of our Scott’s Liquid Gold® brand, Alpha® Skin Care, Denorex®, Zincon®,Neoteric Diabetic Skin Care®, and BIZ® as part of the sale of those brands in 2023.
Public Information
Our website address is www.slginc.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available, free of charge, on our website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, shareholder proxy statements on Schedule 14A, interactive data files posted pursuant to Rule 405 of Regulation S-T, our Current Reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the United States Securities and Exchange Commission (the “SEC”). You may also access and read our filings without charge through the SEC’s website at www.sec.gov.
Our Code of Business Conduct and Ethics Policy, Audit Committee Charter, Governance and Nominating Committee Charter, and Compensation Committee Charter, are all available, free of charge, on our website. The documents referenced above are available in print at no cost to any stockholder who requests them from our Corporate Secretary at 8400 East Crescent Parkway, Suite 450, Greenwood Village, Colorado 80111.
ITEM 1A. RISK FACTORS.
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The following is a discussion of certain material 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.
Business and Industry Risks
A loss of one or more of our major customers could have a material adverse effect on our product sales.
For a majority of our sales, we are dependent upon a small number of major retail customers. The easy access of consumers to our products is dependent upon these major retail stores and other retail stores carrying our products. The willingness of retail customers to carry any of our products depends on various factors, including the level of sales of the product at their stores. In addition, private label products sold by retail trade chains, which are typically sold at lower prices than branded products, are a source of competition for certain of our product lines.
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Any declines in sales of our products to consumers could result in the loss of retail customers and a corresponding decrease in the distribution of the products, as well as increased costs related to any markdown or return of our products. It is uncertain whether the consumer base served by these stores would purchase our products at other retail stores.
Our international operations in China expose us to a number of risks.
There is both cost and risk associated with establishing, developing, and maintaining international sales operations, and promoting our brand internationally. The PRC’s economic, political, and social conditions, and its government policies, could adversely affect our business. We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our operating results.
Our international operations also subject us to changes in trade policies and agreements and other foreign or domestic legal and regulatory requirements, including those resulting in potentially adverse tax consequences or the imposition of onerous trade restrictions such as tariffs, sanctions, and price controls. Any changes in these international trade policies could adversely affect our profitability and stock price.
A continued change in the consumer product retail market may cause our sales to decline.
Our performance depends upon the general health of the economy and of the retail environment in particular. Consumer products, such as those marketed by us, are increasingly being sold by club stores, dollar stores, mass merchandisers, e-commerce retailers and subscription services. The retail environment is changing with the growth of third-party resellers and alternative retail channels and thisthat could significantly change the way traditional retailers do business. If we are not effective in limiting these third-party resellers in selling our products, or if the alternative retail channels were to take significant market share away from traditional retailers or we are not successful in these alternative retail channels, our margins and results of operations may be negatively impacted.
In both health and beauty care and household products, ourOur competitors include some of the largest consumer products companies in the United States.
The marketsmarket in which our products compete are intensely competitive, and many of the other competitors in these markets are larger multi-national consumer products companies. These competitors have much greater financial, technical, and other resources than us, and as a result, are able to regularly introduce new products and spend considerably more on advertising. The distribution and sales of our products can be adversely impacted by the actions of our competitors, and we may have little or no ability to take action to prevent or mitigate these adverse impacts.
We have limited resources to promote our products with advertising and marketing effectiveness.
We believe the growth of our net sales is dependent upon our ability to introduce our products to current and new consumers through advertising and marketing. At present, we have limited resources compared to many of our competitors to spend on advertising and marketing our products. Advertising and marketing can be important in reaching consumers, although the effectiveness of any particular advertisement and marketing cannot be predicted. Additionally, we may not be able to obtain optimal effectiveness at our current advertising and marketing budget. Our limited resources to promote our products through advertising and marketing may adversely affect our net sales and operating results.
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 health and beauty care and household products. Any changes in consumer preferences can materially affect the sales of our products and the results of our operations.
Our future performance and growth is dependent, in part, on the introduction of new or acquired products or businesses.
On December 19, 2023, the Company, Horizon Kinetics and Merger Sub entered into the Merger Agreement, providing for the acquisition of Horizon Kinetics by the Company. The proposed transaction entails important risks, including, among others: the expected timing and likelihood of completion of the proposed transaction, including the timing, receipt and terms and conditions of any required governmental and regulatory clearance of the proposed transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the inability to consummate the proposed transaction due to the failure to satisfy other conditions to complete the proposed transaction; risks that the proposed transaction disrupts our current plans and operations; the amount of the costs, fees, expenses and charges related to the proposed transaction; the risk that transaction and/or integration costs are successfulgreater than expected, including as a result of conditions regulators put on any approvals of the transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; and other risks to be described in our filings with the SEC.
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The Company’s ability to utilize its net operating loss (“NOL”) carryforwards may be substantially limited due to ownership changes that could occur in the marketplace.future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. Further, if the Company experiences such an ownership change and does not satisfy certain requirements in Section 382 of the Code to continue its business enterprise (which generally requires that the Company continue its historic business or use a significant portion of its historic business assets in a business for the two-year period beginning on the date of the ownership change), its NOL carryforwards may be disallowed, subject to certain exceptions. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups.
OurIn addition, our future performance and growth is partially dependent on our ability to successfully identify, develop and introduce new products and product line extensions. The successful development and introduction of new products involves substantial research, development, marketing and promotional expenditures, which we may be unable to recover if the new products do not gain widespread market acceptance.
We have pursued
Our directors, officers, and current principal stockholders own a large percentage of our common stock and could limit other stockholders’ influence over corporate decisions.
As of March 25, 2024, our directors, officers, and current stockholders holding more than 5% of our common stock collectively beneficially own, directly or indirectly, in the aggregate, approximately 41.2% of our outstanding common stock, with Maran Capital beneficially owning 40.3% of our outstanding common stock. As a result, these stockholders acting alone or together may continue to pursuebe capable of controlling most matters requiring stockholder approval, including the election of directors, approval of acquisitions requiring the issuance of brands or businesses. Acquisitions involve numerous potential risks, including, among other things, the successful integrationa significant amount of the acquired products or brandsCompany’s equity, approval of equity incentive plans, and realization of the full extent of expected benefits or synergies. Acquisitions could also result in additional debt, exposure to liabilities, the potential impairment of goodwill or other intangible assets, or transaction costs. Anysignificant corporate transactions. The interests of these risks, shouldstockholders may not always coincide with our corporate interests or the interests of our other stockholders, and they materialize, could adversely impact our operating results.may act in a manner with which some stockholders may not agree or that may not be in the best interests of all stockholders.
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 or key employees, our ability to continue our business and effectively compete may be substantially diminished.
Our stock price can be volatile and can decline substantially.
Our stock is traded on the OTC Pink Market tier of the OTC Markets. The volume of trades in our stock varies from day to day but is relatively limited. As a result, any events can result in volatile movements in the price of our stock and can result in significant declines in the market price of our stock.
We rely on trademark, copyright, and trade secret laws, which may not be sufficient to protect our intellectual property.
We rely on a combination of laws, such as copyright, trademark and trade secret laws, as well as confidentiality provisions and limited licenses, to establish and protect our intellectual property. We have registered U.S. and foreign country trademarks, and HK NFS Limited (“HK NFS”) has contractually agreed to undertake steps to prevent counterfeiting of our products and to otherwise protect our trademarks in the PRC.trademarks. These forms of intellectual property protection are critically important to our ability to establish and maintain our competitive position. However, it is possible that laws, contractual restrictions, and other efforts may not be sufficient to prevent misappropriation of our property or to deter others from developing similar intellectual property.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers, and business partners on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen, resulting in legal claims or proceedings, which could disrupt our operations and damage our reputation, adversely affect our operating results and stock price.
We may from time to time expand our business through acquisitions, which could disrupt our business.
We have completed, and may pursue in the future, acquisitions of businesses or assets that are complementary to our business. Such acquisitions involve a number of risks, including:
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If we fail to properly evaluate acquisitions, we may not achieve the anticipated benefits of such acquisitions, we may incur costs in excess of what is anticipated, and management resources and attention may be diverted from other necessary or valuable activities. Any acquisition may not result in short-term or long-term benefits to us. If we are unable to integrate or successfully manage any business that we acquire, we may not realize anticipated cost savings, improved efficiencies or revenue growth, which may result in reduced profitability or operating losses.
Operational Risks
Disruptions in our supply chain and other factors affecting the distribution of our finished goods inventory could adversely impact our business.
A disruption within our logistics or supply chain network could adversely affect our ability to maintain appropriate inventory or deliver products in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation. As a result of COVID-19, we have encountered shortages of raw materials for certain of our products and delays in receiving finished goods product from contract manufacturers, which has prevented us from meeting certain customer demands for our products. Along with many other industry participants, weour contract manufacturing partners have experienced great difficulty procuring containerscertain raw materials and caps.components.
