UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017 March 31, 2023
OR
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☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-13458
SCOTT’S LIQUID GOLD-INC.
(Exact name of registrant as specified in its charter)
Colorado | 84-0920811 | |
(State or other jurisdiction of | (I.R.S. Employer | |
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(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 | ☒ | ||||||
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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.Act). Yes ☐ No ☒
As of November 13, 2017,OPEN May 7, 2023 the Registrantregistrant had 11,885,839OPEN 12,797,423shares 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 U.S. federal securities laws.the Private Securities Litigation Reform Act of 1995, in addition to historical information. All statements, other than statements of historical fact,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 riskrisks and uncertaintyuncertainties 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;
the degree of success of any new product or product line introduction by us;
competitive factors, including any decrease in distribution of (i.e., retail stores carrying) our significant products;
continuation of our distributorship agreements for Montagne Jeunesse skin care products and Batiste Dry Shampoos;
the need for effective advertising of our products and limited resources available for such advertising;
new competitive products and/or technological changes;
dependence upon third party vendors and upon sales to major customers;
the availability of necessary raw materials and potential increases in the prices of these raw materials;
changes in the regulation of our products, including applicable environmental and U.S. Food and Drug Administration (“FDA”) regulations;
the continuing availability of financing on terms and conditions that are acceptable to us;
the degree of success of the integration of product lines or businesses we may acquire;
changes in the regulation of our products, including applicable environmental, U.S. and international Food and Drug Administration regulations and process-audit compliance;
the loss of any executive officer; and
other matters discussed in this Report, including the risks described in the Risk Factors section of this Report.
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.
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Item 1. | 1 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item |
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Item 1A. | 19 | ||||
Item |
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ITEM 1. FINANCIAL STATEMENTS.
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of IncomeOperations (Unaudited)
Scott’s Liquid Gold-Inc. & Subsidiaries(in thousands, except per share data)
| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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Net sales | $ | 10,340,600 |
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| $ | 9,936,900 |
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| $ | 30,657,000 |
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| $ | 24,274,800 |
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Operating costs and expenses: |
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Cost of sales |
| 5,420,000 |
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| 5,830,600 |
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| 16,649,000 |
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| 13,454,600 |
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Advertising |
| 109,800 |
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| 91,700 |
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| 531,100 |
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| 1,426,600 |
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Selling |
| 1,583,400 |
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| 1,717,300 |
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| 4,878,600 |
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| 4,184,300 |
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General and administrative |
| 1,062,700 |
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| 1,218,800 |
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| 3,166,300 |
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| 3,433,000 |
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Total operating costs and expenses |
| 8,175,900 |
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| 8,858,400 |
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| 25,225,000 |
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| 22,498,500 |
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Income from operations |
| 2,164,700 |
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| 1,078,500 |
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| 5,432,000 |
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| 1,776,300 |
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Other income |
| - |
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| 1,000 |
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|
| - |
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| 12,600 |
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Interest expense |
| (26,400 | ) |
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| (60,400 | ) |
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| (101,500 | ) |
|
| (77,500 | ) |
Income before income taxes |
| 2,138,300 |
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| 1,019,100 |
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| 5,330,500 |
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| 1,711,400 |
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Income tax expense |
| (663,500 | ) |
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| (415,500 | ) |
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| (1,899,300 | ) |
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| (697,900 | ) |
Net income | $ | 1,474,800 |
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| $ | 603,600 |
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| $ | 3,431,200 |
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| $ | 1,013,500 |
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Net income per common share |
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Basic | $ | 0.12 |
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| $ | 0.05 |
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| $ | 0.29 |
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| $ | 0.09 |
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Diluted | $ | 0.12 |
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| $ | 0.05 |
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| $ | 0.28 |
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| $ | 0.08 |
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Weighted average shares outstanding: |
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Basic |
| 11,885,839 |
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| 11,747,612 |
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| 11,840,957 |
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| 11,730,759 |
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Diluted |
| 12,360,079 |
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| 12,027,956 |
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| 12,217,890 |
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| 11,969,167 |
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| Three Months Ended |
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| March 31, |
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| 2023 |
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| 2022 |
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Net sales | $ | 3,248 |
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| $ | 3,729 |
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Cost of sales |
| 1,849 |
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| 1,886 |
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Gross profit |
| 1,399 |
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| 1,843 |
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Operating expenses: |
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Advertising |
| 154 |
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| 135 |
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Selling |
| 865 |
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| 1,625 |
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General and administrative |
| 618 |
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| 791 |
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Intangible asset amortization |
| 56 |
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| 93 |
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Total operating expenses |
| 1,693 |
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| 2,644 |
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Loss from operations |
| (294 | ) |
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| (801 | ) |
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Interest expense |
| (152 | ) |
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| (82 | ) |
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Loss before income taxes and discontinued operations |
| (446 | ) |
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| (883 | ) |
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Income tax benefit |
| 4 |
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| - |
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Loss from continuing operations |
| (442 | ) |
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| (883 | ) |
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Income from discontinued operations |
| 811 |
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| 432 |
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Net income (loss) | $ | 369 |
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| $ | (451 | ) |
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Basic and diluted net income (loss) per common shares: |
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Loss from continuing operations | $ | (0.03 | ) |
| $ | (0.07 | ) |
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Income from discontinued operations | $ | 0.06 |
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| $ | 0.03 |
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Net income (loss) | $ | 0.03 |
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| $ | (0.04 | ) |
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Weighted average shares outstanding: |
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Basic and diluted |
| 12,797 |
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| 12,739 |
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See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).Statements.
1
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
Scott’s Liquid Gold-Inc. & Subsidiaries(in thousands, except par value amounts)
| September 30, |
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| December 31, |
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| 2017 |
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| 2016 |
| March 31, |
| December 31, |
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| (Unaudited) |
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| 2023 |
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| 2022 |
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Assets |
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Current assets: |
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Cash and cash equivalents | $ | 2,389,000 |
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| $ | 2,097,300 |
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Cash | $ | 457 |
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| $ | 49 |
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Accounts receivable, net |
| 3,152,200 |
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| 3,456,400 |
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| 975 |
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| 1,833 |
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Inventories, net |
| 9,483,900 |
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| 5,641,300 |
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Inventories |
| 2,940 |
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| 3,457 |
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Income taxes receivable |
| - |
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| 7,000 |
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| - |
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| 239 |
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Prepaid expenses |
| 396,800 |
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| 319,600 |
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| 462 |
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| 243 |
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Total current assets |
| 15,421,900 |
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| 11,521,600 |
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| 4,834 |
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| 5,821 |
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Property and equipment, net |
| 823,900 |
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| 578,400 |
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Deferred tax asset |
| 563,400 |
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| 1,392,600 |
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Goodwill |
| 1,520,600 |
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| 1,520,600 |
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Intangible assets, net |
| 6,303,600 |
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| 6,769,100 |
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| 1,081 |
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| 1,137 |
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Operating lease right-of-use assets |
| 2,428 |
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| 2,491 |
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Other assets |
| 49,100 |
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| 51,000 |
|
| 46 |
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| 47 |
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Assets of discontinued operations |
| - |
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| 1,235 |
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Total assets | $ | 24,682,500 |
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| $ | 21,833,300 |
| $ | 8,389 |
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| $ | 10,731 |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable | $ | 2,376,900 |
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| $ | 1,939,400 |
| $ | 1,030 |
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| $ | 1,407 |
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Accrued expenses |
| 860,900 |
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|
| 964,800 |
|
| 215 |
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|
| 311 |
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Income taxes payable |
| 197,300 |
|
|
| - |
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Current maturities of long-term debt |
| 800,000 |
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| 800,000 |
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Current portion of long-term debt, net of debt issuance costs |
| 1,205 |
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| 3,384 |
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Operating lease liabilities, current portion |
| 275 |
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| 270 |
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Total current liabilities |
| 4,235,100 |
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| 3,704,200 |
|
| 2,725 |
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| 5,372 |
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Line-of-credit |
| - |
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| 750,000 |
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Long-term debt, net of current maturities and debt issuance costs |
| 556,100 |
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| 1,137,300 |
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Operating lease liabilities, net of current |
| 2,441 |
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| 2,512 |
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Other liabilities |
| 27 |
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| 27 |
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Total liabilities |
| 4,791,200 |
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| 5,591,500 |
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| 5,193 |
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| 7,911 |
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Shareholders’ equity: |
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Preferred stock, no par value, authorized 20,000,000 shares; no shares issued and outstanding |
| - |
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| - |
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Common stock; $0.10 par value, authorized 50,000,000 shares; issued and outstanding 11,885,839 shares (2017) and 11,749,589 shares (2016) |
| 1,188,600 |
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| 1,175,000 |
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Preferred Stock, no par value, authorized 20,000 shares; no shares issued and outstanding |
| - |
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| - |
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Common Stock; $0.10 par value, authorized 50,000 shares; issued and outstanding 12,797 shares (2023) and 12,797 shares (2022) |
| 1,280 |
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| 1,280 |
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Capital in excess of par |
| 6,382,500 |
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| 6,177,800 |
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| 7,919 |
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| 7,912 |
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Retained earnings |
| 12,320,200 |
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| 8,889,000 |
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Accumulated deficit |
| (6,003 | ) |
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| (6,372 | ) | |||||||
Total shareholders’ equity |
| 19,891,300 |
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|
| 16,241,800 |
|
| 3,196 |
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|
| 2,820 |
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Total liabilities and shareholders’ equity | $ | 24,682,500 |
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| $ | 21,833,300 |
| $ | 8,389 |
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| $ | 10,731 |
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See accompanying notes to these Condensed Consolidated Financial Statements.
2
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
(in thousands)
| Common Stock |
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| Shares |
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| Amount |
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| Capital in Excess of Par |
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| (Accumulated Deficit) Retained Earnings |
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| Total |
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Balance, December 31, 2022 |
| 12,797 |
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| $ | 1,280 |
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| $ | 7,912 |
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| $ | (6,372 | ) |
| $ | 2,820 |
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Stock-based compensation |
| - |
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|
| - |
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|
| 7 |
|
|
| - |
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| 7 |
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Net income |
| - |
|
|
| - |
|
|
| - |
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|
| 369 |
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|
| 369 |
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Balance, March 31, 2023 (Unaudited) |
| 12,797 |
|
| $ | 1,280 |
|
| $ | 7,919 |
|
| $ | (6,003 | ) |
| $ | 3,196 |
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Balance, December 31, 2021 |
| 12,727 |
|
| $ | 1,273 |
|
| $ | 7,789 |
|
| $ | 2,479 |
|
| $ | 11,541 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 35 |
|
|
| - |
|
|
| 35 |
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Net loss |
| - |
|
|
| - |
|
|
| - |
|
|
| (451 | ) |
|
| (451 | ) |
Restricted stock unit vesting |
| 22 |
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|
| 2 |
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|
| 26 |
|
|
| - |
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|
| 28 |
|
Balance, March 31, 2022 (Unaudited) |
| 12,749 |
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| $ | 1,275 |
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| $ | 7,850 |
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| $ | 2,028 |
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| $ | 11,153 |
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See accompanying notes to these Condensed Consolidated Financial Statements.
