UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period endedSeptemberJune 30, 20222023

OR

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

For the transition period from to

Commission File Number: 001-13458

SCOTT’S LIQUID GOLD-INC.

(Exact name of registrant as specified in its charter)

Colorado

84-0920811

(State or other jurisdiction of
incorporation or organization)

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

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 Exchange Act.

Title of each class

Trading Symbol

Name of exchange on which registered

None

None

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of November 13, 2022August 11, 2023, the registrant had 12,805,66312,997,423 shares of its common stock, $0.10 par value per share, outstanding.


CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, in addition to historical information. All statements, other than statements of historical facts, included in this Report that address activities, events, or developments with respect to our financial condition, results of operations, or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. You can typically identify forward-looking statements by the use of words, such as “may,” “could,” “should,” “assume,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” and other similar words. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements contained in this Report are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Forward-looking statements and our performance inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to:

the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees;
disruptions or inefficiencies in the supply chain, including any impact of the COVID-19 pandemic;chain;
dependence on third-party vendors and on sales to major customers;
regulations, economic conditions, and tariffs in the People’s Republic of China (“PRC”), as well as the transition from our exclusive distributor in the PRC to market and sell our products there;
a continued shift in the retail market from food and drug stores to mass merchandisers, club stores, dollar stores, e-commerce retailers, and subscription services;
competition from large consumer products companies in the United States;
competitive factors, including any decrease in distribution of (i.e., retail stores carrying) our significant products;
new competitive products and/or technological changes;
the need for effective advertising of our products and limited resources available for such advertising;
unfavorable economic conditions;
changing consumer preferences and the continued acceptance of each of our significant products in the marketplace;
the degree of success of any new product or product line introduction by us;
the degree of success of the integration of product lines or businesses we may acquire;
the degree of success of our conversion to outsourced manufacturing and dependence on third-party manufacturers;
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;
the risk that we may not be able to remediate the existing material weakness related to the impairment assessmentour finance department lacking a sufficient number of goodwilltrained professionals with technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP and develop and maintain effective internal controls over financial reporting;
other matters discussed in this Report, including the risks described in the Risk Factors section of this Report and in our Annual Report on Form 10-K for the year ended December 31, 20212022 and subsequent Quarterly Reports on Form 10-Q.

We caution you that forward-looking statements are not guarantees of future performance and that actual results or performance may be materially different from those expressed or implied in the forward-looking statements. The forward-looking statements in this Report speak as of the filing date of this Report. Although we may from time to time voluntarily update our prior forward-looking statements, we undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Report.


TABLE OF CONTENTS

Page

PART I

Item 1.

Financial Statements

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1617

Item 4.

Controls and Procedures

22

PART II

Item 1A.

Risk Factors

23

Item 6.

Exhibits

23


PART I

ITEM 1. FINANCIAL STATEMENTS.

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

Three Months Ended

 

 

Nine Months Ended

 

Three Months Ended

 

 

Six Months Ended

 

September 30,

 

 

September 30,

 

June 30,

 

 

June 30,

 

2022

 

 

2021

 

 

2022

 

 

2021

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

$

4,277

 

 

$

7,970

 

 

$

15,449

 

 

$

24,583

 

$

1,538

 

 

$

1,120

 

 

$

3,268

 

 

$

2,928

 

Cost of sales

 

2,358

 

 

 

5,100

 

 

 

8,337

 

 

 

14,624

 

 

824

 

 

 

737

 

 

 

1,826

 

 

 

1,599

 

Gross profit

 

1,919

 

 

 

2,870

 

 

 

7,112

 

 

 

9,959

 

 

714

 

 

 

383

 

 

 

1,442

 

 

 

1,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

166

 

 

 

144

 

 

 

492

 

 

 

506

 

 

120

 

 

 

174

 

 

 

275

 

 

 

326

 

Selling

 

1,691

 

 

 

2,542

 

 

 

5,752

 

 

 

7,388

 

 

574

 

 

 

867

 

 

 

1,146

 

 

 

1,970

 

General and administrative

 

578

 

 

 

836

 

 

 

2,020

 

 

 

3,782

 

 

638

 

 

 

776

 

 

 

1,255

 

 

 

1,561

 

Intangible asset amortization

 

87

 

 

 

278

 

 

 

313

 

 

 

834

 

 

51

 

 

 

103

 

 

 

101

 

 

 

226

 

Impairment of goodwill and intangible assets

 

-

 

 

 

-

 

 

 

3,589

 

 

 

-

 

 

-

 

 

 

3,589

 

 

 

-

 

 

 

3,589

 

Total operating expenses

 

2,522

 

 

 

3,800

 

 

 

12,166

 

 

 

12,510

 

 

1,383

 

 

 

5,509

 

 

 

2,777

 

 

 

7,672

 

Loss from operations

 

(603

)

 

 

(930

)

 

 

(5,054

)

 

 

(2,551

)

 

(669

)

 

 

(5,126

)

 

 

(1,335

)

 

 

(6,343

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(139

)

 

 

(109

)

 

 

(419

)

 

 

(219

)

 

(6

)

 

 

(18

)

 

 

(113

)

 

 

(57

)

Loss before income taxes and discontinued operations

 

(742

)

 

 

(1,039

)

 

 

(5,473

)

 

 

(2,770

)

 

(675

)

 

 

(5,144

)

 

 

(1,448

)

 

 

(6,400

)

Income tax expense

 

(2

)

 

 

(1,224

)

 

 

(55

)

 

 

(798

)

 

(6

)

 

 

(52

)

 

 

(2

)

 

 

(52

)

Loss from continuing operations

 

(744

)

 

 

(2,263

)

 

 

(5,528

)

 

 

(3,568

)

 

(681

)

 

 

(5,196

)

 

 

(1,450

)

 

 

(6,452

)

Loss from discontinued operations, net of taxes

 

-

 

 

 

(205

)

 

 

-

 

 

 

(246

)

Income from discontinued operations, net of taxes

 

228

 

 

 

863

 

 

 

1,366

 

 

 

1,668

 

Net loss

$

(744

)

 

$

(2,468

)

 

$

(5,528

)

 

$

(3,814

)

$

(453

)

 

$

(4,333

)

 

$

(84

)

 

$

(4,784

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common shares:

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per common shares:

 

 

 

 

 

 

 

 

Loss from continuing operations

$

(0.06

)

 

$

(0.18

)

 

$

(0.43

)

 

$

(0.28

)

$

(0.05

)

 

$

(0.41

)

 

$

(0.11

)

 

$

(0.51

)

Loss from discontinued operations

$

-

 

 

$

(0.02

)

 

$

-

 

 

$

(0.02

)

Income from discontinued operations

$

0.02

 

 

$

0.07

 

 

$

0.11

 

 

$

0.13

 

Net loss

$

(0.06

)

 

$

(0.20

)

 

$

(0.43

)

 

$

(0.30

)

$

(0.03

)

 

$

(0.34

)

 

$

-

 

 

$

(0.38

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

12,749

 

 

 

12,642

 

 

 

12,747

 

 

 

12,628

 

 

12,908

 

 

 

12,749

 

 

 

12,853

 

 

 

12,745

 






1


See accompanying notes to these Condensed Consolidated Financial Statements.

12


SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except par value amounts)

September 30,

 

December 31,

 

June 30,

 

December 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash

$

14

 

 

$

770

 

$

608

 

 

$

49

 

Restricted cash

 

125

 

 

 

500

 

Accounts receivable, net

 

1,791

 

 

 

3,516

 

 

1,182

 

 

 

1,833

 

Inventories

 

6,289

 

 

 

5,677

 

 

523

 

 

 

1,097

 

Income taxes receivable

 

247

 

 

 

320

 

 

-

 

 

 

239

 

Prepaid expenses

 

214

 

 

 

436

 

 

304

 

 

 

243

 

Assets held for sale

 

2,280

 

 

 

2,591

 

Assets of discontinued operations

 

-

 

 

 

1,235

 

Total current assets

 

8,680

 

 

 

11,219

 

 

4,897

 

 

 

7,287

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

3

 

 

 

7

 

Goodwill

 

838

 

 

 

1,710

 

Intangible assets, net

 

2,272

 

 

 

5,160

 

 

805

 

 

 

906

 

Operating lease right-of-use assets

 

2,553

 

 

 

2,735

 

 

2,364

 

 

 

2,491

 

Other assets

 

38

 

 

 

38

 

 

45

 

 

 

47

 

Total assets

$

14,384

 

 

$

20,869

 

$

8,111

 

 

$

10,731

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

1,750

 

 

$

2,647

 

$

1,325

 

 

$

1,407

 

Accrued expenses

 

397

 

 

 

747

 

 

107

 

 

 

311

 

Current portion of long-term debt

 

2,684

 

 

 

1,000

 

Current portion of long-term debt, net of debt issuance costs

 

1,210

 

 

 

3,384

 

Operating lease liabilities, current portion

 

264

 

 

 

251

 

 

280

 

 

 

270

 

Total current liabilities

 

5,095

 

 

 

4,645

 

 

2,922

 

 

 

5,372

 

 

 

 

 

 

 

 

 

 

 

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

 

555

 

 

 

1,876

 

Operating lease liabilities, net of current

 

2,581

 

 

 

2,780

 

 

2,369

 

 

 

2,512

 

Other liabilities

 

27

 

 

 

27

 

 

27

 

 

 

27

 

Total liabilities

 

8,258

 

 

 

9,328

 

 

5,318

 

 

 

7,911

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

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

 

-

 

 

 

-

 

 

-

 

 

 

-

 

Common Stock; $0.10 par value, authorized 50,000 shares; issued and outstanding 12,749 shares (2022) and 12,727 shares (2021)

 

1,275

 

 

 

1,273

 

Common Stock; $0.10 par value, authorized 50,000 shares; issued and outstanding 12,997 shares (2023) and 12,797 shares (2022)

 

1,300

 

 

 

1,280

 

Capital in excess of par

 

7,900

 

 

 

7,789

 

 

7,949

 

 

 

7,912

 

(Accumulated deficit) retained earnings

 

(3,049

)

 

 

2,479

 

Accumulated deficit

 

(6,456

)

 

 

(6,372

)

Total shareholders’ equity

 

6,126

 

 

 

11,541

 

 

2,793

 

 

 

2,820

 

Total liabilities and shareholders’ equity

$

14,384

 

 

$

20,869

 

$

8,111

 

 

$

10,731

 




See accompanying notes to these Condensed Consolidated Financial Statements.