COVID-19 could also negatively impact the operations of our third-party manufacturing and logistics partners, resultingContinued increases in an adverse impactcosts as well as any impacts to our abilitypartners' abilities to meet customer demand. Disruptionfulfill sales to our supply chain and manufacturing and logistics partners is not limited to COVID-19, as other factors beyond our control could also result in a negative impact to our financial performance and condition.
COVID-19 disruptionscustomers could continue to impactaffect our ability to meet debt requirements and lead to increased debt costs.
We face the risk that raw materials for our products may not be available or that costs for these materials will increase.
Raw materials required for our products are sourced areand obtained from third party suppliers, some of which are sole source suppliers. We have no long-term contracts with such suppliers and are subject to cost increases. Manufacturers of our products may not have sufficient raw materials for production if there is a shortage in raw materials or other disruption in the supply chain or if suppliers terminate their relationships or are otherwise unable to supply raw materials. In addition, if our contract manufacturers change suppliers it could involve delays that restrict our ability to have our products manufactured or to buy products in a timely manner to meet delivery requirements of our customers. Suppliers of raw materials for our products can also be subject to the same risk with their vendors.
Manufacturing relationships with third parties.
We currently outsource our manufacturing to one or more third parties, which we intend to expand. Failure by one or more of these third parties to complete activities on schedule or in accordance with our expectations, meet their contractual or other obligations to us, or comply with applicable laws or regulations, or any disruption in the relationships between us and one or more of these third parties, could delay or prevent the development, approval, manufacturing, or commercialization of our products, could expose us to suboptimal quality of service delivery or deliverables, could result in repercussions such as missed deadlines or other timeliness issues, erroneous data and supply disruptions, and could also result in non-compliance with legal or regulatory requirements or industry standards or reputational harm, all with potential negative implications for our product pipeline and business.
Currently, as a result of COVID-19, our third-party manufacturers are having delays due to material shortages and delays and difficulty staffing workforce to keep production lines moving efficiently, which is forcing them to restructure their planning to produce products in a timely manner.
Financial and Economic Risks
Unfavorable and uncertain economic conditions could adversely affect our profitability.
Unfavorable and uncertain economic conditions in the past have adversely affected, and in the future may adversely affect, consumer demand for some of our products, resulting in reduced sales volume and a decrease in our overall profitability. Factors that can affect consumer demand for our products include inflation, slower growth or recession, rates of unemployment, consumer confidence, tighter credit, higher interest rates, health care costs, fuel and other energy costs and other economic factors affecting consumer spending behavior.
Our products are subject to truckingtransportation costs, both in delivery to us at our production facility as well as transportationshipments to our customers. As a result, we are exposed to volatility in the freight industry that could affect our costs, including changes in regulations and labor costs. Any increases in transportation costs could adversely affect our profitability if we are not able to pass those costs on to our customers.
Changes in the economic environment have resulted, and could further result, in significant impairments of certain of our goodwill and long-lived assets.
Under U.S. generally accepted accounting principles (“GAAP”),If we reviewfail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, investors could lose confidence in our financial reporting, which could adversely affect our business and the carrying value of our goodwill onshares.
We are required to include in our annual reports filed with the SEC a report from our management regarding internal control over financial reporting. As a result, we documented and evaluated our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and SEC rules and regulations, which require an annual basis. We also reviewmanagement report on our internal control over financial reporting, including, among other matters, management's assessment of the carryingeffectiveness of internal control over financial reporting. Failure or circumvention of our system of internal control could have an adverse effect on our business, profitability, and financial condition, and could result in regulatory actions and loss of investor confidence. Additionally, if we fail to identify and correct any significant deficiencies or material weaknesses in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential stockholders could lose confidence in our financial reporting, which could adversely affect our business, financial condition and results of operations, and the value of our long-lived assets when eventsshares.
6
We have identified a material weakness in our internal control over financial reporting.
Based on management’s assessment, we have identified a material weakness in our controls related to our finance department lacking a sufficient number of trained professionals with technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP. The material weakness that we previously reported was identified as of June 30, 2023, and the deficiencies in internal control over financial reporting were detailed in Item 4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2023. The specific factors leading to this conclusion are described in Part II – Item 9A.“Controls and Procedures” of this Annual Report on Form 10-K. A material weakness is a deficiency, or changesa combination of deficiencies, in circumstances indicateinternal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim Consolidated Financial Statements would not be prevented or detected on a timely basis.
This material weakness did not result in any restatements to our Consolidated Financial Statements. As of December 31, 2023, this material weakness had not been remediated. If our remedial measures are insufficient, or if additional material weakness or significant deficiencies in our internal control over financial reporting or in our disclosure controls occur in the carryingfuture, our future Consolidated Financial Statements or other information filed with the SEC may contain material misstatements and could require a restatement of our Consolidated Financial Statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in the market value of these assets may not be recoverable, based on their expected future cash flows. The impact of reduced expected future cash flow could require the write-down of all or a portion of the carrying value for these assets, which would result in additional impairments, resulting in decreased earnings. During 2021, we determined that the fair values of goodwill and certain intangible assets in our Detergent, All-Purpose, and Shampoo reporting units were less than their carrying values which resulted in impairment charges.securities.
Legal and Regulatory Risks
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 ofGenerally, the FDA and NMPA for cosmetic products and environmental regulations. In the past, the FDA has mentioned the treatment of products with AHAs as drugs, which could make our productionmanufacture, processing, formulation, packaging, labeling, storage, distribution, advertising and sale of certain Alpha® Skin Carethe Company’s products more expensive or prohibitive. Also,and the conduct of its business operations must comply with extensive federal, state and foreign laws and regulations. For example, in the past, we have been required to changeU.S., many of the formulation of ourCompany’s products to comply with environmental regulations and may be required to do so again in the future if the applicable regulations are further amended.
Labeling practices in our industry have recently experienced an increase of warning letters admonishing cosmetics manufacturers for promotional claims on their websites and product labels deemedregulated by the FDA to blurEnvironmental Protection Agency, the line between “cosmetics”Food and “drugs.” The increase of warning lettersDrug Administration (including applicable current good manufacturing practice regulations) and/or the Consumer Product Safety Commission, and the Company’s product claims and advertising are regulated by the FDA hasFederal Trade Commission, among other regulatory agencies. Additionally, the Company’s and its suppliers’ manufacturing and distribution operations are also triggered a wave of follow-on class action lawsuits against cosmetic manufacturerssubject to regulation by the Occupational Safety and Health Administration. Most states have agencies that regulate in general, including manufacturersparallel to these federal agencies. Additionally, the Company could be subject to future inquiries or investigations by governmental and other regulatory bodies. Any determination that the Company’s operations or activities are not singled out via FDA warning letters. Any claims levied against usin compliance with applicable law could expose the Company to future impairment charges or significant fines, penalties or other sanctions that may result in costly settlements, distract managementa reduction in net income or otherwise adversely impact the business and have an adverse effect on our operating results.reputation of the Company.
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 operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
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Not applicable.
ITEM 1C. CYBERSECURITY.
Risk Management and Strategy
The Company utilizes information systems to support a variety of business processes and activities in its operations. These systems may be subject to cyber-based attacks or breaches. Some examples of the cybersecurity threats that could negatively impact the Company are denial of service attacks, excessive port scans, firewall breach and computer virus outbreak.
Cybersecurity risk management is part of management’s annual risk assessment program. In order to manage the risks associated with cybersecurity threats, the Company maintains a risk-based cybersecurity program consisting of processes, technologies, and controls to assess, identify and manage material risks from cybersecurity threats.
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While the Company's information systems are exposed to cybersecurity threats and risks, the Company has not experienced any material cybersecurity incidents affecting its business strategy, results of operations, or financial condition, and any costs or operational impacts related to cybersecurity incidents were immaterial during the period presented.
For additional information related to the risks associated with cybersecurity threats, refer to the Information Security, Cybersecurity and Data Privacy Risks section of Item 1A. Risk Factors.
Governance
The Company’s Board of Directors is responsible for providing oversight and strategic guidance to management to support the long-term interests of the Company's shareholders. The Audit Committee is the lead committee of the Board of Directors responsible for oversight of the Company’s risk-based cybersecurity program and bears the primary responsibility for oversight of this aspect of the business. As part of this responsibility, the Audit Committee of the Board of Directors annually reviews the Company's Information Security Incident Response Plan.
On a quarterly basis, or more often as applicable, any cybersecurity incidents are summarized and reported to the Audit Committee of the Board of Directors which cover any identified cybersecurity incidents, results of third-party vulnerability testing, and key developments in policies.
