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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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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
(Exact name of Registrant as specified in its Charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
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Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act.
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Name of exchange on which registered |
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None |
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None |
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None |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
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.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
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.
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of the common stock held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on June 30, 2021, was $
The number of shares of Registrant’s Common Stock outstanding as of March 30, 2022 was
CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, in addition to historical information. All statements, other than statements of historical facts, included in this Report that address activities, events, or developments with respect to our financial condition, results of operations, or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. You can typically identify forward-looking statements by the use of words, such as “may,” “could,” “should,” “assume,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” and other similar words. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements contained in this Report are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Forward-looking statements and our performance inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to:
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the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees; |
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disruptions or inefficiencies in the supply chain, including any impact of the COVID-19 pandemic; |
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dependence on third-party vendors and on sales to major customers; |
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regulations, economic conditions, and tariffs in the People’s Republic of China (“PRC”), as well as dependence on the efforts of our exclusive distributor in the PRC to market and sell our products there; |
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a continued shift in the retail market from food and drug stores to mass merchandisers, club stores, dollar stores, e-commerce retailers, and subscription services; |
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competition from large consumer products companies in the United States; |
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competitive factors, including any decrease in distribution of (i.e., retail stores carrying) our significant products; |
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new competitive products and/or technological changes; |
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the need for effective advertising of our products and limited resources available for such advertising; |
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unfavorable economic conditions; |
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changing consumer preferences and the continued acceptance of each of our significant products in the marketplace; |
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the degree of success of any new product or product line introduction by us; |
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the degree of success of the integration of product lines or businesses we may acquire; |
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the degree of success of our conversion to outsourced manufacturing and dependence on third-party manufacturers; |
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changes in the regulation of our products, including applicable environmental, U.S. and international Food and Drug Administration regulations and process-audit compliance; |
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the loss of any executive officer or other personnel; |
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future losses which could affect our liquidity; |
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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.
TABLE OF CONTENTS
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PART I |
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Item 1. |
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1 |
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Item 1A. |
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4 |
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Item 1B. |
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8 |
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Item 2. |
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8 |
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Item 3. |
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8 |
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Item 4. |
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PART II |
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Item 5. |
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9 |
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Item 6. |
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Item 7. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
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Item 9C. |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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PART III |
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Item 10. |
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39 |
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Item 11. |
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39 |
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Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
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Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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PART IV |
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Item 15. |
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39 |
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Item 16. |
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PART I
(in thousands, except per share data)
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ITEM 1. |
BUSINESS |
Overview
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954. In this Report the terms “we”, “us” or “our” refer to Scott’s Liquid Gold-Inc. and our subsidiaries, collectively. We develop, market, and sell high-quality, high-value household and health and beauty care products. Our business is divided into two operating segments; household products and health and beauty care products. Our family of brands include:
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Scott’s Liquid Gold®; |
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Alpha® Skin Care; |
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Prell®; |
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Denorex®; |
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Kids N Pets®; and |
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BIZ®. |
Effective as of December 31, 2021, we sold the Dryel® brand and we are no longer distributing Batiste Dry Shampoo.
Financial Information About Segments and Principal Products
The table set forth below shows the percentage of our net sales contributed by each operating segment during 2021 and 2020:
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% of Net Sales |
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2021 |
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2020 |
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Household |
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42.8 |
% |
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43.9 |
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Health and beauty care |
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Distributed |
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21.5 |
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22.8 |
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Manufactured |
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35.7 |
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33.3 |
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Total health and beauty care |
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57.2 |
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56.1 |
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For more financial information on our operating segments, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 13 to our Consolidated Financial Statements in Item 8.
Household Products
The principal products in our household products segment include:
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Scott’s Liquid Gold® Wood Care; |
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Scott’s Liquid Gold® Floor Restore; and |
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Kids N Pets® and Messy Pet®; and |
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BIZ® . |
Scott’s Liquid Gold® Wood Care has been our core product since our inception. It has been sold in the United States for over 70 years. Unlike leading furniture polishes, our higher quality product contains natural oils that penetrate the wood’s surface to clean, replace lost moisture, minimize the appearance of scratches and bring out the natural beauty of wood. Our Scott’s Liquid Gold® Floor Restore product is a quick and easy way to renew and protect hardwood floors.
1
On October 1, 2019, we acquired Kids N Pets® brands, which includes Messy Pet®. Founded in 1989, Kids N Pets® brands are award winning, safe, stain and odor removing products targeted toward households with children and pets. These high-quality, high-value brands currently encompass six SKUs exceptional at controlling odor and cleaning up kid and pet accidents, and food and drink stains while being products that parents can feel safe using around their children and pets. Kids N Pets® primary sales channel is through retail stores such as Walmart and Home Depot, and online through properties such as such as Amazon and Chewy.
On July 1, 2020, we acquired BIZ® and Dryel® brands. BIZ is the top performing detergent in the market, utilizing a proprietary enzyme-based formula to fight stains and eliminate odors. It was established by Proctor & Gamble in 1968 and is sold in Powder, Liquid, and Liquid Booster Pack for a total of seven SKUs. Dryel is the market leader in the at-home dry cleaning category, representing approximately 65% of the at-home dry cleaning market in 2019. It was established by Proctor & Gamble in 1998 and is sold primarily in a consumer starter kit with refills.
On December 23, 2021, we sold the Dryel® brand to a company that markets and distributes household cleaning products. We have reflected the operations of Dryel as discontinued operations for all periods presented. See Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information.
Health and Beauty Care Products
The principal products in our health and beauty care products segment include:
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Alpha® Skin Care products; |
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Prell® hair care products; |
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Denorex® hair care products; and |
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Batiste Dry Shampoo. |
Our Alpha® Skin Care brand was one of the first to use alpha hydroxy acids (“AHAs”) in lines of facial care products, body lotion, and body wash. Products containing AHAs gently slough off dead skin cells to promote a healthier, more youthful appearance and help to diminish fine lines and wrinkles.
In 2016, we acquired the Prell®, Denorex® and Zincon® brands of hair and scalp care products. Prell® Shampoo, an iconic brand since 1947, is a classic clean shampoo for healthy hair. Our Denorex® products are dermatologist-recommended medicated hair care products to control the symptoms of dandruff and other scalp conditions. Our Zincon® product is a medicated anti-dandruff shampoo.
We were a distributor in the United States for Batiste Dry Shampoo from 2009 through 2021. Under our distribution agreement with the manufacturer of Batiste Dry Shampoo, Church & Dwight Co. Inc. (“Church & Dwight”), we were the exclusive specialty retail distributor in the United States of Batiste Dry Shampoo until our agreement expired on December 31, 2021.
Marketing and Distribution
We primarily market our products through: (1) trade promotions to support price features, displays, slotting fees and other merchandising of our products by our retail customers; (2) consumer marketing in print, social and digital media and television advertising; and (3) to a lesser extent, consumer incentives such as coupons and rebates.
Our products are sold nationally through our sales force and internationally (Canada and China) through independent distributors, to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, and other retail outlets and to wholesale distributors.
The table set forth below shows net sales to our significant customers as a percentage of consolidated net sales during 2021 and 2020:
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2021 |
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2020 |
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Walmart Inc. ("Walmart") |
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30.9 |
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29.2 |
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Ulta |
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18.8 |
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15.8 |
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As is typical in our industry, we do not have long-term contracts with Walmart, Ulta, or any other retail customer.
2
Historically, we have used our websites for sales of our products directly to consumers. Beginning in January 2022, our websites redirect consumers to our e-commerce retail partners to fulfill sales of our products directly to our consumers.
Currently, our international sales are made to distributors who are responsible for the selling and marketing of the products, and we are paid for these products in United States dollars.
From time to time, our customers return products to us. For our household products, we permit returns only for a limited time. For our health and beauty care products, returns are accepted for a greater period of time in order to maintain or enhance our relationship with the customer. Typically, customers are granted a credit equal to the original sale price plus a handling charge.
Manufacturing and Suppliers
On March 10, 2020, we consummated an agreement with Colorado Quality Products LLC (“Elevation”), pursuant to which Elevation (i) acquired certain of our assets, which included all fixed assets utilized in the manufacturing and warehouse operations of the Company, (ii) assumed all of the Company’s obligations under its existing real property leases, (iii) manufactured certain products of the Company for a transitional period, and (iv) paid cash consideration of $500,000 (collectively, the “Elevation Transaction”).
Subsequent to the Elevation Transaction, we identified third-party logistics and contract manufacturing partners for our product lines, and we no longer manufacture or ship any of our products directly to our retail partners.
Under our distribution agreement with Church & Dwight, we were the exclusive distributor of Batiste Dry Shampoo products in the specialty retailer channel in the United States through December 31, 2021.
Almost all of the raw and packaging materials used by the Company are purchased from third parties, some of whom are single-source suppliers. The prices we pay for materials and other commodities are subject to fluctuation. Due primarily to weather and COVID-19 related supply chain disruptions combined with increased demand as the economy re-opens, we experienced limited supply constraints and commodity costs increases for certain raw materials and finished goods. When prices for these items change, we may or may not be able to pass the change to our customers. The Company expects continued volatility and increased cost pressures in both commodities and transportation to continue in fiscal year 2022.
Competition
Both the household and health and beauty care product categories are highly competitive and innovative. We compete in both categories against a range of competitors, most of which are significantly larger and have greater financial resources, name recognition, innovation capabilities, and product and market diversification than us. We compete in both categories primarily on the basis of quality, brand recognition, and the distinguishing characteristics of our products. The wood care and laundry care product categories are dominated by a small number of companies that are significantly larger than us and each of these competitors produces several competing products. In the health and beauty care category, several of our competitors are also significantly larger than us and each of these competitors produces several competing products.