3
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Scott’s Liquid Gold-Inc. & Subsidiaries(in thousands)
| Nine Months Ended |
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| September 30, |
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| 2017 |
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| 2016 |
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Cash flows from operating activities: |
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Net income | $ | 3,431,200 |
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| $ | 1,013,500 |
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Adjustment to reconcile net income to net cash provided (used) by operating activities: |
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Depreciation and amortization |
| 591,400 |
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|
| 264,900 |
|
Stock-based compensation |
| 183,500 |
|
|
| 189,500 |
|
Deferred income taxes |
| 829,200 |
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|
| 649,600 |
|
Change in operating assets and liabilities: |
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|
|
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Accounts receivable |
| 304,200 |
|
|
| (2,774,700 | ) |
Inventories |
| (3,842,600 | ) |
|
| (305,500 | ) |
Prepaid expenses and other assets |
| (75,300 | ) |
|
| (54,200 | ) |
Income taxes payable (receivable) |
| 204,300 |
|
|
| (13,400 | ) |
Accounts payable and accrued expenses |
| 333,600 |
|
|
| 906,300 |
|
Total adjustments to net income |
| (1,471,700 | ) |
|
| (1,137,500 | ) |
Net cash provided (used) by operating activities |
| 1,959,500 |
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| (124,000 | ) |
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Cash flows from investing activities: |
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Cash paid for Acquisition |
| - |
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| (9,000,000 | ) |
Purchase of property and equipment |
| (352,600 | ) |
|
| (223,600 | ) |
Net cash used by investing activities: |
| (352,600 | ) |
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| (9,223,600 | ) |
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Cash flows from financing activities: |
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Borrowing under line-of-credit |
| - |
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|
| 3,694,100 |
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Repayments under line-of-credit |
| (750,000 | ) |
|
| (1,794,100 | ) |
Proceeds from issuance of long-term debt |
| - |
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|
| 2,400,000 |
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Repayments of long-term debt |
| (600,000 | ) |
|
| (200,000 | ) |
Debt issuance costs |
| - |
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|
| (75,200 | ) |
Proceeds from exercise of stock options |
| 34,800 |
|
|
| 30,500 |
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Net cash (used) provided by financing activities: |
| (1,315,200 | ) |
|
| 4,055,300 |
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Net increase (decrease) in cash and cash equivalents |
| 291,700 |
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| (5,292,300 | ) |
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Cash and cash equivalents, beginning of period |
| 2,097,300 |
|
|
| 7,165,100 |
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Cash and cash equivalents, end of period | $ | 2,389,000 |
|
| $ | 1,872,800 |
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Supplemental disclosures: |
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Cash paid during the period for interest | $ | 101,500 |
|
| $ | 77,500 |
|
Cash paid during the period for income taxes | $ | 865,700 |
|
| $ | - |
|
| Three Months Ended |
| |||||
| March 31, |
| |||||
| 2023 |
|
| 2022 |
| ||
Cash flows from operating activities: |
|
|
|
| |||
Net income (loss) | $ | 369 |
|
| $ | (451 | ) |
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |
|
|
|
|
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Depreciation and amortization |
| 162 |
|
|
| 164 |
|
Stock-based compensation |
| 7 |
|
|
| 63 |
|
Gain on disposal of discontinued operations |
| (787 | ) |
|
| - |
|
Change in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| 858 |
|
|
| 1,117 |
|
Inventories |
| 603 |
|
|
| (497 | ) |
Prepaid expenses and other assets |
| (218 | ) |
|
| 14 |
|
Income taxes receivable |
| 239 |
|
|
| - |
|
Accounts payable, accrued expenses, and other liabilities |
| (477 | ) |
|
| (414 | ) |
Total adjustments to net income (loss) |
| 387 |
|
|
| 447 |
|
Net cash provided by (used in) operating activities |
| 756 |
|
|
| (4 | ) |
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
| ||||
Proceeds from sale of discontinued operations |
| 1,936 |
|
|
| - |
|
Purchase of software |
| - |
|
|
| (99 | ) |
Net cash provided by (used in) investing activities |
| 1,936 |
|
|
| (99 | ) |
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
| ||||
Proceeds from term loans |
| 250 |
|
|
| - |
|
Repayments on term loans |
| (30 | ) |
|
| (1,250 | ) |
Proceeds from revolving credit facility |
| 2,795 |
|
|
| 8,379 |
|
Repayments of revolving credit facility |
| (5,299 | ) |
|
| (7,899 | ) |
Net cash used in financing activities |
| (2,284 | ) |
|
| (770 | ) |
|
|
|
|
|
| ||
Net increase (decrease) in cash and restricted cash |
| 408 |
|
|
| (873 | ) |
|
|
|
|
|
| ||
Cash and restricted cash, beginning of period |
| 49 |
|
|
| 1,270 |
|
Cash and restricted cash, end of period | $ | 457 |
|
| $ | 397 |
|
|
|
|
|
|
| ||
Supplemental disclosures: |
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| ||||
Cash paid during the period for interest | $ | 47 |
|
| $ | 95 |
|
Supplemental disclosure of non-cash activity:
In connection with the Company’s Acquisition (defined in Note 5) during the nine months ended September 30, 2016, the Company acquired $400,000 of inventory, intangible assets of $7,079,400, and goodwill of $1,520,600 for a total of $9,000,000.
See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).Statements.
4
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Scott’s Liquid Gold-Inc. & Subsidiaries(in thousands, except per share data)
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Note 1. Organization and Summary of Significant Accounting Policies
(a) Company Background
Scott’s Liquid Gold-Inc. (a, a Colorado corporation)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, manufacture, market and sell high quality household and skin and hair care products. We are also a distributorproducts in the United States of Montagne Jeunesse skin sachets and Batiste Dry Shampoo manufactured by two other companies. Our business is comprised of two segments, segments: household products and skinhealth and hairbeauty care products.
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(b) Principles of Consolidation
Our Condensed Consolidated Financial Statements (Unaudited) include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
On January 23, 2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Scott's Liquid Gold® brand, including the Wood Care and Floor Restore products. We have reflected the operations of the Scott's Liquid Gold® brand as discontinued operations for all periods presented, which was previously classified under our household products segment. See Note 3 for further information.
On December 15, 2022, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Prell® product line. We have reflected the operations of the Prell® product line as discontinued operations for all periods presented, which was previously classified under our health and beauty care segment. See Note 3 for further information.
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(c) Basis of Presentation
The unaudited Condensed Consolidated Statements of Income,Operations, Condensed Consolidated Balance Sheets, and the 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 September 30, 2017March 31, 2023 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 (Unaudited) 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, 2016.2022. The results of operations for the period ended September 30, 2017March 31, 2023 are not necessarily indicative of the operating results for the full year.year and are unaudited.
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(d) Useof Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesGAAP 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.
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We consider all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents.
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On March 16, 2011, we entered into a financing agreement with Wells Fargo Bank, National Association (“Wells Fargo”) for the purpose of lowering the cost of borrowing associated with the financing of our accounts receivable. Pursuant to this agreement, we were able to sell accounts receivable from Wal-Mart Stores, Inc. (“Wal-Mart”) at a discount to Wells Fargo. On January 29, 2016 we terminated our agreement with Wells Fargo due to Wal-Mart changing its accounts payable policy.(e) InventoriesValuation and Reserves
During the nine months ended September 30, 2017 and 2016, we sold approximately $0 and $306,800, respectively, of our relevant accounts receivable to Wells Fargo for approximately $0 and $305,200, respectively. The difference between the invoiced amount of the receivable and the cash that we received from Wells Fargo is a cost to us. This cost is in lieu of any cash discount our customer would have been allowed and, thus, is treated in a manner consistent with standard trade discounts granted to our customers.
The reporting of the sale of accounts receivable to Wells Fargo is treated as a sale rather than as a secured borrowing. As a result, affected accounts receivable are relieved from the Company’s financial statements upon receipt of the cash proceeds.
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Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or market.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 record aestimate an inventory reserve for slow moving and obsolete products and raw materials. We estimate this reservematerials based upon, among other things, an assessment of historical and anticipated sales.sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.
Inventories were comprised
Our remaining raw materials balance is to be sold to contract manufacturing partners based on production demand.
5
(f) 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 following at: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.
| September 30, 2017 |
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| December 31, 2016 |
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Finished goods | $ | 7,364,900 |
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| $ | 2,668,700 |
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Raw materials |
| 2,133,600 |
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|
| 3,035,000 |
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Inventory reserve for obsolescence |
| (14,600 | ) |
|
| (62,400 | ) |
| $ | 9,483,900 |
|
| $ | 5,641,300 |
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PropertyCertain nonlease components, such as maintenance and equipmentother 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 at historical cost. Depreciationon the balance sheet, and the expense for these short-term leases and for operating leases is provided using therecognized on a straight-line methodbasis over the estimated useful lives of the assets ranging from three to 20 years. Production equipmentlease term. Lease agreements with lease and production support equipmentnonlease components are estimated to have useful lives of 15 to 20 years and three to 10 years, respectively. 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 expensedcombined as incurred. Improvements that extend the useful lives of the asset or provide improved efficiency are capitalized.a single lease component.
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(g) Intangible Assets
Intangible assets consist ofwith finite lives, such as customer relationships, trade names, and formulas, and batching processes and a non-compete agreement. The fair value of the intangible assets isare amortized over their estimated useful lives, and rangegenerally ranging from a period5 to 20 years. Amortization expense related to intangible assets is included in Operating Expenses on the Condensed Consolidated Statement of Operations.
Internal-use software costs recognized as an intangible asset relates to capitalizable costs of computer software obtained for internal-use as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40-30-1. All other internal-use software costs are expensed as incurred by the Company. In the second quarter of 2022, our internal-use software was implemented for its intended use with an estimated useful life of five to 15 yearsyears. Amortization expense is recorded on a straight-line basis and are reviewed for impairment when changesis included in market circumstances occurgeneral and written down to fair value if impaired.
