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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
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
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(I.R.S. Employer
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Exchange Act.
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Title of each class |
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Trading Symbol |
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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 |
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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Large accelerated filer |
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☐ |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
As of, November 13, 2022 the registrant had
CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, in addition to historical information. All statements, other than statements of historical facts, included in this Report that address activities, events, or developments with respect to our financial condition, results of operations, or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. You can typically identify forward-looking statements by the use of words, such as “may,” “could,” “should,” “assume,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” and other similar words. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements contained in this Report are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Forward-looking statements and our performance inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to:
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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Page |
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Item 1. |
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1 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
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Item 4. |
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22 |
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Item 1A. |
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23 |
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Item 6. |
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23 |
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P ART I
ITEM 1. FINANCIAL STATEMENTS .
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net sales |
$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Advertising |
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Selling |
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General and administrative |
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Intangible asset amortization |
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Impairment of goodwill and intangible assets |
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- |
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- |
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- |
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Total operating expenses |
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Loss from operations |
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(
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(
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Interest expense |
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(
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(
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(
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Loss before income taxes and discontinued operations |
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(
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(
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(
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(
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Income tax expense |
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(
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(
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(
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(
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Loss from continuing operations |
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(
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(
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(
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(
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Loss from discontinued operations, net of taxes |
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- |
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(
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- |
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(
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Net loss |
$ |
(
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$ |
(
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$ |
(
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$ |
(
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Basic and diluted net loss per common shares: |
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Loss from continuing operations |
$ |
(
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$ |
(
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$ |
(
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$ |
(
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Loss from discontinued operations |
$ |
- |
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$ |
(
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$ |
- |
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$ |
(
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Net loss |
$ |
(
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$ |
(
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$ |
(
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$ |
(
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Weighted average shares outstanding: |
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Basic and diluted |
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See accompanying notes to these Condensed Consolidated Financial Statements.
1
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except par value amounts)
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September 30, |
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December 31, |
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2022 |
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2021 |
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Assets |
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Current assets: |
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Cash |
$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Inventories |
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Income taxes receivable |
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Prepaid expenses |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Operating lease right-of-use assets |
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Other assets |
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Total assets |
$ |
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$ |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued expenses |
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Current portion of long-term debt |
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Operating lease liabilities, current portion |
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Total current liabilities |
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Long-term debt, net of current portion and debt issuance costs |
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Operating lease liabilities, net of current |
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Other liabilities |
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Total liabilities |
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Shareholders’ equity: |
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Preferred Stock,
par value, authorized
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Common Stock; $
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Capital in excess of par |
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(Accumulated deficit) retained earnings |
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(
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) |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ |
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$ |
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See accompanying notes to these Condensed Consolidated Financial Statements.
2
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
(in thousands)
|
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Common Stock |
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Shares |
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Amount |
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Capital in Excess of Par |
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(Accumulated Deficit) Retained Earnings |
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Total |
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Balance, December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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(
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) |
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(
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) |
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Restricted stock unit vesting |
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- |
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Balance, March 31, 2022 (Unaudited) |
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Stock-based compensation |
|
- |
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- |
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- |
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Net loss |
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- |
|
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- |
|
|
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- |
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(
|
) |
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(
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) |
|
Balance, June 30, 2022 (Unaudited) |
|
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(
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) |
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|
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Stock-based compensation |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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(
|
) |
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(
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) |
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Balance, September 30, 2022 (Unaudited) |
|
|
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$ |
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$ |
|
|
|
$ |
(
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) |
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$ |
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Balance, December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
|
- |
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- |
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- |
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Net loss |
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- |
|
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- |
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- |
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(
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) |
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(
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) |
|
Balance, March 31, 2021 (Unaudited) |
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Stock-based compensation |
|
- |
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- |
|
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- |
|
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Net loss |
|
- |
|
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- |
|
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- |
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(
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) |
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(
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) |
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Balance, June 30, 2021 (Unaudited) |
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Stock-based compensation |
|
- |
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- |
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(
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) |
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- |
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(
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Stock options exercised |
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- |
|
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Restricted stock unit vesting |
|
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|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
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Net loss |
|
- |
|
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|
- |
|
|
|
- |
|
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(
|
) |
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(
|
) |
|
Balance, September 30, 2021 (Unaudited) |
|
|
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|
$ |
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|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
S ee accompanying notes to these Condensed Consolidated Financial Statements.