Management’s Role Managing Risk
The Company’s cybersecurity risk management is managed by the President and Chief Financial Officer.
The Company engages with a range of third-party experts, including cybersecurity assessors, consultants, and auditors in evaluating and testing its risk management systems. These relationships enable management to leverage specialized knowledge and insights with respect to the Company’s cybersecurity strategies and processes.
ITEM 2. PROPERTIES.PROPERTIES.
We lease our corporate headquarter facilities in Greenwood Village, Colorado. Please see Note 87 to our Consolidated Financial Statements for more information on our facilities.
Effective November 29, 2023, the Company entered into a sublease agreement (the "Sublease") with the consent of our landlord pursuant to which the Company will sublease the premises for a term commencing on April 1, 2024 and continuing until March 31, 2027 with the option to renew until the expiration of the Lease on March 31, 2030.
Through our annual assessment conducted in December 2023, we concluded that the Sublease triggered the need for a quantitative review of the carrying values of our operating lease right-of-use assets and resulted in an impairment charge for the year ended December 31, 2023.
ITEM 3. LEGAL PROCEEDINGS.
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 lack of insurance coverage for a lawsuit could materially and adversely affect our financial condition and cash flow.
ITEM 4. MINE SAFETY DISCLOSURES.
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Not applicable.
8
PART II
(in thousands, except per share data)
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
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Market Information
Our $0.10 par value common stock is traded on the OTC Pink Market tier of the OTC Markets (an electronic inter-dealer quotation system) under the ticker symbol “SLGD.” Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The high and low prices of our common stock as traded on the OTC Pink Market tier of the OTC Markets were as follows:
Three Months Ended | 2021 |
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| 2020 |
| 2023 |
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| 2022 |
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| Low |
| High |
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| Low |
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March 31 | $ | 3.03 |
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| $ | 1.78 |
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| $ | 2.50 |
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| $ | 1.25 |
| $ | 0.30 |
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| $ | 0.17 |
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| $ | 1.60 |
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| $ | 1.02 |
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June 30 |
| 3.00 |
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| 2.28 |
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| 2.05 |
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| 1.28 |
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| 0.27 |
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| 0.18 |
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| 1.07 |
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| 0.70 |
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September 30 |
| 3.00 |
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| 2.00 |
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| 1.82 |
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| 1.51 |
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| 0.45 |
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| 0.25 |
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| 0.81 |
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| 0.33 |
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December 31 |
| 2.08 |
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| 1.00 |
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| 1.84 |
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| 1.52 |
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| 1.04 |
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| 0.28 |
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| 0.37 |
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| 0.19 |
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Shareholders of Record
As of March 30, 2022,25, 2024, based on inquiry, we had approximately 638612 shareholders of record.
Dividends
We did not pay any cash dividends during the two most recent fiscal years. We do not anticipate paying dividends in the foreseeable future.
ITEM 6. RESERVED.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements.Consolidated Financial Statements. This Item 7 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“Item 1A. Risk Factors"Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.
COVID-19 Pandemic
In 2020, the global economy began experiencingDivestitures
On September 15, 2023, we entered into and consummated a downturn relatedStock Purchase Agreement with a buyer to the impactssell 100% of the COVID-19 global pandemic. While many businesses resumed operations towards the end of the second quarter of 2020, the effects of the pandemic have continued into 2021 and the duration of the impact still remains uncertain. We expect to see continued volatility in the economic markets and government responses to the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on our operating results for the remainder of the year or longer.
Supply Chain and Outsourcing Partners
As a result of COVID-19, we have encountered various supply chain disruptions impacting the availability of certain raw materials for our finished goods products. We have been proactively identifying alternative sources for delayed raw materials. At times, our highest demand products were impacted by supply chain disruptions, but availability continues to improve primarily as a resultoutstanding stock of our actions to mitigate such disruptions. Our third-party logistics partners are facing challenges with availability of staffing and transportation sources, which could cause product shipments to be delayed.
Health and Safety
We have taken proactive, aggressive action to protect the health and safety of our employees, customers, and partners. We monitor national, state, and local health recommendations and regulations, and will implement additional protective measures as appropriate.
Customer Demand
At the onset of the pandemic, as a result of government-mandated stay-at-home orders, some of our customers were impacted and forced to cease operations. Customer closings primarily impacted revenue for our Batiste Dry Shampoo distributed products during 2020.
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
Distribution Agreement with Church & Dwight
Our distribution agreement with Church & Dwight Co., Inc. and ourwholly owned subsidiary Neoteric Cosmetics, Inc., was not extended beyond the Expiration Date. As a result, the distribution agreement expired on its own terms as of the Expiration Date ("Neoteric). Effective June 30, 2023, and the Company ceased to distribute Batiste Dry Shampoo products. Unless offset by increased sales of our other products, the conclusion of this distribution agreement is expected to have a material impact on our net sales and result of operations. Net sales of Batiste were $7,155 and $5,299 for the years ended December 31, 2021, and 2020, respectively.
Sale of Dryel® Brand
On December 23, 2021,closed in July 2023, we sold the AlphaDryel®Skin Care product line to a company that markets and distributes skin care products. Effective June 30, 2023, and closed in July 2023, we sold the BIZ®product line to a company that markets and distributes laundry products. On January 23, 2023, we sold the Scott's Liquid Gold®Wood Care and Scott's Liquid Gold® Floor Restore product lines to a company that markets and distributes wood care products. On December 15, 2022, we sold the Prell®brand to a company that markets and distributes household cleaningnatural hair and skincare products. We have reflected the operations of DryelNeoteric, Alpha®Skin Care, BIZ®, Scott's Liquid Gold®and Prell® as discontinued operations for all periods presented.
See Note 23 - “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information.information on the sale of these brands.
In conjunction with the sale of the Scott’s Liquid Gold® brand, as discussed below, the Company may continue to use names “Scott’s Liquid Gold” and “SLG” for up to eighteen months following the closing date of the agreement on January 23, 2023. Following this transitional name period, the Company will only be able to use the aforementioned names in connection with retaining records and other historical or archived documents and any use required by or permitted as a fair use or otherwise under applicable law.
Executive Overview
Our Business
Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve and create shareholder value. We develop, market, and sell high-quality high-value household and health and beauty care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors. Our long history of selling household products has generated strong consumer and customer loyalty for our brands.
On an ongoing basis, management focuses on a variety of key indicators to monitor our business health and performance. These key indicators include (but are not limited to) the following:
• Net sales (collectively and by operating segment); • Profitability, focusing on gross margins and net income; and • Cash flow.
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To achieve our business and financial objectives, we focus on initiatives to drive the growth of the key indicators above. Our ability to drive and generate growth depends on consumer demand for our products and retail customers’ willingness to carry our products in a competitive marketplace. In this environment, we intend to continue to focus on our key indicators to remain competitive, sustain our current level of operations, and drive further growth in future periods.
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During 2023, the Company achieved objectives focused on optimization, cost reduction, and modernization of our business. These included (but were not limited to) the following:
Outlook
Looking forward, we are focused on both short- and long-term strategies that we believe will enhance our financial health and deliver shareholder value. The Company entered into the Merger Agreement with the purpose of creating meaningful shareholder value for all shareholders of the combined entity.
