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

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

For the quarterly period ended March 31, September 30, 2022

OR

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

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

For the transition period from to 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

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, May 10,November 13, 2022 the registrant had 12,749,156 12,805,663shares 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;
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 assessment of goodwill 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, 2021 and subsequent Quarterly Reports on Form 10-Q.

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;

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 dependence on the efforts of 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;

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, 2021 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

1516

 

Item 4.

 

Controls and Procedures

1922

 

PART II

 

 

Item 1A.

 

Risk Factors

2023

 

Item 6.

 

Exhibits

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

PART I

ITEM 1. FINANCIAL STATEMENTS.

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 March 31,

 

September 30,

 

 

September 30,

 

2022

 

 

2021

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

$

5,790

 

 

$

8,844

 

$

4,277

 

 

$

7,970

 

 

$

15,449

 

 

$

24,583

 

Cost of sales

 

2,856

 

 

 

4,840

 

 

2,358

 

 

 

5,100

 

 

 

8,337

 

 

 

14,624

 

Gross Profit

 

2,934

 

 

 

4,004

 

Gross profit

 

1,919

 

 

 

2,870

 

 

 

7,112

 

 

 

9,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

135

 

 

 

159

 

 

166

 

 

 

144

 

 

 

492

 

 

 

506

 

Selling

 

2,204

 

 

 

2,415

 

 

1,691

 

 

 

2,542

 

 

 

5,752

 

 

 

7,388

 

General and administrative

 

791

 

 

 

1,285

 

 

578

 

 

 

836

 

 

 

2,020

 

 

 

3,782

 

Intangible asset amortization

 

105

 

 

 

265

 

 

87

 

 

 

278

 

 

 

313

 

 

 

834

 

Impairment of goodwill and intangible assets

 

-

 

 

 

-

 

 

 

3,589

 

 

 

-

 

Total operating expenses

 

3,235

 

 

 

4,124

 

 

2,522

 

 

 

3,800

 

 

 

12,166

 

 

 

12,510

 

Loss from operations

 

(301

)

 

 

(120

)

 

(603

)

 

 

(930

)

 

 

(5,054

)

 

 

(2,551

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(150

)

 

 

(35

)

 

(139

)

 

 

(109

)

 

 

(419

)

 

 

(219

)

Loss before income taxes and discontinued operations

 

(451

)

 

 

(155

)

 

(742

)

 

 

(1,039

)

 

 

(5,473

)

 

 

(2,770

)

Income tax benefit

 

-

 

 

 

41

 

Income tax expense

 

(2

)

 

 

(1,224

)

 

 

(55

)

 

 

(798

)

Loss from continuing operations

 

(451

)

 

 

(114

)

 

(744

)

 

 

(2,263

)

 

 

(5,528

)

 

 

(3,568

)

Loss from discontinued operations, net of taxes

 

-

 

 

 

(166

)

 

-

 

 

 

(205

)

 

 

-

 

 

 

(246

)

Net loss

$

(451

)

 

$

(280

)

$

(744

)

 

$

(2,468

)

 

$

(5,528

)

 

$

(3,814

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

$

(0.04

)

 

$

(0.01

)

$

(0.06

)

 

$

(0.18

)

 

$

(0.43

)

 

$

(0.28

)

Loss from discontinued operations

$

-

 

 

$

(0.01

)

$

-

 

 

$

(0.02

)

 

$

-

 

 

$

(0.02

)

Net loss

$

(0.04

)

 

$

(0.02

)

$

(0.06

)

 

$

(0.20

)

 

$

(0.43

)

 

$

(0.30

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

12,739

 

 

 

12,618

 

 

12,749

 

 

 

12,642

 

 

 

12,747

 

 

 

12,628

 

 















 

See accompanying notes to these Condensed Consolidated Financial Statements.

1



 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except par value amounts)

 

March 31,

 

 

December 31,

 

2022

 

 

2021

 

September 30,

 

December 31,

 

 

 

 

 

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

22

 

 

$

770

 

$

14

 

 

$

770

 

Restricted cash

 

375

 

 

 

500

 

 

125

 

 

 

500

 

Accounts receivable, net

 

2,399

 

 

 

3,516

 

 

1,791

 

 

 

3,516

 

Inventories

 

6,174

 

 

 

5,677

 

 

6,289

 

 

 

5,677

 

Income taxes receivable

 

320

 

 

 

320

 

 

247

 

 

 

320

 

Prepaid expenses

 

422

 

 

 

436

 

 

214

 

 

 

436

 

Total current assets

 

9,712

 

 

 

11,219

 

 

8,680

 

 

 

11,219

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

5

 

 

 

7

 

 

3

 

 

 

7

 

Goodwill

 

1,710

 

 

 

1,710

 

 

838

 

 

 

1,710

 

Intangible assets, net

 

5,153

 

 

 

5,160

 

 

2,272

 

 

 

5,160

 

Operating lease right-of-use assets

 

2,675

 

 

 

2,735

 

 

2,553

 

 

 

2,735

 

Other assets

 

38

 

 

 

38

 

 

38

 

 

 

38

 

Total assets

$

19,293

 

 

$

20,869

 

$

14,384

 

 

$

20,869

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

2,289

 

 

$

2,647

 

$

1,750

 

 

$

2,647

 