3
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
|
|
Nine Months Ended |
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|||||
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September 30, |
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|||||
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
$ |
(
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) |
|
$ |
(
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) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Deferred income taxes |
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- |
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Impairment of goodwill and intangible assets |
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- |
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Change in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
|
(
|
) |
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(
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) |
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Prepaid expenses and other assets |
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Income taxes receivable |
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Accounts payable, accrued expenses, and other liabilities |
|
(
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) |
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Total adjustments to net loss |
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Net cash used in operating activities |
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(
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) |
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(
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) |
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Cash flows from investing activities: |
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Purchase of software |
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(
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) |
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(
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) |
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Net cash used in investing activities |
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(
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) |
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(
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) |
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Cash flows from financing activities: |
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Repayments on term loans |
|
(
|
) |
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(
|
) |
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Proceeds from revolving credit facility |
|
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Repayments of revolving credit facility |
|
(
|
) |
|
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(
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) |
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Proceeds from exercise of stock options |
|
- |
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Net cash provided by financing activities |
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Net (decrease) increase in cash and restricted cash |
|
(
|
) |
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Cash and restricted cash, beginning of period |
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Cash and restricted cash, end of period |
$ |
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$ |
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Supplemental disclosures: |
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Cash paid during the period for interest |
$ |
|
|
|
$ |
|
|
See accompanying notes to these Condensed Consolidated Financial Statements.
4
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies
(a) Company Background
Scott’s Liquid Gold-Inc., a Colorado corporation was incorporated on February 15, 1954. Scott’s Liquid Gold-Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” or “us”) develop, market and sell high quality products in
(b) Principles of Consolidation
Our Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
On December 23, 2021, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Dryel ® product line. We have reflected the operations of the Dryel ® product line as discontinued operations for all periods presented, which were previously classified under our household products segment. See Note 3 for further information.
(c) Basis of Presentation
The unaudited Condensed Consolidated Statements of Operations, Condensed Consolidated Balance Sheets, and Condensed Consolidated Statements of Cash Flows included in this Report have been prepared by the Company. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at September 30, 2022 and results of operations and cash flows for all periods have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the period ended September 30, 2022 are not necessarily indicative of the operating results for the full year and are unaudited.
(d) Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, the realization of deferred tax assets, reserves for slow moving and obsolete inventory, customer returns and allowances, intangible asset useful lives and amortization method, fair value of assets acquired in business combinations, operating lease right-of-use assets and operating lease liabilities, and stock-based compensation. Actual results could differ from our estimates.
(e) Cash and Restricted Cash
Cash and restricted cash consist of the following:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Cash |
$ |
|
|
|
$ |
|
|
|
Restricted Cash |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(f) Inventories Valuation and Reserves
Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We estimate an inventory reserve, which is generally not material to our financial statements, for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.
5
Inventories were comprised of the following at:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Finished goods |
|
|
|
|
$ |
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
||
Our remaining raw materials balance is to be sold to contract manufacturing partners based on production demand.
(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
to
(h) Leases
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
Certain nonlease components, such as maintenance and other services provided by the lessor, are included in the valuation of the lease. Leases with an initial term of 12 months or less, which are not material to our financial statements, are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term. Lease agreements with lease and nonlease components are combined as a single lease component.
The Company evaluates reimbursable leasehold improvements based on whether improvements are indicative of a lessor or lessee asset. The Company concluded that all of its reimbursable leasehold improvement payments have qualified as lessor assets and, as such, have accounted for leasehold improvement payments as prepaid rent included in prepaid expenses on the Condensed Consolidated Balance Sheets.
(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 over the estimated useful life of the software once the software is ready for its intended use and placed into service. In the second quarter of 2022, our internal-use software was implemented for its intended use. The estimated useful life for internal-use software is five years and will be periodically reassessed based on considerations for obsolescence, technology, competition, and other economic factors.