23


SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(in thousands)

Common Stock

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital in Excess of Par

 

 

(Accumulated Deficit) Retained Earnings

 

 

Total

 

Balance, December 31, 2022

 

12,797

 

 

$

1,280

 

 

$

7,912

 

 

$

(6,372

)

 

$

2,820

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

369

 

 

 

369

 

Balance, March 31, 2023 (Unaudited)

 

12,797

 

 

 

1,280

 

 

 

7,919

 

 

 

(6,003

)

 

 

3,196

 

Stock-based compensation

 

200

 

 

 

20

 

 

 

30

 

 

 

-

 

 

 

50

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(453

)

 

 

(453

)

Balance, June 30, 2023 (Unaudited)

 

12,997

 

 

$

1,300

 

 

$

7,949

 

 

$

(6,456

)

 

$

2,793

 

Shares

 

 

Amount

 

 

Capital in Excess of Par

 

 

(Accumulated Deficit) Retained Earnings

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

12,727

 

 

$

1,273

 

 

$

7,789

 

 

$

2,479

 

 

$

11,541

 

 

12,727

 

 

$

1,273

 

 

$

7,789

 

 

$

2,479

 

 

$

11,541

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

35

 

 

 

-

 

 

 

35

 

 

-

 

 

 

-

 

 

 

35

 

 

 

-

 

 

 

35

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(451

)

 

 

(451

)

 

-

 

 

 

-

 

 

 

-

 

 

 

(451

)

 

 

(451

)

Restricted stock unit vesting

 

22

 

 

 

2

 

 

 

26

 

 

 

-

 

 

 

28

 

 

22

 

 

 

2

 

 

 

26

 

 

 

-

 

 

 

28

 

Balance, March 31, 2022 (Unaudited)

 

12,749

 

 

 

1,275

 

 

 

7,850

 

 

 

2,028

 

 

 

11,153

 

 

12,749

 

 

 

1,275

 

 

 

7,850

 

 

 

2,028

 

 

 

11,153

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

22

 

 

 

-

 

 

 

22

 

 

-

 

 

 

-

 

 

 

22

 

 

 

-

 

 

 

22

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,333

)

 

 

(4,333

)

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,333

)

 

 

(4,333

)

Balance, June 30, 2022 (Unaudited)

 

12,749

 

 

 

1,275

 

 

 

7,872

 

 

 

(2,305

)

 

 

6,842

 

 

12,749

 

 

$

1,275

 

 

$

7,872

 

 

$

(2,305

)

 

$

6,842

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

28

 

 

 

-

 

 

 

28

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(744

)

 

 

(744

)

Balance, September 30, 2022 (Unaudited)

 

12,749

 

 

$

1,275

 

 

$

7,900

 

 

$

(3,049

)

 

$

6,126

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

12,618

 

 

$

1,262

 

 

$

7,633

 

 

$

13,570

 

 

$

22,465

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

69

 

 

 

-

 

 

 

69

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(280

)

 

 

(280

)

Balance, March 31, 2021 (Unaudited)

 

12,618

 

 

 

1,262

 

 

 

7,702

 

 

 

13,290

 

 

 

22,254

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

33

 

 

 

-

 

 

 

33

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,066

)

 

 

(1,066

)

Balance, June 30, 2021 (Unaudited)

 

12,618

 

 

 

1,262

 

 

 

7,735

 

 

 

12,224

 

 

 

21,221

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

(3

)

 

 

-

 

 

 

(3

)

Stock options exercised

 

45

 

 

 

4

 

 

 

53

 

 

 

-

 

 

 

57

 

Restricted stock unit vesting

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,468

)

 

 

(2,468

)

Balance, September 30, 2021 (Unaudited)

 

12,666

 

 

$

1,266

 

 

$

7,785

 

 

$

9,756

 

 

$

18,807

 

S

ee

See accompanying notes to these Condensed Consolidated Financial Statements.

34


SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

Nine Months Ended

 

Six Months Ended

 

September 30,

 

June 30,

 

2022

 

 

2021

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(5,528

)

 

$

(3,568

)

$

(84

)

 

$

(4,784

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

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

 

 

 

 

Depreciation and amortization

 

480

 

 

 

1,357

 

 

224

 

 

 

339

 

Gain on disposal of discontinued operations

 

(787

)

 

 

-

 

Stock-based compensation

 

113

 

 

 

99

 

 

57

 

 

 

85

 

Deferred income taxes

 

-

 

 

 

784

 

Impairment of goodwill and intangible assets

 

3,589

 

 

 

-

 

 

-

 

 

 

3,589

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

1,725

 

 

 

228

 

 

651

 

 

 

1,823

 

Inventories

 

(612

)

 

 

(2,651

)

 

958

 

 

 

(165

)

Prepaid expenses and other assets

 

222

 

 

 

175

 

 

(59

)

 

 

143

 

Income taxes receivable

 

73

 

 

 

192

 

 

239

 

 

 

45

 

Accounts payable, accrued expenses, and other liabilities

 

(1,251

)

 

 

1,990

 

 

(292

)

 

 

(609

)

Total adjustments to net loss

 

4,339

 

 

 

2,174

 

 

991

 

 

 

5,250

 

Net cash used in operating activities

 

(1,189

)

 

 

(1,394

)

Net cash provided by operating activities

 

907

 

 

 

466

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from sale of discontinued operations

 

1,936

 

 

 

-

 

Purchase of software

 

(142

)

 

 

(262

)

 

-

 

 

 

(142

)

Net cash used in investing activities

 

(142

)

 

 

(262

)

Net cash provided by (used in) investing activities

 

1,936

 

 

 

(142

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Repayments on term loans

 

(2,000

)

 

 

(750

)

Proceeds from term loans

 

250

 

 

 

-

 

Repayments of term loans

 

(30

)

 

 

(2,000

)

Proceeds from revolving credit facility

 

20,763

 

 

 

29,824

 

 

2,795

 

 

 

14,737

 

Repayments of revolving credit facility

 

(18,563

)

 

 

(27,222

)

 

(5,299

)

 

 

(14,015

)

Proceeds from exercise of stock options

 

-

 

 

 

57

 

Net cash provided by financing activities

 

200

 

 

 

1,909

 

Net cash used in financing activities

 

(2,284

)

 

 

(1,278

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and restricted cash

 

(1,131

)

 

 

253

 

Net increase (decrease) in cash and restricted cash

 

559

 

 

 

(954

)

 

 

 

 

 

 

 

 

Cash and restricted cash, beginning of period

 

1,270

 

 

 

5

 

Cash and restricted cash, end of period

$

139

 

 

$

258

 

Cash, beginning of period

 

49

 

 

 

1,270

 

Cash, end of period

$

608

 

 

$

316

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

Cash paid during the period for interest

$

256

 

 

$

372

 

$

109

 

 

$

170

 



See accompanying notes to these Condensed Consolidated Financial Statements.

45


SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except per share data)

Note 1. Organization and Summary of Significant Accounting Policies

(a) Company Background

Scott’s Liquid Gold-Inc., a Colorado corporation was incorporated on February 15, 1954. Scott’s Liquid Gold-Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” or “us”) develop, market and sell high quality products inproducts. Our business is comprised of two segments: household products and health and beauty care products.

(b) Principles of Consolidation

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

Closed in July 2023 and effective June 30, 2023, we entered into 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 "Alpha Purchase Agreement"). The transactions contemplated by the Alpha Purchase Agreement are subject to customary conditions and closing deliveries by both Neoteric and the Alpha Buyer. The assets of Alpha® are classified as assets held for sale as of June 30, 2023 and December 31, 2022, and their operations have been classified as income from 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.

Closed in July 2023 and effective June 30, 2023, we entered into 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 assets of BIZ® are classified as assets held for sale as of June 30, 2023 and December 31, 2022, and their operations have been classified as income from 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 DecemberJanuary 23, 2021,2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the DryelScott'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 15, 2022, 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 Prell® product line. We have reflected the operations of the DryelPrell® product line as discontinued operations for all periods presented, which werewas previously classified under our householdhealth and beauty care products segment. See Note 3 for further information.

(c) Basis of Presentation

The unaudited Condensed Consolidated Statements of Operations, Condensed Consolidated Balance Sheets, and Condensed Consolidated Statements of Cash Flows included in this Report have been prepared by the Company. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at SeptemberJune 30, 20222023 and results of operations and cash flows for all periods have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.2022. The results of operations for the period ended SeptemberJune 30, 20222023 are not necessarily indicative of the operating results for the full year and are unaudited. Certain prior year amounts have been reclassified to conform to the current period presentation.

6


(d) Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, the realization of deferred tax assets, reserves for slow moving and obsolete inventory, customer returns and allowances, intangible asset useful lives and amortization method, fair value of assets acquired in business combinations, operating lease right-of-use assets and operating lease liabilities, and stock-based compensation. Actual results could differ from our estimates.

(e)Cash and Restricted Cash

Cash and restricted cash consist of the following:

 

September 30, 2022

 

 

December 31, 2021

 

Cash

$

14

 

 

$

770

 

Restricted Cash

 

125

 

 

 

500

 

 

$

139

 

 

$

1,270

 

(f) Inventories Valuation and Reserves

Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We estimate an inventory reserve, which is generally not material to our financial statements, for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.

5


Inventories were comprised of the following at:

 

September 30, 2022

 

 

December 31, 2021

 

Finished goods

 

5,986

 

 

$

5,499

 

Raw materials

 

303

 

 

 

178

 

 

$

6,289

 

 

$

5,677

 

 

 

 

 

 

 

Our remaining raw materials balance is to be sold to contract manufacturing partners based on production demand.

(g)(f) PropertyAssets Held for Sale and EquipmentDiscontinued Operations

PropertyAssets classified as held for sale are measured at the lower of their carrying amount or fair value less costs to sell and equipment are recorded at historical cost. Depreciationnot depreciated or amortized. Fair value is provided usingdetermined based on the straight-line method overtotal consideration expected to be received by the estimated useful livesCompany. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the assets ranging from threedisposal group. When the net realizable value of a disposal group increases during a period, a gain can be recognized to 20 years. Office furniture and office machines are estimated to have useful lives of 10 to 20 years and three to five years, respectively. Maintenance and repairs are expensed as incurred. Improvementsthe extent that extendit does not increase the useful livesvalue of the asset or provide improved efficiencydisposal group beyond its original carrying value when the disposal group was reclassified as held for sale. Disposal groups that meet the discontinued operations criteria by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 205-20-45 are capitalized.classified as discontinued operations and are excluded from continuing operations and segment results for all periods presented.