Regulation
We are subject to various federal, state and local laws and regulations that pertain to the types of consumer products that we manufacture and sell. Many chemicals used in consumer products, some of which are used in several of our product formulations, have come under scrutiny by various state governments and the federal government. These chemicals are called volatile organic compounds (“VOCs”). All of our products currently meet the most stringent VOC regulations and may be sold throughout the United States. Many of our skin care products, several of which contain AHAs, are considered cosmetics within the definition of the Federal Food Drug and Cosmetic Act (the “FFDCA”). Our cosmetic products are subject to the regulations under the FFDCA and the Fair Packaging and Labeling Act. The relevant laws and regulations are enforced by the FDA. We believe that we are producing and marketing all of our products in compliance with all applicable laws and regulations in the markets in which we participate.
Prior to the Elevation Transaction, our production facility was subject to federal, state, and local regulations governing water quality, air quality, and waste related to stationary sources and we held required permits from the state of Colorado, which implements the delegated federal programs. These programs regulate the emissions, discharges, and waste generated in the production of our products.
The laws and regulations applicable to our production facility will no longer impact us following the consummation of the Elevation Transaction.
3
Our advertising is subject to regulation under the Federal Trade Commission Act and related regulations, which prohibit false and misleading claims in advertising. Private and derivative labeling claims are common in this industry and can result in costly settlements and distraction of management. Changes in these regulations, or interpretations or enforcement of these regulations, could adversely affect our profitability, result in regulatory actions, or private or derivative claims.
Our international sales are primarily conducted in China and we rely on the efforts of our exclusive distributor in the PRC to market and sell our products there. As such, we may be impacted by regulations, economic conditions, and tariffs imposed by the PRC. In 2019, we were impacted by regulatory changes imposed on over-the-counter (“OTC”) products by the PRC’s National Medical Products Administration (“NMPA”).
Employees
As of December 31, 2021, we employed 27 people, who work in administrative, sales, advertising, marketing and operational functions. Through our history, we appreciate the importance of retention, growth and development of our employees. We believe we offer competitive compensation (including salary, incentive bonus, and equity) and benefits packages to our employees. We are also focused on understanding our diversity and inclusion strengths and opportunities and executing on a strategy to support further progress. We continue to focus on building a pipeline for talent to create more opportunities for workplace diversity and to support greater representation within the Company.
No contracts exist between us and any union. The compensation of our executive officers is subject to annual review by the Compensation Committee of our Board of Directors.
Patents and Trademarks
At present, we own one patent for our Neoteric Diabetic® Healing Cream. Additionally, we actively use our registered trademarks for Scott’s Liquid Gold®, Alpha® Skin Care, Prell®, Denorex®, Zincon®, Neoteric Diabetic Skin Care®, Neoteric®, Kids N Pets®, Messy Pet®, and BIZ® in the United States and have registered trademarks in a number of additional countries. Our registered trademarks protect names and logos relating to our products as well as the design of boxes for certain of our products.
Public Information
Our website address is www.slginc.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available, free of charge, on our website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, shareholder proxy statements on Schedule 14A, interactive data files posted pursuant to Rule 405 of Regulation S-T, our Current Reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the United States Securities and Exchange Commission (the “SEC”). You may also access and read our filings without charge through the SEC’s website at www.sec.gov.
Our Code of Business Conduct and Ethics Policy, Audit Committee Charter, Governance and Nominating Committee Charter, and Compensation Committee Charter, are all available, free of charge, on our website. The documents referenced above are available in print at no cost to any stockholder who requests them from our Corporate Secretary at 8400 East Crescent Parkway, Suite 450, Greenwood Village, Colorado 80111.
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ITEM 1A. |
RISK FACTORS. |
The following is a discussion of certain material risks that may affect our business. These risks may negatively impact our existing business, future business opportunities, our financial condition or our financial results. In such case, the trading price of our common stock could also decline. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also negatively impact our business.
Business and Industry Risks
A loss of one or more of our major customers could have a material adverse effect on our product sales.
For a majority of our sales, we are dependent upon a small number of major retail customers. The easy access of consumers to our products is dependent upon these major retail stores and other retail stores carrying our products. The willingness of retail customers to carry any of our products depends on various factors, including the level of sales of the product at their stores. In addition, private label products sold by retail trade chains, which are typically sold at lower prices than branded products, are a source of competition for certain of our product lines.
4
Any declines in sales of our products to consumers could result in the loss of retail customers and a corresponding decrease in the distribution of the products, as well as increased costs related to any markdown or return of our products. It is uncertain whether the consumer base served by these stores would purchase our products at other retail stores.
Our international operations in China expose us to a number of risks.
There is both cost and risk associated with establishing, developing, and maintaining international sales operations, and promoting our brand internationally. The PRC’s economic, political, and social conditions, and its government policies, could adversely affect our business. We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our operating results.
Our international operations also subject us to changes in trade policies and agreements and other foreign or domestic legal and regulatory requirements, including those resulting in potentially adverse tax consequences or the imposition of onerous trade restrictions such as tariffs, sanctions, and price controls. Any changes in these international trade policies could adversely affect our profitability and stock price.
A continued change in the consumer product retail market may cause our sales to decline.
Our performance depends upon the general health of the economy and of the retail environment in particular. Consumer products, such as those marketed by us, are increasingly being sold by club stores, dollar stores, mass merchandisers, e-commerce retailers and subscription services. The retail environment is changing with the growth of alternative retail channels and this could significantly change the way traditional retailers do business. If these alternative retail channels were to take significant market share away from traditional retailers or we are not successful in these alternative retail channels, our margins and results of operations may be negatively impacted.
In both health and beauty care and household products, our competitors include some of the largest consumer products companies in the United States.
The markets in which our products compete are intensely competitive, and many of the other competitors in these markets are larger multi-national consumer products companies. These competitors have much greater financial, technical, and other resources than us, and as a result, are able to regularly introduce new products and spend considerably more on advertising. The distribution and sales of our products can be adversely impacted by the actions of our competitors, and we may have little or no ability to take action to prevent or mitigate these adverse impacts.
We have limited resources to promote our products with advertising and marketing effectiveness.
We believe the growth of our net sales is dependent upon our ability to introduce our products to current and new consumers through advertising and marketing. At present, we have limited resources compared to many of our competitors to spend on advertising and marketing our products. Advertising and marketing can be important in reaching consumers, although the effectiveness of any particular advertisement and marketing cannot be predicted. Additionally, we may not be able to obtain optimal effectiveness at our current advertising and marketing budget. Our limited resources to promote our products through advertising and marketing may adversely affect our net sales and operating results.
Sales of our existing products are affected by changing consumer preferences.
Our primary market is retail stores in the United States which sell to consumers or end users in the mass market. Consumer preferences can change rapidly and are affected by new competitive products. This situation is true for both health and beauty care and household products. Any changes in consumer preferences can materially affect the sales of our products and the results of our operations.
Our future performance and growth is dependent, in part, on the introduction of new or acquired products that are successful in the marketplace.
Our future performance and growth is partially dependent on our ability to successfully identify, develop and introduce new products and product line extensions. The successful development and introduction of new products involves substantial research, development, marketing and promotional expenditures, which we may be unable to recover if the new products do not gain widespread market acceptance.
5
We have pursued and may continue to pursue acquisitions of brands or businesses. Acquisitions involve numerous potential risks, including, among other things, the successful integration of the acquired products or brands and realization of the full extent of expected benefits or synergies. Acquisitions could also result in additional debt, exposure to liabilities, the potential impairment of goodwill or other intangible assets, or transaction costs. Any of these risks, should they materialize, could adversely impact our operating results.
Any loss of our key executives or other personnel could harm our business.
Our success has depended on the experience and continued service of our executive officers and key employees. If we fail to retain these officers or key employees, our ability to continue our business and effectively compete may be substantially diminished.
Our stock price can be volatile and can decline substantially.
Our stock is traded on the OTC Pink Market tier of the OTC Markets. The volume of trades in our stock varies from day to day but is relatively limited. As a result, any events can result in volatile movements in the price of our stock and can result in significant declines in the market price of our stock.
We rely on trademark, copyright, and trade secret laws, which may not be sufficient to protect our intellectual property.
We rely on a combination of laws, such as copyright, trademark and trade secret laws, as well as confidentiality provisions and limited licenses, to establish and protect our intellectual property. We have registered U.S. and foreign country trademarks, and HK NFS Limited (“HK NFS”) has contractually agreed to undertake steps to prevent counterfeiting of our products and to otherwise protect our trademarks in the PRC. These forms of intellectual property protection are critically important to our ability to establish and maintain our competitive position. However, it is possible that laws, contractual restrictions, and other efforts may not be sufficient to prevent misappropriation of our property or to deter others from developing similar intellectual property.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers, and business partners on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen, resulting in legal claims or proceedings, which could disrupt our operations and damage our reputation, adversely affect our operating results and stock price.
We may from time to time expand our business through acquisitions, which could disrupt our business.
We have completed, and may pursue in the future, acquisitions of businesses or assets that are complementary to our business. Such acquisitions involve a number of risks, including:
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failure of the acquired businesses to achieve the results we expect; |
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substantial cash expenditures; |
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diversion of capital and management attention from operational matters; |
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our inability to retain key personnel of the acquired businesses; |
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possible impairment of substantial intangible assets if performance doesn’t meet expectations; |
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incurrence of debt and contingent liabilities and risks associated with unanticipated events or liabilities; and |
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the potential disruption and strain on our existing business and resources that could result from our planned growth and continuing integration of our acquisitions. |
If we fail to properly evaluate acquisitions, we may not achieve the anticipated benefits of such acquisitions, we may incur costs in excess of what is anticipated, and management resources and attention may be diverted from other necessary or valuable activities. Any acquisition may not result in short-term or long-term benefits to us. If we are unable to integrate or successfully manage any business that we acquire, we may not realize anticipated cost savings, improved efficiencies or revenue growth, which may result in reduced profitability or operating losses.