(j) Financial Instruments
Financial instruments which potentially subject us to concentrations of credit risk include cash, restricted cash, and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. Historically, we have maintained balances in various operating accounts in excess of federally insured limits. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, based upon factors surrounding the credit risk of specific customers, historical trends and other information. We have
The recorded amounts for cash, restricted cash, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
6
(k) Income Taxes
Income taxes reflect the tax effects of transactions reported in the Condensed Consolidated Financial Statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. A valuation allowance is established when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. We classify penalty and interest expense related to income tax liabilities as an income tax expense. There are
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three and nine months ended September 30, 2022
differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, and permanent differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to realize deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more likely than not threshold for realizability. Accordingly, a valuation allowance has been recorded against the Company’s net deferred tax assets as of September 30, 2022, and December 31, 2021.
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. The tax impact of the carryback of the 2020 loss was recorded in the first quarter 2021 income tax provision. We elected to defer our portion of social security tax payments, and we paid this liability in the third quarter of 2021.
(l) Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.
Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
7
Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of both customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted.
Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce our revenue in that period.
Sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
We have also established an allowance for doubtful accounts. We estimate this allowance based upon, among other things, an assessment of the credit risk of specific customers and historical trends. We believe our allowance for doubtful accounts is adequate to absorb any losses which may arise. In the event that actual losses differ from our estimates, the results of future periods may be impacted.
Customer allowances for trade promotions and allowance for doubtful accounts are included in net accounts receivable on the Condensed Consolidated Balance Sheets and were as follows:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Trade promotions |
$ |
|
|
|
$ |
|
|
|
Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(m) Advertising Costs
We expense advertising costs as incurred.
(n) Stock-Based Compensation
We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options with only service conditions using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the vesting period using the straight-line method, which approximates the service period.
The Company issues restricted stock unit ("RSUs") awards with restrictions that lapse upon the passage of time (service vesting) and satisfaction of market conditions targeted to our Company’s stock price. For those RSU awards with only service vesting, the Company recognizes compensation cost on a straight-line basis over the service period. For awards with both market and service conditions, the Company starts recognizing compensation cost over the requisite service period, with the effect of the market conditions reflected in the calculation of the award's fair value at grant date. The Company values awards with only service vesting requirements based on the grant date share price. The Company values awards with market and service conditions using a Monte Carlo simulation. The Company determines the requisite service period for awards with both market and service conditions based on the longer of the explicit service period and the derived service period. Stock awards that contain market vesting conditions are included in the computations of diluted EPS reflecting the average number of shares that would be issued based on the highest 30-day average market price during the reporting periods, if their effect is dilutive. If the condition is based on an average of market prices over some period of time, the corresponding average for the period is used.
8
(o) Operating Costs and Expenses Classification
Cost of sales includes costs associated with the purchase of goods from our third-party manufacturing partners, which include labor, materials, and other expenses associated with the manufacturing of our products, freight-in, purchasing and receiving, quality control, repairs, maintenance, and other indirect costs. We classify freight-out as selling expenses. Other selling expenses consist primarily of costs for warehousing and distribution, sales and sales support personnel, brokerage commissions, customer compliance fines, and promotional costs. Freight-out costs included in selling expenses totaled
$
General and administrative expenses consist primarily of wages and benefits associated with management and administrative support departments, business insurance costs, professional fees, office facility related expenses, and other general support costs.
On April 29, 2021, the Company announced that Mark E. Goldstein, the President and Chief Executive Officer of the Company and a member of the Board of Directors, retired effective as of
(p) Recently Adopted Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The purpose of ASU 2020-04 is to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance primarily provides temporary optional expedients which simplify the accounting for contract modifications to existing debt agreements expected to arise from the market transition from LIBOR to alternative reference rates. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply amendments prospectively through December 31, 2022. The Company
(q) Recently Issued Accounting Standards
In September 2022, the FASB issued ASU No. 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations". This guidance requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. These amendments are effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. We are currently assessing the impact of this guidance on our financial statements.
Note 2. Going Concern
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern.