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Goodwill consistsadministrative expenses on the Condensed Consolidated Statements of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired in the Acquisition discussed in Notes 5 and 6. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests, and in certain circumstances these assets are written down to fair value if impaired.Operations.
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(h) Financial Instruments
Financial instruments which potentially subject us to concentrations of credit risk include cash, and cash equivalents and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. During the nine months ended September 30, 2017,Historically, we have maintained balances in various operating accounts in excess of federally insured limits. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, based upon factors surrounding the credit risk of specific customers, historical trends and other information. We have no significant financial instruments with off-balance sheet risk of accounting loss, such as foreign exchange contracts, option contracts or other foreign currency hedging arrangements.
The recorded amounts for cash, and cash equivalents, receivables, other current assets, accounts payable, and accrued expenses and current maturities of long-term debt approximate fair value due to the short-term nature of these financial instruments. The recorded amount of long-term debt approximates fair value and is estimated primarily based on current market rates for debt with similar terms and remaining maturities. At September 30, 2017, we had long-term debt of $1,400,000 and no outstanding balance on our line-of-credit. At December 31, 2016 we had long-term debt of $2,000,000 and a $750,000 outstanding balance on our line-of-credit.
(i) Income Taxes
Income taxes reflect the tax effects of transactions reported in the financial statementsCondensed 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 providedestablished when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. We classify penalty and interest expense related to income tax liabilities as an income tax expense. There are no significant interest and penalties recognized in the Condensed Consolidated Statements of IncomeOperations or accrued on the Condensed Consolidated Balance Sheets.
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three months ended March 31, 2023 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily due to valuation allowance. The effective tax rate for the ninethree months ended September 30, 2017March 31, 2023 and 20162022 was 35.6%-0.9% and 40.8% respectively, which differs from0.0% respectively.
6
The computation of the statutory incomeannual estimated effective tax rate dueat each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, and permanent bookdifferences. 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 differences.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, 2023, and December 31, 2022.
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(j) 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. In our case,When consideration is received in advance of the criteria generallydelivery of goods or services, a contract liability is recorded. Our revenue contracts are met when: (i) we have an arrangementidentified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a product; (ii) we have deliveredcustomer.
Net sales reflect the product in accordance with that arrangement; (iii) thetransaction 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 pricereturns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
Variable consideration is primarily comprised of the product is determinable; and (iv) we believe that we will be paid for the sale.
We establishcustomer allowances. Customer allowances primarily include reserves for customer returnstrade 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. We estimate these reservesIn 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 upon,on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These reservesestimates are established in the period of sale and reduce our revenue in that period.
Our reserve for customer allowances includes primarily reserves for trade promotions to support price features, displays, slotting fees and other merchandising of our products to our customers. The actual level of returns and customer allowances is influenced by several factors, includingSales are recorded at the promotional efforts of our customers, changes in mix of our customers, changes in the mixtime that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we sellconsider several indicators, including significant risks and rewards of products, our right to payment, and the maturitylegal title of the product. We may change our estimates basedproducts. Based on actual results and consideration of other factors that cause returns and allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted.
We also establish reserves for coupons, rebates and certain other promotional programs for consumers. We estimate these reserves based upon, among other things, an assessment of historical trends and currentcontrol indicators, sales activity. These reserves are recorded as a reduction of revenue at the later of the date at which the revenue isgenerally recognized or the date at which the sale incentive is offered.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 were as follows:
At September 30, 2017 and December 31, 2016 approximately $831,400 and $1,184,700, respectively, had been reserved as a reduction of accounts receivable. Trade promotions to our customers and incentives such as coupons to our consumers are deducted from gross sales and totaled $1,854,100 and $1,584,500 for the nine months ended September 30, 2017 and 2016, respectively, and totaled $522,300 and $616,300 for the three months ended September 30, 2017 and 2016, respectively.
| March 31, 2023 |
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| December 31, 2022 |
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Trade promotions | $ | 259 |
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| $ | 361 |
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Allowance for doubtful accounts |
| 59 |
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| 59 |
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| $ | 318 |
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| $ | 420 |
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(k) Advertising Costs
We expense advertising costs are expensed as incurred.
7
The Company accounts(l) 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. The Company determinesWe 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. The Company recognizesWe recognize compensation costs ratably over the vesting period using the straight-line method.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.
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(m) 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, internal transfer costs, repairs, maintenance, and other indirect costs, as well as warehousing and distribution costs. We classify shipping and handling costs comprised primarily of freight-out as selling expenses. Other selling expenses consist primarily of wagescosts for warehousing and benefits fordistribution, sales and sales support personnel, travel, brokerage commissions, customer compliance fines, and promotional costs. Freight-out costs as well as certain other indirect costs. Shippingincluded in selling expenses totaled $425 and handling costs totaled $1,864,400 and $1,149,600 for the nine months ended September 30, 2017 and 2016, respectively, and totaled $611,200 and $439,000$527 for the three months ended September 30, 2017March 31, 2023 and 2016,2022, respectively.
General and administrative expenses consist primarily of wages and benefits associated with management and administrative support departments, business insurance costs, professional fees, office facility related expenses, and other general support costs.
| (n) Supplier Finance Programs During 2022, we entered into an agreement with a third-party financial institution and and agreement with an insurance agency which allows us to obtain extended payment terms for our insurance policies. The insurance policies can be canceled by the Company at any time with 10 days’ notice. The financial institution may cancel this agreement after providing 10 days’ notice if the Company does not pay any installment payment according to the terms of the agreement. We do not provide any forms of guarantees under these agreements. Payments of our obligations are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. Outstanding confirmed amounts are $145 and $217 as of March 31, 2023 and December 31, 2022, respectively, which will be recognized on the Condensed Consolidated Financial Statements as payments are due. (o) Recently Issued |
In May 2014, the Financial Accounting Standards Board (“FASB”)
In September 2022, the FASB issued Accounting Standards Update (“ASU”)("ASU)" No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).2022-04, "Liabilities-Supplier Finance Programs (Subtopic 405-50), Disclosure of Supplier Finance Program Obligations." This guidance as amended by subsequent ASUs onrequires annual and interim disclosures for entities that use supplier finance programs in connection with the topic, outlines a comprehensive model for determining revenue recognition for contracts with customers, which replaces numerous industry-specific requirementspurchase of goods and converges areas under this topic with those of the International Financial Reporting Standards. This guidance implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The new guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts and customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingenciesservices. These amendments are resolved in certain circumstances. The new guidance is effective for reporting periodsfiscal years beginning after December 15, 2017, and early adoption is permitted. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of the adoption. We have substantially completed our assessment of the new guidance and continue to make progress on its implementation. We plan to adopt the new guidance on January 1, 2018, on a “full retrospective” basis. Currently, we believe that the new guidance is not expected to have a material impact on our financial statements and we are currently assessing the need for expanded financial disclosures, if any.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Payments” (“ASU 2016-15”), which provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice. Application of ASU 2016-15, which should be applied prospectively, is required2022, except for the annual and interim periods beginning after December 15, 2017. Early adoption is permitted. ASU 2016-15 is not expected to have a material impactamendment on our financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”),rollforward information, which provides a more defined framework to use in determining when a set of assets and activities is a business. ASU 2017-01 also provides greater consistency in applying the guidance, making the definition of a business more operable. ASU 2017-01 is effective for public companies for annual periods, including interim periods, beginning after December 15, 2017. ASU 2017-01 is not expected to have a material impact on our financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. ASU 2017-09 is effective for public companies for annual periods, including interim periods, beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 is not expected to have a material impact on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018,2023. We adopted this ASU as of January 1, 2023 on a prospective basis. As the guidance requires only additional disclosures, there were no effects of this standard on our financial position, results of operations and cash flows. See disclosure contained in Note 1(n).
Note 2. Going Concern
The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
8
Primarily due to a decline in net sales, disruption of our international sales to China, and increases in costs associated with the manufacture and distribution of our products, the Company has sustained significant losses from operations in several reporting periods since 2019. In February 2023, the Company terminated its Loan and Security Agreement with UMB Bank, N.A. and repaid its revolving credit facility in full. The Company’s debt agreement with La Plata Capital, LLC matures on November 9, 2023. See Note 8 - “Long-Term Debt and Line of Credit” in the Notes to Condensed Consolidated Financial Statements for further information. 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 restructured debt facilities through the adjustments to the timing of required principal payments and covenant compliance periods. Management is considering additional various strategic actions including interim periods within those fiscal years. A modified retrospective transition approach isasset sales, obtaining additional debt or equity financing (potentially in conjunction with acquisitions), workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to ensure alignment with customer demand in order to address 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 lessees for capitalongoing operations. However, given the impact of the economic downturn on the U.S., the Company may be unable to sell assets or access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
The Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and operating leases existing at,classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
Note 3. Discontinued Operations
On January 23, 2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore product lines. The total consideration paid to us was $800, plus an amount equal to the value of the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore inventory of $1,136, subject to post-close adjustment. Additionally, the buyer will pay a royalty equal to 2% of gross sales for two yearsafter the beginning of the earliest comparative period presented in the financial statements. We anticipate that most of our operating leases will resultclosing date (the "Scott's Liquid Gold® Royalty"). The Scott's Liquid Gold® Royalty resulted in recognition of additional assetsa gain upon the sale of assets. Because the Scott's Liquid Gold® Royalty is variable consideration and the corresponding liabilitiesis contingent on the outcome of future events that are largely outside of the Company’s control, the variable consideration from the Scott's Liquid Gold® Royalty has been fully constrained and no amount is included in the results from discontinued operations. Consideration for the Scott's Liquid Gold® Royalty is to be recognized as received from the buyer. The constraint on the variable consideration will be reassessed at each subsequent reporting period.
On December 15, 2022, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Prell® product line. The total consideration paid to us was $150, plus an amount equal to the value of the Prell® inventory of $330, subject to post-close adjustment. Additionally, the buyer will pay a royalty equal to 3% of collections on net sales for four years after the closing date (the “Prell® Royalty”). The Prell® Royalty resulted in recognition of a gain upon the sale of assets. For the three months ended March 31, 2023, there were no changes in the assessment of the Prell® Royalty, which will continue to be recognized as received from the buyer. The constraint on the variable consideration will be reassessed at each subsequent reporting period.