(h)(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.

The Company evaluates reimbursable leasehold improvements based on whether improvements are indicative of a lessor or lessee asset. The Company concluded that all of its reimbursable leasehold improvement payments have qualified as lessor assets and, as such, have accounted for leasehold improvement payments as prepaid rent included in prepaid expenses on the Condensed Consolidated Balance Sheets.

(i)(h) Intangible Assets and Goodwill

Goodwill is subject to impairment tests at least annually or when events or changes in circumstances indicate that an asset may be impaired. Other intangibleIntangible assets with finite lives, such as customer relationships, trade names, and formulas, are amortized over their estimated useful lives, generally ranging from 510 to 20 years15. years. Amortization expense related to intangible assets is included in Operating Expenses on the Condensed Consolidated Statement of Operations.

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”)ASC 350-40-30-1. All other internal-use software costs are expensed as incurred by the Company. Amortization will be recorded over the estimated useful life of the software once the software is ready for its intended use and placed into service. In the second quarter of 2022, our internal-use software was implemented for its intended use. The estimated useful life for internal-use software is five years and will be periodically reassessed based on considerations for obsolescence, technology, competition, and other economic factors.

7


(j)(i) Financial Instruments

Financial instruments which potentially subject us to concentrations of credit risk include cash, restricted cash and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. Historically, we have maintained balances in various operating accounts in excess of federally insured limits. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, based upon factors surrounding the credit risk of specific customers, historical trends and other information. We have no significant financial instruments with off-balance sheet risk of accounting loss, such as foreign exchange contracts, option contracts or other foreign currency hedging arrangements.

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

6


(k)(j) Income Taxes

Income taxes reflect the tax effects of transactions reported in the Condensed Consolidated Financial Statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. A valuation allowance is established when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three and ninesix months ended SeptemberJune 30, 20222023 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily due to valuation allowance. The effective tax rate for the ninesix months ended SeptemberJune 30, 20222023 and 20212022 was 0.00.1% and 21.60.0% respectively.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, and permanent differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to realize deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more likely than not threshold for realizability. Accordingly, a valuation allowance has been recorded against the Company’s net deferred tax assets as of SeptemberJune 30, 2022,2023, and December 31, 2021.2022.

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. The tax impact of the carryback of the 2020 loss was recorded in the first quarter 2021 income tax provision. We elected to defer our portion of social security tax payments, and we paid this liability in the third quarter of 2021.

(l)(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.

78


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

Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, 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 are included in net accounts receivable on the Condensed Consolidated Balance Sheets and were as follows:

September 30, 2022

 

 

December 31, 2021

 

June 30, 2023

 

 

December 31, 2022

 

Trade promotions

$

379

 

 

$

1,242

 

$

141

 

 

$

361

 

Allowance for doubtful accounts

 

44

 

 

 

14

 

 

36

 

 

 

59

 

$

423

 

 

$

1,256

 

$

177

 

 

$

420

 

(m)(l) Advertising Costs

We expense advertising costs as incurred.

(n)(m) Stock-Based Compensation

We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options 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 RSU awards with only service vesting, the Company recognizes compensation cost on a straight-line basis over the service period. For awards with both market and service conditions, the Company starts recognizing compensation cost over the requisite service period, with the effect of the market conditions reflected in the calculation of the award's fair value at grant date. The Company values awards with only service vesting requirements based on the grant date share price. The Company values awards with market and service conditions using a Monte Carlo simulation. The Company determines the requisite service period for awards with both market and service conditions based on the longer of the explicit service period and the derived service period. Stock awards that contain market vesting conditions are included in the computations of diluted EPS reflecting the average number of shares that would be issued based on the highest 30-day average market price during the reporting periods, if their effect is dilutive. If the condition is based on an average of market prices over some period of time, the corresponding average for the period is used.

89


(o)(n) Operating Costs and Expenses Classification

Cost of sales includes costs associated with the purchase of goods from our third-party manufacturing partners, which includeand distribution including labor, materials, and other expenses associated with the manufacturing of our products, freight-in, purchasing and receiving, quality control, repairs, maintenance, and other indirect costs, as well as warehousing and distribution costs. We classify freight-out as selling expenses. Other selling expenses consist primarily of costs for warehousing and distribution, sales and sales support personnel, brokerage commissions, customer compliance fines, and promotional costs. Freight-out costs included in selling expenses totaled $429112 and $624158 for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, and totaled $1,725199 and $2,163461 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.

General and administrative expenses consist primarily of wages and benefits associated with management and administrative support departments, business insurance costs, professional fees, office facility related expenses, and other general support costs.

On April 29, 2021,(o) Supplier Finance Programs

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 announced that Mark E. Goldstein,at any time with 10 days’ notice. The financial institution may cancel this agreement after providing 10 days’ notice if the President and Chief Executive OfficerCompany does not pay any installment payment according to the terms of the Company and a memberagreement. We do not provide any forms of the Boardguarantees under these agreements. Payments 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 (the “Separation Agreement”), pursuant to which the Company will pay Mr. Goldstein $720 in severance payments (equal to 18 months base salary) over a period of 30 months and reimbursement for the costs of continuing health benefits for a period of 18 months. Severance costs of $805 were recognized in the second quarter of 2021 andour obligations are included in generalcash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. Outstanding confirmed amounts are $73 and administrative expenses. Accrued severance costs are included in accrued expenses$218 as of June 30, 2023 and December 31, 2022, respectively, which will be recognized on the Condensed Consolidated Balance Sheets.Financial Statements as payments are due.

(p) Recently Adopted Accounting Standards

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The purpose of ASU 2020-04 is to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance primarily provides temporary optional expedients which simplify the accounting for contract modifications to existing debt agreements expected to arise from the market transition from LIBOR to alternative reference rates. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply amendments prospectively through December 31, 2022. The Company adopted ASU 2020-04 effective July 1, 2022. The adoption of this standard did not have a material impact on our financial statements.

(q) Recently Issued Accounting Standards

In September 2022, the FASB issued ASU No. 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations". This guidance requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. These amendments are effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. We are currently assessing the impact of this guidance on our financial statements.

Note 2. Going ConcernLiquidity

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern.

The Company had cash and restricted cash of $139 and $944 of available borrowing capacity under our revolving credit facility as of September 30, 2022. 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 used net cashhas sustained significant losses from operations in operating activities of $1,189 during the nine months ended September 30, 2022. The Company’s debt agreements with UMB Bank, N.A. and La Plata Capital, LLC mature on July 1, 2023 and November 9, 2023, respectively. Management’s assessment of cash flow forecasts indicate that, absentseveral reporting periods since 2019. Absent any other action, the Company likely willpreviously believed it would require additional liquidity to continue its operations over the next 12 months.

Due to the sales of our BIZ® and Alpha® brands as disclosed in Note 3 to the Condensed Consolidated Financial Statements, which generated $3,700 of cash in July and August 2023, we have fully repaid all long-term debt as of July 2023. 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 recently implemented actions to reduce the Company’s operating expenses through asset sales, consolidation of vendors, and has approved a plan to extend and restructure debt facilities. Managementpersonnel reductions. To further reduce operating losses, the Company is considering additional various strategic actions including asset sales, obtaining additional debt or equity financing (potentially in conjunction with acquisitions), workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to ensure alignment with customer demand in order to address long-term liquidity needs and pursue its business plan. The Company expects that these strategic actions will further reduce expenses and outstanding debt balances and provide required liquidity for ongoing operations. If these plans aren't successfully implemented there could be substantial doubt about the Company's ability to continue as a going concern.

9


Note 3. Discontinued OperationsDivestitures

Alpha® Skin Care

Closed in July 2023 and effective June 30, 2023, we entered into 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 transactions contemplated by the Alpha® Purchase Agreement were subject to customary conditions and closing deliveries by both the Company and the buyer and was consummated on July 31, 2023. 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 and an estimated gain on the sale of assets of $1,585 that will be recognized in the third quarter of 2023. The assets of Alpha® are classified as assets held for sale as of June 30, 2023 and December 31, 2022, and their operations have been classified as income from discontinued operations for all periods presented.

10


BIZ®

Closed in July 2023 and effective June 30, 2023, we entered into 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 estimated gain on the sale of assets is $787 and will be recognized in the third quarter of 2023. The assets of BIZ® are classified as assets held for sale as of June 30, 2023 and December 31, 2022, and their operations have been classified as income from discontinued operations for all periods presented.

Scott's Liquid Gold Wood® Care and Scott's Liquid Gold® Floor Restore

On DecemberJanuary 23, 2021,2023, 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 DryelScott'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. 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 has been fully constrained and no amount is included in the results from discontinued operations. Consideration for the Scott's Liquid Gold® Royalty is 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 15, 2022, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Prell® product line. The total consideration paid to us was $4,850150, plus an amount equal to the value of the DryelPrell® inventory of $440330, subject to post-close adjustment. Additionally, the buyer will pay a royalty equal to At closing, $3500% of the total consideration was held in escrowcollections on net sales for a twelve-month period followingfour years after the closing date to be released ratably in four installments in 2022. We received the first three installment payments during the first nine months ended September 30, 2022. This consideration is reflected as Restricted Cash on the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, respectively. Dryel(the “Prell® generated approximately $2,800 of net sales in the trailing twelve-month period ending December 31, 2021.

Under ASC 360, a long-lived asset group should be classified as held for sale if all of the established criteria are met.Royalty”). The sale of DryelPrell® did not meet these criteriaRoyalty resulted in recognition of a gain upon the sale of assets. For the six months ended June 30, 2023 there were no changes in the year ending December 31, 2021, because we had not established an active programassessment of the Prell® Royalty, which will continue to locate a buyer and becausebe recognized as received from the brand was not being marketed for sale. All efforts betweenbuyer. The constraint on the buyer and the Company occurred during the fourth quarter of 2021. As a result, there was no adjustment to fair value under ASC 360 guidance related to held for sale assets, and the difference between thevariable consideration paid to us and the carrying amount of all assets is reflected in the loss on sale of discontinued operations.

will be reassessed at each subsequent reporting period. We have reflected the operations of the DryelPrell®product line as discontinued operations.