The Company had cash and restricted cash of $
Management has implemented actions to reduce the Company’s operating expenses and has approved a plan to extend and restructure debt facilities. Management is considering additional various strategic actions including asset sales, workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to ensure alignment with customer demand in order to address liquidity needs and pursue its business plan. The Company expects that these strategic actions will reduce expenses and outstanding debt balances and provide required liquidity for ongoing operations. If these plans aren't successfully implemented there could be substantial doubt about the Company's ability to continue as a going concern.
9
Note 3. Discontinued Operations
On December 23, 2021, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Dryel
®
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 the year ending December 31, 2021, because we had not established an active program to locate a buyer and because the brand was not being marketed for sale. All efforts between the buyer and the Company occurred during the fourth quarter of 2021. As a result, there was no adjustment to fair value under ASC 360 guidance related to held for sale assets, and the difference between the consideration paid to us and the carrying amount of all assets is reflected in the loss on sale of discontinued operations.
We have reflected the operations of the Dryel
®
product line as discontinued operations. Our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. Our Condensed Consolidated Statements of Equity and Statements of Cash Flows combine the results of continuing and discontinued operations. As of the three and nine months ended September 30, 2022
, there were
Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30:
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating expenses: |
|
|
|
|
|||
|
Selling |
|
|
|
|
|
|
|
|
Intangible asset amortization |
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
Loss from discontinued operations, before tax |
|
(
|
) |
|
|
(
|
) |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
||
|
Income tax expense |
|
(
|
) |
|
|
(
|
) |
|
Loss from discontinued operations, net of tax |
$ |
(
|
) |
|
$ |
(
|
) |
Note 4. Stock-Based Compensation
On January 18, 2022, we granted
On March 2, 2022, we granted
Compensation cost related to stock options totaled
$
10
Compensation cost related to RSUs totaled
$
Note 5. Earnings per Share
Per share data is determined by using the weighted average number of common shares outstanding. Common equivalent shares are considered only for diluted earnings per share, unless considered anti-dilutive. Common equivalent shares, determined using the treasury stock method, result from stock options with exercise prices that are below the average market price of the common stock.
Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in our earnings.
A reconciliation of the weighted average number of common shares outstanding (in thousands) is as follows. The dilutive effect of stock options and RSUs are excluded for periods in which the Company has a net loss because the impact is anti-dilutive.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
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 because they would have been anti-dilutive:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Segment Information
We operate in
11
The following provides information on our segments for the three and nine months ended September 30:
|
|
Three Months Ended September 30, 2022 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Capital and intangible asset expenditures |
|
- |
|
|
|
- |
|
|
|
- |
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2022 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
Note 7. Goodwill and Intangible Assets
There was
During the second quarter of 2022,
|
|
Intangible Assets |
|
|
Goodwill |
|
|
Total |
|
|||
|
All-Purpose |
|
|
|
|
|
|
|
|
|
|
|
There was
12
The changes in the carrying amount of goodwill by reporting unit for the nine months ended September 30, 2022 and 2021 were as follows:
|
|
Detergent |
|
|
Shampoo |
|
|
All-Purpose |
|
|
Total |
|
|
||||
|
Balance, January 1, 2022 |
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
|
Additions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Impairment |
|
- |
|
|
|
- |
|
|
|
(
|
) |
|
|
(
|
) |
|
|
Balance, September 30, 2022 |
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Balance, January 1, 2021 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Additions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Intangible assets, which are comprised of our capitalized costs of software obtained for internal-use or are related to our acquisition of our Prell ® , Denorex ® , BIZ ® and Kids N Pets ® brands, consisted of the following:
|
|
As of September 30, 2022 |
|
|
As of December 31, 2021 |
|
||||||||||||||||||
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Non-compete agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The change in the net carrying amounts of intangible assets during 2022 was due to capitalization of costs related to our internal-use software, the impact of impairment charges related to intangible assets in our All-Purpose reporting unit, and amortization expense. Amortization expense for the three months ended September 30, 2022 and 2021 was
$
Estimated amortization expense for 2022 and subsequent years is as follows:
|
Remainder of 2022 |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
$ |
|
|
Note 8. Long-Term Debt and Line-of-Credit
On July 1, 2020, we entered into a Loan and Security Agreement (as amended, the “UMB Loan Agreement”) with UMB Bank, N.A. (“UMB”). Under the UMB Loan Agreement we obtained a $
13
The UMB Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis. The UMB Loan Agreement also contains covenants typical of transactions of this type, including among others, limitations on our ability to: create, incur or assume any indebtedness or lien on our assets; pay dividends or make other distributions; redeem, retire or acquire outstanding common stock, options, warrants or other rights; make fundamental changes to our corporate structure or business; make investments or sell assets; or engage in certain other activities as set forth in the UMB Loan Agreement. The Company was in compliance with the UMB Loan Agreement financial covenants as of September 30, 2022.