While the marketplace in which we operatefor household products has always been highly competitive, we expect that the category challenges and the level of competition will continue to rise. We believe that some of the trends in our business and industry could adversely affect our profitability, including the following:
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We believe our history of providing high-quality, high-value products to consumers positions us to meet the challenges in our marketplace by continuing to focus on the following key priorities in 2022:
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ResultsResults of Operations
| For the Year Ended December 31, (in thousands) |
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| 2023 |
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| 2022 |
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| $ |
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Net sales | $ | 3,403 |
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| $ | 2,980 |
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| $ | 423 |
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| 14.2 | % |
Cost of sales |
| 1,956 |
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| 1,607 |
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| 349 |
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| 21.7 | % |
Gross profit |
| 1,447 |
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| 1,373 |
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| 74 |
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| 5.4 | % |
Gross margin |
| 42.5 | % |
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| 46.1 | % |
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Operating expenses: |
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Advertising |
| 330 |
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| 641 |
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| (311 | ) |
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| (48.5 | %) |
Selling |
| 1,528 |
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| 2,928 |
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| (1,400 | ) |
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| (47.8 | %) |
General and administrative |
| 3,053 |
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| 3,059 |
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| (6 | ) |
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| (0.2 | %) |
Intangible asset amortization |
| 180 |
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| 232 |
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| (52 | ) |
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| (22.4 | %) |
Impairment of long-lived assets |
| 1,471 |
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| 4,427 |
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| (2,956 | ) |
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| (66.8 | %) |
Total operating expenses |
| 6,562 |
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| 11,287 |
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| (4,725 | ) |
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| (41.9 | %) |
Loss from operations |
| (5,115 | ) |
|
| (9,914 | ) |
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| 4,799 |
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| 48.4 | % |
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Interest income |
| 68 |
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| - |
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| 68 |
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| 100.0 | % |
Interest expense |
| (145 | ) |
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| (141 | ) |
|
| (4 | ) |
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| (2.8 | %) |
Loss before income taxes and discontinued operations |
| (5,192 | ) |
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| (10,055 | ) |
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| 4,863 |
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| 48.4 | % |
Income tax expense |
| (9 | ) |
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| (63 | ) |
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| 54 |
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| 85.7 | % |
Loss from continuing operations |
| (5,201 | ) |
|
| (10,118 | ) |
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| 4,917 |
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| 48.6 | % |
Income from discontinued operations |
| 5,581 |
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| 1,267 |
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| 4,314 |
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| 340.5 | % |
Net income (loss) | $ | 380 |
|
| $ | (8,851 | ) |
| $ | 9,231 |
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| 104.3 | % |
| For the Year Ended December 31, (in thousands) |
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| Increase / (Decrease) |
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| 2021 |
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| 2020 |
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| $ |
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| % |
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Net sales | $ | 33,081 |
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| $ | 28,958 |
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| $ | 4,123 |
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| 14.2 | % |
Cost of sales |
| 19,082 |
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| 16,433 |
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| 2,649 |
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| 16.1 | % |
Impairment of inventories |
| 404 |
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| 876 |
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| (472 | ) |
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| (53.9 | %) |
Total cost of sales |
| 19,486 |
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| 17,309 |
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| 2,177 |
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| 12.6 | % |
Gross profit |
| 13,595 |
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| 11,649 |
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| 1,946 |
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| 16.7 | % |
Gross margin |
| 41.1 | % |
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| 40.2 | % |
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Operating expenses: |
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Advertising |
| 639 |
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| 702 |
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| (63 | ) |
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| (9.0 | %) |
Selling |
| 9,797 |
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| 7,546 |
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| 2,251 |
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| 29.8 | % |
General and administrative |
| 4,611 |
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| 4,724 |
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| (113 | ) |
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| (2.4 | %) |
Intangible asset amortization |
| 1,111 |
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| 1,005 |
|
|
| 106 |
|
|
| 10.5 | % |
Impairment of goodwill and intangible assets |
| 6,294 |
|
|
| - |
|
|
| 6,294 |
|
|
| 100.0 | % |
Impairment of property and equipment |
| - |
|
|
| 107 |
|
|
| (107 | ) |
|
| (100.0 | %) |
Total operating expenses |
| 22,452 |
|
|
| 14,084 |
|
|
| 8,368 |
|
|
| 59.4 | % |
Loss from operations |
| (8,857 | ) |
|
| (2,435 | ) |
|
| (6,422 | ) |
|
| (263.7 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| (373 | ) |
|
| (216 | ) |
|
| (157 | ) |
|
| (72.7 | %) |
Other income |
| - |
|
|
| 350 |
|
|
| (350 | ) |
|
| (100.0 | %) |
Loss before income taxes and discontinued operations |
| (9,230 | ) |
|
| (2,301 | ) |
|
| (6,929 | ) |
|
| (301.1 | %) |
Income tax (expense) benefit |
| (1,008 | ) |
|
| 707 |
|
|
| (1,715 | ) |
|
| (242.6 | %) |
Loss from continuing operations |
| (10,238 | ) |
|
| (1,594 | ) |
|
| (8,644 | ) |
|
| (542.3 | %) |
(Loss) income from discontinued operations, net of taxes |
| (853 | ) |
|
| 43 |
|
|
| (896 | ) |
|
| (2,083.7 | %) |
Net loss | $ | (11,091 | ) |
| $ | (1,551 | ) |
| $ | (9,540 | ) |
|
| (615.1 | %) |
Net loss increasedincome changed primarily due to the following:
| 11 |
|
|
|
|
|
|
|
|
|
|
|
|
Segment Results
The following tables show comparative net sales and cost of sales are due to increased distribution of our products sold at existing and certain new customers. The decrease in gross profit and gross margin gross profit, loss (income)are primarily due to higher costs from our manufacturers and a change in the mix of our product sales to customers.
Household products
| For the Year Ended December 31, (in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
| Increase / (Decrease) |
| |||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Net sales | $ | 14,152 |
|
| $ | 12,003 |
|
| $ | 2,149 |
|
|
| 17.9 | % |
Gross profit | $ | 5,583 |
|
| $ | 5,830 |
|
| $ | (247 | ) |
|
| (4.2 | %) |
Gross margin |
| 39.5 | % |
|
| 48.6 | % |
|
|
|
|
|
|
|
|
(Loss) income from operations | $ | (3,963 | ) |
| $ | 52 |
|
| $ | (4,015 | ) |
|
| (7,721.2 | %) |
|
|
|
|
|
|
Health and beauty care products
| For the Year Ended December 31, (in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
| Increase / (Decrease) |
| |||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Health and beauty care net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales- distributed products | $ | 7,123 |
|
| $ | 6,834 |
|
| $ | 289 |
|
|
| 4.2 | % |
Net sales- manufactured products |
| 11,806 |
|
|
| 10,121 |
|
|
| 1,685 |
|
|
| 16.6 | % |
Total health and beauty care net sales | $ | 18,929 |
|
| $ | 16,955 |
|
| $ | 1,974 |
|
|
| 11.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit | $ | 8,012 |
|
| $ | 5,819 |
|
| $ | 2,193 |
|
|
| 37.7 | % |
Gross margin |
| 42.3 | % |
|
| 34.3 | % |
|
|
|
|
|
|
|
|
Loss from operations | $ | (4,894 | ) |
| $ | (2,487 | ) |
| $ | (2,407 | ) |
|
| (96.8 | %) |
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Financing Agreements
Please see Note 76 to our Consolidated Financial Statements for information on our debt facilities with UMB Bank, N.A. and La Plata Capital, LLC.Loan Agreement, which was satisfied and terminated in July 2023, and our UMB Loan Agreement, which was satisfied and terminated in February 2023.
Liquidity and Changes in Cash Flows
At December 31, 2021,2023, we had $5,467 available on our revolving credit facility with UMB, and approximately $770$3,927 in cash on hand, an increase of $765$3,878 from December 31, 2020 due to our sale of Dryel and paydown of our revolving credit facility.2022.
The following is a summary of cash provided by or used in each of the indicated types of activities:
| For the Year Ended December 31, (in thousands) |
| |||||||||||||
|
|
|
|
|
|
| Increase / (Decrease) |
| |||||||
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
Operating activities | $ | (861 | ) |
| $ | (1,849 | ) |
| $ | 988 |
|
|
| 53.4 | % |
Investing activities |
| 8,243 |
|
|
| 338 |
|
|
| 7,905 |
|
|
| 2,338.8 | % |
Financing activities |
| (3,504 | ) |
|
| 290 |
|
|
| (3,794 | ) |
|
| (1,308.3 | %) |
| For the Year Ended December 31, (in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
| Increase / (Decrease) |
| |||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Operating activities | $ | (322 | ) |
| $ | 3,582 |
|
| $ | (3,904 | ) |
|
| (109.0 | %) |
Investing activities |
| 4,381 |
|
|
| (10,097 | ) |
|
| 14,478 |
|
|
| 143.4 | % |
Financing activities |
| (2,794 | ) |
|
| 5,426 |
|
|
| (8,220 | ) |
|
| (151.5 | %) |
|
|
|
|
|
|
The uncertainty related to the COVID-19 outbreak has impacted our loss from continuing operations and could affectpartially offset by conversion of working capital from accounts receivable and reduction in finished goods inventories.
The cash received from the sales of our BIZ® and Alpha® Skin Care brands in July 2023 was $3,700 and was partially used to pay off and terminate our La Plata Loan Agreement. Cash proceeds from the sale of Neoteric will be used to fund operations as we seek to grow our existing business while closing the Merger. While we believe that our business model will allow uscurrent cash reserves represent sufficient cash to generate sufficient operating cash flows,fund our operations, our liquidity has been affected by the timing ofinflationary pressures at our build of depleted finished goods inventories, while our netcustomers which have caused sales have been delayed due to supply chain shortages.decreases and higher costs on materials, logistics, and other purchases. We expect that our current cash reserves and availability under our UMB Loan Agreement and La Plata Loan Agreement will be sufficient to meet operational cash needs during the next twelve months, but further economic impacts to our sales to customers or supply chain disruptions in the short-term could limitimpact our liquidity.