Our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. Our Condensed Consolidated Statements of Equity and Statements of Cash Flows combine the results of continuing and discontinued operations. As of the three and nine months ended September 30, 2022, there were no operating results from discontinued operations included in the Condensed Consolidated Statements of Operations. As of September 30, 2022 and December 31, 2021, respectively, there were no assets and liabilities relating to discontinued operations presented separately in the Condensed Consolidated Balance Sheets. There were no capital expenditures or significant operating and investing noncash items related to discontinued operations during the nine months ended September 30, 2022 and 2021, respectively. A summary of financial information related to our discontinued operations is as follows:

Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations in the Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30:

 

Three Months Ended September 30, 2021

 

 

Nine Months Ended September 30, 2021

 

Net sales

$

585

 

 

$

1,856

 

Cost of sales

 

313

 

 

 

1,013

 

Gross profit

 

272

 

 

 

843

 

 

 

 

 

 

Operating expenses:

 

 

 

 

Selling

 

144

 

 

 

367

 

Intangible asset amortization

 

123

 

 

 

369

 

Interest expense

 

99

 

 

 

298

 

Loss from discontinued operations, before tax

 

(94

)

 

 

(191

)

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(111

)

 

 

(55

)

Loss from discontinued operations, net of tax

$

(205

)

 

$

(246

)

 

Three Months Ended June 30, 2023

 

 

Alpha®

 

 

BIZ®

 

 

Prell®

 

 

Scott's Liquid Gold®

 

 

Total

 

Net sales

$

514

 

 

$

1,011

 

 

$

-

 

 

$

-

 

 

$

1,525

 

Cost of sales

 

209

 

 

 

732

 

 

 

-

 

 

 

-

 

 

 

941

 

Gross profit

 

305

 

 

 

279

 

 

 

-

 

 

 

-

 

 

 

584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

80

 

 

 

204

 

 

 

-

 

 

 

-

 

 

 

284

 

General and administrative

 

10

 

 

 

12

 

 

 

-

 

 

 

-

 

 

 

22

 

Intangible asset amortization

 

-

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

6

 

Operating income from discontinued operations

 

215

 

 

 

57

 

 

 

-

 

 

 

-

 

 

 

272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

-

 

 

 

(44

)

 

 

-

 

 

 

-

 

 

 

(44

)

Income from discontinued operations

$

215

 

 

$

13

 

 

$

-

 

 

$

-

 

 

$

228

 

11


 

Three Months Ended June 30, 2022

 

 

Alpha®

 

 

BIZ®

 

 

Prell®

 

 

Scott's Liquid Gold®

 

 

Total

 

Net sales

$

1,057

 

 

$

1,363

 

 

$

753

 

 

$

1,090

 

 

$

4,263

 

Cost of sales

 

401

 

 

 

952

 

 

 

470

 

 

 

548

 

 

 

2,371

 

Gross profit

 

656

 

 

 

411

 

 

 

283

 

 

 

542

 

 

 

1,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

169

 

 

 

328

 

 

 

202

 

 

 

200

 

 

 

899

 

Intangible asset amortization

 

-

 

 

 

6

 

 

 

12

 

 

 

-

 

 

 

18

 

Operating income from discontinued operations

 

487

 

 

 

77

 

 

 

69

 

 

 

342

 

 

 

975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

-

 

 

 

(44

)

 

 

(14

)

 

 

(54

)

 

 

(112

)

Income from discontinued operations

$

487

 

 

$

33

 

 

$

55

 

 

$

288

 

 

$

863

 

 

Six Months Ended June 30, 2023

 

 

Alpha®

 

 

BIZ®

 

 

Prell®

 

 

Scott's Liquid Gold®

 

 

Total

 

Net sales

$

879

 

 

$

2,164

 

 

$

-

 

 

$

187

 

 

$

3,230

 

Cost of sales

 

278

 

 

 

1,510

 

 

 

-

 

 

 

95

 

 

 

1,883

 

Gross profit

 

601

 

 

 

654

 

 

 

-

 

 

 

92

 

 

 

1,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

141

 

 

 

437

 

 

 

-

 

 

 

28

 

 

 

606

 

General and administrative

 

10

 

 

 

12

 

 

 

-

 

 

 

22

 

 

 

44

 

Intangible asset amortization

 

-

 

 

 

12

 

 

 

-

 

 

 

-

 

 

 

12

 

Operating income from discontinued operations

 

450

 

 

 

193

 

 

 

-

 

 

 

42

 

 

 

685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

-

 

 

 

(88

)

 

 

-

 

 

 

(18

)

 

 

(106

)

Gain on sale of discontinued operations

 

-

 

 

 

-

 

 

 

-

 

 

 

787

 

 

 

787

 

Income from discontinued operations

$

450

 

 

$

105

 

 

$

-

 

 

$

811

 

 

$

1,366

 

 

Six Months Ended June 30, 2022

 

 

Alpha®

 

 

BIZ®

 

 

Prell®

 

 

Scott's Liquid Gold®

 

 

Total

 

Net sales

$

1,917

 

 

$

2,423

 

 

$

1,591

 

 

$

2,313

 

 

$

8,244

 

Cost of sales

 

684

 

 

 

1,707

 

 

 

966

 

 

 

1,022

 

 

 

4,379

 

Gross profit

 

1,233

 

 

 

716

 

 

 

625

 

 

 

1,291

 

 

 

3,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

280

 

 

 

677

 

 

 

492

 

 

 

489

 

 

 

1,938

 

Intangible asset amortization

 

-

 

 

 

12

 

 

 

24

 

 

 

-

 

 

 

36

 

Operating income from discontinued operations

 

953

 

 

 

27

 

 

 

109

 

 

 

802

 

 

 

1,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

-

 

 

 

(88

)

 

 

(27

)

 

 

(108

)

 

 

(223

)

Income (loss) from discontinued operations

$

953

 

 

$

(61

)

 

$

82

 

 

$

694

 

 

$

1,668

 

There were no capital expenditures or significant operating and investing noncash items related to discontinued operations during the six months ended June 30, 2023 and 2022, respectively.

12


Reconciliation of Major Classes of Assets of the Discontinued Operations to Amounts Presented Separately in the Consolidated Balance Sheets as of:

 

June 30, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

Inventories

$

-

 

 

$

1,235

 

All assets in the above table are related to the discontinued operations of Scott's Liquid Gold®. There were no assets of discontinued operations related to Prell®, BIZ®, and Alpha® as of June 30, 2023 and December 31, 2022, respectively.

Assets Held for Sale

The following tables set forth the assets held for sale as of:

 

June 30, 2023

 

 

BIZ®

 

 

Alpha®

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Inventories

$

946

 

 

$

1,115

 

 

$

2,061

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

219

 

 

 

-

 

 

 

219

 

Assets held for sale

$

1,165

 

 

$

1,115

 

 

$

2,280

 

 

December 31, 2022

 

 

BIZ®

 

 

Alpha®

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Inventories

$

1,092

 

 

$

1,268

 

 

$

2,360

 

 

 

 

 

 

 

 

 

 

Intangible assets, net

 

231

 

 

 

-

 

 

 

231

 

Assets held for sale

$

1,323

 

 

$

1,268

 

 

$

2,591

 

We measured the assets held for sale at the lower of their carrying value or fair value less costs to sell. We did not record any impairment charges in the second quarter of 2023.

Note 4. Stock-Based Compensation

On May 11, 2023, we granted 200 shares of restricted stock to two directors all of which vested on the grant date with a fair value of $40.

On March 2, 2022, we granted 15 shares of restricted stock to one executive all of which vested on the grant date with a fair value of $18.

On January 18, 2022, we granted 25 RSUs to an employee (the “2022 Individual Employee Grant”) with a grant date fair value of $10. The 2022 Individual Employee Grant vested one-third on the initial grant date, and the remaining two-thirds will vest on each anniversary of the grant date.

On March 2, 2022, we granted 15 shares of restricted stock to one executive all of which vested on the grant date with a fair value of $18.

Compensation cost related to stock options totaled $100 and $4410 in the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The stock options were fully vested in the second quarter of 2022. There was no tax benefit from recording the non-cash expense as it relates to the options granted to employees, as these were qualified stock options which are not normally tax deductible.

10


Compensation cost related to RSUs totaled $10357 and $5576 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Approximately $17054 of total unrecognized compensation costs related to non-vested RSUs is expected to be recognized over the next three years.

13


Note 5. Earnings per Share

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

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

A reconciliation of the weighted average number of common shares outstanding (in thousands) is as follows. The dilutive effect of stock options and RSUs areis excluded for periods in which the impact is anti-dilutive and when the Company has a net loss because the impact is also anti-dilutive.

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

2022

 

 

2021

 

 

2022

 

 

2021

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Common shares outstanding, beginning of the period

 

12,749

 

 

 

12,618

 

 

 

12,727

 

 

 

12,618

 

 

12,797

 

 

 

12,749

 

 

 

12,797

 

 

 

12,727

 

Weighted average common shares issued

 

-

 

 

 

24

 

 

 

20

 

 

 

10

 

 

111

 

 

 

-

 

 

 

56

 

 

 

18

 

Weighted average number of common shares outstanding

 

12,749

 

 

 

12,642

 

 

 

12,747

 

 

 

12,628

 

 

12,908

 

 

 

12,749

 

 

 

12,853

 

 

 

12,745

 

Dilutive effect of common share equivalents

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Diluted weighted average number of common shares outstanding

 

12,749

 

 

 

12,642

 

 

 

12,747

 

 

 

12,628

 

 

12,908

 

 

 

12,749

 

 

 

12,853

 

 

 

12,745

 

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

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Stock options

 

153

 

 

 

15

 

 

 

153

 

 

 

15

 

 

Three Months and Six Months Ended June 30,

 

 

2023

 

 

2022

 

Stock options

 

60

 

 

 

213

 

Restricted stock units

 

31

 

 

 

104

 

Note 6. Segment Information

We operate in two different segments: household products and health and beauty care products. We have chosen to organize our business around these segments based on differences in the products sold. Accounting policies for our segments are the same as those described in Note 1. We evaluate segment performance based on segment income or loss from operations.