As of September 30, 2022, our UMB revolving credit facility and UMB term loan had an outstanding balance of
$
On
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 as of September 30, 2022.
As of September 30, 2022, our La Plata term loan had an outstanding balance of
$
As of September 30, 2022, the total principal payments due on our outstanding debt were as follows:
|
|
Revolving Credit Facility |
|
|
Term Loan |
|
|
Total |
|
|||
|
Remainder of 2022 |
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum principal payments |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 9. Leases
We have entered into a lease for our corporate headquarters with a remaining lease term of
Information related to leases was as follows:
|
|
Three Months Ended September 30, 2022 |
|
Nine Months Ended September 30, 2022 |
|
||
|
Operating lease information: |
|
|
|
|
||
|
Operating lease cost |
$ |
|
|
$ |
|
|
|
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 |
|
|
% |
|
|
% |
14
Future minimum annual lease payments are as follows:
|
Remainder of 2022 |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total minimum lease payments |
$ |
|
|
|
Less imputed interest |
|
(
|
) |
|
|
|
|
|
|
Total operating lease liability |
$ |
|
|
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA TIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. This Item 2 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Please refer to "Item 1A. Risk Factors" in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of the uncertainties, risks and assumptions associated with these statements.
Executive Overview
Our Business
Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve while creating shareholder value. We develop, market, and sell high-quality, high-value household and health and beauty care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors.
COVID-19 Pandemic
For our fiscal quarter ended September 30, 2022, the coronavirus (COVID-19) pandemic continued to cause economic and social disruptions that led to ongoing uncertainties. During the first quarter of 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic. Such impacts have included significant volatility in the global stock markets, and uncertainty in the costs and performance of our supply chain and logistics partners. We expect to see continued volatility in these areas, which could impact our operating results in future periods.
Supply Chain and Outsourcing Partners
As a result of COVID-19, we have encountered, and expect to continue to experience, various supply chain disruptions impacting the availability and lead times of certain raw materials for our finished goods products. We have been proactively identifying alternative sources for raw materials to mitigate the impacts of these disruptions. All of our outsourcing partners, including contract manufacturing plants and third-party logistics warehouses, have remained open during the entirety of COVID-19, however, they have had difficulties with staffing their workforce to keep production lines running.
Inflation
Inflationary trends in certain markets and global supply chain challenges have, and are expected to continue to, negatively affect our sales and operating performance. We experienced the impact of greater inflation on material, logistical and other costs during the third quarter. We are aiming to offset these inflationary costs through a combination of pricing and cost savings strategies. We currently anticipate the impact of inflation in certain markets will be increasingly significant continuing into the fourth quarter and fiscal 2023. We will continue to implement mitigation strategies and price increases to offset these trends; however, such measures may not fully offset the impact to our operating performance.
Distribution Agreement with Church & Dwight
Our distribution agreement with Church & Dwight Co., Inc. (“Church & Dwight”) and our subsidiary, Neoteric Cosmetics, Inc., was not extended beyond the Expiration Date of December 31, 2021. As a result, the distribution agreement expired on its own terms as of the Expiration Date and the Company ceased to distribute Batiste Dry Shampoo products. Unless offset by increased sales of our other products, the conclusion of this distribution agreement is expected to have a material impact on our net sales and result of operations. Net sales of Batiste were $4,704 for the nine months ended September 30, 2021.