12
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment and make estimates. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could ultimately differ from those estimates. The accounting policies that are most critical in the preparation of the Company’s Consolidated Financial Statements are those that are both important to the presentation of the Consolidated Financial Statements and require significant or complex judgments and estimates on the part of management.
Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. See Note 1(m)1(k), “Revenue Recognition” in our Consolidated Financial Statements in Item 8 for additional discussion.
IntangibleLong-Lived Assets
Long-lived assets are tested for impairment at the reporting unit level, which is the level at which discrete financial information is available and Goodwill
reviewed by management. For fiscal year 2021,2023, the Company’s reporting units for goodwill impairment testing purposes were its individual components, which are differentiated by their product categories. These reporting units are the level at which discrete financial information is available and reviewed by management.
Determining the fair value of the Company’s reporting units for goodwill and the fair value of its intangiblelong-lived assets requires significant estimates and judgments by management. When a quantitative analysis is performed, the Company generally uses the income approach, which requires several estimates, including future cash flows consistent with management’s strategic plans, sales growth rates, and the selection of royalty rates and a discount rate. Estimating sales growth rates requires significant judgment by management in areas such as future economic conditions, category growth rates, product pricing, consumer tastes and preferences and future expansion expectations. In selecting an appropriate royalty rate, the Company considers recent market transactions for similar brands and products. In determining an appropriate discount rate, the Company considers the current interest rate environment and its estimated cost of capital. Other qualitative factors the Company considers, in addition to those quantitative measures discussed above, include assessments of general macroeconomic conditions, industry-specific considerations and historical financial performance. The Company generally engages a third-party valuation firm to assist it in determining the fair value of intangible assets acquired in business combinations.
In determining the fair value of the Company’s reporting units, fair value is also determined using the market approach, which is generally derived from metrics of comparable publicly traded companies. As multiple valuation methodologies are used, the Company also performs a qualitative analysis comparing the fair value of a reporting unit under each method to assess its reasonableness and ensure consistency of results.
Determining the expected life of a brand requires management judgment and is based on an evaluation of several factors including market share, brand history, future expansion expectations, the level of in-market support anticipated by management, legal or regulatory restrictions and the economic environment where the products are sold.
We made revisions to the internal forecasts relating to all reporting units during the fourth quarter of 2021 due primarily to the sale of our Dryel brand and the impact of rising costs associated with the manufacture and distribution of our products. Through our annual assessments, conducted on December 31, 2021, we concluded that the changes in circumstances in these reporting units triggered the need for a quantitative review of the carrying values of goodwill and certain intangiblelong-lived assets and resulted in following impairment charges to each of our Detergent, All-Purpose, and Shampoocertain reporting units during the year ended December 31,2021,31, 2023 and resulted in the following impairment charges:2022:
| Intangible Assets |
|
| Goodwill |
|
| Total |
| |||
Detergent | $ | 1,085 |
|
| $ | 593 |
|
| $ | 1,678 |
|
Shampoo |
| 2,966 |
|
|
| 1,520 |
|
|
| 4,486 |
|
All-Purpose |
| 130 |
|
|
| - |
|
|
| 130 |
|
| $ | 4,181 |
|
| $ | 2,113 |
|
| $ | 6,294 |
|
Inventories
| 2023 |
|
| 2022 |
| ||||||||||||||||||||||||||
| Operating lease right-of-use assets |
|
| Intangible Assets |
|
| Goodwill |
|
| Total |
|
| Operating lease right-of-use assets |
|
| Intangible Assets |
|
| Goodwill |
|
| Total |
| ||||||||
All-Purpose | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 2,717 |
|
| $ | 1,710 |
|
| $ | 4,427 |
|
Corporate |
| 858 |
|
|
| 613 |
|
|
| - |
|
|
| 1,471 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| $ | 858 |
|
| $ | 613 |
|
| $ | - |
|
| $ | 1,471 |
|
| $ | - |
|
| $ | 2,717 |
|
| $ | 1,710 |
|
| $ | 4,427 |
|
InventoriesValuation
Our inventory valuation policy is significant because the costs and valuation of slow-moving or obsolete inventories are key components of our results of operations. See Note 1(f), “Inventories Valuation” in our Consolidated Financial Statements in Item 8 for additional discussion.
13
During the year ended December 31, 2021, we specifically identified slow moving and obsolete inventories, resulting in an impairment of $404.
Income Taxes
Our income taxes policy is significant because our estimate for taxes is a key component of our results of operations. See Note 1(l)1(j), “Income Taxes” in our Consolidated Financial Statements in Item 8 for additional discussion.
Recently Issued Accounting Standards
For information on recently issued accounting standards, see Note 1(q)1(p), “Recently Issued Accounting Standards,” to our Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
|
Not applicable.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
15 Report of Independent Registered Public Accounting Firm To the Scott's Liquid Opinion on the Consolidated Financial Statements We have audited the accompanying Basis for Opinion
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter Impairment of right of use assets Description of the Matter As discussed in Note 7, the Company reviews its right-of-use assets (“ROU assets”) for impairment whenever events or changes in circumstances indicate that the carrying value of ROU assets may not be recoverable, including when there is an adverse change in the extent or manner in which a long-lived asset group is being used. The Company considered a triggering event occurred related to ROU assets associated with a specific lease as the Company closed its operations in the leased premises and then subleased the location. The Company concluded that the carrying value of the ROU asset will not be recovered based on expected undiscounted future cash flows, and accordingly an impairment loss was recorded to reduce the ROU asset to its fair value. This resulted in a non-cash impairment charge of $858,000 and a post impairment carrying value of the ROU asset of $1.4 million for the year ended December 31, 2023. Auditing the Company’s recoverability test for right of use assets was challenging due to subjective estimates and assumptions used by the Company to determine the undiscounted cash flows associated with the lease and its determined fair value. The estimate of undiscounted cash flows and fair value was subject to higher estimation uncertainty due to management’s judgments over significant assumptions, including future sublease income. Changes in these significant assumptions could have a significant effect on the undiscounted cash flows and fair value of the ROU asset. 16 How We Addressed the Matter in Our Audit Our audit procedures over the Company’s impairment assessment for this ROU asset included, among others, • Obtaining an understanding of management’s process of identifying events or circumstances that may indicate the carrying amount of the right of use asset may not be recoverable. • Evaluating the completeness and accuracy of data used in the projected cash flow model and related fair value discounted cash flow model, • Assessing the reasonableness of significant assumptions in the cash flow models, including projected sublease income, current market rental market in the geographic area, assessing the lease rate used in company’s calculations of the fair value of the sublease. • Recalculating the impairment recorded based on the excess of the carrying value of the right of use asset over its estimated fair value as of December 31, 2023. Assessment of the Company’s Ability to Continue as a Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note 2 to the financial statements, for the year ended December 31, 2023 the Company had cash of $3.9 million, working capital of $4 million and shareholders’ equity $3.3 million. Management evaluated the Company’s liquidity within one year after the date of issuance of the consolidated financial statements to determine if there is substantial doubt about the Company’s ability to continue as a going concern. Management has concluded that, based on its current plans and projections, the Company will be able to satisfy its liquidity requirements for more than one year from when these financial statements were issued. In the preparation of the liquidity assessment, management applied judgment to estimate the projected cash flows of the Company, including the following: (i) projected cash outflows, (ii) projected cash inflows, and (iii) other quantitative factors of the Company’s business including a potential sale of the Company. We identified management’s evaluation of the Company’s ability to continue as a going concern and related disclosures as a critical audit matter due to the significant judgments and assumptions used by management in preparing the Company’s forecasted cash flows and the risk of bias in management’s judgments and assumptions in estimating these cash flows. Auditing these judgments and assumptions required a high degree of auditor judgment and increased auditor effort required to address these matters. The primary procedures we performed to address this critical audit matter included: • We obtained management’s cash flow forecasts covering the going concern assessment period and evaluated the reasonableness of the cash flow forecast by comparing it to historical operating results • We evaluated Managements assumptions in the preparing these forecasts and examined the underlying evidence. • We performed sensitivity analyses on the projected revenue and operating margins used in the Company’s cash flow projections to evaluate the impact on the conclusions reached by management. • We evaluated the adequacy of management’s disclosure in the financial statements regarding the Company’s liquidity by comparing to other audit evidence obtained to determine whether such information is consistent with the Company’s liquidity disclosure Emphasis of a Matter As discussed in Note 13 to the financial statements, on December 19, 2023, the Company entered into the Merger Agreement. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, upon obtaining the requisite shareholder approval, the Company will be merged with another company, whereby, with the other company being the surviving entity. Our opinion is not modified with respect to this matter. We have served as the Company’s auditor since 2023. /s/ Weinberg & Company, P.A. Los Angeles, California March 26, 2024 17 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Scott’s Liquid Gold-Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Scott’s Liquid Gold-Inc. (the “Company”) as of December 31, 2022, the related statements of operations, stockholders' equity, and cash flows for each of the year in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for each of the years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Substantial Doubt Regarding Going Concern The accompanying 2022 consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has experienced cash used from operations in excess of its current cash position, and has an accumulated deficit, which raised substantial doubt about its ability to continue as a going concern as of December 31, 2022 as assessed at March 29, 2023. Management’s plans in regard to these matters are also described in Note 2. The 2022 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter. Basis for Opinion The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (the “PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Plante & Moran, PLLC Broomfield, Colorado March