Accrued expenses

 

693

 

 

 

747

 

 

397

 

 

 

747

 

Current portion of long-term debt

 

840

 

 

 

1,000

 

 

2,684

 

 

 

1,000

 

Operating lease liabilities, current portion

 

259

 

 

 

251

 

 

264

 

 

 

251

 

Total current liabilities

 

4,081

 

 

 

4,645

 

 

5,095

 

 

 

4,645

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,321

 

 

 

1,876

 

 

555

 

 

 

1,876

 

Operating lease liabilities, net of current

 

2,711

 

 

 

2,780

 

 

2,581

 

 

 

2,780

 

Other liabilities

 

27

 

 

 

27

 

 

27

 

 

 

27

 

Total liabilities

 

8,140

 

 

 

9,328

 

 

8,258

 

 

 

9,328

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, no par value, authorized 20,000 shares; 0 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

 

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

 

Capital in excess of par

 

7,850

 

 

 

7,789

 

 

7,900

 

 

 

7,789

 

Retained earnings

 

2,028

 

 

 

2,479

 

(Accumulated deficit) retained earnings

 

(3,049

)

 

 

2,479

 

Total shareholders’ equity

 

11,153

 

 

 

11,541

 

 

6,126

 

 

 

11,541

 

Total liabilities and shareholders’ equity

$

19,293

 

 

$

20,869

 

$

14,384

 

 

$

20,869

 

 

 




 

 

See accompanying notes to these Condensed Consolidated Financial Statements.

2



 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

 

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(in thousands)

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital in Excess of Par

 

 

Retained Earnings

 

 

Total

 

Common Stock

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,333

)

 

 

(4,333

)

Balance, June 30, 2022 (Unaudited)

 

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

 

 





 

 

 

 

 

 

 

 

 

See accompanying notes to these Condensed Consolidated Financial Statements.

3


 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

Nine Months Ended

 

 

September 30,

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(5,528

)

 

$

(3,568

)

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

 

 

 

 

 

Depreciation and amortization

 

480

 

 

 

1,357

 

Stock-based compensation

 

113

 

 

 

99

 

Deferred income taxes

 

-

 

 

 

784

 

Impairment of goodwill and intangible assets

 

3,589

 

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,725

 

 

 

228

 

Inventories

 

(612

)

 

 

(2,651

)

Prepaid expenses and other assets

 

222

 

 

 

175

 

Income taxes receivable

 

73

 

 

 

192

 

Accounts payable, accrued expenses, and other liabilities

 

(1,251

)

 

 

1,990

 

Total adjustments to net loss

 

4,339

 

 

 

2,174

 

Net cash used in operating activities

 

(1,189

)

 

 

(1,394

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of software

 

(142

)

 

 

(262

)

Net cash used in investing activities

 

(142

)

 

 

(262

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayments on term loans

 

(2,000

)

 

 

(750

)

Proceeds from revolving credit facility

 

20,763

 

 

 

29,824

 

Repayments of revolving credit facility

 

(18,563

)

 

 

(27,222

)

Proceeds from exercise of stock options

 

-

 

 

 

57

 

Net cash provided by financing activities

 

200

 

 

 

1,909

 

 

 

 

 

 

 

Net (decrease) increase in cash and restricted cash

 

(1,131

)

 

 

253

 

 

 

 

 

 

 

Cash and restricted cash, beginning of period

 

1,270

 

 

 

5

 

Cash and restricted cash, end of period

$

139

 

 

$

258

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Cash paid during the period for interest

$

256

 

 

$

372

 

See accompanying notes to these Condensed Consolidated Financial Statements.


4


SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

 

March 31,

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(451

)

 

$

(280

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

164

 

 

 

453

 

Stock-based compensation

 

63

 

 

 

69

 

Deferred income taxes

 

-

 

 

 

(97

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

1,117

 

 

 

(860

)

Inventories

 

(497

)

 

 

(738

)

Prepaid expenses and other assets

 

14

 

 

 

146

 

Accounts payable, accrued expenses, and other liabilities

 

(414

)

 

 

1,653

 

Total adjustments to net loss

 

447

 

 

 

626

 

Net cash (used) provided by operating activities

 

(4

)

 

 

346

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of software

 

(99

)

 

 

-

 

Net cash used in investing activities

 

(99

)

 

 

-

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from revolving credit facility

 

8,379

 

 

 

8,730

 

Repayments of revolving credit facility

 

(7,899

)

 

 

(8,830

)

Repayments of term loan

 

(1,250

)

 

 

(250

)

Net cash used in financing activities

 

(770

)

 

 

(350

)

 

 

 

 

 

 

 

 

Net decrease in cash

 

(873

)

 

 

(4

)

 

 

 

 

 

 

 

 

Cash and restricted cash, beginning of period

 

1,270

 

 

 

5

 

Cash and restricted cash, end of period

$

397

 

 

$

1

 

 

 

 

 

 

 

 

 

Cash and restricted cash, end of period associated with discontinued operations

$

-

 

 

$

-

 

Cash and restricted cash, end of period associated with continuing operations

$

397

 

 

$

1

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for interest

$

95

 

 

$

86

 




See accompanying notes to these Condensed Consolidated Financial Statements.


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

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. Our business is comprised of 2products in two segments: household products and health and beauty care products.