11


The following provides information on our segments for the three and ninesix months ended SeptemberJune 30:

Three Months Ended September 30, 2022

 

Three Months Ended June 30, 2023

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

2,748

 

 

$

1,529

 

 

$

4,277

 

$

847

 

 

$

691

 

 

$

1,538

 

Loss from operations

 

(371

)

 

 

(232

)

 

 

(603

)

 

(527

)

 

 

(142

)

 

 

(669

)

Capital and intangible asset expenditures

 

-

 

 

 

-

 

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

Depreciation and amortization

 

99

 

 

 

41

 

 

 

140

 

 

56

 

 

 

6

 

 

 

62

 

Three Months Ended September 30, 2021

 

Three Months Ended June 30, 2022

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

3,846

 

 

$

4,124

 

 

$

7,970

 

$

692

 

 

$

428

 

 

$

1,120

 

Loss from operations

 

(382

)

 

 

(548

)

 

 

(930

)

 

(4,567

)

 

 

(559

)

 

 

(5,126

)

Capital and intangible asset expenditures

 

113

 

 

 

-

 

 

 

113

 

 

43

 

 

 

-

 

 

 

43

 

Depreciation and amortization

 

297

 

 

 

155

 

 

 

452

 

 

148

 

 

 

27

 

 

 

175

 

 

Nine Months Ended September 30, 2022

 

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

9,103

 

 

$

6,346

 

 

$

15,449

 

Loss from operations

 

(4,854

)

 

 

(200

)

 

 

(5,054

)

Capital and intangible asset expenditures

 

142

 

 

 

-

 

 

 

142

 

Depreciation and amortization

 

386

 

 

 

93

 

 

 

480

 

14

 

Nine Months Ended September 30, 2021

 

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

10,762

 

 

$

13,821

 

 

$

24,583

 

Loss from operations

 

(1,960

)

 

 

(591

)

 

 

(2,551

)

Capital and intangible asset expenditures

 

262

 

 

 

-

 

 

 

262

 

Depreciation and amortization

 

893

 

 

 

464

 

 

 

1,357

 


 

Six Months Ended June 30, 2023

 

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

1,669

 

 

$

1,599

 

 

$

3,268

 

Loss from operations

 

(1,049

)

 

 

(286

)

 

 

(1,335

)

Capital and intangible asset expenditures

 

-

 

 

 

-

 

 

 

-

 

Depreciation and amortization

 

213

 

 

 

11

 

 

 

224

 

 

Six Months Ended June 30, 2022

 

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

1,619

 

 

$

1,309

 

 

$

2,928

 

Loss from operations

 

(5,313

)

 

 

(1,030

)

 

 

(6,343

)

Capital and intangible asset expenditures

 

142

 

 

 

-

 

 

 

142

 

Depreciation and amortization

 

287

 

 

 

52

 

 

 

339

 

Note 7. Goodwill and Intangible Assets

There was no impairment in the three months ended September 30, 2022 and 2021, respectively.

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. 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 intangible assets and resulted in impairment charges to our All-Purpose reporting unit during the nine months ended September 30, 2022 and resulted in the following impairment charges:

 

Intangible Assets

 

 

Goodwill

 

 

Total

 

All-Purpose

 

2,717

 

 

 

872

 

 

 

3,589

 

There was no impairment in the nine months ended September 30, 2021.

12


The changes in the carrying amount of goodwill by reporting unit for the nine months ended September 30, 2022 and 2021 were as follows:

 

Detergent

 

 

Shampoo

 

 

All-Purpose

 

 

Total

 

 

Balance, January 1, 2022

$

-

 

 

$

-

 

 

$

1,710

 

 

$

1,710

 

 

Additions

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Impairment

 

-

 

 

 

-

 

 

 

(872

)

 

 

(872

)

 

Balance, September 30, 2022

$

-

 

 

$

-

 

 

$

838

 

 

$

838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2021

$

593

 

 

$

1,520

 

 

$

1,710

 

 

$

3,823

 

 

Additions

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Impairment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Balance, September 30, 2021

$

593

 

 

$

1,520

 

 

$

1,710

 

 

$

3,823

 

 

Intangible assets, which are comprised of our capitalized costs of software obtained for internal-use or are related to our acquisition of our Prell®, Denorex®, BIZ® and Kids N Pets® brands,brand, consisted of the following:

As of September 30, 2022

 

 

As of December 31, 2021

 

As of June 30, 2023

 

 

As of December 31, 2022

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Value

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

-

 

 

$

-

 

 

$

-

 

 

$

2,103

 

 

$

329

 

 

$

1,774

 

Trade names

 

970

 

 

 

99

 

 

 

871

 

 

 

1,850

 

 

 

151

 

 

 

1,699

 

$

159

 

 

$

100

 

 

$

59

 

 

$

159

 

 

$

97

 

 

$

62

 

Formulas and batching processes

 

1,000

 

 

 

441

 

 

 

559

 

 

 

1,370

 

 

 

452

 

 

 

918

 

 

333

 

 

 

290

 

 

 

43

 

 

 

333

 

 

 

282

 

 

 

51

 

Internal-use software

 

898

 

 

 

60

 

 

 

838

 

 

 

756

 

 

 

-

 

 

 

756

 

 

898

 

 

 

195

 

 

 

703

 

 

 

898

 

 

 

105

 

 

 

793

 

Non-compete agreement

 

33

 

 

 

29

 

 

 

4

 

 

 

48

 

 

 

35

 

 

 

13

 

 

30

 

 

 

30

 

 

 

-

 

 

 

30

 

 

 

30

 

 

 

-

 

$

2,901

 

 

$

629

 

 

$

2,272

 

 

$

6,127

 

 

$

967

 

 

$

5,160

 

$

1,420

 

 

$

615

 

 

$

805

 

 

$

1,420

 

 

$

514

 

 

$

906

 

The change in the net carrying amounts of intangible assets during 2022 was due to capitalization of costs related to our internal-use software, the impact of impairment charges related to intangible assets in our All-Purpose reporting unit, and amortization expense. Amortization expense for the three months ended SeptemberJune 30, 20222023 and 20212022 was $8751 and $278103, respectively. Amortization expense for the ninesix months ended SeptemberJune 30, 20222023 and 20212022 was $313101 and $433226, respectively.

Estimated amortization expense for 20222023 and subsequent years is as follows:

Remainder of 2022

$

86

 

2023

 

344

 

Remainder of 2023

$

100

 

2024

 

344

 

 

201

 

2025

 

343

 

 

201

 

2026

 

342

 

 

192

 

2027

 

81

 

Thereafter

 

813

 

 

30

 

Total

$

2,272

 

$

805

 

Note 8. Long-Term Debt and Line-of-Credit

UMB Loan Agreement

On July 1, 2020, we entered into a Loan and Security Agreement (as amended, the “UMB Loan Agreement”) with UMB Bank, N.A. (“UMB”). Under the UMB Loan Agreement we obtained a $3,000 term loan, with equal monthly payments fully amortized over three years, and interest at which was repaid in full in the LIBOR Rate + 4.50% with a floorsecond quarter of 5.50%,2022, and a revolving credit facility, with a maximum commitment of $7,000 with interest at the LIBOR Rate + 3.75%, with a floor of 4.75%. On August 10, 2022, the revolving credit facility was reduced to a maximum commitment of $4,000 withbearing interest at the one monthone-month term SOFR rate + 6.83%, with a floor of 7.75%.

The UMB Loan Agreement was terminated on February 27, 2023 and the revolving credit facility will terminatewas paid in full on July 1, 2023, unless terminated earlier pursuant to the terms of the UMB Loan Agreement.February 28, 2023. The loans arewere secured by all of the assets of the Company and allits subsidiaries. Unamortized loan costs were $0 and $100 as of its subsidiaries.

13


The UMB Loan Agreement requires compliance with affirmative, negative,June 30, 2023 and financial covenants,December 31, 2022, respectively. Amortization of loan costs for the six months ended June 30, 2023 was $100, including $83 that were expensed as determined on a monthly basis. The UMB Loan Agreement also contains covenants typicalresult of transactionsthe termination of this type, including among others, limitations on our ability to: create, incur or assume any indebtedness or lien on our assets; pay dividends or make other distributions; redeem, retire or acquire outstanding common stock, options, warrants or other rights; make fundamental changes to our corporate structure or business; make investments or sell assets; or engage in certain other activities as set forth in the UMB Loan Agreement. The CompanyAmortization of loan costs for the six months ended June 30, 2022 was in compliance with the UMB Loan Agreement financial covenants as of September 30, 2022.$99.

As of September 30, 2022, our UMB revolving credit facility and UMB term loan had an outstanding balance of $152,414


 and $

0, respectively, with an all-in interest rate of 9.87% and 9.13%, respectively. Unamortized loan costs were as $149 of September 30, 2022.La Plata Loan Agreement

On November 9, 2021,, we entered into a loan and security agreement (the(as amended, the “La Plata Loan Agreement”) with La Plata Capital, LLC (“La Plata”). Under the La Plata Loan Agreement, we obtained a $2,000 term loan that bears interest at 14% and a maturity date$250 term loan that bears interest at 15%. We repaid $1,000 of November 9, 2023. Interest-only payments are required on a monthly basis beginning in January 2022 and ending on December 1, 2022. Beginning on January 1, 2023, monthly principal payments of $30 are required in addition to accrued and unpaid interest. All remaining unpaid principal and interest are fully due on November 9, 2023.

The La Plata Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis beginning in July 2022. The La Plata Loan Agreement is secured by all of the assets of the Company and all of its subsidiaries, subordinate to the security of the UMB Loan Agreement. In conjunction with this agreement, we also entered into an intercreditor and subordination agreement with UMB and La Plata, effective November 9, 2021. The Company was in compliance withagainst the La Plata Loan Agreement asduring the first quarter of September 30, 2022.

As of September 30, 2022, our La Plata term loan had an outstanding balance of $1,000. La Plata unamortizedUnamortized loan costs were $269 and $20 as of SeptemberJune 30, 2022.

As2023 and December 31, 2022, respectively. Amortization of Septemberloan costs for the six months ended June 30, 2023 and 2022 the total principal payments due on our outstanding debt were as follows:$11, respectively.

On July 7, 2023, the La Plata term loans were paid in full and the La Plata Loan Agreement was terminated.

 

Revolving Credit Facility

 

 

Term Loan

 

 

Total

 

Remainder of 2022

$

-

 

 

 

-

 

 

 

-

 

2023

 

2,414

 

 

 

1,000

 

 

 

3,414

 

Total minimum principal payments

$

2,414

 

 

$

1,000

 

 

$

3,414

 

Note 9. Leases

We have entered into a lease for our corporate headquarters with a remaining lease term of 97 years. This lease includes both lease and nonlease components, which are accounted for as a single lease component as we have elected the practical expedient to combine these components for all leases. As this lease does not provide an implicit rate, we calculated the right-of-use assets and lease liabilities using our secured incremental borrowing rate at the lease commencement date. We currently do not have any finance leases outstanding.