6
Operational Risks
Disruptions in our supply chain and other factors affecting the distribution of our finished goods inventory could adversely impact our business.
A disruption within our logistics or supply chain network could adversely affect our ability to maintain appropriate inventory or deliver products in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation. As a result of COVID-19, we have encountered shortages of raw materials for certain of our products and delays in receiving finished goods product from contract manufacturers, which has prevented us from meeting certain customer demands for our products. Along with many other industry participants, we have experienced great difficulty procuring containers and caps.
COVID-19 could also negatively impact the operations of our third-party manufacturing and logistics partners, resulting in an adverse impact to our ability to meet customer demand. Disruption to our supply chain and manufacturing and logistics partners is not limited to COVID-19, as other factors beyond our control could also result in a negative impact to our financial performance and condition.
COVID-19 disruptions could continue to impact our ability to meet debt requirements and lead to increased debt costs.
We face the risk that raw materials for our products may not be available or that costs for these materials will increase.
Raw materials required for our products are sourced are obtained from third party suppliers, some of which are sole source suppliers. We have no long-term contracts with such suppliers and are subject to cost increases. Manufacturers of our products may not have sufficient raw materials for production if there is a shortage in raw materials or other disruption in the supply chain or if suppliers terminate their relationships or are otherwise unable to supply raw materials. In addition, if our contract manufacturers change suppliers it could involve delays that restrict our ability to have our products manufactured or to buy products in a timely manner to meet delivery requirements of our customers. Suppliers of raw materials for our products can also be subject to the same risk with their vendors.
Manufacturing relationships with third parties.
We currently outsource our manufacturing to one or more third parties, which we intend to expand. Failure by one or more of these third parties to complete activities on schedule or in accordance with our expectations, meet their contractual or other obligations to us, or comply with applicable laws or regulations, or any disruption in the relationships between us and one or more of these third parties, could delay or prevent the development, approval, manufacturing, or commercialization of our products, could expose us to suboptimal quality of service delivery or deliverables, could result in repercussions such as missed deadlines or other timeliness issues, erroneous data and supply disruptions, and could also result in non-compliance with legal or regulatory requirements or industry standards or reputational harm, all with potential negative implications for our product pipeline and business.
Currently, as a result of COVID-19, our third-party manufacturers are having delays due to material shortages and delays and difficulty staffing workforce to keep production lines moving efficiently, which is forcing them to restructure their planning to produce products in a timely manner.
Financial and Economic Risks
Unfavorable and uncertain economic conditions could adversely affect our profitability.
Unfavorable and uncertain economic conditions in the past have adversely affected, and in the future may adversely affect, consumer demand for some of our products, resulting in reduced sales volume and a decrease in our overall profitability. Factors that can affect consumer demand for our products include rates of unemployment, consumer confidence, health care costs, fuel and other energy costs and other economic factors affecting consumer spending behavior.
Our products are subject to trucking costs, both in delivery to us at our production facility as well as transportation to our customers. As a result, we are exposed to volatility in the freight industry that could affect our costs, including changes in regulations and labor costs. Any increases in transportation costs could adversely affect our profitability if we are not able to pass those costs on to our customers.
7
Changes in the economic environment have resulted, and could further result, in significant impairments of certain of our goodwill and long-lived assets.
Under U.S. generally accepted accounting principles (“GAAP”), we review the carrying value of our goodwill on an annual basis. We also review the carrying value of our long-lived assets when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable, based on their expected future cash flows. The impact of reduced expected future cash flow could require the write-down of all or a portion of the carrying value for these assets, which would result in additional impairments, resulting in decreased earnings. During 2021, we determined that the fair values of goodwill and certain intangible assets in our Detergent, All-Purpose, and Shampoo reporting units were less than their carrying values which resulted in impairment charges.
Legal and Regulatory Risks
Changes in the regulation of our products, including environmental regulations, could have an adverse effect on the distribution, cost or function of our products.
Regulations affecting our products include requirements of the FDA and NMPA for cosmetic products and environmental regulations. In the past, the FDA has mentioned the treatment of products with AHAs as drugs, which could make our production and sale of certain Alpha® Skin Care products more expensive or prohibitive. Also, in the past, we have been required to change the formulation of our products to comply with environmental regulations and may be required to do so again in the future if the applicable regulations are further amended.
Labeling practices in our industry have recently experienced an increase of warning letters admonishing cosmetics manufacturers for promotional claims on their websites and product labels deemed by the FDA to blur the line between “cosmetics” and “drugs.” The increase of warning letters by the FDA has also triggered a wave of follow-on class action lawsuits against cosmetic manufacturers in general, including manufacturers not singled out via FDA warning letters. Any claims levied against us could result in costly settlements, distract management and have an adverse effect on our operating results.
Any adverse developments in litigation could have a material impact on us.
We are subject to lawsuits from time to time in the ordinary course of business. While we expect those lawsuits not to have a material effect on us, an adverse development in any such lawsuit or the insurance coverage for a lawsuit could materially and adversely affect our operating results.
|
ITEM 1B. |
UNRESOLVED STAFF COMMENTS. |
Not applicable.
ITEM 2.PROPERTIES.
We lease our corporate headquarter facilities in Greenwood Village, Colorado. Please see Note 8 to our Consolidated Financial Statements for more information on our facilities.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to lawsuits from time to time in the ordinary course of business. While we expect those lawsuits not to have a material effect on us, an adverse development in any such lawsuit or the lack of insurance coverage for a lawsuit could materially and adversely affect our financial condition and cash flow.
|
ITEM 4. |
MINE SAFETY DISCLOSURES. |
Not applicable.
8
PART II
(in thousands, except per share data)
|
ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our $0.10 par value common stock is traded on the OTC Pink Market tier of the OTC Markets (an electronic inter-dealer quotation system) under the ticker symbol “SLGD.” Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The high and low prices of our common stock as traded on the OTC Pink Market tier of the OTC Markets were as follows:
|
Three Months Ended |
2021 |
|
|
2020 |
|
||||||||||
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
||||
|
March 31 |
$ |
3.03 |
|
|
$ |
1.78 |
|
|
$ |
2.50 |
|
|
$ |
1.25 |
|
|
June 30 |
|
3.00 |
|
|
|
2.28 |
|
|
|
2.05 |
|
|
|
1.28 |
|
|
September 30 |
|
3.00 |
|
|
|
2.00 |
|
|
|
1.82 |
|
|
|
1.51 |
|
|
December 31 |
|
2.08 |
|
|
|
1.00 |
|
|
|
1.84 |
|
|
|
1.52 |
|
Shareholders of Record
As of March 30, 2022, based on inquiry, we had approximately 638 shareholders of record.
Dividends
We did not pay any cash dividends during the two most recent fiscal years. We do not anticipate paying dividends in the foreseeable future.
|
ITEM 6. |
RESERVED. |
|
ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements. This Item 7 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please refer to "Item 1A. Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements.
COVID-19 Pandemic
In 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic. While many businesses resumed operations towards the end of the second quarter of 2020, the effects of the pandemic have continued into 2021 and the duration of the impact still remains uncertain. We expect to see continued volatility in the economic markets and government responses to the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on our operating results for the remainder of the year or longer.
Supply Chain and Outsourcing Partners
As a result of COVID-19, we have encountered various supply chain disruptions impacting the availability of certain raw materials for our finished goods products. We have been proactively identifying alternative sources for delayed raw materials. At times, our highest demand products were impacted by supply chain disruptions, but availability continues to improve primarily as a result of our actions to mitigate such disruptions. Our third-party logistics partners are facing challenges with availability of staffing and transportation sources, which could cause product shipments to be delayed.
9
Health and Safety
We have taken proactive, aggressive action to protect the health and safety of our employees, customers, and partners. We monitor national, state, and local health recommendations and regulations, and will implement additional protective measures as appropriate.
Customer Demand
At the onset of the pandemic, as a result of government-mandated stay-at-home orders, some of our customers were impacted and forced to cease operations. Customer closings primarily impacted revenue for our Batiste Dry Shampoo distributed products during 2020.
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
Distribution Agreement with Church & Dwight
Our distribution agreement with Church & Dwight Co., Inc. and our subsidiary, Neoteric Cosmetics, Inc., was not extended beyond the Expiration Date. As a result, the distribution agreement expired on its own terms as of the Expiration Date and the Company ceased to distribute Batiste Dry Shampoo products. Unless offset by increased sales of our other products, the conclusion of this distribution agreement is expected to have a material impact on our net sales and result of operations. Net sales of Batiste were $7,155 and $5,299 for the years ended December 31, 2021, and 2020, respectively.
Sale of Dryel® Brand
On December 23, 2021, we sold the Dryel® brand to a company that markets and distributes household cleaning products. We have reflected the operations of Dryel as discontinued operations for all periods presented. See Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information.
Executive Overview
Our Business
Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve and create shareholder value. We develop, market, and sell high-quality, high-value household and health and beauty care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors. Our long history of selling household products has generated strong consumer and customer loyalty for our brands.
On an ongoing basis, management focuses on a variety of key indicators to monitor our business health and performance. These key indicators include (but are not limited to) the following:
|
|
• |
Net sales (collectively and by operating segment); |
|
|
• |
Profitability, focusing on gross margins and net income; and |
|
|
• |
Cash flow. |
To achieve our business and financial objectives, we focus on initiatives to drive the growth of the key indicators above. Our ability to drive and generate growth depends on consumer demand for our products and retail customers’ willingness to carry our products in a competitive marketplace. In this environment, we intend to continue to focus on our key indicators to remain competitive, sustain our current level of operations, and drive further growth in future periods.