16
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. These results are excluded from our segment results of household products, which previously included Dryel ® operating results. See Note 3 - “Discontinued Operations” in the Notes to Condensed Consolidated Financial Statements for further information.
Results of Operations
Three months ended September 30, 2022 compared to three months ended September 30, 2021
|
|
Three Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
4,277 |
|
|
$ |
7,970 |
|
|
$ |
(3,693 |
) |
|
|
(46.3 |
%) |
|
Cost of sales |
|
2,358 |
|
|
|
5,100 |
|
|
|
(2,742 |
) |
|
|
(53.8 |
%) |
|
Gross profit |
|
1,919 |
|
|
|
2,870 |
|
|
|
(951 |
) |
|
|
(33.1 |
%) |
|
Gross margin |
|
44.9 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Advertising |
|
166 |
|
|
|
144 |
|
|
|
22 |
|
|
|
15.3 |
% |
|
Selling |
|
1,691 |
|
|
|
2,542 |
|
|
|
(851 |
) |
|
|
(33.5 |
%) |
|
General and administrative |
|
578 |
|
|
|
836 |
|
|
|
(258 |
) |
|
|
(30.9 |
%) |
|
Intangible asset amortization |
|
87 |
|
|
|
278 |
|
|
|
(191 |
) |
|
|
(68.7 |
%) |
|
Total operating expenses |
|
2,522 |
|
|
|
3,800 |
|
|
|
(1,278 |
) |
|
|
(33.6 |
%) |
|
Loss from operations |
|
(603 |
) |
|
|
(930 |
) |
|
|
327 |
|
|
|
35.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense |
|
(139 |
) |
|
|
(109 |
) |
|
|
(30 |
) |
|
|
(27.5 |
%) |
|
Loss before income taxes and discontinued operations |
|
(742 |
) |
|
|
(1,039 |
) |
|
|
297 |
|
|
|
28.6 |
% |
|
Income tax expense |
|
(2 |
) |
|
|
(1,224 |
) |
|
|
1,222 |
|
|
|
99.8 |
% |
|
Loss from continuing operations |
|
(744 |
) |
|
|
(2,263 |
) |
|
|
1,519 |
|
|
|
67.1 |
% |
|
Loss from discontinued operations |
|
- |
|
|
|
(205 |
) |
|
|
205 |
|
|
|
100.0 |
% |
|
Net loss |
$ |
(744 |
) |
|
$ |
(2,468 |
) |
|
$ |
1,724 |
|
|
|
69.9 |
% |
Change in net loss was primarily due to the following:
17
Segment Results
Household products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume, and percentage changes for household products between periods:
|
|
Three Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
2,748 |
|
|
$ |
3,846 |
|
|
$ |
(1,098 |
) |
|
|
(28.5 |
%) |
|
Gross profit |
$ |
1,084 |
|
|
$ |
1,514 |
|
|
$ |
(430 |
) |
|
|
(28.4 |
%) |
|
Gross margin |
|
39.4 |
% |
|
|
39.4 |
% |
|
|
|
|
|
|
||
|
Loss from operations |
$ |
(371 |
) |
|
$ |
(382 |
) |
|
$ |
11 |
|
|
|
2.9 |
% |
Health and beauty care products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume and percentage changes for health and beauty care products between periods:
|
|
Three Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales - distributed products |
$ |
- |
|
|
$ |
1,535 |
|
|
$ |
(1,535 |
) |
|
|
(100.0 |
%) |
|
Net sales - manufactured products |
|
1,529 |
|
|
|
2,589 |
|
|
|
(1,060 |
) |
|
|
(40.9 |
%) |
|
Total health and beauty net sales |
$ |
1,529 |
|
|
$ |
4,124 |
|
|
$ |
(2,595 |
) |
|
|
(62.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit |
$ |
835 |
|
|
$ |
1,356 |
|
|
$ |
(521 |
) |
|
|
(38.4 |
%) |
|
Gross margin |
|
54.6 |
% |
|
|
32.9 |
% |
|
|
|
|
|
|
||
|
Loss from operations |
$ |
(232 |
) |
|
$ |
(548 |
) |
|
$ |
316 |
|
|
|
57.7 |
% |
18
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
15,449 |
|
|
$ |
24,583 |
|
|
$ |