(b) Principles of Consolidation

(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.

On December 23, 2021, 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 Dryel®Dryel® product line. We have reflected the operations of the Dryel®Dryel® product line as discontinued operations for all periods presented, which were previously classified under our household products segment. See Note 23 for further information.

(c) Basis of Presentation

(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 March 31,September 30, 2022 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. The results of operations for the period ended March 31,September 30, 2022 are not necessarily indicative of the operating results for the full year and are unaudited.

(d) Useof Estimates

(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

(e)

Cash and Restricted Cash

Cash and restricted cash consist of the following:

 

March 31, 2022

 

 

December 31, 2021

 

September 30, 2022

 

 

December 31, 2021

 

Cash

$

22

 

 

$

770

 

$

14

 

 

$

770

 

Restricted Cash

 

375

 

 

 

500

 

 

125

 

 

 

500

 

$

397

 

 

$

1,270

 

$

139

 

 

$

1,270

 


(f)InventoriesValuation 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:

 

March 31, 2022

 

 

December 31, 2021

 

September 30, 2022

 

 

December 31, 2021

 

Finished goods

$

5,883

 

 

$

5,499

 

 

5,986

 

 

$

5,499

 

Raw materials

 

1,130

 

 

 

1,186

 

 

303

 

 

 

178

 

Impairment of raw materials

 

(839

)

 

 

(1,008

)

$

6,174

 

 

$

5,677

 

$

6,289

 

 

$

5,677

 

 

 

 

 

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

(g) Property and Equipment

(g)

Property and Equipment

Property and equipment are recorded at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from three to 20 years.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. Improvements that extend the useful lives of the asset or provide improved efficiency are capitalized.

(h) Leases

(h)

Leases

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

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

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.Condensed Consolidated Balance Sheets.

(i)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 intangible assets with finite lives, such as customer relationships, trade names, and formulas, are amortized over their estimated useful lives, generally ranging from 5

Intangible Assets and Goodwill

Goodwill issubjecttoimpairmenttestsatleastannuallyorwheneventsorchangesincircumstancesindicatethatanassetmaybeimpaired.Otherintangibleassetswithfinitelives,suchascustomerrelationships,tradenames,andformulas,areamortizedovertheirestimatedusefullives,generallyrangingfrom5 to 25 years.20 years. AmortizationexpenserelatedtointangibleassetsisincludedinOperating 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”) 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. AsIn the second quarter of March 31, 2022, our internal-use software was not readyimplemented for its intended use. The estimated useful life for internal-use software is five years and will be determined and periodically reassessed based on considerations for obsolescence, technology, competition, and other economic factors.


(j) Financial Instruments

(j)

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 0no 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) Income Taxes

(k)

Income Taxes

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

Taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. We classify penalty and interest expense related to income tax liabilities as an income tax expense. There are 0no significant interest and penalties recognized in the Condensed Consolidated Statements of Income 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 nine months ended March 31,September 30, 2022 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21%21% to pre-tax income primarily due to valuation allowance. The effective tax rate for the threenine months ended March 31,September 30, 2022 and 2021 was 0.0%0.0% and 26.5% respectively, which can differ from the statutory income tax rate due to permanent book-to-tax differences.21.6% 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 March 31,September 30, 2022, and December 31, 2021.

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) Revenue Recognition

(l)

Revenue Recognition

Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.

Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.

7


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 sheetsCondensed Consolidated Balance Sheets and were as follows:

 

March 31, 2022

 

 

December 31, 2021

 

September 30, 2022

 

 

December 31, 2021

 

Trade promotions

$

640

 

 

$

1,242

 

$

379

 

 

$

1,242

 

Allowance for doubtful accounts

 

14

 

 

 

14

 

 

44

 

 

 

14

 

$

654

 

 

$

1,256

 

$

423

 

 

$

1,256

 

 

(m) Advertising Costs

(m)

Advertising Costs

We expense advertising costs as incurred.


(n) Stock-Based Compensation

(n)

Stock-Based Compensation

We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options 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.

8


(o) Operating Costs and Expenses Classification

(o)

Operating Costs and Expenses Classification

Cost of sales includes costs associated with the purchase of goods from our third-party manufacturing and distribution includingpartners, which include 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 $840$429 and $801$624 for the three months ended March 31,September 30, 2022 and 2021, respectively, and totaled $1,725 and $2,163 for the nine months ended September 30, 2022 and 2021, 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, the Company announced that Mark E. Goldstein, the President and Chief Executive Officer of the Company and a member of the Board of Directors, retired effective as of April 26, 2021.2021. 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$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$805 were recognized in the second quarter of 2021 and are included in general and administrative expenses. Accrued severance costs are included in accrued expenses on the Condensed Consolidated Balance Sheets. SheetsNo severance cost was recognized in the first quarter of 2022..

(p) Recently Adopted Accounting Standards

(p)

Recently Issued 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 optional expedients were available to be used upon issuanceCompany 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 but we have not yet appliedrequires annual and interim disclosures for entities that use supplier finance programs in connection with the guidance because we have not yet modified anypurchase of our existing contractsgoods and services. These amendments are effective for reference rate reform. The Companyfiscal 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 ASU 2020-04this guidance on our financial statements.