Information related to leases was as follows:

 

Three Months Ended September 30, 2022

 

Nine Months Ended September 30, 2022

 

Operating lease information:

 

 

 

 

Operating lease cost

$

100

 

$

300

 

Operating cash flows from operating leases

 

100

 

 

300

 

Net assets obtained in exchange for new operating lease liabilities

 

-

 

 

-

 

 

 

 

 

 

Weighted average remaining lease term in years

 

8.17

 

 

8.17

 

Weighted average discount rate

 

5.1

%

 

5.1

%

 

Three Months Ended June 30, 2023

 

Six Months Ended June 30, 2023

 

Operating lease information:

 

 

 

 

Operating lease cost

$

101

 

$

203

 

Operating cash flows from operating leases

 

101

 

 

203

 

Net assets obtained in exchange for new operating lease liabilities

 

-

 

 

-

 

 

 

 

 

 

Weighted average remaining lease term in years

 

7.42

 

 

7.42

 

Weighted average discount rate

 

5.1

%

 

5.1

%

14


 

Three Months Ended June 30, 2022

 

Six Months Ended June 30, 2022

 

Operating lease information:

 

 

 

 

Operating lease cost

$

100

 

$

200

 

Operating cash flows from operating leases

 

100

 

 

200

 

Net assets obtained in exchange for new operating lease liabilities

 

-

 

 

-

 

 

 

 

 

 

Weighted average remaining lease term in years

 

8.42

 

 

8.42

 

Weighted average discount rate

 

5.1

%

 

5.1

%

Future minimum annual lease payments are as follows:

Remainder of 2022

$

99

 

2023

 

406

 

Remainder of 2023

$

203

 

2024

 

413

 

 

413

 

2025

 

420

 

 

420

 

2026

 

427

 

 

427

 

2027

 

434

 

Thereafter

 

1,739

 

 

1,305

 

Total minimum lease payments

$

3,504

 

$

3,202

 

Less imputed interest

 

(659

)

 

(553

)

 

 

 

 

Total operating lease liability

$

2,845

 

$

2,649

 

15

16


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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.2022. This Item 2 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Please refer to "Item 1A. Risk Factors" in this Report and in our Annual Report on Form 10-K for the year ended December 31, 20212022 for a discussion of the uncertainties, risks and assumptions associated with these statements.

Executive Overview

Our Business

Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve while creating shareholder value. We develop, 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.

COVID-19 Pandemic

For our fiscal quarter ended September 30, 2022, the coronavirus (COVID-19) pandemic continuedPrimarily due to cause economic and social disruptions that led to ongoing uncertainties. During the first quarter of 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic. Such impacts have included significant volatilitydecline in the global stock markets, and uncertainty in the costs and performancenet sales, disruption of our supply chaininternational sales to China, and logistics partners. We expectincreases in costs associated with the manufacture and distribution of our products, the Company has experienced negative cash flows from operations for several reporting periods. In efforts to see continued volatility in these areas, which could impactimprove our operating results in future periods.

Supply Chainfinancial position and Outsourcing Partners

As a result of COVID-19, we have encountered, and expect to continue to experience, various supply chain disruptions impactingliquidity, the availability and lead timesCompany has pursued asset sales of certain raw materialsbrands where management has determined that the brand(s) are not aligned with our long-term goals for our finished goods products. We have been proactively identifying alternative sources for raw materials to mitigate the impacts of these disruptions. All of our outsourcing partners, including contract manufacturing plantsgrowth and third-party logistics warehouses, have remained open during the entirety of COVID-19, however, they have had difficulties with staffing their workforce to keep production lines running.

Inflation

Inflationary trends in certain markets and global supply chain challenges have, and are expected to continue to, negatively affect our sales and operating performance. We experienced the impact of greater inflation on material, logistical and other costs during the third quarter. We are aiming to offset these inflationary costs through a combination of pricing and cost savings strategies. We currently anticipate the impact of inflation in certain markets will be increasingly significant continuing into the fourth quarter and fiscal 2023. Weprofitability. The Company will continue to implement mitigation strategiesconsider a wide range of options, including one or more of the following: the sale of additional brands; a sale, merger, or other strategic transaction involving the entire company; acquisitions of other brands or companies; issuance of additional debt or equity; and price increasescontinuing to offset these trends; however, such measures may not fully offset the impact to our operating performance.operate as a public, independent company.

Distribution Agreement with Church & DwightDivestitures

Our distribution agreement with Church & Dwight Co., Inc. (“Church & Dwight”)Closed in July 2023 and our subsidiary, Neoteric Cosmetics, Inc., was not extended beyondeffective June 30, 2023, we sold the Expiration Date of December 31, 2021. As a result, the distribution agreement expired on its own terms as of the Expiration Date 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 $4,704 for the nine months ended September 30, 2021.

16


Sale of DryelAlpha® Brand

On December 23, 2021,Skin Care product line to a company that markets and distributes skin care products. Closed in July 2023 and effective June 30, 2023, we sold the DryelBIZ® product line to a company that markets and distributes laundry products. The assets of Alpha® and BIZ® are classified as assets held for sale as of June 30, 2023 and December 31, 2022, and their operations have been classified as income from discontinued operations for all periods presented. 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 DryelScott's Liquid Gold® and Prell®as discontinued operations for all periods presented. These results are excluded from our segment results of household products, which previously included Dryel®

operating results. See Note 3 - “Discontinued Operations”Operations and Assets Held for Sale” in the Notes to Condensed 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 one year 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.

17


Results of Operations

Three months ended SeptemberJune 30, 20222023 compared to three months ended SeptemberJune 30, 20212022

Three Months Ended September 30, (in thousands)

 

Three Months Ended June 30, (in thousands)

 

 

 

 

 

 

Increase / (Decrease)

 

 

 

 

 

 

Increase / (Decrease)

 

2022

 

 

2021

 

 

$

 

 

%

 

2023

 

 

2022

 

 

$

 

 

%

 

Net sales

$

4,277

 

 

$

7,970

 

 

$

(3,693

)

 

 

(46.3

%)

$

1,538

 

 

$

1,120

 

 

$

418

 

 

 

37.3

%

Cost of sales

 

2,358

 

 

 

5,100

 

 

 

(2,742

)

 

 

(53.8

%)

 

824

 

 

 

737

 

 

 

87

 

 

 

11.8

%

Gross profit

 

1,919

 

 

 

2,870

 

 

 

(951

)

 

 

(33.1

%)

 

714

 

 

 

383

 

 

 

331

 

 

 

86.4

%

Gross margin

 

44.9

%

 

 

36.0

%

 

 

 

 

 

 

46.4

%

 

 

34.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

166

 

 

 

144

 

 

 

22

 

 

 

15.3

%

 

120

 

 

 

174

 

 

 

(54

)

 

 

(31.0

%)

Selling

 

1,691

 

 

 

2,542

 

 

 

(851

)

 

 

(33.5

%)

 

574

 

 

 

867

 

 

 

(293

)

 

 

(33.8

%)

General and administrative

 

578

 

 

 

836

 

 

 

(258

)

 

 

(30.9

%)

 

638

 

 

 

776

 

 

 

(138

)

 

 

(17.8

%)

Intangible asset amortization

 

87

 

 

 

278

 

 

 

(191

)

 

 

(68.7

%)

 

51

 

 

 

103

 

 

 

(52

)

 

 

(50.5

%)

Impairment of goodwill and intangible assets

 

-

 

 

 

3,589

 

 

 

(3,589

)

 

 

(100.0

%)

Total operating expenses

 

2,522

 

 

 

3,800

 

 

 

(1,278

)

 

 

(33.6

%)

 

1,383

 

 

 

5,509

 

 

 

(4,126

)

 

 

(74.9

%)

Loss from operations

 

(603

)

 

 

(930

)

 

 

327

 

 

 

35.2

%

 

(669

)

 

 

(5,126

)

 

 

4,457

 

 

 

86.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(139

)

 

 

(109

)

 

 

(30

)

 

 

(27.5

%)

 

(6

)

 

 

(18

)

 

 

12

 

 

 

66.7

%

Loss before income taxes and discontinued operations

 

(742

)

 

 

(1,039

)

 

 

297

 

 

 

28.6

%

 

(675

)

 

 

(5,144

)

 

 

4,469

 

 

 

86.9

%

Income tax expense

 

(2

)

 

 

(1,224

)

 

 

1,222

 

 

 

99.8

%

 

(6

)

 

 

(52

)

 

 

46

 

 

 

88.5

%

Loss from continuing operations

 

(744

)

 

 

(2,263

)

 

 

1,519

 

 

 

67.1

%

 

(681

)

 

 

(5,196

)

 

 

4,515

 

 

 

86.9

%

Loss from discontinued operations

 

-

 

 

 

(205

)

 

 

205

 

 

 

100.0

%

Income from discontinued operations

 

228

 

 

 

863

 

 

 

(635

)

 

 

(73.6

%)

Net loss

$

(744

)

 

$

(2,468

)

 

$

1,724

 

 

 

69.9

%

$

(453

)

 

$

(4,333

)

 

$

3,880

 

 

 

89.5

%

Change in net loss wasOur operating results were primarily due toimpacted by the following:

LowerIncreases in net sales, cost of sales, and gross profits from the conclusionprofit are due to increased distribution of our distribution agreement with Church & Dwight for Batiste products as well as reduced salessold at existing and gross profits from various product lines due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures.
Gross margin increased due to product sales mix including the elimination of our Church and Dwight distribution agreement, as distributed products required higher promotional activity with customers which reduced our margins.certain new customers.
Decrease in selling expenses was a result ofis primarily due to lower logistics and warehousing costs from lower sales as well asa consolidation of our third-party logistics partners, and a reduction in personnel costs related to asset divestitures.
Decreased general and administrative costs primarily due to a reduction in legal and professional fees, lower bank charges from the termination of our UMB Loan Agreement, and reduced personnel costs.
DecreaseDecreased intangible asset amortization from reduced carrying amounts related to impairments recognized in general and administrative costs due to changes in personnel and related costs.2022.
DecreaseResults from discontinued operations, which are disclosed in income tax expense as a valuation allowance on our deferred tax asset was established duringNote 3 to the third quarter of 2021.Condensed Consolidated Financial Statements.