(9,134 |
) |
|
|
(37.2 |
%) |
|
Cost of sales |
|
8,337 |
|
|
|
14,624 |
|
|
|
(6,287 |
) |
|
|
(43.0 |
%) |
|
Gross profit |
|
7,112 |
|
|
|
9,959 |
|
|
|
(2,847 |
) |
|
|
(28.6 |
%) |
|
Gross margin |
|
46.0 |
% |
|
|
40.5 |
% |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Advertising |
|
492 |
|
|
|
506 |
|
|
|
(14 |
) |
|
|
(2.8 |
%) |
|
Selling |
|
5,752 |
|
|
|
7,388 |
|
|
|
(1,636 |
) |
|
|
(22.1 |
%) |
|
General and administrative |
|
2,020 |
|
|
|
3,782 |
|
|
|
(1,762 |
) |
|
|
(46.6 |
%) |
|
Intangible asset amortization |
|
313 |
|
|
|
834 |
|
|
|
(521 |
) |
|
|
(62.5 |
%) |
|
Impairment of goodwill and intangible assets |
|
3,589 |
|
|
|
- |
|
|
|
3,589 |
|
|
|
100.0 |
% |
|
Total operating expenses |
|
12,166 |
|
|
|
12,510 |
|
|
|
(344 |
) |
|
|
(2.7 |
%) |
|
Loss from operations |
|
(5,054 |
) |
|
|
(2,551 |
) |
|
|
(2,503 |
) |
|
|
(98.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense |
|
(419 |
) |
|
|
(219 |
) |
|
|
(200 |
) |
|
|
(91.3 |
%) |
|
Loss before income taxes and discontinued operations |
|
(5,473 |
) |
|
|
(2,770 |
) |
|
|
(2,703 |
) |
|
|
(97.6 |
%) |
|
Income tax expense |
|
(55 |
) |
|
|
(798 |
) |
|
|
743 |
|
|
|
93.1 |
% |
|
Loss from continuing operations |
|
(5,528 |
) |
|
|
(3,568 |
) |
|
|
(1,960 |
) |
|
|
(54.9 |
%) |
|
Loss from discontinued operations |
|
- |
|
|
|
(246 |
) |
|
|
246 |
|
|
|
100.0 |
% |
|
Net loss |
$ |
(5,528 |
) |
|
$ |
(3,814 |
) |
|
$ |
(1,714 |
) |
|
|
(44.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Change in net loss was primarily due to the following:
19
Segment Results
Household products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume, and percentage changes for household products between periods:
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
9,103 |
|
|
$ |
10,762 |
|
|
$ |
(1,659 |
) |
|
|
(15.4 |
%) |
|
Gross profit |
$ |
3,714 |
|
|
$ |
4,213 |
|
|
$ |
(499 |
) |
|
|
(11.8 |
%) |
|
Gross margin |
|
40.8 |
% |
|
|
39.1 |
% |
|
|
|
|
|
|
||
|
Loss from operations |
$ |
(4,854 |
) |
|
$ |
(1,960 |
) |
|
$ |
(2,894 |
) |
|
|
(147.7 |
%) |
Health and beauty care products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume and percentage changes for health and beauty care products between periods:
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales- distributed products |
$ |
- |
|
|
$ |
4,704 |
|
|
$ |
(4,704 |
) |
|
|
(100.0 |
%) |
|
Net sales- manufactured products |
|
6,346 |
|
|
|
9,117 |
|
|
|
(2,771 |
) |
|
|
(30.4 |
%) |
|
Total healthcare and beauty net sales |
$ |
6,346 |
|
|
$ |
13,821 |
|
|
$ |
(7,475 |
) |
|
|
(54.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit |
$ |
3,398 |
|
|
$ |
5,746 |
|
|
$ |
(2,348 |
) |
|
|
(40.9 |
%) |
|
Gross margin |
|
53.5 |
% |
|
|
41.6 |
% |
|
|
|
|
|
|
||
|
Loss from operations |
$ |
(200 |
) |
|
$ |
(591 |
) |
|
$ |
391 |
|
|
|
66.2 |
% |
20
Liquidity and Capital Resources
Overview
Our primary sources of funds include cash expected to be generated from operations and borrowings from our line of credit. Our principal uses of cash are to fund planned operating expenditures, interest payments, and any principal payments on our line of credit. Working capital movements are influenced by the sourcing of finished goods inventories.