Note 2. Going Concern

The accompanying unaudited Condensed Consolidated Financial Statements.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 and increases in costs associated with the manufacture and distribution of our products, the Company used net cash 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, absent any other action, the Company likely will require additional liquidity to continue its operations over the next 12 months.

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.

9


 


Note 2.3. Discontinued Operations

On December 23, 2021, 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 Dryel®Dryel® product line. The total consideration paid to us was $4,850,$4,850, plus an amount equal to the value of the Dryel® inventory of $440,$440, subject to post-close adjustment. At closing, $500$500 of the total consideration was held in escrow for a twelve-month period following the closing date, to be released ratably in four installments in 2022. We received the first threeinstallment paymentpayments during Marchthe first nine months ended September 30, 2022. This consideration is reflected as Restricted Cash on the condensed consolidated balance sheetsCondensed Consolidated Balance Sheets as of March 31,September 30, 2022 and December 31, 2021, respectively. DryelDryel® generated approximately $2,800$2,800 of net sales in the trailing twelve-month period ending December 31, 20212021..

Under ASC 360, a long-lived asset group should be classified as held for sale if all of the established criteria are met. The sale of Dryel® did not meet these criteria in the year ending December 31, 2021, because we had not established an active program to locate a buyer and because the brand was not being marketed for sale. All efforts between 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 the consideration paid to us and the carrying amount of all assets is reflected in the loss on sale of discontinued operations.

We have reflected the operations of the Dryel®Dryel® product line as discontinued operations. Our condensed consolidated balance sheetsCondensed Consolidated Balance Sheets and condensed consolidated statementsCondensed Consolidated Statements of operationsOperations report discontinued operations separate from continuing operations. Our condensed consolidated statementsCondensed Consolidated Statements of equityEquity and statementsStatements of cash flowsCash Flows combine the results of continuing and discontinued operations. As of the three and nine months ended March 31,September 30, 2022, there were 0no operating results from discontinued operations included in the condensed consolidated statementsCondensed Consolidated Statements of operations.Operations. As of March 31,September 30, 2022 and December 31, 2021, respectively, there were 0no assets and liabilities relating to discontinued operations presented separately in the condensed consolidated balance sheets.Condensed Consolidated Balance Sheets. There were 0no capital expenditures or significant operating and investing noncash items related to discontinued operations during the threenine months ended March 31,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 nine months ended March 31:September 30:

 

 

 

 

For the Three Months Ended March 31, 2021

 

Three Months Ended September 30, 2021

 

 

Nine Months Ended September 30, 2021

 

Net sales

$

589

 

$

585

 

 

$

1,856

 

Cost of sales

 

456

 

 

313

 

 

 

1,013

 

Gross profit

 

133

 

 

272

 

 

 

843

 

 

 

 

 

 

Operating expenses:

Operating expenses:

 

Operating expenses:

 

 

 

Selling

 

136

 

 

144

 

 

 

367

 

Intangible asset amortization

 

123

 

 

123

 

 

 

369

 

Interest expense

 

(99

)

 

99

 

 

 

298

 

Loss from discontinued operations before tax

 

(225

)

Loss from discontinued operations, before tax

 

(94

)

 

 

(191

)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

59

 

Income tax expense

 

(111

)

 

 

(55

)

Loss from discontinued operations, net of tax

$

(166

)

$

(205

)

 

$

(246

)

 

Note 4. Stock-Based Compensation

Note 3.

Stock-Based Compensation

On January 18, 2022, we granted 25 RSUs to an employee (the “2022 Individual Employee Grant”) with a grant date fair value of $10. $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.$18.


Compensation cost related to stock options totaled $7$10 and $16$44 in the threenine months ended March 31,September 30, 2022 and 2021, respectively. Approximately $7 of total unrecognized compensation costs related to non-vestedThe stock options is expected to be recognized overwere fully vested in the next two years, depending on the vesting provisionssecond quarter of the options.2022. There was 0no 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 $56$103 and $53$55 for the threenine months ended March 31,September 30, 2022 and March 31, 2021, respectively. Approximately $228$170 of total unrecognized compensation costs related to non-vested RSUs is expected to be recognized over the next three years.years.

Note 5. Earnings per Share

Note 4.

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 are excluded for periods in which the Company has a net loss because the impact is anti-dilutive.

 

Three Months Ended March 31,

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

2022

 

 

2021

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Common shares outstanding, beginning of the period

 

12,727

 

 

 

12,618

 

 

12,749

 

 

 

12,618

 

 

 

12,727

 

 

 

12,618

 

Weighted average common shares issued

 

12

 

 

 

-

 

 

-

 

 

 

24

 

 

 

20

 

 

 

10

 

Weighted average number of common shares outstanding

 

12,739

 

 

 

12,618

 

 

12,749

 

 

 

12,642

 

 

 

12,747

 

 

 

12,628

 

Dilutive effect of common share equivalents

 

-

 

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Diluted weighted average number of common shares outstanding

 

12,739

 

 

 

12,618

 

 

12,749

 

 

 

12,642

 

 

 

12,747

 

 

 

12,628

 

 

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

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Stock options

 

213

 

 

 

15

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Stock options

 

153

 

 

 

15

 

 

 

153

 

 

 

15

 

 

Note 6. Segment Information

Note 5.