9
We have reflected the operations of the Scott's Liquid Gold® andPrell® product lines as discontinued operations. Our Condensed Consolidated Balance Sheets. We have not determinedSheets and Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. Our Condensed Consolidated Statements of Equity and Statements of Cash Flows combine the amountresults of these transactions or the final impactcontinuing and discontinued operations. A summary of financial information related to our earningsdiscontinued operations is as the actual impact will depend on the Company’s lease portfolio at the time of adoption.follows:
In June 2016, FASB issued ASU No. 2016-13, “Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). ASU 2016-13 is not expected to have a material impact on our financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by eliminationReconciliation of the Step 2 requirement to calculate the implied fair value of goodwill. Instead, if a reporting unit’s carrying amount exceeds its fair value, an impairment charge will be recorded based on that difference. The impairment charge will be limitedLine Items Constituting Pretax Loss from Discontinued Operations to the amountAfter-Tax Loss from Discontinued Operations in the Condensed Consolidated Statements of goodwill allocatedOperations for the three months ended March 31:
| Three Months Ended March 31, 2023 |
|
| |||||||||
| Prell® |
|
| Scott's Liquid Gold® |
|
| Total |
|
| |||
Net sales | $ | - |
|
| $ | 187 |
|
| $ | 187 |
|
|
Cost of sales |
| - |
|
|
| 95 |
|
| $ | 95 |
|
|
Gross profit |
| - |
|
|
| 92 |
|
|
| 92 |
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Selling |
| - |
|
|
| 28 |
|
|
| 28 |
|
|
General and administrative |
| - |
|
|
| 22 |
|
|
| 22 |
|
|
Operating income from discontinued operations |
| - |
|
|
| 42 |
|
|
| 42 |
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest expense |
| - |
|
|
| (18 | ) |
|
| (18 | ) |
|
Gain on sale of discontinued operations |
| - |
|
|
| 787 |
|
|
| 787 |
|
|
Income from discontinued operations | $ | - |
|
| $ | 811 |
|
| $ | 811 |
|
|
| Three Months Ended March 31, 2022 |
|
| |||||||||
| Prell® |
|
| Scott's Liquid Gold® |
|
| Total |
|
| |||
Net sales | $ | 838 |
|
| $ | 1,223 |
|
| $ | 2,061 |
|
|
Cost of sales |
| 496 |
|
|
| 474 |
|
| $ | 970 |
|
|
Gross profit |
| 342 |
|
|
| 749 |
|
|
| 1,091 |
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Selling |
| 290 |
|
|
| 289 |
|
|
| 579 |
|
|
Intangible asset amortization |
| 12 |
|
|
| - |
|
|
| 12 |
|
|
Operating income from discontinued operations |
| 40 |
|
|
| 460 |
|
|
| 500 |
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest expense |
| (14 | ) |
|
| (54 | ) |
|
| (68 | ) |
|
Income from discontinued operations | $ | 26 |
|
| $ | 406 |
|
| $ | 432 |
|
|
There were no capital expenditures or significant operating and investing noncash items related to that reporting unit. ASU 2017-04 will be applied prospectivelydiscontinued operations during the years ended December 31, 2022 and is effective for impairment tests performed after2021, respectively.
Reconciliation of the Major Classes of Assets and Liabilities of the Discontinued Operations to Amounts Presented Separately in the Condensed Consolidated Balance Sheets as of:
| March 31, 2023 |
|
| December 31, 2022 |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Inventories | $ | - |
|
| $ | 1,235 |
|
Total assets | $ | - |
|
| $ | 1,235 |
|
All assets in the above table are related to the discontinued operations of Scott's Liquid Gold®. There were no assets related to Prell® as of March 31, 2023 and December 15, 2019, with early adoption permitted. ASU 2017-04 is not expected to have a material impact on our financial statements.31, 2022, respectively.
10
|
|
During the nine months ended September 30, 2017, we granted: (i) options to acquire 16,560 shares of our common stock to employees at prices ranging between $1.80 and $2.25 per share; and (ii) options to acquire 30,000 shares of our common stock to a non-employee board member at a price of $2.25 per share. During the nine months ended September 30, 2016,Note 4. Stock-Based Compensation
On January 18, 2022, we granted options to acquire 3,000 shares of our common stock25 RSUs to an employee at(the “2022 Individual Employee Grant”) with a price of $1.20 per share.
The weighted averagegrant date fair market value of the options granted in the nine months ended September 30, 2017 and 2016 was estimated$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 usingdate.
On March 2, 2022, we granted 15 shares of restricted stock to one executive all of which vested on the grant date with a Black-Scholes option pricing model with the following assumptions:
| September 30, 2017 |
|
| September 30, 2016 | |
Expected life of options (using the “simplified” method) | 4 years |
|
| 6 years | |
Average risk-free interest rate |
| 1.44% |
|
| 1.50% |
Average expected volatility of stock |
| 78% |
|
| 134% |
Expected dividend rate | None |
|
| None | |
Fair value of options granted | $55,100 |
|
| $3,488 |
fair value of $18.
Compensation cost related to stock options recognized in operating results (included in generaltotaled $0 and administrative expenses) totaled $183,500 and $189,500 in the nine months ended September 30, 2017 and 2016, respectively, and totaled $71,500 and $61,600$7 in the three months ended September 30, 2017March 31, 2023 and 2016,2022, respectively. Approximately $495,000 of total unrecognized compensation costs related to non-vestedThe stock options is expected to be recognized overwere fully vested in the next 12-60 months, depending on the vesting provisionssecond quarter of the options.2022. There was no tax benefit from recording the non-cash expense as it relates to the options granted to employees, as these were qualified stock options which are not normally tax deductible.
In 2005, we adopted a stock option planCompensation cost related to RSUs totaled $7 and $56 for our employees, officers and directors (the “2005 Plan”). In 2015, we adopted a stock option plan for our employees, officers and directors (the “2015 Plan”) to replace the 2005 Plan, which expired onthree months ended March 31, 2015.
Activity under our two stock option plans2023 and 2022, respectively. Approximately $64 of total unrecognized compensation costs related to non-vested RSUs is as follows:expected to be recognized throughout the year.
| Number of Options |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life |
| Aggregate Intrinsic Value |
| |||
2005 Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016 |
| 628,313 |
|
| $ | 0.63 |
|
| 3.8 years |
| $ | 510,000 |
|
Granted |
| - |
|
|
|
|
|
|
|
|
|
|
|
Exercised |
| (136,250 | ) |
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired |
| - |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017 |
| 492,063 |
|
| $ | 0.73 |
|
| 4.0 years |
| $ | 865,300 |
|
Exercisable, September 30, 2017 |
| 378,158 |
|
| $ | 0.69 |
|
| 3.3 years |
| $ | 679,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016 |
| 787,615 |
|
| $ | 1.27 |
|
| 7.2 years |
| $ | 136,000 |
|
Granted |
| 46,560 |
|
|
|
|
|
|
|
|
|
|
|
Exercised |
| - |
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired |
| (49,491 | ) |
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017 |
| 784,684 |
|
| $ | 1.32 |
|
| 6.6 years |
| $ | 916,500 |
|
Exercisable, September 30, 2017 |
| 380,205 |
|
| $ | 1.31 |
|
| 6.2 years |
| $ | 449,200 |
|
|
|
Note 5. Earnings per Share
Per share data is determined by using the weighted average number of common shares outstanding. Common equivalent shares are considered only for diluted earnings per share, unless considered anti-dilutive. Common equivalent shares, determined using the treasury stock method, result from stock options with exercise prices that are below the average market price of the common stock.
Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in our earnings.
A reconciliation of the weighted average number of common shares outstanding (in thousands) is as follows:follows. The dilutive effect of stock options and RSUs are excluded for periods in which the impact is anti-dilutive and when the Company has a net loss because the impact is also anti-dilutive.
| Three Months Ended March 31, |
|
| |||||
| 2023 |
|
| 2022 |
|
| ||
Common shares outstanding, beginning of the period |
| 12,797 |
|
|
| 12,727 |
|
|
Weighted average common shares issued |
| - |
|
|
| 12 |
|
|
Weighted average number of common shares outstanding |
| 12,797 |
|
|
| 12,739 |
|
|
Dilutive effect of common share equivalents |
| - |
|
|
| - |
|
|
Diluted weighted average number of common shares outstanding |
| 12,797 |
|
|
| 12,739 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Common shares outstanding, beginning of the period |
| 11,885,839 |
|
|
| 11,742,329 |
|
|
| 11,749,589 |
|
|
| 11,710,745 |
|
Weighted average common shares issued |
| - |
|
|
| 5,283 |
|
|
| 91,368 |
|
|
| 20,014 |
|
Weighted average number of common shares outstanding |
| 11,885,839 |
|
|
| 11,747,612 |
|
|
| 11,840,957 |
|
|
| 11,730,759 |
|
Dilutive effect of common share equivalents |
| 474,240 |
|
|
| 280,344 |
|
|
| 376,933 |
|
|
| 238,408 |
|
Diluted weighted average number of common shares outstanding |
| 12,360,079 |
|
|
| 12,027,956 |
|
|
| 12,217,890 |
|
|
| 11,969,167 |
|
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, |
|
| |||||
| 2023 |
|
| 2022 |
|
| ||
Stock options |
| 138 |
|
|
| 213 |
|
|
Restricted stock units |
| 38 |
|
|
| 63 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Stock options |
| 46,600 |
|
|
| 579,500 |
|
|
| 89,100 |
|
|
| 659,000 |
|
Note 6. Segment Information
We operate in two different segments: household products and skinhealth and hairbeauty care products. Our products are sold nationally and internationally (primarily Canada), directly through our sales force and indirectly through independent brokers and manufacturer’s representatives, to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, and other retail outlets and to wholesale distributors. 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 before income taxes.from operations.