10
Outlook
Looking forward, we are focused on both short- and long-term strategies that we believe will enhance our financial health and deliver shareholder value. While the marketplace in which we operate has always been highly competitive, we expect that the category challenges and the level of competition will continue to rise. We believe that some of the trends in our business and industry could adversely affect our profitability, including the following:
|
|
• |
Changes in national and international regulations; |
|
|
• |
Changes in policies or practices of some of our key retail customers; |
|
|
• |
Rapid growth of e-commerce and alternative retail channels; and |
|
|
• |
Volatility in the costs of products, transportation, and labor associated with our logistics and warehousing partners. |
We believe our history of providing high-quality, high-value products to consumers positions us to meet the challenges in our marketplace by continuing to focus on the following key priorities in 2022:
|
|
• |
Pursuing growth opportunities, including distributing Alpha® Skin Care, Kids N Pets®, and other products to broader markets; |
|
|
• |
Improving our processes and systems, specifically through the implementation of a new ERP; |
|
|
• |
Optimizing our inventories, supply chain, and third-party logistics partners, and operations; and |
|
|
• |
Paydown of debt and improving cash flows from operations through growth of sales and optimization of cost structure. |
11
|
|
Results of Operations
|
|
For the Year Ended December 31, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
33,081 |
|
|
$ |
28,958 |
|
|
$ |
4,123 |
|
|
|
14.2 |
% |
|
Cost of sales |
|
19,082 |
|
|
|
16,433 |
|
|
|
2,649 |
|
|
|
16.1 |
% |
|
Impairment of inventories |
|
404 |
|
|
|
876 |
|
|
|
(472 |
) |
|
|
(53.9 |
%) |
|
Total cost of sales |
|
19,486 |
|
|
|
17,309 |
|
|
|
2,177 |
|
|
|
12.6 |
% |
|
Gross profit |
|
13,595 |
|
|
|
11,649 |
|
|
|
1,946 |
|
|
|
16.7 |
% |
|
Gross margin |
|
41.1 |
% |
|
|
40.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
639 |
|
|
|
702 |
|
|
|
(63 |
) |
|
|
(9.0 |
%) |
|
Selling |
|
9,797 |
|
|
|
7,546 |
|
|
|
2,251 |
|
|
|
29.8 |
% |
|
General and administrative |
|
4,611 |
|
|
|
4,724 |
|
|
|
(113 |
) |
|
|
(2.4 |
%) |
|
Intangible asset amortization |
|
1,111 |
|
|
|
1,005 |
|
|
|
106 |
|
|
|
10.5 |
% |
|
Impairment of goodwill and intangible assets |
|
6,294 |
|
|
|
- |
|
|
|
6,294 |
|
|
|
100.0 |
% |
|
Impairment of property and equipment |
|
- |
|
|
|
107 |
|
|
|
(107 |
) |
|
|
(100.0 |
%) |
|
Total operating expenses |
|
22,452 |
|
|
|
14,084 |
|
|
|
8,368 |
|
|
|
59.4 |
% |
|
Loss from operations |
|
(8,857 |
) |
|
|
(2,435 |
) |
|
|
(6,422 |
) |
|
|
(263.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(373 |
) |
|
|
(216 |
) |
|
|
(157 |
) |
|
|
(72.7 |
%) |
|
Other income |
|
- |
|
|
|
350 |
|
|
|
(350 |
) |
|
|
(100.0 |
%) |
|
Loss before income taxes and discontinued operations |
|
(9,230 |
) |
|
|
(2,301 |
) |
|
|
(6,929 |
) |
|
|
(301.1 |
%) |
|
Income tax (expense) benefit |
|
(1,008 |
) |
|
|
707 |
|
|
|
(1,715 |
) |
|
|
(242.6 |
%) |
|
Loss from continuing operations |
|
(10,238 |
) |
|
|
(1,594 |
) |
|
|
(8,644 |
) |
|
|
(542.3 |
%) |
|
(Loss) income from discontinued operations, net of taxes |
|
(853 |
) |
|
|
43 |
|
|
|
(896 |
) |
|
|
(2,083.7 |
%) |
|
Net loss |
$ |
(11,091 |
) |
|
$ |
(1,551 |
) |
|
$ |
(9,540 |
) |
|
|
(615.1 |
%) |
Net loss increased primarily due to the following:
|
|
• |
Increase in gross profit due to the acquisition of BIZ in July 2020 and additional foot traffic at our retail customers from eased restrictions related to the COVID-19 pandemic in 2021. Additionally, net sales increased due to restored finished goods inventory of key products in 2021 in our household segment. |
|
|
• |
Increase in selling expenses from the acquisition of BIZ and COVID-19 driven increases in costs in transportation and labor associated with our logistics and warehousing partners. |
|
|
• |
Decrease in general and administrative expenses is due to reduced professional costs from acquisition-related expenses that were incurred in 2020 and offset by restructuring costs associated with separation of employees in 2021. |
|
|
• |
Increase in interest expense associated with our increased debt facilities. The increased debt resulting from simultaneous supply chain shortages and investment in building depleted finished goods inventories has also increased our interest expense. |
|
|
• |
Increase in income tax expense due to the establishment of a valuation allowance against our deferred tax asset. |
|
|
• |
Loss from discontinued operations due to the sale of our Dryel brand, which resulted in the recognition of a loss on the sale of the business. |
|
|
• |
Impairment of goodwill and intangible assets of Detergent and Shampoo reporting units. |
12
|
|
Segment Results
The following tables show comparative net sales, gross margin, gross profit, loss (income) from operations, volume and percentage changes for our household and health and beauty care products between periods:
Household products
|
|
For the Year Ended December 31, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
14,152 |
|
|
$ |
12,003 |
|
|
$ |
2,149 |
|
|
|
17.9 |
% |
|
Gross profit |
$ |
5,583 |
|
|
$ |
5,830 |
|
|
$ |
(247 |
) |
|
|
(4.2 |
%) |
|
Gross margin |
|
39.5 |
% |
|
|
48.6 |
% |
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
$ |
(3,963 |
) |
|
$ |
52 |
|
|
$ |
(4,015 |
) |
|
|
(7,721.2 |
%) |
|
|
• |
Household products increase in net sales was attributable to our acquisition of BIZ. This was offset by a decrease in net sales from key product shortages, including our Scott’s Liquid Gold Wood Care product. |
|
|
• |
Gross profit and gross margin decreased due to cost increases in our manufacturing partners’ raw materials and inventory impairment related to slow moving and obsolete raw materials and finished goods. |
|
|
• |
Loss from operations was related to increases in transportation and labor associated with our logistics and warehousing partners, restructuring costs, and impairment of goodwill and intangible assets in our Detergent and All-Purpose reporting units. |
Health and beauty care products
|
|
For the Year Ended December 31, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Health and beauty care net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales- distributed products |
$ |
7,123 |
|
|
$ |
6,834 |
|
|
$ |
289 |
|
|
|
4.2 |
% |
|
Net sales- manufactured products |
|
11,806 |
|
|
|
10,121 |
|
|
|
1,685 |
|
|
|
16.6 |
% |
|
Total health and beauty care net sales |
$ |
18,929 |
|
|
$ |
16,955 |
|
|
$ |
1,974 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
$ |
8,012 |
|
|
$ |
5,819 |
|
|
$ |
2,193 |
|
|
|
37.7 |
% |
|
Gross margin |
|
42.3 |
% |
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(4,894 |
) |
|
$ |
(2,487 |
) |
|
$ |
(2,407 |
) |
|
|
(96.8 |
%) |
|
|
• |
Net sales of distributed health and beauty care products increased due to additional foot traffic at our retail customers from eased restrictions related to the COVID-19 pandemic in 2021. This increase is offset by the conclusion of our distribution arrangement with Montagne Jeunesse in the second quarter of 2020. |
|
|
• |
Net sales of manufactured health and beauty care products increased primarily due to higher sales of our Alpha Skin Care line to e-commerce partners and China as well as higher sales of our Denorex brand due to the restoration of consistent inventory levels in 2021. |
|
|
• |
Increase in gross margin was due to increased sales of manufactured products, improved margins from outsourced manufacturing operations, and a reduction in impaired inventories in 2021. |
|
|
• |
Loss from operations was primarily due to the impairment of goodwill and intangible assets of our Shampoo reporting unit, inventory impairment related to slow moving and obsolete raw materials and finished goods, and increases in transportation and labor associated with our logistics and warehousing partners. |
13
Liquidity and Capital Resources
Financing Agreements
Please see Note 7 to our Consolidated Financial Statements for information on our debt facilities with UMB Bank, N.A. and La Plata Capital, LLC.
Liquidity and Changes in Cash Flows
At December 31, 2021, we had $5,467 available on our revolving credit facility with UMB, and approximately $770 in cash on hand, an increase of $765 from December 31, 2020 due to our sale of Dryel and paydown of our revolving credit facility.
The following is a summary of cash provided by or used in each of the indicated types of activities:
|
|
For the Year Ended December 31, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Operating activities |
$ |
(322 |
) |
|
$ |
3,582 |
|
|
$ |
(3,904 |
) |
|
|
(109.0 |
%) |
|
Investing activities |
|
4,381 |
|
|
|
(10,097 |
) |
|
|
14,478 |
|
|
|
143.4 |
% |
|
Financing activities |
|
(2,794 |
) |
|
|
5,426 |
|
|
|
(8,220 |
) |
|
|
(151.5 |
%) |
|
|
• |
Net cash used by operating activities decreased primarily related increases in costs related to supply chain and third party logistics impacted as well as investments in finished goods inventories. |
|
|
• |
Net cash provided by investing activities was primarily attributable to our sale of Dryel. |
|
|
• |
Net cash used in financing activities was primarily attributable to repayments of the UMB revolving credit facility and term loan and was offset by proceeds from La Plata term loan. |
The uncertainty related to the COVID-19 outbreak has impacted our operations and could affect our future results. While we believe that our business model will allow us to generate sufficient operating cash flows, our liquidity has been affected by the timing of our build of depleted finished goods inventories, while our net sales have been delayed due to supply chain shortages. We expect that our current cash reserves and availability under our UMB Loan Agreement and La Plata Loan Agreement will be sufficient to meet operational cash needs during the next twelve months, but further supply chain disruptions in the short-term could limit our liquidity.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment and make estimates. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could ultimately differ from those estimates. The accounting policies that are most critical in the preparation of the Company’s Consolidated Financial Statements are those that are both important to the presentation of the Consolidated Financial Statements and require significant or complex judgments and estimates on the part of management.
Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. See Note 1(m), “Revenue Recognition” in our Consolidated Financial Statements in Item 8 for additional discussion.
Intangible Assets and Goodwill
For fiscal year 2021, the Company’s reporting units for goodwill impairment testing purposes were its individual components, which are differentiated by their product categories. These reporting units are the level at which discrete financial information is available and reviewed by management.
14
Determining the fair value of the Company’s reporting units for goodwill and the fair value of its intangible assets requires significant estimates and judgments by management. When a quantitative analysis is performed, the Company generally uses the income approach, which requires several estimates, including future cash flows consistent with management’s strategic plans, sales growth rates, and the selection of royalty rates and a discount rate. Estimating sales growth rates requires significant judgment by management in areas such as future economic conditions, category growth rates, product pricing, consumer tastes and preferences and future expansion expectations. In selecting an appropriate royalty rate, the Company considers recent market transactions for similar brands and products. In determining an appropriate discount rate, the Company considers the current interest rate environment and its estimated cost of capital. Other qualitative factors the Company considers, in addition to those quantitative measures discussed above, include assessments of general macroeconomic conditions, industry-specific considerations and historical financial performance. The Company generally engages a third-party valuation firm to assist it in determining the fair value of intangible assets acquired in business combinations.
In determining the fair value of the Company’s reporting units, fair value is also determined using the market approach, which is generally derived from metrics of comparable publicly traded companies. As multiple valuation methodologies are used, the Company also performs a qualitative analysis comparing the fair value of a reporting unit under each method to assess its reasonableness and ensure consistency of results.
Determining the expected life of a brand requires management judgment and is based on an evaluation of several factors including market share, brand history, future expansion expectations, the level of in-market support anticipated by management, legal or regulatory restrictions and the economic environment where the products are sold.
We made revisions to the internal forecasts relating to all reporting units during the fourth quarter of 2021 due primarily to the sale of our Dryel brand and the impact of rising costs associated with the manufacture and distribution of our products. Through our annual assessments conducted on December 31, 2021, we concluded that the changes in circumstances in these reporting units triggered the need for a quantitative review of the carrying values of goodwill and certain intangible assets and resulted in impairment charges to each of our Detergent, All-Purpose, and Shampoo reporting units during the year ended December 31,2021, and resulted in the following impairment charges:
|
|
Intangible Assets |
|
|
Goodwill |
|
|
Total |
|
|||
|
Detergent |
$ |
1,085 |
|
|
$ |
593 |
|
|
$ |
1,678 |
|
|
Shampoo |
|
2,966 |
|
|
|
1,520 |
|
|
|
4,486 |
|
|
All-Purpose |
|
130 |
|
|
|
- |
|
|
|
130 |
|
|
|
$ |
4,181 |
|
|
$ |
2,113 |
|
|
$ |
6,294 |
|
Inventories Valuation
Our inventory valuation policy is significant because the costs and valuation of slow-moving or obsolete inventories are key components of our results of operations. See Note 1(f), “Inventories Valuation” in our Consolidated Financial Statements in Item 8 for additional discussion.
During the year ended December 31, 2021, we specifically identified slow moving and obsolete inventories, resulting in an impairment of $404.
Income Taxes
Our income taxes policy is significant because our estimate for taxes is a key component of our results of operations. See Note 1(l), “Income Taxes” in our Consolidated Financial Statements in Item 8 for additional discussion.
Recently Issued Accounting Standards
For information on recently issued accounting standards, see Note 1(q), “Recently Issued Accounting Standards,” to our Consolidated Financial Statements.
|
ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
15
|
ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Scott’s Liquid Gold – Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidating balance sheets of Scott’s Liquid Gold - Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, stockholders' equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Intangible Assets
Description of the Matter
At December 31, 2021, the Company’s net intangible assets was $5,160,000. As discussed in Notes 1 (i) and 6 to the consolidated financial statements, net intangible assets are assessed for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value.
Auditing the Company’s impairment tests for intangible assets was complex and highly judgmental due to the significant estimation in management’s assumptions to calculate the undiscounted cash flows and the fair value estimate. These assumptions can significantly affect the undiscounted cash flows and fair value of the intangible assets.
How We Addressed the Matter in Our Audit
16
We evaluated the design of key controls used by management to develop their fair value estimates.
To test the Company’s impairment assessment for intangible assets, we performed audit procedures that included, among others, testing the significant assumptions discussed above, including the completeness and accuracy of the underlying data used by the Company in its analyses. We compared the significant assumptions used by management to current industry and economic trends, historical financial results and other relevant factors. We involved our valuation specialists to assist in the assessment of the Company’s discount rate for the fair value estimate of intangible assets when the carrying amount of the assets exceeds the estimated future undiscounted cashflows. We performed sensitivity analyses related to the discount rate to evaluate the change in the fair value relative to the carrying value when measuring the resulting impairment. We also assessed the historical accuracy of management's projections.
Impairment of Goodwill
Description of the Matter
At December 31, 2021, the Company’s goodwill was $1,710,000. As discussed in Notes 1(i) and 6 of the consolidated financial statements, goodwill is tested by the Company’s management for impairment at least annually, during the fourth quarter, unless events or circumstances indicate the carrying amount may not be recoverable. Goodwill is tested for impairment at the reporting unit level.
Auditing the Company’s impairment tests for goodwill was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units for goodwill. Specifically, the fair value estimates of the reporting units are sensitive to assumptions such as net sales growth rates, discount rate, and long-term growth rates. The fair value estimates of goodwill are affected by such factors as industry, market performance, and financial forecasts.
How We Addressed the Matter in Our Audit
We evaluated the design of key controls used by management to develop their fair value estimates.
To test the estimated fair value of the Company's reporting units, we performed audit procedures that included, among others, assessing the methodologies used and testing the significant assumptions discussed above, including the completeness and accuracy of the underlying data used by the Company in its analyses. We compared the significant assumptions used by management to current industry and economic trends, historical financial results and other relevant factors. We performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the reporting units resulting from changes in the inputs and assumptions. We also assessed the historical accuracy of management's projections. In addition, we involved our valuation specialists to assist in our evaluation of the valuation methodology and significant assumptions described above used to develop the fair value estimates.
/s/
We have served as the Company’s auditor since 2003.
March 31, 2022
17
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
|
|
Year Ended |
|
|||||
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
Impairment of inventories |
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Advertising |
|
|
|
|
|
|
|
|
Selling |
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
Intangible asset amortization |
|
|
|
|
|
|
|
|
Impairment of goodwill and intangible assets |
|
|
|
|
|
- |
|
|
Impairment of property and equipment |
|
- |
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
|
|
Loss from operations |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
( |
) |
|
|
( |
) |
|
Other income |
|
- |
|
|
|
|
|
|
Loss before income taxes and discontinued operations |
|
( |
) |
|
|
( |
) |
|
Income tax (expense) benefit |
|
( |
) |
|
|
|
|
|
Loss from continuing operations |
|
( |
) |
|
|
( |
) |
|
(Loss) income from discontinued operations, net of taxes |
|
( |
) |
|
|
|
|
|
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common shares: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
$ |
( |
) |
|
$ |
( |
) |
|
Loss from discontinued operations |
$ |
( |
) |
|
$ |
|
|
|
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
|
|
|
|
|
See accompanying notes to these Consolidated Financial Statements.
18
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except par value amounts)
|
|
December 31, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash |
$ |
|
|
|
$ |
|
|
|
Restricted cash |
|
|
|
|
|
- |
|
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
|
Income taxes receivable |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
Other current assets |
|
- |
|
|
|
|
|
|
Current assets associated with discontinued operations |
|
- |
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
Deferred tax asset, net |
|
- |
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Long-term assets associated with discontinued operations |
|
- |
|
|
|
|
|
|
Total assets |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
$ |
|
|
|
$ |
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
Operating lease liabilities, current portion |
|
|
|
|
|
|
|
|
Other current liabilities |
|
- |
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion and debt issuance costs |
|
|
|
|
|
|
|
|
Operating lease liabilities, net of current |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value, authorized |
|
|
|
|
|
|
|
|
Common stock; $ |
|
|
|
|
|
|
|
|
Capital in excess of par |
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
$ |
|
|
|
$ |
|
|
See accompanying notes to these Consolidated Financial Statements.
19
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(in thousands)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Shares |
|
|
Amount |
|
|
Capital in Excess of Par |
|
|
Retained Earnings |
|
|
Total |
|
|||||
|
Balance, January 1, 2020 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Stock-based compensation |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Restricted stock unit vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net loss |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Balance, December 31, 2020 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Stock-based compensation |
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Restricted stock unit vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net loss |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Balance, December 31, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See accompanying notes to these Consolidated Financial Statements.