Segment Information

We operate in 2two 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 nine months ended March 31:September 30:

 

Three Months Ended March 31, 2022

 

Three Months Ended September 30, 2022

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

3,210

 

 

$

2,580

 

 

$

5,790

 

$

2,748

 

 

$

1,529

 

 

$

4,277

 

(Loss) Income from continuing operations

 

(334

)

 

 

33

 

 

 

(301

)

Loss from operations

 

(371

)

 

 

(232

)

 

 

(603

)

Capital and intangible asset expenditures

 

99

 

 

 

-

 

 

 

99

 

 

-

 

 

 

-

 

 

 

-

 

Depreciation and amortization

 

139

 

 

 

25

 

 

 

164

 

 

99

 

 

 

41

 

 

 

140

 

 

Three Months Ended September 30, 2021

 

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

3,846

 

 

$

4,124

 

 

$

7,970

 

Loss from operations

 

(382

)

 

 

(548

)

 

 

(930

)

Capital and intangible asset expenditures

 

113

 

 

 

-

 

 

 

113

 

Depreciation and amortization

 

297

 

 

 

155

 

 

 

452

 

 

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

 

 

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

 


 

 

Three Months Ended March 31, 2021

 

 

Household Products

 

 

Health and Beauty Care Products

 

 

Total

 

Net sales

$

3,856

 

 

$

4,988

 

 

$

8,844

 

(Loss) Income from continuing operations

 

(367

)

 

 

247

 

 

 

(120

)

Depreciation and amortization

 

298

 

 

 

155

 

 

 

453

 

Note 6.

Goodwill and Intangible Assets

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, consisted of the following:

 

As of March 31, 2022

 

 

As of December 31, 2021

 

As of September 30, 2022

 

 

As of December 31, 2021

 

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

 

 

$

372

 

 

$

1,731

 

 

$

2,103

 

 

$

329

 

 

$

1,774

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,103

 

 

$

329

 

 

$

1,774

 

Trade names

 

1,850

 

 

 

179

 

 

 

1,671

 

 

 

1,850

 

 

 

151

 

 

 

1,699

 

 

970

 

 

 

99

 

 

 

871

 

 

 

1,850

 

 

 

151

 

 

 

1,699

 

Formulas and batching processes

 

1,370

 

 

 

486

 

 

 

884

 

 

 

1,370

 

 

 

452

 

 

 

918

 

 

1,000

 

 

 

441

 

 

 

559

 

 

 

1,370

 

 

 

452

 

 

 

918

 

Internal-use software (not placed in service)

 

855

 

 

 

-

 

 

 

855

 

 

 

756

 

 

 

-

 

 

 

756

 

Internal-use software

 

898

 

 

 

60

 

 

 

838

 

 

 

756

 

 

 

-

 

 

 

756

 

Non-compete agreement

 

48

 

 

 

36

 

 

 

12

 

 

 

48

 

 

 

35

 

 

 

13

 

 

33

 

 

 

29

 

 

 

4

 

 

 

48

 

 

 

35

 

 

 

13

 

$

6,226

 

 

$

1,073

 

 

$

5,153

 

 

$

6,127

 

 

$

967

 

 

$

5,160

 

$

2,901

 

 

$

629

 

 

$

2,272

 

 

$

6,127

 

 

$

967

 

 

$

5,160

 

 

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 March 31,September 30, 2022 and 2021 was $106$87 and $278,$278, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021 was $313 and $433, respectively.

Estimated amortization expense for 2022 and subsequent years is as follows:

Remainder of 2022

$

86

 

2023

 

344

 

2024

 

344

 

2025

 

343

 

2026

 

342

 

Thereafter

 

813

 

Total

$

2,272

 

2022

$

314

 

2023

 

420

 

2024

 

419

 

2025

 

416

 

2026

 

416

 

Thereafter

 

2,313

 

Total

$

4,298

 

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

Note 7.

Long-Term Debt and Line-of-Credit

On July 1, 2020, we entered into a Loan and Security Agreement (as amended, the “UMB Loan Agreement”) with UMB Bank, N.A. (“UMB”) and we terminated our Credit Agreement, dated June 30, 2016, with JPMorgan Chase Bank, N.A., (as amended, the “Prior Credit Agreement”). Under the UMB Loan Agreement we obtained a $3,000$3,000 term loan, with equal monthly payments fully amortized over three years, and interest at the LIBOR Rate + 4.50%4.50% with a floor of 5.50%5.50%, and a revolving credit facility, with a maximum commitment of $7,000$7,000 with interest at the LIBOR Rate + 3.75%3.75%, with a floor of 4.75%4.75%. On August 10, 2022, the revolving credit facility was reduced to a maximum commitment of $4,000 with interest at the one month term SOFR rate + 6.83%, with a floor of 7.75%. The revolving credit facility will terminate on July 1, 2023, unless terminated earlier pursuant to the terms of the UMB Loan Agreement. The loans are secured by all of the assets of the Company and all of its subsidiaries.

13



 

The UMB Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis. The UMB Loan Agreement also contains covenants typical of transactions of this type, including among others, limitations on the 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 Company was in compliance with the UMB Loan Agreement financial covenants as of March 31,September 30, 2022.