11
The following provides information on our segments for the three and nine months ended September 30:March 31:
| Three Months Ended March 31, 2023 |
| |||||||||
| Household Products |
|
| Health and Beauty Care Products |
|
| Total |
| |||
Net sales | $ | 1,975 |
|
| $ | 1,273 |
|
| $ | 3,248 |
|
(Loss) income from operations |
| (386 | ) |
|
| 92 |
|
|
| (294 | ) |
Depreciation and amortization |
| 130 |
|
|
| 47 |
|
|
| 177 |
|
| Three Months Ended March 31, 2022 |
| |||||||||
| Household Products |
|
| Health and Beauty Care Products |
|
| Total |
| |||
Net sales | $ | 1,987 |
|
| $ | 1,742 |
|
| $ | 3,729 |
|
Loss from operations |
| (793 | ) |
|
| (8 | ) |
|
| (801 | ) |
Capital and intangible asset expenditures |
| 113 |
|
|
| - |
|
|
| 113 |
|
Depreciation and amortization |
| 297 |
|
|
| 155 |
|
|
| 452 |
|
| Three Months Ended September 30, |
| |||||||||||||
| 2017 |
|
| 2016 |
| ||||||||||
| Household Products |
|
| Skin and Hair Care Products |
|
| Household Products |
|
| Skin and Hair Care Products |
| ||||
Net sales | $ | 1,409,000 |
|
| $ | 8,931,600 |
|
| $ | 1,453,400 |
|
| $ | 8,483,500 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
| 661,600 |
|
|
| 4,758,400 |
|
|
| 690,000 |
|
|
| 5,140,600 |
|
Advertising expenses |
| 37,700 |
|
|
| 72,100 |
|
|
| 10,300 |
|
|
| 81,400 |
|
Selling expenses |
| 332,000 |
|
|
| 1,251,400 |
|
|
| 276,800 |
|
|
| 1,440,500 |
|
General and administrative expenses |
| 367,200 |
|
|
| 695,500 |
|
|
| 328,900 |
|
|
| 889,900 |
|
Total operating costs and expenses |
| 1,398,500 |
|
|
| 6,777,400 |
|
|
| 1,306,000 |
|
|
| 7,552,400 |
|
Income from operations |
| 10,500 |
|
|
| 2,154,200 |
|
|
| 147,400 |
|
|
| 931,100 |
|
Other (expense) income |
| - |
|
|
| - |
|
|
| (1,100 | ) |
|
| 2,100 |
|
Interest expense |
| - |
|
|
| (26,400 | ) |
|
| - |
|
|
| (60,400 | ) |
Income before income taxes | $ | 10,500 |
|
| $ | 2,127,800 |
|
| $ | 146,300 |
|
| $ | 872,800 |
|
Note 7. Intangible Assets
| Nine Months Ended September 30, |
| |||||||||||||
| 2017 |
|
| 2016 |
| ||||||||||
| Household Products |
|
| Skin and Hair Care Products |
|
| Household Products |
|
| Skin and Hair Care Products |
| ||||
Net sales | $ | 4,189,400 |
|
| $ | 26,467,600 |
|
| $ | 4,490,300 |
|
| $ | 19,784,500 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
| 2,010,600 |
|
|
| 14,638,400 |
|
|
| 2,148,500 |
|
|
| 11,306,100 |
|
Advertising expenses |
| 353,900 |
|
|
| 177,200 |
|
|
| 889,100 |
|
|
| 537,500 |
|
Selling expenses |
| 977,000 |
|
|
| 3,901,600 |
|
|
| 1,118,400 |
|
|
| 3,065,900 |
|
General and administrative expenses |
| 1,046,400 |
|
|
| 2,119,900 |
|
|
| 1,136,900 |
|
|
| 2,296,100 |
|
Total operating costs and expenses |
| 4,387,900 |
|
|
| 20,837,100 |
|
|
| 5,292,900 |
|
|
| 17,205,600 |
|
(Loss) income from operations |
| (198,500 | ) |
|
| 5,630,500 |
|
|
| (802,600 | ) |
|
| 2,578,900 |
|
Other income |
| - |
|
|
| - |
|
|
| 2,300 |
|
|
| 10,300 |
|
Interest expense |
| - |
|
|
| (101,500 | ) |
|
| (3,500 | ) |
|
| (74,000 | ) |
(Loss) income before income taxes | $ | (198,500 | ) |
| $ | 5,529,000 |
|
| $ | (803,800 | ) |
| $ | 2,515,200 |
|
The following is a reconciliation of segment information to consolidated information:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net sales | $ | 10,340,600 |
|
| $ | 9,936,900 |
|
| $ | 30,657,000 |
|
| $ | 24,274,800 |
|
Consolidated income before income taxes | $ | 2,138,300 |
|
| $ | 1,019,100 |
|
| $ | 5,330,500 |
|
| $ | 1,711,400 |
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Assets: |
|
|
|
|
|
|
|
Household Products | $ | 2,133,600 |
|
| $ | 1,850,000 |
|
Skin and Haircare Products |
| 21,883,700 |
|
|
| 18,371,500 |
|
Corporate |
| 665,200 |
|
|
| 1,611,800 |
|
Consolidated | $ | 24,682,500 |
|
| $ | 21,833,300 |
|
CorporateIntangible assets, noted abovewhich are comprised primarily of our deferred tax assets and property and equipment not directly associated withcapitalized costs of software obtained for internal-use or are related to our manufacturing, warehousing, shipping and receiving activities.
|
|
On June 30, 2016, Neoteric Cosmetics, Inc. (“Neoteric”)acquisition of our Denorex®, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Ultimark Products, Inc. (“Ultimark”) and consummated the transaction contemplated thereby (the “Acquisition”), pursuant to which Neoteric purchased from Ultimark all intellectual property assets and certain related assets owned by Ultimark as well as inventory of finished goods owned by Ultimark and used in connection with the manufacture, sale and distribution of the PrellZincon®, Denorex®, and ZinconBIZ® brands, of hair and scalp care products (collectively, the “Brands”). The total consideration Neoteric paid for the Brands was approximately $9.0 million, plus the assumption by Neoteric of certain specific liabilities of Ultimark related to the performance of certain purchase orders and contracts following June 30, 2016.
|
|
Intangible assets consisted of the following:
| As of September 30, 2017 |
|
| As of December 31, 2016 |
| As of March 31, 2023 |
|
| As of December 31, 2022 |
| ||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
| ||||||||||||
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Customer relationships | $ | 4,022,100 |
|
| $ | 502,800 |
|
| $ | 3,519,300 |
|
| $ | 4,022,100 |
|
| $ | 201,100 |
|
| $ | 3,821,000 |
| |||||||||||||||||||||||
Trade names |
| 2,362,400 |
|
|
| 196,800 |
|
|
| 2,165,600 |
|
|
| 2,362,400 |
|
|
| 78,700 |
|
|
| 2,283,700 |
| $ | 309 |
|
| $ | 101 |
|
| $ | 208 |
|
| $ | 309 |
|
| $ | 97 |
|
| $ | 212 |
|
Formulas and batching processes |
| 668,600 |
|
|
| 69,800 |
|
|
| 598,800 |
|
|
| 668,600 |
|
|
| 27,900 |
|
|
| 640,700 |
|
| 412 |
|
|
| 290 |
|
|
| 122 |
|
|
| 412 |
|
|
| 283 |
|
|
| 129 |
|
Internal-use software |
| 898 |
|
|
| 150 |
|
|
| 748 |
|
|
| 898 |
|
|
| 105 |
|
|
| 793 |
| |||||||||||||||||||||||
Non-compete agreement |
| 26,300 |
|
|
| 6,400 |
|
|
| 19,900 |
|
|
| 26,300 |
|
|
| 2,600 |
|
|
| 23,700 |
|
| 33 |
|
|
| 30 |
|
|
| 3 |
|
|
| 33 |
|
|
| 30 |
|
|
| 3 |
|
|
| 7,079,400 |
|
|
| 775,800 |
|
|
| 6,303,600 |
|
|
| 7,079,400 |
|
|
| 310,300 |
|
|
| 6,769,100 |
| $ | 1,652 |
|
| $ | 571 |
|
| $ | 1,081 |
|
| $ | 1,652 |
|
| $ | 515 |
|
| $ | 1,137 |
|
Goodwill |
|
|
|
|
|
|
|
|
| 1,520,600 |
|
|
|
|
|
|
|
|
|
|
| 1,520,600 |
| |||||||||||||||||||||||
Total intangible assets |
|
|
|
|
|
|
|
| $ | 7,824,200 |
|
|
|
|
|
|
|
|
|
| $ | 8,289,700 |
|
The amortization expense for the three and nine months ended September 30, 2017 was $155,100 and $465,500, respectively. Amortization expense for the three and nine months ended September 30, 2016March 31, 2023 and 2022 was $155,200.$56 and $83, respectively.
Estimated amortization expense for 20172023 and subsequent years is as follows:
Remainder of 2023 | $ | 169 |
|
2024 |
| 225 |
|
2025 |
| 224 |
|
2026 |
| 215 |
|
2027 |
| 104 |
|
Thereafter |
| 144 |
|
Total | $ | 1,081 |
|
2017 (remaining) | $ | 155,200 |
|
2018 |
| 620,700 |
|
2019 |
| 620,700 |
|
2020 |
| 620,700 |
|
2021 |
| 617,600 |
|
Thereafter |
| 3,668,700 |
|
Total | $ | 6,303,600 |
|
Note 8. Long-Term Debt and Line-of-Credit
UMB Loan Agreement
On June 30, 2016, Neoteric and the Company, as borrowers,July 1, 2020, we entered into a Loan and Security Agreement (as amended, the Credit Agreement (the “Credit“UMB Loan Agreement”) with JPMorgan ChaseUMB Bank, N.A. (“Chase”UMB”), as lender, pursuant to. Under the UMB Loan Agreement we obtained a $3,000 term loan, with equal monthly payments fully amortized over three years which Chase provided a term loanwas repaid in full in the second quarter of 2022, and a revolving credit facility, that was used to financewith a portionmaximum commitment of $4,000 bearing interest at the Acquisition and for the Company’s general corporate purposes and working capital. Theone-month term loan amount is $2.4 million with quarterly payments fully amortized over three years and interest of: (i) the LIBO RateSOFR rate + 3.75%; or (ii) the Prime Rate + 1.00%,6.83% with a floor of 7.75%.
On January 23, 2023, we entered in to the one month LIBO Rate + 2.5%. At September 30, 2017, our rate was 4.98%. TheConsent and Seventh Amendment to Loan and Security Agreement, which consents to the sale of Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor restore assets, updates defined terms and financial covenants under the UMB Agreement , and reduces the maximum commitment on the revolving credit facility amount is $4 million with interest of: (i)to $250.
12
The UMB Loan Agreement was terminated on February 27, 2023 and the LIBO Rate + 3.00%; or (ii) the Prime Rate + 0.25%, with a floor of the one month LIBO Rate + 2.5%. At September 30, 2017, our rate was 4.23%. The revolving credit facility will terminatewas paid in full on February 28, 2023. The loans were secured by all of the assets of the Company and its subsidiaries. Unamortized loan costs were $0 and $100 as of March 31, 2023 and December 31, 2022, respectively. Amortization of loan costs for the three months ended March 31, 2023 was $100, including $83 that were expensed as a result of the termination of the UMB Loan Agreement. Amortization of loan costs for the three months ended March 31, 2022 was $50.