20
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
|
|
Year Ended |
|
|||||
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash (used) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
( |
) |
|
Loss on disposal of discontinued operations |
|
|
|
|
|
- |
|
|
Impairment of equipment |
|
- |
|
|
|
|
|
|
Impairment of inventories |
|
|
|
|
|
|
|
|
Impairment of goodwill and intangible assets |
|
|
|
|
|
- |
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
( |
) |
|
Inventories |
|
( |
) |
|
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
|
( |
) |
|
Income taxes receivable |
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses, and other liabilities |
|
|
|
|
|
|
|
|
Total adjustments to net loss |
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition |
|
- |
|
|
|
( |
) |
|
Purchase of software |
|
( |
) |
|
|
- |
|
|
Proceeds from sale of discontinued operations |
|
|
|
|
|
- |
|
|
Purchase of property and equipment |
|
- |
|
|
|
( |
) |
|
Proceeds from sale of property and equipment |
|
- |
|
|
|
|
|
|
Cash paid for leasehold improvements |
|
- |
|
|
|
( |
) |
|
Reimbursement of leasehold improvements |
|
- |
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
|
|
|
|
|
|
|
|
Repayments of revolving credit facility |
|
( |
) |
|
|
( |
) |
|
Proceeds from term loan |
|
|
|
|
|
|
|
|
Repayments of term loan |
|
( |
) |
|
|
( |
) |
|
Payments for debt issuance costs |
|
( |
) |
|
|
( |
) |
|
Proceeds from PPP loan |
|
- |
|
|
|
|
|
|
Repayment of PPP loan |
|
- |
|
|
|
( |
) |
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
Cash and restricted cash, end of period |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash, end of period associated with discontinued operations |
$ |
- |
|
|
$ |
- |
|
|
Cash and restricted cash, end of period associated with continuing operations |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
$ |
|
|
|
$ |
|
|
See accompanying notes to these Consolidated Financial Statements.
21
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies
(a)Company Background
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954. Scott’s Liquid Gold-Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or “us”) develop, market, and sell quality household and health and beauty care products. Our business is comprised of
|
(b) |
Principles of Consolidation |
Our Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
On December 23, 2021, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Dryel® product line. We have reflected the operations the Dryel® product line as discontinued operations for all periods presented, which was previously classified under our household products segment. See Note 2 for further information.
|
(c) |
Basis of Presentation |
The accompanying consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain previously reported financial information has been reclassified to conform to the current year’s presentation.
|
(d) |
Use of Estimates |
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, the realization of deferred tax assets, reserves for slow moving and obsolete inventory, customer returns and allowances, intangible asset useful lives and amortization method, fair value of assets acquired in business combinations, future cash flows associated with impairment testing of goodwill and other long-lived assets, and stock-based compensation. Actual results could differ from our estimates.
|
(e) |
Cash and Restricted Cash |
Cash and restricted cash consist of the following:
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Cash |
$ |
|
|
|
$ |
|
|
|
Restricted Cash |
|
|
|
|
|
- |
|
|
|
$ |
|
|
|
$ |
|
|
(f)Inventories Valuation
Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We specifically identify impairment write downs for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.
During the years ended December 31, 2021 and 2020 respectively, we specifically identified slow moving and obsolete raw material and finished goods inventories, resulting in impairment charges that are reflected on the Consolidated Statements of Operations.
22
|
(g) |
Property and Equipment |
Property and equipment are recorded at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from
|
(h) |
Leases |
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
Certain nonlease components, such as maintenance and other services provided by the lessor, are included in the valuation of the lease. Leases with an initial term of 12 months or less, which are not material to our financial statements, are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term. Lease agreements with lease and nonlease components are combined as a single lease component.
|
(i) |
Intangible Assets and Goodwill |
Goodwill is subject to impairment tests at least annually or when events or changes in circumstances indicate that an asset may be impaired. Other intangible assets with finite lives, such as customer relationships, trade names, and formulas, are amortized over their estimated useful lives, generally ranging from
Internal-use software costs recognized as an intangible asset relates to capitalizable costs of computer software obtained for internal-use as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40-30-1. All other internal-use software costs are expensed as incurred by the Company. Amortization will be recorded straight-line over the estimated useful life of the software once the software is ready for its intended use. As of December 31, 2021 our internal-use software was not ready for its intended use. The estimated useful life for internal-use software will be determined and periodically reassessed based on considerations for obsolescence, technology, competition, and other economic factors.
(j)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. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, based upon factors surrounding the credit risk of specific customers, historical trends and other information. We have
The recorded amounts for cash and cash equivalents, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
|
(k) |
Purchase Accounting for Acquisitions |
We apply the acquisition method of accounting for a business combination. In general, this methodology requires us to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. For certain acquisitions, we also record a liability for contingent consideration based on estimated future business performance. We monitor our assumptions surrounding these estimated future cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow.
23
If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. If the contingent consideration paid for any of our acquisitions differs from the amount initially recorded, we would record either income or expense associated with the change in liability.
|
(l) |
Income Taxes |
Income taxes reflect the tax effects of transactions reported in the Consolidated Financial Statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. A valuation allowance is established when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. We classify penalty and interest expense related to income tax liabilities as an income tax expense. There are
The effective tax rate for the years ended December 31, 2021 and 2020 was -
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. The tax impact of the carryback of 2020 and 2019 losses were recorded in the first quarter 2021 and 2020 income tax provisions, respectively. We elected to defer our portion of social security tax payments, and we paid this liability in the third quarter of 2021.
|
(m) |
Revenue Recognition |
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.
Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted.
24
Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce our revenue in that period.
Sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
We have also established an allowance for doubtful accounts. We estimate this allowance based upon, among other things, an assessment of the credit risk of specific customers and historical trends. We believe our allowance for doubtful accounts is adequate to absorb any losses which may arise. In the event that actual losses differ from our estimates, the results of future periods may be impacted.
Customer allowances for trade promotions and allowance for doubtful accounts at December 31 were as follows:
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Trade promotions |
$ |
|
|
|
$ |
|
|
|
Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(n) |
Advertising Costs |
We expense advertising costs as incurred.
|
(o) |
Stock-Based Compensation |
We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options with only service conditions using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the vesting period using the straight-line method, which approximates the service period.
The Company issues restricted stock unit ("RSUs") awards with restrictions that lapse upon the passage of time (service vesting) and satisfaction of market conditions targeted to our Company’s stock price. For those restricted stock unit 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 at the end 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.
|
(p) |
Operating Costs and Expenses Classification |
Cost of sales includes costs associated with purchasing finished goods from contract manufacturers, labor, freight-in, quality control, repairs, maintenance, and other indirect costs. We classify freight-out as selling expenses. Other selling expenses consist primarily of costs for sales and sales support personnel, brokerage commissions and promotional costs. Freight-out costs included in selling expenses totaled $
General and administrative expenses consist primarily of wages and benefits associated with management and administrative support departments, business insurance costs, professional fees, office facility related expenses and other general support costs.
25
On April 29, 2021, the Company announced that Mark E. Goldstein, the President and Chief Executive Officer of the Company and a member of the Board of Directors, retired effective as of
|
(q) |
Recently Issued Accounting Standards |
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The purpose of ASU 2020-04 is to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance primarily provides temporary optional expedients which simplify the accounting for contract modifications to existing debt agreements expected to arise from the market transition from LIBOR to alternative reference rates. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply amendments prospectively through December 31, 2022. The optional expedients were available to be used upon issuance of this guidance but we have not yet applied the guidance because we have not yet modified any of our existing contracts for reference rate reform. In January 2021, the FASB issued ASU 2021-01 which clarifies the scope of Topic 848, allowing derivatives affected by the discounting transition to apply certain optional expedients and exceptions for contract modifications and hedge accounting. ASU 2021-01 also adds background on the discounting transition and adds implementation guidance to clarify which optional expedients may be applied to derivative instruments. The Company is currently assessing the impact of ASU 2020-04 on our Consolidated Financial Statements.
|
(r) |
Recently Adopted Accounting Standards |
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. This guidance was effective for the Company beginning on January 1, 2021 and did not have a material impact on the Company’s Consolidated Financial Statements.
Note 2. Discontinued Operations
On December 23, 2021, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Dryel® product line. The total consideration paid to us was $
Under ASC 360, a long-lived asset group should be classified as held for sale if all of the established criteria are met. The sale of Dryel did not meet these criteria in either of the years ending December 31, 2021 and 2020, respectively, because we had not established an active program to locate a buyer and because the brand was not being marketed for sale. All efforts between the buyer and the Company occurred during the fourth quarter of 2021. As a result, there was no adjustment to fair value under ASC 360 guidance related to held for sale assets, and the difference between the consideration paid to us and the carrying amount of all assets is reflected in the loss on sale of discontinued operations.
We have reflected the operations
26
the Dryel® product line as discontinued operations. Our consolidated balance sheets and consolidated statements of operations report discontinued operations separate from continuing operations. Our consolidated statements of equity and statements of cash flows combine the results of continuing and discontinued operations.
Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations in the Consolidated Statements of Operations for the years ended December 31:
|
|
Year Ended |
|
|||||
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling |
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
- |
|
|
Intangible asset amortization |
|
|
|
|
|
|
|
|
Income from discontinued operations before tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
( |
) |
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
( |
) |
|
Impairment of goodwill and intangible assets |
|
- |
|
|
|
- |
|
|
Loss on sale of discontinued operations |
|
( |
) |
|
|
- |
|
|
(Loss) income from discontinued operations, net of tax |
$ |
( |
) |
|
$ |
|
|
There were no capital expenditures or significant operating and investing noncash items related to discontinued operations during the years ended December 31, 2021 and 2020, respectively.