As of March 31,September 30, 2022, our UMB revolving credit facility and UMB term loan had an outstanding balance of $693$2,414 and $750,$0, respectively, with an all-in interest rate of 6.759.87% and 7.50%9.13%, respectively. Unamortized loan costs were as $247$149 of March 31,September 30, 2022.

On November 9, 2021, we entered into a loan and security agreement (the “La Plata Loan Agreement”) with La Plata Capital, LLC (“La Plata”). Under the La Plata Loan Agreement, we obtained a $2,000$2,000 term loan that bears interest at 14%14% and a maturity date 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$30 are required in addition to accrued and unpaid interest. All remaining unpaid principal and interest are fully due on November 9, 2023.2023.

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 with the La Plata Loan Agreement financial covenants as of March 31,September 30, 2022.

As of March 31,September 30, 2022, our La Plata term loan had an outstanding balance of $1,000.$1,000. La Plata unamortized loan costs were $35$26 as of March 31,September 30, 2022.

As of March 31,September 30, 2022, the total principal payments due on our outstanding debt were as follows:

 

Revolving Credit Facility

 

 

Term Loan

 

 

Total

 

Revolving Credit Facility

 

 

Term Loan

 

 

Total

 

Remainder of 2022

$

-

 

 

$

750

 

 

$

750

 

$

-

 

 

 

-

 

 

 

-

 

2023

 

693

 

 

 

1,000

 

 

 

1,693

 

 

2,414

 

 

 

1,000

 

 

 

3,414

 

Total minimum principal payments

$

693

 

 

$

1,750

 

 

$

2,443

 

$

2,414

 

 

$

1,000

 

 

$

3,414

 

 

Note 9. Leases

Note 8.

Leases

We have entered into leasesa lease for our corporate headquarters and office equipment with a remaining lease terms up to term of 9 years. Some of these leases includeThis 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 most of the leases dothis 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

%

14


 

 

Three Months Ended March 31, 2022

 

Operating lease information:

 

 

 

Operating lease cost

$

100

 

Operating cash flows from operating leases

 

100

 

Net assets obtained in exchange for new operating lease liabilities

 

-

 

 

 

 

 

Weighted average remaining lease term in years

 

8.67

 

Weighted average discount rate

 

5.1

%


Future minimum annual lease payments are as follows:

 

2022

 

266

 

Remainder of 2022

$

99

 

2023

 

406

 

 

406

 

2024

 

413

 

 

413

 

2025

 

420

 

 

420

 

2026

 

427

 

 

427

 

Thereafter

 

1,739

 

 

1,739

 

Total minimum lease payments

$

3,671

 

$

3,504

 

Less imputed interest

 

(701

)

 

(659

)

 

 

 

 

 

Total operating lease liability

$

2,970

 

$

2,845

 

 

15



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

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 statementsConsolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. 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, 2021 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 March 31,September 30, 2022, the coronavirus (COVID-19) pandemic continued 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 volatility in the global stock markets, and uncertainty in the costs and performance of our supply chain and logistics partners. We expect to see continued volatility in these areas, which could impact our operating results in future periods.

Supply Chain and Outsourcing Partners

As a result of COVID-19, we have encountered, and expect to continue to experience, various supply chain disruptions impacting the availability and lead times of certain raw materials 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 plants 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. We will continue to implement mitigation strategies and price increases to offset these trends; however, such measures may not fully offset the impact to our operating performance.

Distribution Agreement with Church & Dwight

Our distribution agreement with Church & Dwight Co., Inc. (“Church & Dwight”) and our subsidiary, Neoteric Cosmetics, Inc., was not extended beyond 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 $1,961$4,704 for the threenine months ended March 31,September 30, 2021.

16


Sale of Dryel® Brand

On December 23, 2021, we sold the DryelDryel® brand to a company that markets and distributes household cleaning products. We have reflected the operations of Dryel® 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 23 - “Discontinued Operations” in the Notes to Condensed Consolidated Financial Statements for further information.


Results of Operations

Three months ended March 31,September 30, 2022 compared to three months ended March 31,September 30, 2021

 

Three Months Ended March 31, (in thousands)

 

Three Months Ended September 30, (in thousands)

 

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

 

 

 

 

Increase / (Decrease)

 

2022

 

 

2021

 

 

$

 

 

%

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales

$

5,790

 

 

$

8,844

 

 

$

(3,054

)

 

 

(34.5

%)

$

4,277

 

 

$

7,970

 

 

$

(3,693

)

 

 

(46.3

%)

Cost of sales

 

2,856

 

 

 

4,840

 

 

 

(1,984

)

 

 

(41.0

%)

 

2,358

 

 

 

5,100

 

 

 

(2,742

)

 

 

(53.8

%)

Gross profit

 

2,934

 

 

 

4,004

 

 

 

(1,070

)

 

 

(26.7

%)

 

1,919

 

 

 

2,870

 

 

 

(951

)

 

 

(33.1

%)

Gross margin

 

50.7

%

 

 

45.3

%

 

 

 

 

 

 

 

 

 

44.9

%

 

 

36.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

135

 

 

 

159

 

 

 

(24

)

 

 

(15.1

%)

 

166

 

 

 

144

 

 

 

22

 

 

 

15.3

%

Selling

 

2,204

 

 

 

2,415

 

 

 

(211

)

 

 

(8.7

%)

 

1,691

 

 

 

2,542

 

 

 

(851

)

 