18 SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES Consolidated Statements of Operations (in thousands, except per share data)
See accompanying notes to these Consolidated Financial Statements. 19 SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES Consolidated Balance Sheets (in thousands, except par value amounts)
See accompanying notes to these Consolidated Financial Statements. 20 SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES Consolidated Statements of Shareholders’ Equity (in thousands)
See accompanying notes to these Consolidated Financial Statements. 21 SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)
See accompanying notes to these Consolidated Financial Statements. 22 SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES Notes to Consolidated Financial Statements (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,” On December 19, 2023, Scott’s Liquid Gold-Inc. (the “Company”), Horizon Kinetics LLC (“Horizon Kinetics”) and
Our Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. On September 15, 2023, we entered into and consummated a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Neoteric Beauty Holdings, LLC, a Delaware limited liability company (the “Neoteric Buyer”), pursuant to which the Company agreed to sell 100% of the outstanding stock of our wholly owned subsidiary Neoteric Cosmetics, Inc. (“Neoteric”) to the Neoteric Buyer. Neoteric owned and operated the Denorex®, Zincon®, and Neoteric Diabetic Skin Care® brands. We have reflected the operations of the Neoteric brands as discontinued operations for all periods presented. The Neoteric brands were previously classified under our health and beauty care products segment. See Note 3 for further information. Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Alpha® Skin Care brand. We have reflected the operations of the Alpha® Skin Care brand as discontinued operations for all periods presented. The Alpha product line was previously classified under our health and beauty care products segment. See Note 3 for further information. Effective June 30, 2023 we entered into, and in July 2023 closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the BIZ® brand. We have reflected the operations of the BIZ® brand as discontinued operations for all periods presented. The BIZ® product line was previously classified under our household products segment. See Note 3 for further information. On January 23, 2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Scott's Liquid Gold® brand, including the Wood Care and Floor Restore products. We have reflected the operations of the Scott's Liquid Gold® brand as discontinued operations for all periods presented, which was previously classified under our household products segment. See Note 3 for further information. On December
The accompanying 23 salaries in the amount of $273 for the year ended December 31, 2022 has been reclassified from selling expenses to general and administrative expenses to conform to the current year’s presentation.
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, (e) Cash andRestricted Cash
Cash and restricted cash consist of the following:
(f)InventoriesValuation 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 specifically identify impairment write downs 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. (g) 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. In accordance with our accounting policy for impairment of long-lived assets, operating lease right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group to which the operating lease right-of-use asset is assigned may not be recoverable. We evaluate the recoverability of the asset group based on forecasted undiscounted cash flows. See Note 7 “Leases” for additional information on our leases, including the operating lease right-of-use asset impairment charges recorded during the year ended December 31, 2023.
Goodwill is subject to impairment tests at least annually or when events or changes in circumstances indicate that an asset may be impaired. Other intangible assets with finite lives, such as customer relationships, trade names, and formulas, are amortized over their estimated useful lives, generally ranging from 5 to 24 Internal-use software costs recognized as an intangible asset relates to capitalizable costs of computer software obtained for internal-use as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40-30-1. All other internal-use software costs are expensed as incurred by the Company.
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. 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 The recorded amounts for cash and cash equivalents, restricted cash, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
Income taxes reflect the tax effects of transactions reported in the 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 (k) 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. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial. 25 Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted. Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce our revenue in that period. Sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers. We have also established an allowance for doubtful accounts. We estimate this allowance based upon, among other things, an assessment of the credit risk of specific customers and historical trends. We believe our allowance for doubtful accounts is adequate to absorb any losses which may arise. In the event that actual losses differ from our estimates, the results of future periods may be impacted. Customer allowances for trade promotions and allowance for doubtful accounts at December 31 were as follows:
(l) Advertising Costs
We expense advertising costs as incurred.
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 with only service conditions 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. The Company issues restricted stock unit ("RSUs") awards with restrictions that lapse upon the passage of time (service vesting) and satisfaction of market conditions targeted to our Company’s stock price. For those
Cost of sales includes costs associated with purchasing finished goods from contract manufacturers, labor, freight-in, quality control, repairs, maintenance, and other indirect 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 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. On April 29, 2021, the Company announced that Mark E. Goldstein, the President and Chief Executive Officer of the Company and a member of the Board of Directors, retired effective as of April 26,
In
During 2022, we entered into an agreement with a third-party financial institution and an agreement with an insurance agency which allows us to obtain extended payment terms for our insurance policies. The insurance policies can be canceled by the Company at any time with 10 days’ notice. The financial institution may cancel this agreement after providing 10 days’ notice if the Company does not pay any installment payment according to the terms of the agreement. We do not provide any forms of guarantees under these agreements. Payments of our obligations are included in cash flows from operating activities in the Consolidated Statements of Cash Flows. Outstanding confirmed amounts are $0 and $218 as of December 31, 2023 and December 31, 2022, respectively, which will be recognized on the Consolidated Financial Statements as payments are due. (p) Recently Issued Accounting Standards In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740) Improvements to Income Tax Disclosures" ("ASU 2023-09") enhancing the transparency and decision usefulness of income tax disclosures. ASU 2023-09 addresses investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The amendments in ASU 2023-09 are applied on a prospective basis, though retrospective application is permitted. We are in the process of evaluating its impact on our Consolidated Financial Statements and related disclosures. Other recent accounting pronouncements and guidance issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements. Note 2. Liquidity The accompanying Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Primarily due to a decline in net sales, disruption of our international sales to China, and increases in costs associated with the manufacture and distribution of our products, the Company sustained significant losses from operations in several reporting periods since 2019, had experienced cash used in operations in excess of its current cash position, and had an accumulated deficit as of December 27 31, 2022. As such, the Company previously believed at December 31, 2022 that it would require additional liquidity to continue its operations over the next 12 months. As a result of the sales of our various brands as disclosed in Note 3 to the Consolidated Financial Statements, we fully repaid all long-term debt, and as of December 31, 2023, have a cash balance of $3,927, working capital of $4,097, and shareholders’ equity of $3,265. While, absent any other actions, our operating activities are still expected to result in negative cash flows, we now expect to have enough liquidity to finance operations for the next 12 months. Management has implemented actions to reduce the Company’s operating expenses through asset sales, consolidation of vendors, personnel reductions, and will continue to pursue additional actions to further reduce operating losses. In addition, the Company has entered into the Merger Agreement with Horizon Kinetics, which is expected to significantly change the nature of our operations (see Note 