1718


Segment Results

Household products

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

Three Months Ended September 30, (in thousands)

 

Three Months Ended June 30, (in thousands)

 

 

 

 

 

 

Increase / (Decrease)

 

 

 

 

 

 

Increase / (Decrease)

 

2022

 

 

2021

 

 

$

 

 

%

 

2023

 

 

2022

 

 

$

 

 

%

 

Net sales

$

2,748

 

 

$

3,846

 

 

$

(1,098

)

 

 

(28.5

%)

$

847

 

 

$

692

 

 

$

155

 

 

 

22.4

%

Gross profit

$

1,084

 

 

$

1,514

 

 

$

(430

)

 

 

(28.4

%)

$

392

 

 

$

186

 

 

$

206

 

 

 

110.8

%

Gross margin

 

39.4

%

 

 

39.4

%

 

 

 

 

 

 

46.3

%

 

 

26.9

%

 

 

 

 

 

Loss from operations

$

(371

)

 

$

(382

)

 

$

11

 

 

 

2.9

%

$

(527

)

 

$

(4,567

)

 

$

4,040

 

 

 

88.5

%

Net sales and gross profits decreasedprofit increased due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures. In addition, supply chain affected in-stock levels of certain products. Due to low inventory levels in the third quarter of 2022,additional sales of BIZ powderKids N Pets® and Messy Pet® products decreased compared to the same period in the prior year.existing customers.
Loss from operations was offsetimproved primarily due to decreases indecreased selling expenses from the consolidation of our third-party logistics partners. Our loss from operations in the second quarter of 2022 was impacted by the impairment of goodwill and general and administrative costs.intangible assets associated with our All-Purpose reporting unit.

Health and beauty care products

The following table shows comparative net sales, gross margin, gross profit, income or loss from operations, volume and percentage changes for health and beauty care products between periods:

 

Three Months Ended September 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales - distributed products

$

-

 

 

$

1,535

 

 

$

(1,535

)

 

 

(100.0

%)

Net sales - manufactured products

 

1,529

 

 

 

2,589

 

 

 

(1,060

)

 

 

(40.9

%)

Total health and beauty net sales

$

1,529

 

 

$

4,124

 

 

$

(2,595

)

 

 

(62.9

%)

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$

835

 

 

$

1,356

 

 

$

(521

)

 

 

(38.4

%)

Gross margin

 

54.6

%

 

 

32.9

%

 

 

 

 

 

 

Loss from operations

$

(232

)

 

$

(548

)

 

$

316

 

 

 

57.7

%

Net sales of distributed health and beauty care products decreased due to the termination of our Batiste distribution agreement with Church & Dwight in December 2021.

 

Three Months Ended June 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2023

 

 

2022

 

 

$

 

 

%

 

Net sales

$

691

 

 

$

428

 

 

$

263

 

 

 

61.4

%

Gross profit

$

322

 

 

$

197

 

 

$

125

 

 

 

63.6

%

Gross margin

 

46.7

%

 

 

46.0

%

 

 

 

 

 

 

Loss from operations

$

(142

)

 

$

(559

)

 

$

417

 

 

 

74.6

%

Net sales and gross profits from manufactured products decreasedincreased due to the elimination of sales to our exclusive China distributor of Alpha® Skin Care products. During the first quarter of 2022 we also eliminatedadditional sales of our Prell® and Denorex® brandsto existing customers as well as sales growth to certain customers with minimal profitability.new customers.
Gross margins increased due toIncome from operations resulted from decreased selling expenses from the eliminationconsolidation of our Church & Dwight distribution agreement and elimination of sales of our shampoo products to certain customers, as these sales required higher promotional activity which reduced our margins.

18


Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

 

Nine Months Ended September 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales

$

15,449

 

 

$

24,583

 

 

$

(9,134

)

 

 

(37.2

%)

Cost of sales

 

8,337

 

 

 

14,624

 

 

 

(6,287

)

 

 

(43.0

%)

Gross profit

 

7,112

 

 

 

9,959

 

 

 

(2,847

)

 

 

(28.6

%)

Gross margin

 

46.0

%

 

 

40.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

492

 

 

 

506

 

 

 

(14

)

 

 

(2.8

%)

Selling

 

5,752

 

 

 

7,388

 

 

 

(1,636

)

 

 

(22.1

%)

General and administrative

 

2,020

 

 

 

3,782

 

 

 

(1,762

)

 

 

(46.6

%)

Intangible asset amortization

 

313

 

 

 

834

 

 

 

(521

)

 

 

(62.5

%)

Impairment of goodwill and intangible assets

 

3,589

 

 

 

-

 

 

 

3,589

 

 

 

100.0

%

Total operating expenses

 

12,166

 

 

 

12,510

 

 

 

(344

)

 

 

(2.7

%)

Loss from operations

 

(5,054

)

 

 

(2,551

)

 

 

(2,503

)

 

 

(98.1

%)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(419

)

 

 

(219

)

 

 

(200

)

 

 

(91.3

%)

Loss before income taxes and discontinued operations

 

(5,473

)

 

 

(2,770

)

 

 

(2,703

)

 

 

(97.6

%)

Income tax expense

 

(55

)

 

 

(798

)

 

 

743

 

 

 

93.1

%

Loss from continuing operations

 

(5,528

)

 

 

(3,568

)

 

 

(1,960

)

 

 

(54.9

%)

Loss from discontinued operations

 

-

 

 

 

(246

)

 

 

246

 

 

 

100.0

%

Net loss

$

(5,528

)

 

$

(3,814

)

 

$

(1,714

)

 

 

(44.9

%)

 

 

 

 

 

 

 

 

 

 

 

 

Change in net loss was primarily due to the following:

Lower sales and gross profits from the conclusion of our distribution agreement with Church & Dwight for Batiste products, as well as reduced sales and gross profits from various product lines due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures. In addition, supply chain affected in-stock levels of certain products and impacted our sales to customers.
Gross margin increased due to product sales mix including the elimination of our Church and Dwight distribution agreement, as distributed products required higher promotional activity with customers which reduced our margins.
Decrease in selling expenses caused by lowerthird-party logistics and warehousing costs from lower salespartners as well as a reduction in personnel costs.

19


Six months ended June 30, 2023 compared to six months ended June 30, 2022

 

Six Months Ended June 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2023

 

 

2022

 

 

$

 

 

%

 

Net sales

$

3,268

 

 

$

2,928

 

 

$

340

 

 

 

11.6

%

Cost of sales

 

1,826

 

 

 

1,599

 

 

 

227

 

 

 

14.2

%

Gross profit

 

1,442

 

 

 

1,329

 

 

 

113

 

 

 

8.5

%

Gross margin

 

44.1

%

 

 

45.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

275

 

 

 

326

 

 

 

(51

)

 

 

(15.6

%)

Selling

 

1,146

 

 

 

1,970

 

 

 

(824

)

 

 

(41.8

%)

General and administrative

 

1,255

 

 

 

1,561

 

 

 

(306

)

 

 

(19.6

%)

Intangible asset amortization

 

101

 

 

 

226

 

 

 

(125

)

 

 

(55.3

%)

Impairment of goodwill and intangible assets

 

-

 

 

 

3,589

 

 

 

(3,589

)

 

 

(100.0

%)

Total operating expenses

 

2,777

 

 

 

7,672

 

 

 

(4,895

)

 

 

(63.8

%)

Loss from operations

 

(1,335

)

 

 

(6,343

)

 

 

5,008

 

 

 

79.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(113

)

 

 

(57

)

 

 

(56

)

 

 

(98.2

%)

Loss before income taxes and discontinued operations

 

(1,448

)

 

 

(6,400

)

 

 

4,952

 

 

 

77.4

%

Income tax expense

 

(2

)

 

 

(52

)

 

 

50

 

 

 

96.2

%

Loss from continuing operations

 

(1,450

)

 

 

(6,452

)

 

 

5,002

 

 

 

77.5

%

Income from discontinued operations

 

1,366

 

 

 

1,668

 

 

 

(302

)

 

 

(18.1

%)

Net loss

$

(84

)

 

$

(4,784

)

 

$

4,700

 

 

 

98.2

%

Our operating results were primarily impacted by the following:

Increases in net sales, cost of sales, and gross profit are due to increased distribution of our products sold at existing and certain new customers.
Decrease in selling expenses is primarily due to lower logistics and warehousing costs from a consolidation of our third-party logistics partners, and a reduction in personnel costs related to asset divestitures.
Decreased general and administrative costs primarily due to changesa reduction in legal and professional fees, lower bank charges from the termination of our UMB Loan Agreement, and reduced personnel and related costs as well as reductions in restructuring costs associated with separation of employees during 2021.costs.
Decreased intangible asset amortization is primarily from reduced carrying amounts related to impairments recognized in the fourth quarter of 2021.2022.
Impairment of goodwill and intangible assets associated with our All-Purpose reporting unit.Results from discontinued operations, which are disclosed in Note 3 to the Condensed Consolidated Financial Statements.

1920


Segment Results

Household products

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

Nine Months Ended September 30, (in thousands)

 

Six Months Ended June 30, (in thousands)

 

 

 

 

 

 

Increase / (Decrease)

 

 

 

 

 

 

Increase / (Decrease)

 

2022

 

 

2021

 

 

$

 

 

%

 

2023

 

 

2022

 

 

$

 

 

%

 

Net sales

$

9,103

 

 

$

10,762

 

 

$

(1,659

)

 

 

(15.4

%)

$

1,669

 

 

$

1,619

 

 

$

50

 

 

 

3.1

%

Gross profit

$

3,714

 

 

$

4,213

 

 

$

(499

)

 

 

(11.8

%)

$

728

 

 

$

624

 

 

$

104

 

 

 

16.7

%

Gross margin

 

40.8

%

 

 

39.1

%

 

 

 

 

 

 

43.6

%

 

 

38.5

%

 

 

 

 

 

Loss from operations

$

(4,854

)

 

$

(1,960

)

 

$

(2,894

)

 

 

(147.7

%)

$

(1,049

)

 

$

(5,313

)

 

$

4,264

 

 

 

80.3

%

Net sales and gross profit decreasedincreased due to changes in our customers’ purchasing strategies relatedadditional sales of Kids N Pets® and Messy Pet® products to inventory and inflationary pressures as well as supply chain disruptions.existing customers. Gross margins improved due to impairments of inventories that occurred during the second quarter of 2022.
Loss from operations improved primarily due to decreased selling expenses from the consolidation of our third-party logistics partners. Our loss from operations in the second quarter of 2022 was impacted by the impairment of goodwill and intangible assets associated with our All-Purpose reporting unit and partially offset by reductions in selling and general and administrative costs.unit.