 

(33.5

%)

General and administrative

 

791

 

 

 

1,285

 

 

 

(494

)

 

 

(38.5

%)

 

578

 

 

 

836

 

 

 

(258

)

 

 

(30.9

%)

Intangible asset amortization

 

105

 

 

 

265

 

 

 

(160

)

 

 

(60.4

%)

 

87

 

 

 

278

 

 

 

(191

)

 

 

(68.7

%)

Total operating expenses

 

3,235

 

 

 

4,124

 

 

 

(729

)

 

 

(21.6

%)

 

2,522

 

 

 

3,800

 

 

 

(1,278

)

 

 

(33.6

%)

Loss from operations

 

(301

)

 

 

(120

)

 

 

(341

)

 

 

(150.6

%)

 

(603

)

 

 

(930

)

 

 

327

 

 

 

35.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(150

)

 

 

(35

)

 

 

(115

)

 

 

(328.6

%)

 

(139

)

 

 

(109

)

 

 

(30

)

 

 

(27.5

%)

Loss before income taxes and discontinued operations

 

(451

)

 

 

(155

)

 

 

(296

)

 

 

(190.8

%)

 

(742

)

 

 

(1,039

)

 

 

297

 

 

 

28.6

%

Income tax benefit

 

-

 

 

 

41

 

 

 

(41

)

 

 

(100.0

%)

Income tax expense

 

(2

)

 

 

(1,224

)

 

 

1,222

 

 

 

99.8

%

Loss from continuing operations

$

(451

)

 

$

(114

)

 

 

(337

)

 

 

(295.4

%)

 

(744

)

 

 

(2,263

)

 

 

1,519

 

 

 

67.1

%

Loss from discontinued operations

 

-

 

 

 

(166

)

 

 

166

 

 

 

100.0

%

 

-

 

 

 

(205

)

 

 

205

 

 

 

100.0

%

Net loss

$

(451

)

 

$

(280

)

 

$

(171

)

 

 

(61.0

%)

$

(744

)

 

$

(2,468

)

 

$

1,724

 

 

 

69.9

%

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.
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 was a result of lower logistics and warehousing costs from lower sales as well as a reduction in personnel costs.
Decrease in general and administrative costs due to changes in personnel and related costs.
Decrease in income tax expense as a valuation allowance on our deferred tax asset was established during the third quarter of 2021.

17


 

Lower sales and gross profits from the conclusion of our distribution agreement with Church and Dwight for Batiste product, as well as reduced sales and gross profits from our BIZ, Alpha, and Liquid Gold product lines.

Increased rates for transportation and labor costs associated with our logistics and warehousing partners that continue to remain elevated.

Favorable reductions in general and administrative costs due to decreases in personnel and related costs.

Decreased intangible asset amortization from reduced carrying amounts related to impairments recognized in 2021.



Segment Results

Household products

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

 

 

Three Months Ended September 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales

$

2,748

 

 

$

3,846

 

 

$

(1,098

)

 

 

(28.5

%)

Gross profit

$

1,084

 

 

$

1,514

 

 

$

(430

)

 

 

(28.4

%)

Gross margin

 

39.4

%

 

 

39.4

%

 

 

 

 

 

 

Loss from operations

$

(371

)

 

$

(382

)

 

$

11

 

 

 

2.9

%

 

Three Months Ended March 31, (in thousands)

 

 

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales

$

3,210

 

 

$

3,856

 

 

$

(646

)

 

 

(16.8

%)

Gross profit

$

1,491

 

 

$

1,866

 

 

$

(375

)

 

 

(20.1

%)

Gross margin

 

46.4

%

 

 

48.4

%

 

 

 

 

 

 

 

 

Loss from operations

$

(334

)

 

$

(367

)

 

$

33

 

 

 

8.9

%

Net sales and gross profits decreased 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, sales of BIZ powder products decreased compared to the same period in the prior year.

Loss from operations was offset due to decreases in selling expenses and general and administrative costs.

Household products experienced lower sales of various brands: BIZ products decreased due to product shortages caused by supply chain disruptions, and Liquid Gold products decreased due to the return of other competitive products to the shelves throughout 2021 as well as some limited reductions in store counts featuring the products.

Gross margins decreased due to continued increased costs of components and other underlying raw materials of our products.

Health and beauty care products

The following table shows comparative net sales, gross margin, gross profit, income (loss)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

%

 

Three Months Ended March 31, (in thousands)

 

 

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales - distributed products

$

-

 

 

$

1,982

 

 

$

(1,982

)

 

 

(100.0

%)

Net sales - manufactured products

$

2,580

 

 

 

3,006

 

 

 

(426

)

 

 

(14.2

%)

Total health and beauty net sales

$

2,580

 

 

$

4,988

 

 

$

(2,408

)

 

 

(48.3

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$

1,443

 

 

$

2,138

 

 

$

(695

)

 

 

(32.5

%)

Gross margin

 

55.9

%

 

 

42.9

%

 

 

 

 

 

 

 

 

Income from operations

$

33

 

 

$

247

 

 

$

(214

)

 

 

(86.6

%)

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.
Net sales and gross profits from manufactured products decreased due to the elimination 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® brands to certain customers with minimal profitability.
Gross margins increased due to the elimination 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 lower logistics and warehousing costs from lower sales as well as a reduction in personnel costs.
Decrease in general and administrative costs due to changes in personnel and related costs as well as reductions in restructuring costs associated with separation of employees during 2021.
Decreased intangible asset amortization is primarily from reduced carrying amounts related to impairments recognized in the fourth quarter of 2021.
Impairment of goodwill and intangible assets associated with our All-Purpose reporting unit.