La Plata Loan Agreement
On November 9, 2021, we entered into a loan and security agreement (as amended, the “La Plata Loan Agreement”) with La Plata Capital, LLC (“La Plata”). Under the La Plata Loan Agreement, we obtained a $2,000 term loan that bears interest at 14% and a $250 term loan that bears interest at 15%, both of which mature on November 9, 2023. Interest-only payments are required on a monthly basis through June 30, 2019 or any earlier date2023, with monthly principal and interest payments of $30K beginning on whichJuly 1, 2023. All remaining unpaid principal and interest are fully due on November 9, 2023. We repaid $1,000 of principal against the revolving commitmentLa Plata Loan Agreement during the first quarter of 2022.
The La Plata Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis beginning in June 2023. The La Plata Loan Agreement is otherwise terminated pursuant to the Credit Agreement. Under the Credit Agreement we are obligated to pay quarterly an unused commitment fee equal to 0.5% per annum on the daily amount of the undrawn portion of the revolving line-of-credit. The loans are collateralizedsecured by all of the assets of the Company and all of its subsidiaries.
The Credit Agreement requires, among other things, that beginning on DecemberAs of March 31, 20162023, our La Plata term loan had an outstanding balance of $1,220. La Plata unamortized loan costs were $15 and subsequently on a quarterly basis, the Company maintain a Debt Service Coverage Ratio of no less than 1.25 to 1.0 and a Funded Indebtedness to Adjusted EBITDA Ratio of no greater than 3.0 to 1.0. The Credit Agreement also contains covenants typical of transactions of this type, including among others, limitations on the Company’s ability to: create, incur or assume any indebtedness or lien on Company assets; pay dividends or make other distributions; redeem, retire or acquire the Company’s outstanding common stock, options, warrants or other rights; make fundamental changes to the Company’s corporate structure or business; make investments or asset sales; or engage in certain other activities as set forth in the Credit Agreement. The Company was in compliance with the covenants in the Credit Agreement$20 as of September 30, 2017March 31, 2023 and December 31, 2016. Capitalized terms used but not defined shall have the meanings provided in the Credit Agreement.
Maturities of long-term debt are as follows as of September 30, 2017:
2017 (remaining) | $ | 200,000 |
|
2018 |
| 800,000 |
|
2019 |
| 400,000 |
|
|
| 1,400,000 |
|
Less unamortized debt issuance costs |
| (43,900 | ) |
Total | $ | 1,356,100 |
|
Debt issuance costs recognized as a component of interest2022, respectively. Amortization expense for the three and nine months ended September 30, 2017 were $6,300 and $18,800, respectively. Debt issuance costs recognized as a component of interest expense for the three and nine months ended September 30, 2016 were $6,200. These costs are amortized using the effective interest method over the term of the loan.
Results of Operations
Our consolidated net sales for the first nine months ended September 30, 2017 were $30,657,000 versus $24,274,800 for the first nine months ended September 30, 2016, an increase of $6,382,200 or 26.3%. We saw a 76.5% increase in net sales of our own lines of skin and hair care products and a 17.4% increase in net sales of the skin and hair care products that we distribute for other companies. We saw a 6.7% decrease in net sales of our household products. The reasons for the foregoing changes in net sales are described below.
Our consolidated net sales for the three months ended September 30, 2017March 31, 2023 and 2022 were $10,340,600 versus $9,936,900$5 and $5, respectively.
Note 9. Leases
We have entered into a lease for our corporate headquarters with a remaining lease term of 8 years. This lease includes both lease and nonlease components, which are accounted for as a single lease component as we have elected the practical expedient to combine these components for all leases. As this lease does not provide an implicit rate, we calculated the right-of-use assets and lease liabilities using our secured incremental borrowing rate at the lease commencement date. We currently do not have any finance leases outstanding.
Information related to leases was as follows:
| Three Months Ended March 31, 2023 |
|
| Three Months Ended March 31, 2022 |
|
| ||
Operating lease information: |
|
|
|
|
|
| ||
Operating lease cost | $ | 101 |
|
| $ | 100 |
|
|
Operating cash flows from operating leases |
| 100 |
|
|
| 100 |
|
|
Net assets obtained in exchange for new operating lease liabilities |
| - |
|
|
| - |
|
|
|
|
|
|
|
|
| ||
Weighted average remaining lease term in years |
| 7.67 |
|
|
| 8.67 |
|
|
Weighted average discount rate |
| 5.1 | % |
|
| 5.1 | % |
|
13
Future minimum annual lease payments are as follows:
Remainder of 2023 | $ | 305 |
|
2024 |
| 413 |
|
2025 |
| 420 |
|
2026 |
| 427 |
|
2027 |
| 434 |
|
Thereafter |
| 1,305 |
|
Total minimum lease payments | $ | 3,304 |
|
Less imputed interest |
| (588 | ) |
|
|
| |
Total operating lease liability | $ | 2,716 |
|
14
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 Condensed Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022. This Item 2 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Please refer to "Item 1A. Risk Factors" in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2022 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.
Sale of Brands
On January 23, 2023, we sold the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore product lines to a company that markets and distributes wood care products. On December 15, 2022, we sold the Prell® brand to a company that markets and distributes natural hair and skincare products. We have reflected the operations of Scott's Liquid Gold® and Prell® as discontinued operations for all periods presented.
See Note 3 - “Discontinued Operations” in the Notes to Condensed Consolidated Financial Statements for further information on the sale of both brands.
In conjunction with the sale of the Scott’s Liquid Gold® brand, as discussed below, the Company may continue to use names “Scott’s Liquid Gold” and “SLG” for up to one year following the closing date of the agreement on January 23, 2023. Following this transitional name period, the Company will only be able to use the aforementioned names in connection with retaining records and other historical or archived documents and any use required by or permitted as a fair use or otherwise under applicable law.
15
Results of Operations
Three months ended March 31, 2023 compared to three months ended September 30, 2016, an increaseMarch 31, 2022
| Three Months Ended March 31, (in thousands) |
|
| |||||||||||||
|
|
|
|
|
|
| Increase / (Decrease) |
|
| |||||||
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
|
| ||||
Net sales | $ | 3,248 |
|
| $ | 3,729 |
|
| $ | (481 | ) |
|
| (12.9 | %) |
|
Cost of sales |
| 1,849 |
|
|
| 1,886 |
|
|
| (37 | ) |
|
| (2.0 | %) |
|
Gross profit |
| 1,399 |
|
|
| 1,843 |
|
|
| (444 | ) |
|
| (24.1 | %) |
|
|
| 43.1 | % |
|
| 49.4 | % |
|
|
|
|
|
|
| ||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Advertising |
| 154 |
|
|
| 135 |
|
|
| 19 |
|
|
| 14.1 | % |
|
Selling |
| 865 |
|
|
| 1,625 |
|
|
| (760 | ) |
|
| (46.8 | %) |
|
General and administrative |
| 618 |
|
|
| 791 |
|
|
| (173 | ) |
|
| (21.8 | %) |
|
Intangible asset amortization |
| 56 |
|
|
| 93 |
|
|
| (37 | ) |
|
| (39.8 | %) |
|
Total operating expenses |
| 1,693 |
|
|
| 2,644 |
|
|
| (951 | ) |
|
| (36.0 | %) |
|
Loss from operations |
| (294 | ) |
|
| (801 | ) |
|
| 507 |
|
|
| 63.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| (152 | ) |
|
| (82 | ) |
|
| (70 | ) |
|
| (85.4 | %) |
|
Loss before income taxes and discontinued operations |
| (446 | ) |
|
| (883 | ) |
|
| 437 |
|
|
| 49.5 | % |
|
Income tax benefit |
| 4 |
|
|
| - |
|
|
| 4 |
|
|
| 100.0 | % |
|
Loss from continuing operations |
| (442 | ) |
|
| (883 | ) |
|
| 441 |
|
|
| 49.9 | % |
|
Gain from discontinued operations, net of taxes |
| 811 |
|
|
| 432 |
|
|
| 379 |
|
|
| 87.7 | % |
|
Net income (loss) | $ | 369 |
|
| $ | (451 | ) |
| $ | 820 |
|
|
| 181.9 | % |
|
Our operating results were primarily impacted by the following:
16
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:
| Three Months Ended March 31, (in thousands) |
|
| |||||||||||||
|
|
|
|
|
|
| Increase / (Decrease) |
|
| |||||||
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
|
| ||||
Net sales | $ | 1,975 |
|
| $ | 1,987 |
|
| $ | (12 | ) |
|
| (0.6 | %) |
|
Gross profit | $ | 712 |
|
| $ | 742 |
|
| $ | (30 | ) |
|
| (4.0 | %) |
|
Gross margin |
| 36.1 | % |
|
| 37.3 | % |
|
|
|
|
|
|
| ||
Loss from operations | $ | (386 | ) |
| $ | (793 | ) |
| $ | 407 |
|
|
| 51.3 | % |
|
Health and beauty care products
The following table shows comparative net sales, of our household products. The reasonsgross margin, gross profit, loss from operations, volume and percentage changes for the foregoing changes inhealth and beauty care products between periods:
| Three Months Ended March 31, (in thousands) |
|
| |||||||||||||
|
|
|
|
|
|
| Increase / (Decrease) |
|
| |||||||
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
|
| ||||
Net sales |
| 1,273 |
|
|
| 1,742 |
|
|
| (469 | ) |
|
| (26.9 | %) |
|
Gross profit | $ | 687 |
|
| $ | 1,101 |
|
| $ | (414 | ) |
|
| (37.6 | %) |
|
Gross margin |
| 54.0 | % |
|
| 63.2 | % |
|
|
|
|
|
|
| ||
Income (loss) from operations | $ | 92 |
|
| $ | (8 | ) |
| $ | 100 |
|
|
| 1,250.0 | % |
|
Our net income for the first nine months ended September 30, 2017 was $3,431,200 versus net income of $1,013,500 in the first nine months ended September 30, 2016. Our net income for the third quarter of 2017 was $1,474,800 versus net income of $603,600 in the third quarter of 2016. The increase in net income for the first nine months ended September 30, 2017 comparedand gross profits due to the net income for the same period in 2016 resulted primarily from: (1) increasedelimination of sales as a resultto our exclusive China distributor of the Acquisition and further growth of the skin and hair care products that we distribute; (2) an increase in the sales of Alpha
Liquidity and Capital Resources
Overview
Our primary sources of funds include cash expected to be generated from operations. Our principal uses of cash are to fund planned operating expenditures, interest payments, and principal payments on our debt. Management’s assessment of cash flow forecasts indicate that, absent any other action, the incurrenceCompany likely will require additional liquidity to continue its operations over the next 12 months. Working capital movements are influenced by the sourcing of professional fees in the first nine months of 2016 related to the Acquisition. These increases were offset in part by an increase in income tax expense and the amortization of the acquired intangible assets. Our income tax expense for the first nine months ended September 30, 2017 was $1,899,300 versus an income tax expense of $697,900 in the first nine months ended September 30, 2016. Our income tax expense in the third quarter of 2017 was $663,500 versus an income tax expense of $415,500 in the third quarter of 2016.finished goods inventories.