Health and beauty care products

The following table shows comparative net sales, gross margin, gross profit, income or loss from operations, volume and percentage changes for health and beauty care products between periods:

 

Nine Months Ended September 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales- distributed products

$

-

 

 

$

4,704

 

 

$

(4,704

)

 

 

(100.0

%)

Net sales- manufactured products

 

6,346

 

 

 

9,117

 

 

 

(2,771

)

 

 

(30.4

%)

Total healthcare and beauty net sales

$

6,346

 

 

$

13,821

 

 

$

(7,475

)

 

 

(54.1

%)

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$

3,398

 

 

$

5,746

 

 

$

(2,348

)

 

 

(40.9

%)

Gross margin

 

53.5

%

 

 

41.6

%

 

 

 

 

 

 

Loss from operations

$

(200

)

 

$

(591

)

 

$

391

 

 

 

66.2

%

Net sales of distributed health and beauty care products decreased due to the termination of our Batiste distribution agreement with Church & Dwight in December 2021.

 

Six Months Ended June 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2023

 

 

2022

 

 

$

 

 

%

 

Net sales

$

1,599

 

 

$

1,309

 

 

 

290

 

 

 

22.1

%

Gross profit

$

714

 

 

$

705

 

 

$

9

 

 

 

1.2

%

Gross margin

 

44.6

%

 

 

53.9

%

 

 

 

 

 

 

Loss from operations

$

(286

)

 

$

(1,030

)

 

$

744

 

 

 

72.2

%

Net sales and gross profits from manufactured productsincreased due to additional sales of Denorex® to existing customers as well as sales growth to certain new customers. Gross margin decreased due to rising costs of products, inventory impairments, and the eliminationsales mix of sales to our exclusive China distributor of Alpha® Skin Care products. During the first quarter of 2022 we also eliminated sales of our Prell® and Denorex® brandsproducts sold to certain customers with minimal profitability.customers.
Gross margins increased due toLoss from operations resulted from decreased selling expenses from the eliminationconsolidation of our Church & Dwight distribution agreement and elimination of sales of our shampoo products to certain customers,third-party logistics partners as these sales required higher promotional activity which reduced our margins.well as a reduction in personnel costs.

20


Liquidity and Capital Resources

Overview

Our primary sources of funds include cash expected to be generated from operations and borrowings from our linesale of credit.brands. Our principal uses of cash are to fund planned operating expenditures, interest payments, and any principal payments on our line of credit.expenditures. Working capital movements are influenced by the sourcing of finished goods inventories.materials related to the production of products.

Financing Agreements

Please see Note 8 to our Condensed Consolidated Financial Statements for information on our La Plata Loan Agreement, which was terminated in July 2023, and our UMB Loan Agreement, and La Plata Loan Agreement.which was terminated in February 2023.

Liquidity and Changes in Cash Flows

At SeptemberJune 30, 2022,2023, we had $944 available on our revolving credit facility with UMB, and $139approximately $608 in cash on hand, a decreasean increase of $1,131 when compared to the balance as of$559 from December 31, 2021 as this cash was utilized to reduce long-term debt balances.2022.

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

21

 

Nine Months Ended September 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Operating activities

$

(1,189

)

 

$

(1,394

)

 

$

205

 

 

 

14.7

%

Investing activities

 

(142

)

 

 

(262

)

 

 

120

 

 

 

45.8

%

Financing activities

 

200

 

 

 

1,909

 

 

 

(1,709

)

 

 

(89.5

%)


 

Six Months Ended June 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2023

 

 

2022

 

 

$

 

 

%

 

Operating activities

$

907

 

 

$

466

 

 

$

441

 

 

 

94.6

%

Investing activities

 

1,936

 

 

 

(142

)

 

 

2,078

 

 

 

1,463.4

%

Financing activities

 

(2,284

)

 

 

(1,278

)

 

 

(1,006

)

 

 

(78.7

%)

Net cash used inprovided by operating activities was primarily related to conversion of working capital from accounts receivable and offsetinventories.
Net cash provided by investments in finished goods inventories.investing activities was due to the sale of our Scott's Liquid Gold® brand.
Net cash used in investing activities was due to purchases relating to our internal-use software.
Net cash provided by financing activities was from proceedsrepayments and termination of our various debt facilities which is used for working capital.UMB Loan Agreement and offset by proceeds from our La Plata Loan Agreement.

The uncertainty relatedcash received from the sales of our BIZ® and Alpha® Skin Care brands in July and August 2023 was $3,700 and was partially used to the COVID-19 outbreak has impactedpay off and terminate our La Plata Loan Agreement. While we believe that our current cash reserves represent sufficient cash flows to fund our operations, and could affect our future results. Our liquidity has been affected by inflationary pressures at our customers which have caused sales decreases and higher costs on materials, logistics, and other purchases.

Primarily due We expect that our current cash reserves will be sufficient to a decline in net sales and increases in costs associated with the manufacture and distribution of our products, the Company used netmeet operational cash in operating activities of $1,189needs during the ninenext twelve months, ended September 30, 2022. The Company’s debt agreements with UMB Bank, N.A. and La Plata Capital, LLC mature on July 1, 2023 and November 9, 2023, respectively. Management’s assessment of cash flow forecasts indicate that, absent any other action,but further economic impacts to our sales to customers or supply chain disruptions in the Company likely will require additional liquidity to continue its operations over the next 12 months.short-term could impact our liquidity.

Management has implemented actions to reduce the Company’s operating expenses and has approved a plan to extend and restructure debt facilities. Management is considering additional various strategic actions including asset sales, workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to ensure alignment with customer demand in order to address liquidity needs and pursue its business plan. The Company expects that these strategic actions will reduce expenses and outstanding debt balances and provide required liquidity for ongoing operations. If these plans aren't successfully implemented there could be substantial doubt about the Company's ability to continue as a going concern.

21


ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

AnAs of June 30, 2023, we conducted an evaluation, was performed as of September 30, 2022, under the supervision and with the participation of our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2023 due to the previously discloseda material weakness relatingin our internal controls resulting from our finance department not being able to process and account for complex, non-routine transactions in accordance with GAAP. Management concluded that we lack a sufficient number of trained professionals with technical accounting expertise to process and account for complex and non-routine transactions.

Remediation Plan

We are committed to maintaining a strong internal control environment and we are developing a remediation plan designed to help ensure that this material weakness is remediated as soon as possible, by establishing internal control(s) to identify complex, non-routine accounting transactions and engaging the operatingassistance of accounting expert(s) as needed to assist in the accounting and reporting of these transactions.

The material weakness will not be considered remediated until a sustained period of time has passed to allow management to test the design and operational effectiveness of the review of the impairment assessment of goodwill prepared by a third-party firm. We believe the actions described in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2022 will be sufficient to remediate the identified material weakness and related disclosure controls and procedures. However, we do not believe that the new and enhanced controls and procedures have been implemented for a sufficient amount of time for management to conclude thatcorrective actions. Until the material weakness is remediated, we plan to continue to perform additional analyses and other procedures to ensure that our Condensed Consolidated Financial Statements are prepared in the Company’saccordance with GAAP.

Notwithstanding such material weakness in internal controlscontrol over financial reporting, our President and effectivenessChief Financial Officer have concluded that the Condensed Consolidated Financial Statements in Part I, Item 1 of related disclosure controlsthis report, present fairly, in all material respects, our financial position, results of operations, and procedures has been fully remediated, and we are stillcash flows for the periods presented in the process of improving those controls and procedures. We will continue to improve and monitor the effectiveness of these controls and will make any further changes that management determines to be appropriate.conformity with GAAP.

Changes in Internal Control over Financial Reporting

In June 2022, we implemented an enterprise resource planning (“ERP”) software system on a company-wide basis. Despite this transition in software, there has not been a significantThere was no change in internal controls over financial reporting. Over the remainder of 2022, certain internal controls over financial reporting will be automated, modified, or implemented to address the new control environment associated with the ERP system. Additionally, the Company completed pre-implementation and post-implementation internal control monitoring associated with the launch. While we believe that this new system will enhance its internal control over financial reporting, there are inherent risks in implementing any new system, and we will continue to monitor and evaluate these control changes as part of our assessment of the control design and effectiveness throughout 2022.

There have been no other changes in our internal control over financial reporting that occurred during the third quarter of 2022three months ended June 30, 2023 that has materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.

22


PART II

ITEM 1A. RISK FACTORS

We have identified a material weakness in our internal control over financial reporting.

We are a public reporting company subject to the rules and regulations established from time to time by the SEC. As a public company we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting.

As disclosed in Part I, Item 4, “Disclosure Controls and Procedures,” we have identified a material weakness in our controls related to the operating effectivenessour finance department lacking a sufficient number of the review of the impairment assessment of goodwill prepared by a third-party firmtrained professionals with technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP as of June 30, 2022. We did not maintain effective controls to sufficiently review the completeness and accuracy of the impairment assessment.2023.

This material weakness did not result in any restatements to our Condensed Consolidated Financial Statements. Our management is committed to remediating this material weakness and is in the process of developing a remediation plan to address the material weakness.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition, or future results.

ITEM 6. EXHIBITS

Exhibit Number

Document

10.1

Restricted Stock Award Agreement, dated May 15, 2023, between Scott's Liquid Gold-Inc. and Daniel Roller

10.2

Asset Purchase Agreement, by and among the Company, SLG Chemicals, Inc. and Commercial Brands LLC, dated June 30, 2023

10.3

Asset Purchase Agreement, by and among the Company, Neoteric Cosmetics, Inc. and Alpha Skin LLC dated June 30, 2023

31.1

Rule 13a-14(a) Certification of the President.

31.2

Rule 13a-14(a) Certification of the Chief Financial Officer.

32.1*

Section 1350 Certification.

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRLtagsXBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Furnished, not filed.

23


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SCOTT’S LIQUID GOLD-INC.

By:

/s/ Tisha Pedrazzini

Tisha Pedrazzini, President

(Principal Executive Officer)

By:

/s/ David M. Arndt

David M. Arndt, Chief Financial Officer

(Principal Financial and Chief Accounting Officer)

Date: NovemberAugust 14, 20222023

24