19


Segment Results

Household products

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

 

Nine Months Ended September 30, (in thousands)

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Net sales

$

9,103

 

 

$

10,762

 

 

$

(1,659

)

 

 

(15.4

%)

Gross profit

$

3,714

 

 

$

4,213

 

 

$

(499

)

 

 

(11.8

%)

Gross margin

 

40.8

%

 

 

39.1

%

 

 

 

 

 

 

Loss from operations

$

(4,854

)

 

$

(1,960

)

 

$

(2,894

)

 

 

(147.7

%)

Net sales and gross profit decreased due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures as well as supply chain disruptions.
Loss from operations primarily due to 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.

Health and beauty care products

The following table shows comparative net sales, gross margin, gross profit, 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.
Net sales and gross profits from manufactured products decreased due to the elimination 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® brands to certain customers with minimal profitability.
Gross margins increased due to the elimination 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.

20


 

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

Net sales and gross profits from manufactured products decreased due to decreased sales of Alpha from COVID-19 outbreaks in China that resulted in government-enforced lockdowns and delayed shipments to our exclusive China distributor.

Gross margins increased due to the elimination of our Church and Dwight distribution agreement, as distributed products required higher promotional activity with customers which reduced our margins.

Liquidity and Capital Resources

Overview

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

Financing Agreements

Please see Note 78 to our Condensed Consolidated Financial Statements for information on our UMB Loan Agreement and La Plata Loan Agreement.

Liquidity and Changes in Cash Flows

At March 31,September 30, 2022, we had $3,235$944 available on our revolving credit facility with UMB, and approximately $397$139 in cash on hand, a decrease of $873$1,131 when compared to the balance as of December 31, 2021.2021 as this cash was utilized to reduce long-term debt balances.


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

 

 

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

%)

 

Three Months Ended March 31, (in thousands)

 

 

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Operating activities

$

(4

)

 

$

346

 

 

$

(350

)

 

 

(101.2

%)

Investing activities

 

(99

)

 

 

-

 

 

 

(99

)

 

 

(100.0

%)

Financing activities

 

(770

)

 

 

(350

)

 

 

(420

)

 

 

(120.0

%)

Net cash used in operating activities was primarily related to conversion of working capital from accounts receivable and offset by investments in finished goods inventories.

Net cash used in investing activities was due to purchases relating to our internal-use software.
Net cash provided by financing activities was from proceeds of our various debt facilities which is used for working capital.

Net cash used in operating activities was primarily related to our net loss, which was offset by the conversion of working capital from accounts receivable.

Net cash used in investing activities was due to purchases relating to our ERP software.

Net cash used in financing activities related to net repayments of our UMB revolving credit facility, UMB term loan, and La Plata term loan.

The uncertainty related to the COVID-19 outbreak has impacted our operations and could affect our future results. While we believe that our business model will allow us to generate sufficient operating cash flows, ourOur 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 to a decline in net sales and increases in costs associated with the timingmanufacture and distribution of our buildproducts, the Company used net cash in operating activities of depleted finished goods inventories, while our net sales have been delayed due to supply chain shortages. We expect that our current cash reserves and availability under our$1,189 during the nine months ended September 30, 2022. The Company’s debt agreements with UMB Loan AgreementBank, N.A. and La Plata Loan AgreementCapital, LLC mature on July 1, 2023 and November 9, 2023, respectively. Management’s assessment of cash flow forecasts indicate that, absent any other action, the Company likely will be sufficientrequire additional liquidity to meet operational cash needs duringcontinue its operations over the next twelve months, but12 months.

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 supply chain disruptionsreduction 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 short-term could limit our liquidity.Company's ability to continue as a going concern.


21


ITEM 4. CONTROLS AND PROCEDURES

ITEM  4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

AsAn evaluation was performed as of March 31,September 30, 2022, we conducted an evaluation, under the supervision and with the participation of our interim co-presidentsPresident 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 due to the previously disclosed material weakness relating to the operating 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 that the material weakness in the Company’s internal controls over financial reporting and effectiveness of related disclosure controls and procedures has been fully remediated, and we are effective asstill in the process of March 31, 2022.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.

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 significant 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 washave been no changeother changes in our internal control over financial reporting that occurred during the three months ended March 31,third quarter of 2022 that has materially affected or isare 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 effectiveness of the review of the impairment assessment of goodwill prepared by a third-party firm as of June 30, 2022. We did not maintain effective controls to sufficiently review the completeness and accuracy of the impairment assessment.

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.

ITEM  1A.

RISK FACTORS

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, 2021 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition, or future results.

ITEM 6. EXHIBITS

Exhibit Number

EXHIBITS

Exhibit Number

Document

 

10.131.1

Restricted Stock Award Agreement, dated March 2, 2022, between the Company and Tisha Pedrazzini

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 XBRLtags 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

*

Furnished, not filed.


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.

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: May 10,November 14, 2022

24

21