Summary of Results as a Percentage of Net SalesFinancing Agreements
| Year Ended December 31, |
|
| Nine Months Ended September 30, |
| ||||||
| 2016 |
|
| 2017 |
|
| 2016 |
| |||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
Household products |
| 17.0 | % |
|
| 13.7 | % |
|
| 18.5 | % |
Skin and hair care products |
| 83.0 | % |
|
| 86.3 | % |
|
| 81.5 | % |
Total net sales |
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of sales |
| 56.9 | % |
|
| 54.3 | % |
|
| 55.4 | % |
Gross profit |
| 43.1 | % |
|
| 45.7 | % |
|
| 44.6 | % |
Other revenue |
| 0.0 | % |
|
| 0.0 | % |
|
| 0.1 | % |
|
| 43.1 | % |
|
| 45.7 | % |
|
| 44.7 | % |
Operating expenses |
| 34.0 | % |
|
| 28.0 | % |
|
| 37.3 | % |
Interest expense |
| 0.4 | % |
|
| 0.3 | % |
|
| 0.3 | % |
|
| 34.4 | % |
|
| 28.3 | % |
|
| 37.6 | % |
Income before income taxes |
| 8.7 | % |
|
| 17.4 | % |
|
| 7.1 | % |
Our gross margins may not be comparable to those of companies who include all of the costs related to their distribution network in cost of sales because we, like some other companies, exclude a portion of these costs (i.e., freight out to customers) from gross margin. Instead, we include them as part of selling expenses. SeePlease see Note 1(p), “Operating Costs and Expenses Classification,”8 to our Condensed Consolidated Financial Statements (Unaudited) in Item 1.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Comparative Net Sales
| Nine Months Ended September 30, |
|
| Percentage Increase |
| ||||||
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Total household products | $ | 4,189,400 |
|
| $ | 4,490,300 |
|
|
| (6.7 | %) |
Total skin and hair care products |
| 26,467,600 |
|
|
| 19,784,500 |
|
|
| 33.8 | % |
Total net sales | $ | 30,657,000 |
|
| $ | 24,274,800 |
|
|
| 26.3 | % |
Sales of household products for the first nine months of 2017 accounted for 13.7% of consolidated net sales compared to 18.5% for the same period in 2016. The net sales of these products were $4,189,400 in the first nine months of 2017 compared to $4,490,300 for the same period in 2016, a decrease of $300,900 or 6.7%. This decrease is primarily attributable to: (1) lower sales of our Scott’s Liquid Gold® Floor Restore product due to the first nine months of 2016 including sales at one of our customers who discontinued the product in the second quarter of 2016; and (2) lower sales of our other household products.
Sales of skin and hair care products for the first nine months of 2017 accounted for 86.3% of consolidated net sales compared to 81.5% for the same period in 2016. The net sales of these products were $26,467,600 in the first nine months ended September 30, 2017 compared to $19,784,500 for the same period in 2016, an increase of $6,683,100 or 33.8%, primarily as a result of the addition of the net sales of Prell®, Denorex®, and Zincon®, which we acquired in the Acquisition on June 30, 2016, and increases in the sales of Alpha® Skin Care products and Montagne Jeunesse face masque sachets, and offset by a decrease in the sales of Batiste Dry Shampoo due to changes in our distribution agreement with Church & Dwight Co., Inc. (“Church & Dwight”), as previously disclosed in two Form 8-K filings dated July 17, 2017 and September 7, 2016.
The net sales of our own skin and hair care products were $9,694,800 in the first nine months of 2017 compared to $5,492,800 for the same period in 2016, an increase of $4,202,000 or 76.5%. This increase is primarily attributable to: (1) an increase in the sales of Alpha® Skin Care products; and (2) the addition of the net sales of Prell®, Denorex®, and Zincon®. The net sales of Prell®, Denorex®, and Zincon® were $4,709,800 in the first nine months ended September 30, 2017.
The net sales of Montagne Jeunesse and Batiste Dry Shampoo were $16,772,800 in the first nine months of 2017 compared to $14,291,700 for the same period in 2016, an increase of $2,481,100 or 17.4%. This increase is primarily attributable to increased sales of Montagne Jeunesse face masque sachets.
We paid our customers a total of $1,854,100 in the first nine months of 2017 for trade promotions to support price features, displays, slotting fees and other merchandising of our products compared to $1,584,500 for the same period in 2016, an increase of $269,600 or 17.0%. This increase is primarily attributable to the addition of the sales of Prell®, Denorex®, and Zincon® as well as increased sales of Montagne Jeunesse face masque sachets.
From time to time, our customers return products to us. For our household products, we permit returns only for a limited time. With regard to our skin and hair care products, returns are more frequent under an unwritten industry standard that permits returns for a variety of reasons. In the event a skin and hair care customer requests a return of a product, we will consider the request, and may grant such request in order to maintain or enhance our relationship with the customer, even in the absence of an enforceable right of the customer to do so. Typically, customers that return products to us take a credit on our invoice equal to the original sales price plus a handling charge ranging from 8-10% of the original sales price. Our product returns (as a percentage of net sales) were 0.2% for the first nine months of 2017 and 0.1% for the same period in 2016.
On a consolidated basis, cost of sales was $16,649,000 during the first nine months of 2017 compared to $13,454,600 for the same period in 2016, an increase of $3,194,400 or 23.7%, on a net sales increase of 26.3%. As a percentage of consolidated net sales, cost of sales was 54.3% in the first nine months of 2017 compared to 55.4% for the same period in 2016.
As a percentage of net sales of our household products, the costs of sales for our household products increased to 48.0% in the first nine months of 2017 compared to 47.8% for the same period in 2016.
As a percentage of net sales of our skin and hair care products, the cost of sales for our skin and hair care products decreased to 55.3% in the first nine months of 2017 compared to 57.1% for the same period in 2016. This change varies from period to period based on product mix and trade promotions of the products we make versus the products we distribute for other companies, which have higher costs and higher trade promotions. The underlying costs of the products did not significantly change in the first nine months of 2017 compared to the same period in 2016, except for an increase in certain overhead costs incurred from leasing additional warehouse space starting in the second quarter of 2016.
Operating Expenses, Interest Expense and Other Income
| Nine Months Ended September 30, |
|
| Percentage Increase |
| ||||||
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Advertising | $ | 531,100 |
|
| $ | 1,426,600 |
|
|
| (62.8 | %) |
Selling |
| 4,878,600 |
|
|
| 4,184,300 |
|
|
| 16.6 | % |
General and administrative |
| 3,166,300 |
|
|
| 3,433,000 |
|
|
| (7.8 | %) |
Total operating expenses | $ | 8,576,000 |
|
| $ | 9,043,900 |
|
|
| (5.2 | %) |
Other income | $ | - |
|
| $ | 12,600 |
|
|
| (100.0 | %) |
Interest expense | $ | 101,500 |
|
| $ | 77,500 |
|
|
| 31.0 | % |
Our operating expenses for the first nine months of 2017 were $8,576,000 compared to $9,043,900 for the same period in 2016, a decrease of $467,900 or 5.2%. These expenses consist primarily of advertising, selling, and general and administrative expenses.
Advertising expenses for the first nine months of 2017 were $531,100 compared to $1,426,600 for the same period in 2016, a decrease of $895,500 or 62.8%. This decrease is primarily due to: (1) the one-time expenses we incurred during the first nine months of 2016 relating to the repositioning of our Alpha® Skin Care products and Scott’s Liquid Gold® household products in the marketplace, which were not repeated in 2017; and (2) spending less on a national television campaign in the first nine months of 2017 compared to the same period in 2016 on our Scott’s Liquid Gold® Wood Care product.
Selling expenses for the first nine months of 2017 were $4,878,600 compared to $4,184,300 for the same period in 2016, an increase of $694,300 or 16.6%. This increase is primarily attributable to: (1) an increase in the commissions that we paid our sales brokers and an increase in our costs of freight-out to our customers due to higher sales volume; and (2) an increase in the accrual of probable bonus payments to personnel within our sales and marketing organization compared to the first nine months of 2016. This increase was offset primarily by a reduction in certain marketing and promotional activities compared to the first nine months of 2016.
General and administrative expenses for the first nine months of 2017 were $3,166,300 compared to $3,433,000 for the same period of 2016, a decrease of $266,700 or 7.8%. This decrease is due primarily to a decrease in professional fees in the first nine months of 2017 compared to higher fees in the same period of 2016 related to the Acquisition. This decrease was offset primarily by: (1) an increase in the accrual of probable bonus payments to our management and administrative personnel, compared to the first nine months of 2016; and (2) amortization of the acquired intangible assets.
Other income from interest earned on our cash reserves for the first nine months ended September 30, 2017 and 2016 was $0 and $12,600, respectively.
Interest expense for the first nine months of 2017 was $101,500 compared to $77,500 for the same period in 2016, an increase of $24,000 or 31.0%. The increase is due to borrowings under the Credit Agreement entered into on June 30, 2016 to help fund the Acquisition.
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Comparative Net Sales
| Three Months Ended September 30, |
|
| Percentage Increase |
| ||||||
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Total household products | $ | 1,409,000 |
|
| $ | 1,453,400 |
|
|
| (3.1 | %) |
Total skin and hair care products |
| 8,931,600 |
|
|
| 8,483,500 |
|
|
| 5.3 | % |
Total net sales | $ | 10,340,600 |
|
| $ | 9,936,900 |
|
|
| 4.1 | % |
Sales of household products for the third quarter of 2017 accounted for 13.6% of consolidated net sales compared to 14.6% for the same period in 2016. The net sales of these products were $1,409,000 in the third quarter of 2017 compared to $1,453,400 for the same period in 2016, a decrease of $44,400 or 3.1%. This decrease is primarily attributable to lower sales of certain household products, which were partially offset by a slight increase in sales of our Scott’s Liquid Gold® Wood Care product.