Reconciliation of Major Classes of Assets and Liabilities of the Discontinued Operations to Amounts Presented Separately in the Consolidated Balance Sheets as of December 31:
|
|
2021 |
|
|
2020 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Inventories |
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
- |
|
|
|
|
|
|
Intangible assets, net |
|
- |
|
|
|
|
|
|
Total assets |
$ |
- |
|
|
$ |
|
|
The following summarizes the carrying values of goodwill, intangible assets, and the resulting loss on sale of discontinued operations associated with Dryel at the date of disposition:
|
Customer relationships |
$ |
|
|
|
Trade names |
|
|
|
|
Formulas and batching processes |
|
|
|
|
Non-compete |
|
|
|
|
Goodwill |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
Proceeds from sale of Dryel |
|
|
|
|
Loss on sale |
$ |
( |
) |
27
Note 3. Inventories
Inventories, consisting of materials, labor and overhead at December 31 were comprised of the following:
|
|
2021 |
|
|
2020 |
|
||
|
Finished goods |
$ |
|
|
|
$ |
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
Impairment of raw materials |
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
|
$ |
|
|
Note 4. Property and Equipment
Property and equipment at December 31 were comprised of the following:
|
|
2021 |
|
|
2020 |
|
||
|
Office furniture and equipment |
$ |
|
|
|
$ |
|
|
|
Other |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
|
$ |
|
|
Depreciation expense for the years ended December 31, 2021 and 2020 was $
Note 5. Acquisition
On June 25, 2020, we entered into an Asset Purchase Agreement (the “CR Brands Purchase Agreement”) with CR Brands, Inc., a Delaware corporation (“CR Brands”), and Sweep Acquisition Company, a Delaware corporation (“Sweep” and together with CR Brands, “Sellers”), pursuant to which we agreed to purchase from Sellers substantially all of the assets, properties, rights and interests of Sellers primarily used in the business of designing, formulating, marketing and selling laundry care products to retail and wholesale customers under the BIZ® and Dryel® brand names. The transactions contemplated by the CR Brands Purchase Agreement were consummated on July 1, 2020 (the “CR Brands Acquisition”). The Company concluded that the CR Brands Acquisition qualified as a business combination under ASC 805. The total cash consideration paid for the CR Brands Acquisition was $
|
(a) |
Purchase Price Allocation |
The following summarizes the aggregate fair values of the assets acquired as part of the CR Brands Acquisition:
|
Inventories |
$ |
|
|
|
Intangible assets |
|
|
|
|
Goodwill |
|
|
|
|
Total assets acquired |
$ |
|
|
Intangible assets for the CR Brands Acquisition consist of the following:
|
|
Intangible Assets |
|
|
Useful Life |
|
||
|
Customer relationships |
$ |
|
|
|
|
|
|
|
Trade names |
|
|
|
|
|
|
|
|
Formulas and batching processes |
|
|
|
|
|
|
|
|
Non-compete |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
28
|
(b) |
Pro Forma Results of Operations (Unaudited) |
The following table summarizes selected unaudited pro forma consolidated statements of operations data for the years ended December 31, 2020, as if the BIZ had been completed on January 1, 2020.
|
|
2020 |
|
|
|
Net sales |
$ |
|
|
|
Net loss |
|
( |
) |
This selected unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the BIZ had been completed on that date. Moreover, this information does not indicate what our future operating results will be. The information for 2020 prior to the acquisition of BIZ is based on prior accounting records maintained by CR Brands. In some cases, CR Brands’ accounting policies may differ materially from accounting policies adopted by the Company following acquisition of BIZ.
The pro forma amounts above reflect the application of accounting policies and adjustment of the results of the CR Brands Acquisition to reflect: (1) the additional amortization that would have been charged to the acquired intangible assets; (2) additional interest expense relating to the borrowings on our Chase line of credit and UMB term loan and revolving credit facility, respectively; and (3) the tax impacts.
Note 6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by reporting unit for the fiscal years ended December 31, 2021 and 2020 were as follows:
|
|
Detergent |
|
|
Shampoo |
|
|
All-Purpose |
|
|
Total |
|
|
||||
|
Balance, January 1, 2020 |
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Additions |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Impairment |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Balance, December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Impairment |
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
Balance, December 31, 2021 |
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
Goodwill related to the disposition of Dryel is included in long-term assets associated with discontinued operations on the consolidated balance sheets. The goodwill impairment charges related to our Detergent and Shampoo reporting units are more fully described below.
Intangible assets consisted of the following:
|
|
As of December 31, 2021 |
|
|
As of December 31, 2020 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||||
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formulas and batching processes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal-use software (not placed in service) |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Non-compete agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
29
The change in the net carrying amounts of intangible assets during 2021 was primarily due to cash paid for our internal-use software, the impact of impairment charges related to intangible assets in our Shampoo and Detergent reporting units more fully described below, and amortization expense. Amortization expense for the years ended December 31, 2021 and 2020 was $
Estimated amortization expense for 2022 and subsequent years is as follows:
|
2022 |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
$ |
|
|
We made revisions to the internal forecasts relating to all reporting units during the fourth quarter of 2021 due primarily to the sale of our Dryel brand and the impact of rising costs associated with the manufacture and distribution of our products. Through our annual assessments conducted on December 31, 2021, The Company we concluded that the changes in circumstances in these reporting units triggered the need for a quantitative review of the carrying values of goodwill and certain intangible assets and resulted in impairment charges to each of our Detergent, All-Purpose, and Shampoo reporting units during the year ended December 31,2021, and resulted in the following impairment charges:
|
|
Intangible Assets |
|
|
Goodwill |
|
|
Total |
|
|||
|
Detergent |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Shampoo |
|
|
|
|
|
|
|
|
|
|
|
|
All-Purpose |
|
|
|
|
|
- |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company used the income approach and market approach to determine the fair value of the reporting units that required significant judgments and estimates by management regarding several key inputs, including future cash flows consistent with management’s strategic plans, sales growth rates and the selection of royalty rate and a discount rate, among others. Estimating sales growth rates requires significant judgment by management in areas such as future economic conditions, category and industry growth rates, product pricing, consumer tastes and preferences and future expansion expectations.
Note 7. Long-Term Debt and Line-of-Credit
On July 1, 2020, we entered into a Loan and Security Agreement (the “UMB Loan Agreement”) with UMB Bank, N.A. (“UMB”) and we terminated our Credit Agreement, dated June 30, 2016, with JPMorgan Chase Bank, N.A., (as amended, the “Prior Credit Agreement”). Under the UMB Loan Agreement we obtained a $
On November 9, 2021, we entered into the Fourth Amendment to the UMB Loan and Security Agreement (“Fourth Amendment”), effective September 30, 2021, which, among other things, amends our tangible net worth and cumulative cash flow after debt service requirements, as well as the timing in which the minimum fixed charge coverage ratio is applicable.
In conjunction with the sale of Dryel, on December 23, 2021, we entered into a Consent to Sale with UMB under which we were required to pay all proceeds of the sale against our UMB revolving credit facility and pay down the outstanding principal on our term loan with UMB to $
The UMB Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis. The UMB Loan Agreement also contains covenants typical of transactions of this type, including among others, limitations on the our ability to: create, incur or assume any indebtedness or lien on our assets; pay dividends or make other distributions; redeem, retire or acquire outstanding common stock, options, warrants or other rights; make fundamental changes to our
30
corporate structure or business; make investments or sell assets; or engage in certain other activities as set forth in the UMB Loan Agreement.
The Company was in compliance with the UMB Loan Agreement financial covenants as of December 31, 2021.
As of December 31, 2021, our UMB term loan and UMB revolving credit facility had an outstanding balance of $
On November 9, 2021, we entered into a loan and security agreement (the “La Plata Loan Agreement”) with La Plata Capital, LLC (“La Plata”). Under the La Plata Loan Agreement, we obtained a $
The La Plata Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis beginning in July 2022. The La Plata Loan Agreement is secured by all of the assets of the Company and all of its subsidiaries, subordinate to the security of the UMB Loan Agreement. In conjunction with this agreement, we also entered into an intercreditor and subordination agreement with UMB and La Plata, effective November 9, 2021.
The Company was in compliance with the La Plata Loan Agreement financial covenants as of December 31, 2021.
As of December 31, 2021, our La Plata term loan had an outstanding balance of $
As of December 31, 2021, the total principal payments due on our outstanding debt were as follows:
|
|
Revolving Credit Facility |
|
|
Term Loan |
|
|
Total |
|
|||
|
2022 |
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum principal payments |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 8. Leases
We have entered into leases for our corporate headquarters and office equipment with remaining lease terms up to
On March 11, 2020, we executed an office lease for a new corporate headquarters. As of that date, we had the right to control the use of the asset, which qualified as an operating lease. There were no initial direct costs associated with our new office lease and our deposit is fully refundable.
31
Information related to leases was as follows:
|
|
2021 |
|
|
2020 |
|
||
|
Operating lease information: |
|
|
|
|
|
|
|
|
Operating lease cost |
$ |
|
|
|
$ |
|
|
|
Operating cash flows from operating leases |
|
|
|
|
|
|
|
|
Net assets obtained in exchange for new operating lease liabilities |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term in years |
|
|
|
|
|
|
|
|
Weighted average discount rate |
|
|
% |
|
|
|
% |
Future minimum annual lease payments are as follows:
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total minimum lease payments |
$ |
|
|
|
Less imputed interest |
|
( |
) |
|
|
|
|
|
|
Total operating lease liability |
$ |
|
|
Note 9. Income Taxes
The provision for income tax attributable to continuing operations for the years ended December 31 is as follows:
|
|
2021 |
|
|
2020 |
|
||
|
Current provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
$ |
|
|
|
$ |
( |
) |
|
State |
|
( |
) |
|
|
( |
) |
|
Total current provision (benefit) |
|
|
|
|
|
( |
) |
|
Deferred provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
( |
) |
|
State |
|
|
|
|
|
( |
) |
|
Total deferred provision (benefit) |
|
|
|
|
|
( |
) |
|
Provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
( |
) |
|
State |
|
|
|
|
|
( |
) |
|
Total provision (benefit) |
$ |
|
|
|
$ |
( |
) |
The current tax provision related to discontinued operations for the years ended December 31, 2021 and 2020 was $
32
Income tax expense at the statutory tax rate is reconciled to the overall income tax expense for the years ended December 31 as follows:
|
|
2021 |
|
|
2020 |
|
||
|
Federal income tax at statutory rates |
$ |
( |
) |
|
$ |
( |
) |
|
State income taxes, net of federal tax effect |
|
( |
) |
|
|
( |
) |
|
Permanent differences |
|
( |
) |
|
|
|
|
|
Nondeductible stock-based compensation |
|
- |
|
|
|
|
|
|
Rate difference in NOL Carryback |
|
|
|
|
|
( |
) |
|
Other |
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
|
|
|
- |
|
|
Provision (benefit) for income taxes |
$ |
|
|
|
$ |
( |
) |
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period.
|
|
2021 |
|
|
2020 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
$ |
|
|
|
$ |
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
|
Accrued vacation and bonus |
|
|
|
|
|
|
|
|
Intangibles and Goodwill |
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
|
( |
) |
|
|
( |
) |
|
Prepaid expenses |
|
( |
) |
|
|
- |
|
|
Total deferred tax liabilities |
|
( |
) |
|
|
( |
) |
|
Net deferred tax asset, before allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
( |
) |
|
|
- |
|
|
Net deferred tax asset |
$ |
- |
|
|
$ |
|
|
Net operating losses and tax credit carryforwards as of December 31, 2021 are as follows:
|
|
|
|
|
|
Expiration Years |
|
Net operating losses, state (After December 31, 2017) |
$ |
|
|
|
|
|
Tax credits, federal |
$ |
|
|
|
|
Accounting for uncertainty in income taxes is based on a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize in our consolidated financial statements only those tax positions that are more-likely-than-not to be sustained as of the adoption date, based on the technical merits of the position. Each year we perform a comprehensive review of our material tax positions.