13 "Subsequent Events"). The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future or raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing, or grant unfavorable terms in licensing future licensing agreements. Note Neoteric Cosmetics, Inc. On September 15, 2023, we entered into and consummated a Stock Purchase Agreement with Neoteric Beauty Holdings, LLC, a Delaware limited liability company, pursuant to which the Company agreed to sell 100% of the outstanding stock of our wholly owned subsidiary Neoteric Cosmetics, Inc. ("Neoteric") to the Neoteric Buyer. Neoteric owned and operated the Denorex®, Zincon®, and Neoteric Diabetic Skin Care® brands. The closing consideration paid to the Company was $1,750, with an initial deposit of $175 paid on September 5, 2023. The operations of the Neoteric brands have been classified as income from discontinued operations for all periods presented. As part of the Stock Purchase Agreement, we agreed to maintain at least $250 in accounts at our primary bank for a period of nine months following closing which is designated as restricted cash on the Consolidated Balance Sheets. Concurrent with the entry into the Stock Purchase Agreement, the Company entered into a transition services agreement with the Neoteric Buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the Stock Purchase Agreement. This transition services agreement has a term of 90 days which can be extended by the Neoteric Buyer for up to three additional 30 day periods or extended as consented by both parties. Alpha® Skin Care Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Alpha® Skin Care brand. The Company received payments of $2,500 and $200 in July 2023 and August 2023, respectively, representing total consideration for the sale of the Alpha Skin Care brand in the amount of $2,700. The operations of Alpha® have been classified as income from discontinued operations for all periods presented. Concurrent with the entry into the Alpha® Purchase Agreement, the Company entered into a transition services agreement with the buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the Alpha® Purchase Agreement. This transition services agreement had a term of 90 days which could be extended by the buyer for up to three additional 30 day periods or extended as consented by both parties, and concluded in accordance with the end of its term during the first quarter of 2024. BIZ® Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the BIZ® brand. The transactions contemplated by the BIZ® Purchase Agreement were consummated on July 7, 2023. The total consideration paid to us was $1,000, plus an amount equal to the value of the BIZ® inventory, valued at $946 as of the effective date of the agreement, subject to post-close adjustment. The operations of BIZ® have been classified as income from discontinued operations for all periods presented. Concurrent with the entry into the BIZ® Purchase Agreement, the Company entered into a transition services agreement with the buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the BIZ® Purchase Agreement. This transition services agreement had a term of 90 days which could be extended by the buyer for up to three additional 30 day periods or extended as consented by both parties, and was concluded in accordance with the end of its term on December 31, 2023. 28 Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore On January 23, 2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore product lines. The total consideration paid to us was $800, plus an amount equal to the value of the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore inventory of $1,136, subject to post-close adjustment. The Company may continue to use the name “Scott’s Liquid Gold” and “SLG” in a manner consistent with all past and current practices for a period of eighteen months following the closing date of the asset purchase agreement, at which point the Company may only use the aforementioned names in connection with retaining records and other historical documentation. Concurrent with the entry into the asset purchase agreement, the Company entered into a transition services agreement with the buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the asset purchase agreement, and was concluded in accordance with the end of its term on July 22, 2023. Additionally, the buyer will pay a royalty equal to 2% of gross sales for two years after the closing date (the "Scott's Liquid Gold® Royalty"). The Scott's Liquid Gold® Royalty resulted in recognition of a gain upon the sale of assets. Because the Scott's Liquid Gold® Royalty is variable consideration and is contingent on the outcome of future events that are largely outside of the Company’s control, the variable consideration from the Scott's Liquid Gold® Royalty was initially fully constrained and no amount was included in the results from discontinued operations. During the year ended December 31, 2023, we assessed the variable consideration and concluded that the volatility of external factors continue to exist and, as a result, consideration for the Scott's Liquid Gold® Royalty continues to be recognized as received from the buyer. The constraint on the variable consideration will be reassessed at each subsequent reporting period. We have reflected the operations of the Scott's Liquid Gold® product lines as discontinued operations. Prell® On December
reassessed at each subsequent reporting period. We have reflected the operations of the 29 Our Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations in the Consolidated Statements of Operations for the years ended December 31:
The following table presents the cash flows from discontinued operations for the years ended December 31:
30 There were no capital expenditures, depreciation expense, or significant operating and investing noncash items related to discontinued operations during the years ended December 31, Reconciliation of Major Classes of Assets
There were no assets of discontinued operations related to Prell® in the above table. There were no assets of discontinued operations related to Neoteric, Alpha®,BIZ®,Scott's Liquid Gold®, or Prell® as of December
The following summarizes the carrying values of
Note Inventories, consisting of materials, labor and overhead at December 31 were comprised of the following:
Note There were no carrying amounts of goodwill as of and during the year ended December 31, 2023. The changes in the carrying amount of goodwill by reporting unit for the fiscal years ended December 31,
31
Intangible assets consisted of the following:
The change in the net carrying amounts of intangible assets during
During the year 2023, we continued to experience a significant decline in our stock price and market capitalization and revised internal forecasts relating to all reporting units due to sales of brands, which resulted in an impairment charge to our internal use software in our Corporate reporting unit through our annual assessments conducted on December 31, 2023, we concluded that the changes in circumstances in this reporting unit triggered the need for a quantitative review of the carrying values of the intangible assets and resulted in impairment charges to our Corporate reporting unit. During the second quarter of 2022, we experienced a significant decline in our stock price and market capitalization and revised internal forecasts relating to all reporting units due to inflationary related pressures at our customers which have caused sales decreases, which resulted in impairment charges to goodwill and certain intangible assets in our All-Purpose reporting unit. We made revisions to the internal forecasts relating to all reporting units during the fourth quarter of During the years ended December 31, 2023 and 2022, we incurred the impairment charges to
The Company used the income approach and market approach to determine the fair value of the reporting units that required significant judgments and estimates by management regarding several key inputs, including future cash flows consistent with management’s strategic plans, sales growth rates and the selection of royalty rate and a discount rate, among others. Estimating sales growth rates requires significant judgment by management in areas such as future economic conditions, category and industry growth rates, product pricing, consumer tastes and preferences and future expansion expectations. Note On July 1, 2020, we entered into a Loan and Security Agreement 32 The UMB Loan Agreement was terminated on February 27, 2023 and the revolving credit facility La Plata Loan Agreement On November 9, 2021
Unamortized loan costs were $0 and $20 as of December 31,
On July 7, 2023, the La Plata term Note 7. Leases
We have entered into
Information related to leases was as follows:
Future minimum annual lease payments are as follows:
33 Note The provision for income tax attributable to continuing operations for the years ended December 31 is as follows:
The current tax provision related to discontinued operations for the years ended December 31, Income tax expense at the statutory tax rate is reconciled to the overall income tax expense for the years ended December 31 as follows:
The effective tax rate for the years ended December 31, 2023 and 2022 was (.18%) and (.62%) respectively, which can differ from the statutory income tax rate due to various factors, including the establishment and change in a valuation allowance. During the year ended 2021, the Company established a valuation allowance on our deferred tax asset, which is reflected in income tax expense on the Consolidated Statements of Operations. The valuation allowance represents our determination that, more likely than not, we will be unable to realize the value of such assets at this time due to the uncertainty of future profitability.
34 ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is
Net operating losses and tax credit carryforwards as of December 31,
The Company’s ability to utilize its net operating loss (“NOL”) carryforwards may be substantially limited due to ownership changes that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. Further, if the Company experiences such an ownership change and does not satisfy certain requirements in Section 382 of the Code to continue its business enterprise (which generally requires that the Company continue its historic business or use a significant portion of its historic business assets in a business for the two-year period beginning on the date of the ownership change), its NOL carryforwards may be disallowed, subject to certain exceptions. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups. Accounting for uncertainty in income taxes is based on a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize in our
Our policy is to recognize interest and penalties related to uncertain tax benefits in income tax expense. As we had We 35 Note In 2015, we adopted, and shareholders approved, an equity incentive plan for our employees, officers and directors (the “2015 Plan”).