Sales of skin and hair care products for the third quarter of 2017 accounted for 86.4% of consolidated net sales compared to 85.4% for the same period in 2016. The net sales of these products were $8,931,600 in the third quarter of 2017 compared to $8,483,500 for the same period in 2016, an increase of $448,100 or 5.3%, primarily as a result of increases in the sales of Alpha® Skin Care products and Montagne Jeunesse face masque sachets, and offset by a decrease in the sales of Batiste Dry Shampoo due to changes in our distribution agreement with Church & Dwight.
The net sales of our own skin and hair care products were $3,919,800 in the third quarter of 2017 compared to $2,849,900 for the same period in 2016, an increase of $1,069,900 or 37.5%. This increase is primarily attributable to an increase in the sales of Alpha® Skin Care products.
The net sales of Montagne Jeunesse and Batiste Dry Shampoo were $5,011,800 in the third quarter of 2017 compared to $5,633,600 for the same period in 2016, a decrease of $621,800 or 11.0%. This decrease is primarily attributable to changes in our distribution agreement with Church & Dwight for Batiste Dry Shampoo, and was partially offset by an increase in sales of Montagne Jeunesse face masque sachets.
We paid our customers a total of $522,300 in the third quarter of 2017 for trade promotions to support price features, displays, slotting fees and other merchandising of our products compared to $616,300 for the same period in 2016, a decrease of $94,000 or 15.3%. This decrease is primarily attributable to: (1) changes in our distribution agreement with Church & Dwight; and (2) a reduction in trade promotions related to Batiste Dry Shampoo.
From time to time, our customers return products to us. For our household products, we permit returns only for a limited time. With regard to our skin and hair care products, returns are more frequent under an unwritten industry standard that permits returns for a variety of reasons. In the event a skin and hair care customer requests a return of a product, we will consider the request, and may grant such request in order to maintain or enhance our relationship with the customer, even in the absence of an enforceable right of the customer to do so. Typically, customers that return products to us take a credit on our invoice equal to the original sales price plus a handling charge ranging from 8-10% of the original sales price. Our product returns (as a percentage of net sales) were 0.3% for the third quarter of 2017 and 0.1% for the same period in 2016.
On a consolidated basis, cost of sales was $5,420,000 during the third quarter of 2017 compared to $5,830,600 for the same period in 2016, a decrease of $410,600 or 7.0%, on a net sales increase of 4.1%. As a percentage of consolidated net sales, cost of sales was 52.4% in the third quarter of 2017 compared to 58.7% for the same period in 2016.
As a percentage of net sales of our household products, the costs of sales for our household products decreased to 47.0% in the third quarter of 2017 compared to 47.5% for the same period in 2016.
As a percentage of net sales of our skin and hair care products, the cost of sales for our skin and hair care products decreased to 53.3% in the third quarter of 2017 compared to 60.6% for the same period in 2016. This change varies from period to period based on product mix and trade promotions of the products we make versus the products we distribute for other companies, which have higher costs and higher trade promotions. The underlying costs of the products did not significantly change in the third quarter of 2017 compared to the same period in 2016.
Operating Expenses, Interest Expense and Other Income
| Three Months Ended September 30, |
|
| Percentage Increase |
| ||||||
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Advertising | $ | 109,800 |
|
| $ | 91,700 |
|
|
| 19.7 | % |
Selling |
| 1,583,400 |
|
|
| 1,717,300 |
|
|
| (7.8 | %) |
General and administrative |
| 1,062,700 |
|
|
| 1,218,800 |
|
|
| (12.8 | %) |
Total operating expenses | $ | 2,755,900 |
|
| $ | 3,027,800 |
|
|
| (9.0 | %) |
Other income | $ | - |
|
| $ | 1,000 |
|
|
| (100.0 | %) |
Interest expense | $ | 26,400 |
|
| $ | 60,400 |
|
|
| (56.3 | %) |
Our operating expenses for the third quarter of 2017 were $2,755,900 compared to $3,027,800 for the same period in 2016, a decrease of $271,900 or 9.0%. These expenses consist primarily of advertising, selling, and general and administrative expenses.
Advertising expenses for the third quarter of 2017 were $109,800 compared to $91,700 for the same period in 2016, an increase of $18,100 or 19.7%.
Selling expenses for the third quarter of 2017 were $1,583,400 compared to $1,717,300 for the same period in 2016, a decrease of $133,900 or 7.8%. This decrease is primarily attributable to: (1) a reduction in certain marketing and promotional activities; and (2) a decrease in the accrual of probable bonus payments to personnel within our sales and marketing organization compared to the third quarter of 2016. This decrease was offset primarily by an increase in our costs of freight-out to our customers due to higher sales volume.
General and administrative expenses for the third quarter of 2017 were $1,062,700 compared to $1,218,800 for the same period of 2016, a decrease of $156,100 or 12.8%. This decrease is due primarily to: (1) a decrease in professional fees in the third quarter of 2017 compared to higher fees in the same period of 2016 related to the Acquisition; and (2) a decrease in the accrual of probable bonus payments to our management and administrative personnel compared to the third quarter of 2016.
Other income from interest earned on our cash reserves for the third quarter of 2017 and 2016 was $0 and $1,000, respectively.
Interest expense for the third quarter of 2017 was $26,400 compared to $60,400 for the same period in 2016, a decrease of $34,000 or 56.3%. The decrease is due to a lower balance on the term loan and no outstanding balance on the line-of-credit as of September 30, 2017. Both borrowings under the Credit Agreement had higher balances as of September 30, 2016 to help fund the Acquisition.
Liquidity and Capital Resources
Financing Agreements
Please see Note 7 to our Condensed Consolidated Financial Statements (Unaudited) for information on our CreditLa Plata Loan Agreement with Chase. Please see Note 1(f) to our Condensed Consolidated Financial Statements (Unaudited) for information on our financing agreement with Wells Fargo,and UMB Loan Agreement, which was terminated during 2016.in February 2023.
Liquidity and Changes in Cash Flows
At September 30, 2017,March 31, 2023, we had approximately $2.4 million$457 in cash on hand, which was $291,700 more compared toan increase of $408 from December 31, 2016, primarily due to2022.
17
The following is a summary of cash provided by or (used in) each of the indicated types of activities:
| Three Months Ended March 31, (in thousands) |
| |||||||||||||
|
|
|
|
|
|
| Increase / (Decrease) |
| |||||||
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
Operating activities | $ | 756 |
|
| $ | (4 | ) | $ | 760 |
|
|
| 19,000.0 | % | |
Investing activities |
| 1,936 |
|
|
| (99 | ) |
|
| 2,035 |
|
|
| 2,055.6 | % |
Financing activities |
| (2,284 | ) |
|
| (770 | ) |
|
| (1,514 | ) |
|
| (196.6 | %) |
The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
Primarily due to a decline in net sales, disruption of our international sales to China, and increases in costs associated with the manufacture and distribution of our products, the Company has sustained significant losses from operations in several reporting periods since 2019. All proceeds from the sale of our Scott's Liquid Gold brand in January 2023 were used to reduce outstanding debt. In February 2023, the Company terminated its Loan and Security Agreement with UMB Bank, N.A, and repaid its revolving credit facility in full. The Company’s debt agreement with La Plata Capital, LLC matures on November 9, 2023. 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 outstanding balance on our line-of-credit to zero; (2) repayments of long-term debt; (3) payment of income taxes;Company’s operating expenses and (4)has restructured debt facilities through the payment of performance bonuses in the first nine months of 2017 to our management, sales, administrative support and operations personnel that were accrued for in 2016. For the first nine months ended September 30, 2017, the primary components of working capital that significantly affected operating cash flows were the following: (1) net accounts receivable were $304,200 less at September 30, 2017 than at December 31, 2016 due primarily to receivables relatedadjustments to the timing of receiving payment; (2) inventory at September 30, 2017 was $3,842,600 more than at December 31, 2016 due primarilyrequired principal payments and covenant compliance periods. Management is considering additional various strategic actions including asset sales, obtaining additional debt or equity financing (potentially in conjunction with acquisitions), workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to higher sales volumeensure 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. However, given the timingimpact of receiving certain inventory from our vendors and shipping our productsthe economic downturn on the U.S., the Company may be unable to our customers; and (3) accounts payable and accrued expenses at September 30, 2017 were $333,600 more than at December 31, 2016 due primarily to bonuses paid to certain employees andsell assets or access further equity or debt financing when needed. As such, there can be no assurance that the timing of payments on our inventory.
We anticipate that our existing cash and our cash flow from operations, together with our current Credit Agreement with Chase,Company will be sufficientable to meet our cash requirements forobtain additional liquidity when needed or under acceptable terms, if at all.
The Condensed Consolidated Financial Statements do not include any adjustments to reflect the 12 months followingpossible future effects on the filing daterecoverability and classification of this Report. Duringassets or the first nine monthsamounts and classification of 2017, we spent $352,600 to purchase production and warehouse equipment to improve our manufacturing capabilities and efficiencies and on additional production and warehouse equipmentliabilities that is primarily related tomay result from the Acquisition, and paid an additional $100,000 in deposits for future production and warehouse equipment to be received and placed in service in 2017. We expect to make additional capital expendituresoutcome of approximately $90,000 in 2017 on additional production and warehouse equipment that is primarily related to the Acquisition.these uncertainties.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of September 30, 2017,March 31, 2023, we conducted an evaluation, under the supervision and with the participation of our Chief Executive OfficerPresident and Chief Financial Officer,Officers 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)and15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Chief Executive OfficerPresident and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2017.March 31, 2023.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the ninethree months ended September 30, 2017March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
18
PART II
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, 20162022 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition, or future results.
| Document | |
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| ||
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| Rule 13a-14(a) Certification of the | |
31.2 | Rule 13a-14(a) Certification of the Chief Financial | |
32.1* | ||
101.INS | Inline XBRL Instance | |
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.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Reportreport to be signed on its behalf by the undersigned thereunto duly authorized.
SCOTT’S LIQUID GOLD-INC. | ||
By: | /s/ | |
| ||
| ||
| ||
By: | /s/ | |
| ||
| ||
(Principal Financial and Chief Accounting Officer) |
Date: November 14, 2017May 8, 2023
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