We believe that it is more likely than not we will not realize all the tax benefits of the deferred tax assets within the allowable carryforward period. Therefore, an appropriate valuation allowance has been provided. The valuation allowance as of December 31, 2021, primarily relates to net operating loss carryforwards. The increase in the valuation allowance during the year ended December 31, 2021, was primarily due to the establishment of the valuation allowance.
Our policy is to recognize interest and penalties related to uncertain tax benefits in income tax expense. As we had
33
We and our subsidiaries are subject to the following material taxing jurisdictions: United States and Colorado. The tax years that remain open to examination by the Internal Revenue Service are
Note 10. Shareholders’ Equity
In 2015, we adopted, and shareholders approved, an equity incentive plan for our employees, officers and directors (the “2015 Plan”).
Under the 2015 Plan, we awarded
On October 2, 2020, we awarded
During 2021 and 2020, we did
Compensation cost related to stock options recognized in operating results (included in general and administrative expenses) totaled $
Compensation cost related to RSUs totaled $
Stock option activity under the 2015 Plan is as follows:
|
|
Number of Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Life |
|
Aggregate Intrinsic Value |
|
|||
|
2015 Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number of shares under the plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
Granted |
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
Exercised |
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Cancelled/Expired |
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
Exercisable, December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
Available for issuance, December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
Exercised |
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Cancelled/Expired |
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
Exercisable, December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
Available for issuance, December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
34
A summary of additional information related to the options outstanding as of December 31, 2021 under the 2015 Plan is as follows:
|
Range of Exercise Prices |
|
Number of Options (in thousands) |
|
|
Weighted Average Remaining Contractual Life |
|
Weighted Average Exercise Price |
|
||
|
2015 Plan |
|
|
|
|
|
|
|
|
|
|
|
$1.20-$1.25 |
|
|
|
|
|
|
|
$ |
|
|
|
$1.26-$1.38 |
|
|
|
|
|
|
|
$ |
|
|
|
$1.80-$2.25 |
|
|
|
|
|
|
|
$ |
|
|
|
Total |
|
|
|
|
|
|
|
$ |
|
|
Under our 2015 Plan, we have
We have an Employee Stock Ownership Plan (“Plan”) to provide retirement benefits for our employees. The Plan is designed to invest primarily in our common stock and is non-contributory on the part of our employees. Contributions to the Plan are discretionary as determined by our Board of Directors. We expense the cost of contributions to the Plan. As of December 1, 2021, we terminated the Plan.
Note 11. 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) for the years ended December 31 is as follows:
|
|
2021 |
|
|
2020 |
|
||
|
Common shares outstanding, beginning of the period |
|
|
|
|
|
|
|
|
Weighted average common shares issued |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
Dilutive effect of common share equivalents |
|
- |
|
|
|
- |
|
|
Diluted weighted average number of common shares outstanding |
|
|
|
|
|
|
|
Common stock equivalents (in thousands) that have been excluded from the calculation of earnings per share as of December 31 because they would have been anti-dilutive are as follows:
|
|
2021 |
|
|
2020 |
|
||
|
Stock options |
|
|
|
|
|
|
|
Note 12. Income from Distribution Agreement Termination
On May 8, 2020, we entered into a settlement agreement with Montagne Jeunesse (“MJ”), the manufacturer of 7th Heaven skin care sachets, wherein both parties agreed to terminate our exclusive distribution agreement (the “Termination Agreement”). During the year ended December 31, 2020, we received
35
Note 13. Segment Information
Segments
We operate in
The following provides information on our segments as of and for the years ended December 31:
|
|
2021 |
|
|||||||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Corporate |
|
|
Total |
|
||||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Loss from continuing operations |
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Identifiable assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital and intangible asset expenditures |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|||||||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Corporate |
|
|
Total |
|
||||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Income (loss) from operations |
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Identifiable assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Corporate assets noted above are comprised of our income tax receivable and internal-use software.
Customers
Net sales to significant customers were the following for the years ended December 31, 2021 and 2020, respectively:
|
|
2021 |
|
|
2020 |
|
||
|
Walmart |
$ |
|
|
|
$ |
|
|
|
Ulta |
|
|
|
|
|
|
|
Outstanding accounts receivable from significant customers represented the following percentages of our total accounts receivable as of December 31, 2021 and 2020, respectively:
|
|
2021 |
|
|
2020 |
|
||
|
Walmart |
|
|
% |
|
|
|
% |
|
Ulta |
|
|
% |
|
|
|
% |
36
A loss of any of our significant customers could have a material adverse effect on us because it is uncertain whether our consumer base served by these customers would purchase our products at other retail outlets. Our distribution agreement with HK NFS renewed on
Note 14. Commitments and Contingencies
As of December 31, 2021, the Company had no material commitments or contingencies.
Note 15. Subsequent Events
The Company performed a review of events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure in the financial statements.
37
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
|
ITEM 9A. |
CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
As of December 31, 2021, we conducted an evaluation, under the supervision and with the participation of our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of December 31, 2021.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our President and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, based on the criteria for effective internal control described in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021.
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permits us to provide only management’s report in this Report.
Management’s report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|
ITEM 9B. |
OTHER INFORMATION. |
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None.
38
PART III
(in thousands)
For Part III, except as set forth below, the information set forth in our definitive Proxy Statement for our Annual Meeting of Shareholders to be filed within 120 days after December 31, 2021, hereby is incorporated by reference into this Report.
|
ITEM 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
|
ITEM 11. |
EXECUTIVE COMPENSATION. |
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
|
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Mark Goldstein
On April 29, 2021, the Company announced that Mark E. Goldstein, the President and Chief Executive Officer of the Company and a member of the Board of Directors, retired effective as of April 26, 2021. In connection with Mr. Goldstein’s retirement, the Company and Mr. Goldstein entered into a Separation Agreement, Waiver and Release (the “Separation Agreement”), pursuant to which the Company will pay Mr. Goldstein $720 in severance payments (equal to 18 months base salary) over a period of 30 months and reimbursement for the costs of continuing health benefits for a period of 18 months.
|
ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES. |
PART IV
|
ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (Plante & Moran, PLLC; Denver, Colorado; PCAOB ID #
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Exhibits
|
Exhibit Number |
|
Document |
|
3.1 |
|
|
|
3.2 |
|
|
|
4.1 |
|
|
|
10.1* |
|
|
|
10.2* |
|
|
39
|
Exhibit Number |
|
Document |
|
10.3* |
|
|
|
10.4* |
|
|
|
10.5* |
|
|
|
10.6* |
|
|
|
10.7* |
|
|
|
10.8* |
|
|
|
10.9* |
|
|
|
10.10* |
|
|
|
10.11* |
|
Form of Executive Officer RSU Award Agreement, dated October 2, 2020 |
|
10.12* |
|
|
|
10.13* |
|
|
|
10.14* |
|
|
|
10.15* |
|
|
|
10.16 |
|
|
|
10.17 |
|
|
|
10.18 |
|
|
|
10.19 |
|
|
|
10.20 |
|
|
|
10.21 |
|
|
40
|
Exhibit Number |
|
Document |
|
10.22 |
|
|
|
10.23 |
|
|
|
10.24 |
|
|
|
10.25 |
|
|
|
10.26 |
|
|
|
10.27 |
|
|
|
21 |
|
|
|
23.1 |
|
|
|
24 |
|
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31.1 |
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31.2 |
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Rule 13a-14(a) Certification of the Chief Financial Officer. |
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32.1** |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* |
Management contract or compensatory plan or arrangement. |
**Furnished, not filed.
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ITEM 16. |
FORM 10-K SUMMARY. |
None.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SCOTT’S LIQUID GOLD-INC., a Colorado corporation |
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By: |
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/s/ Tisha Pedrazzini |
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Tisha Pedrazzini, President (Principal Executive Officer) |
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By: |
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/s/ David M. Arndt |
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David M. Arndt, Chief Financial Officer |
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(Principal Financial and Chief Accounting Officer) |
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Date: |
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March 31, 2022 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Date |
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Name and Title |
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Signature |
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March 31, 2022 |
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Tisha Pedrazzini, |
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Director and President |
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/s/ Tisha Pedrazzini |
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March 31, 2022 |
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Leah S. Bailey, Director |
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Tisha Pedrazzini for herself and as |
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March 31, 2022 |
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Rimmy R. Malhotra, Director |
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Attorney-in-Fact for the named directors |
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March 31, 2022 |
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Daniel J. Roller, Director |
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who constitute all of the members of the |
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the Board of Directors and for the named officers |
42