On March 2, 2022, we On January 18, 2022, we granted 25 RSUs to
Compensation cost related to stock options recognized in operating results (included in general and administrative expenses) totaled Compensation cost related to RSUs totaled Stock option activity under the 2015 Plan is as follows:
36 A summary of additional information related to the options outstanding as of December 31,
Under our 2015 Plan, we have
Note Per share data is determined by using the weighted average number of common shares outstanding. Common equivalent shares are considered only for diluted earnings per share, unless considered anti-dilutive. Common equivalent shares, determined using the treasury stock method, result from stock options with exercise prices that are below the average market price of the common stock. Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in our earnings. A reconciliation of the weighted average number of common shares outstanding (in thousands) for the years ended December 31 is as follows:
Common stock equivalents (in thousands) that have been excluded from the calculation of earnings per share as of December 31 because they would have been anti-dilutive are as follows:
Note Segments We
37
Net sales to significant customers were the following for the years ended December 31,
Outstanding accounts receivable from significant customers represented the following percentages of our total accounts receivable as of December 31,
A loss of any of our significant customers could have a material adverse effect on us because it is uncertain whether our consumer base served by these customers would purchase our products at other retail outlets. Geographic Area Information There were no sales from continuing operations to different geographic areas for the years ended December 31, 2023 and 2022. There were no long-lived assets held outside the United States as of December 31, 2023 and 2022, respectively. Note The Company is routinely subject to lawsuits from time to time in the ordinary course of business that generally arise from the manufacture, processing, formulation, packaging, labeling, storage, distribution, advertising and sale of our products. The Company must comply with extensive federal and state laws and regulations. As of December 31, Note On December 19, 2023, the Company, Horizon Kinetics and Merger Sub entered into the Merger Agreement, providing for the acquisition of Horizon Kinetics by the Company. The
38
Disclosure Controls and Procedures As of December 31, Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including our President and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permits us to provide only management’s report in this Report. Management’s report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. Material Weakness A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s financial statements will not be prevented or detected on a timely basis. The material weakness that we previously reported was identified as of June 30, 2023 related to our finance department lacking a sufficient number of trained professionals with technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP. The deficiencies in internal control over financial reporting were detailed in Item 4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023. 39 The Company is continuing the process of remediating its control deficiencies. However, the material weakness in internal control over financial reporting that has been identified will not be remediated until we are able to add a sufficient number of trained professionals to our finance department, who have technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP, our control is implemented and operates for a period of time, is tested, and the Company is able to conclude that such internal controls are operating effectively. The Company cannot provide assurance that these procedures will be successful in identifying material errors that may exist in the financial statements. The Company cannot make assurances that it will not identify additional material weaknesses in its internal control over financial reporting in the future. Management plans, as capital becomes available to the Company, to increase the accounting and financial reporting staff and provide future investments in the continuing education and public company accounting training of our accounting and financial professionals. Changes in Internal Control over Financial Reporting
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. None. 40 PART III
For Part III, except as set forth below, the information set forth in our definitive Proxy Statement for our Annual Meeting of Shareholders to be filed within 120 days after December 31,
ITEM 11. EXECUTIVE COMPENSATION. The Company’s compensation packages to the executive officers, as determined by the Compensation Committee, are designed to enable the Company to recruit, retain and motivate a talented group of people who contribute to the Company’s success. The packages are also intended to synchronize executive compensation with the Company’s performance, motivate executive officers to achieve the Company’s business objectives, provide performance incentives and minimize undue risk to the Company. In 2023, the Company’s President provided input regarding compensation packages of the executive officers other than herself. In determining the executive compensation presented, the Committee considered, among other things, the following matters: Overview • The objectives of the Company’s compensation program;
What the compensation program is designed to reward; • Each element of compensation; • How the Company determines the amount (and, where applicable, the formula) for each element; and • How each compensation element and the Company’s decisions regarding that element fit into the Company’s overall compensation objectives and affect decisions regarding other elements. Specific Factors • Services performed and time devoted to the Company by the executive; • Amounts paid to executives in comparable companies; • The size and complexity of the Company’s business; • Successes achieved by the executive; • The executive’s abilities; • The executive’s tenure; • The Company’s financial results; • Prevailing economic conditions; • Compensation paid to other employees of the Company; and • The amount previously paid to the executive. The Compensation Committee also takes into account the results of the previous say-on-pay proposals. At the most recent planned Annual Meeting, there were not present in person or represented by proxy a sufficient number of shares of the Company's common stock to constitute a quorum. Accordingly, the Company was unable to conduct any business at the Annual Meeting, including a say-on-pay advisory vote. In March 2022, the Company awarded 15,000 shares of common stock to Ms. Pedrazzini, all of which vested upon issuance. The Compensation Committee has adopted a cash based annual incentive plan pursuant to which the named executive officers could achieve cash bonuses based on both individual and Company performance; however, the Company did not achieve the performance targets for the year ended December 31, 2023. In recognition of their efforts in maintaining sufficient capital during a challenging operating environment in order to position the company for future growth, Ms. Pedrazzini and Mr. Arndt each received cash bonuses of $120,000 and $107,500, respectively, which were awarded in July 2023. The Compensation Committee will use its discretion to make awards to members of the management team in 2024 based on individual and Company performance. 44 The following Summary Compensation Table shows the annual and other compensation of the named executive officers of the Company during the year ended December 31, 2023, for services in all capacities provided to the Company and its subsidiaries for the past two years.
_____________________ (1) Amounts shown in the “Stock Awards” and “Option Awards” columns are the aggregate grant date fair value of stock awards and stock options computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“ASC 718”). For information on the valuation assumptions for the stock options, please refer to Note 1 of the Company’s Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. These amounts do not necessarily correspond to the actual value that may be recognized by the officers in the future. STOCK PLANS The Company’s 2015 Equity and Incentive Plan (the “2015 Plan”) includes 2,000,000 authorized common shares and provides for the issuance of stock awards consisting of incentive and non-qualified stock options, stock appreciation rights, restrictive stock or restrictive stock units, performance share awards and performance compensation awards. Eligible persons under the 2015 Plan are full-time and part-time employees and non-employee directors. Under the 2015 Plan, stock awards vest upon a change in control in certain circumstances. Equity Grants in 2023 There were no equity grants to executive officers in 2023. Equity Grants in 2022 In March 2022, the Company awarded 15,000 shares of common stock to Ms. Pedrazzini.
_____________________ 45 (1) These options were granted on May 9, 2017, vested 1/48 per month from the date of grant, vested fully on May 9, 2021. In the event Mr. Arndt is terminated without cause or good reason during the 18-month period following a change in control, the options would become fully vested and immediately exercisable. (2) These restricted stock units were granted on November 9, 2021, which vest one-third over the next three years on the anniversary of the grant date. In the event Mr. Arndt is terminated without cause or good reason during the 18-month period following a change in control, the restricted stock units would become fully vested. EMPLOYMENT AGREEMENTS AND COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS On March 31, 2023, Mr. Arndt entered into an Employment Agreement with the Company for 12 months, with compensation of $205,000. The initial term of the agreements is one year. While Mr. Arndt’s existing employment agreement will not be renewed past March 31, 2024, his annual salary, should he remain in the roles of President and Principal Executive Officer and Chief Financial Officer after March 31, 2024, is expected to remain at $205,000. STOCK OWNERSHIP REQUIREMENTS Each non-employee director must hold the number of shares of Common Stock equal in value to at least the annual cash compensation of such director. Directors have five years within which to satisfy initial stock ownership requirements and thereafter, one year to increase their ownership following any increase in cash compensation to directors. Our non-employee directors are in compliance with the foregoing stock ownership requirements. For information regarding current beneficial ownership of shares by our non-employee directors, see the table “Security Ownership of Management.” COMPENSATION OF DIRECTORS For 2023, annual director fees were maintained to award annual compensation of $36,000. In May 2023, the Company awarded 100,000 shares of common stock to Mr. Malhotra and Mr. Roller, respectively, under the Company’s 2015 Plan. The following table shows the annual and other compensation of the non-employee directors for services to the Company for 2023:
(1) Amounts shown in the “Stock Awards” and “Option Awards” columns are the aggregate grant date fair value of stock awards and stock options computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“ASC 718”). For information on the valuation assumptions for the stock options, please refer to Note 1 of the Company’s Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. These amounts do not necessarily correspond to the actual value that may be recognized by the officers in the future. (2) In October 2023, the Company agreed to pay $200,000 to Maran Capital Management, LLC ("Maran"), of which Mr. Roller is the Founder, President, and Chief Investment Officer, comprised of $80,000 for certain legal and other expenses incurred by Maran related to the Company between February 2021 and September 2023, and $120,000 in consideration of the significant support received by the Company from Maran in sourcing, structuring, and negotiating the various asset divestitures aforementioned in Note 3 to the Consolidated Financial Statements. This transaction was approved by independent directors that did not include Mr. Roller. (3) On July 20, 2023, John D. McAnnar joined the Board of Directors and Audit Committee. 46 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
_____________________ * Less than 1%. (1) Beneficial owners listed have sole voting or disposition power with respect to the shares shown unless otherwise indicated. (2) As reported on Schedule 13D/A filed with the SEC on July 20, 2023 by (i) Maran Partners Fund, LP, a Delaware limited partnership (“MPF”), (ii) Maran Capital Management, LLC, a Delaware limited liability company (“MCM”), (iii) Maran Partners GP, LLC, a Delaware limited liability company (“MPGP”), (iv) Maran SPV GP, LLC, a Colorado limited liability company ("MSGL"), (v) Maran SPV, LP, a Delaware limited partnership ("MSL"), and (vi) Mr. Roller. Mr. Roller is the managing member of MCM and the managing member of MPGP, which is the general partner of MPF and managing member of MSGL, and MSGL is the general partner of MSL. (3) This item includes 7,536 underlying stock options granted by the Company and exercisable currently or within 60 days of March 25, 2024 for Mr. Arndt. The following table provides certain information with respect to all of the Company’s equity compensation plans in effect as of December 31, 2023.
47
Mark Goldstein On April 29, 2021, the Company announced that Mark E. Goldstein, the President and Chief Executive Officer of the Company and a member of the Board of Directors, retired effective as of April 26, 2021. In connection with Mr. Goldstein’s retirement, the Company and Mr. Goldstein entered into a Separation Agreement, Waiver and Release, Maran Capital Management In October 2023, the Company agreed to pay $200,000 to Maran Capital Management, LLC ("Maran"), comprised of $80,000 for certain legal and other expenses incurred by Maran related to the Company between February 2021 and September 2023, and $120,000 in consideration of the significant support received by the Company from Maran in sourcing, structuring, and negotiating the various asset divestitures aforementioned in Note 3 to the Consolidated Financial Statements. This transaction was approved by independent directors that did not include Mr. Roller. The Company has indemnification agreements with each of its directors and executive officers, which provide for indemnification and advancement of expenses to the full extent permitted by law in connection with any proceeding in which the person is made a party because the person is a director or officer of the Company. The Audit Committee is responsible for reviewing and approving or rejecting related party transactions.
PART IV
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