Financing Agreements
Please see Note 8 to our Condensed Consolidated Financial Statements for information on our UMB Loan Agreement and La Plata Loan Agreement.
Liquidity and Changes in Cash Flows
At September 30, 2022, we had $944 available on our revolving credit facility with UMB, and $139 in cash on hand, a decrease of $1,131 when compared to the balance as of December 31, 2021 as this cash was utilized to reduce long-term debt balances.
The following is a summary of cash provided by or (used in) each of the indicated types of activities:
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Operating activities |
$ |
(1,189 |
) |
|
$ |
(1,394 |
) |
|
$ |
205 |
|
|
|
14.7 |
% |
|
Investing activities |
|
(142 |
) |
|
|
(262 |
) |
|
|
120 |
|
|
|
45.8 |
% |
|
Financing activities |
|
200 |
|
|
|
1,909 |
|
|
|
(1,709 |
) |
|
|
(89.5 |
%) |
The uncertainty related to the COVID-19 outbreak has impacted our operations and could affect our future results. Our liquidity has been affected by inflationary pressures at our customers which have caused sales decreases and higher costs on materials, logistics, and other purchases.
Primarily due to a decline in net sales and increases in costs associated with the manufacture and distribution of our products, the Company used net cash in operating activities of $1,189 during the nine months ended September 30, 2022. The Company’s debt agreements with UMB Bank, N.A. and La Plata Capital, LLC mature on July 1, 2023 and November 9, 2023, respectively. Management’s assessment of cash flow forecasts indicate that, absent any other action, the Company likely will require additional liquidity to continue its operations over the next 12 months.
Management has implemented actions to reduce the Company’s operating expenses and has approved a plan to extend and restructure debt facilities. Management is considering additional various strategic actions including asset sales, workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to ensure alignment with customer demand in order to address liquidity needs and pursue its business plan. The Company expects that these strategic actions will reduce expenses and outstanding debt balances and provide required liquidity for ongoing operations. If these plans aren't successfully implemented there could be substantial doubt about the Company's ability to continue as a going concern.
21
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed as of September 30, 2022, under the supervision and with the participation of our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the previously disclosed material weakness relating to the operating effectiveness of the review of the impairment assessment of goodwill prepared by a third-party firm. We believe the actions described in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2022 will be sufficient to remediate the identified material weakness and related disclosure controls and procedures. However, we do not believe that the new and enhanced controls and procedures have been implemented for a sufficient amount of time for management to conclude that the material weakness in the Company’s internal controls over financial reporting and effectiveness of related disclosure controls and procedures has been fully remediated, and we are still in the process of improving those controls and procedures. We will continue to improve and monitor the effectiveness of these controls and will make any further changes that management determines to be appropriate.
Changes in Internal Control over Financial Reporting
In June 2022, we implemented an enterprise resource planning (“ERP”) software system on a company-wide basis. Despite this transition in software, there has not been a significant change in internal controls over financial reporting. Over the remainder of 2022, certain internal controls over financial reporting will be automated, modified, or implemented to address the new control environment associated with the ERP system. Additionally, the Company completed pre-implementation and post-implementation internal control monitoring associated with the launch. While we believe that this new system will enhance its internal control over financial reporting, there are inherent risks in implementing any new system, and we will continue to monitor and evaluate these control changes as part of our assessment of the control design and effectiveness throughout 2022.
There have been no other changes in our internal control over financial reporting that occurred during the third quarter of 2022 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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P ART II
ITEM 1A. RISK FACTORS
We have identified a material weakness in our internal control over financial reporting .
We are a public reporting company subject to the rules and regulations established from time to time by the SEC. As a public company we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting.
As disclosed in Part I, Item 4, “Disclosure Controls and Procedures,” we have identified a material weakness in our controls related to the operating effectiveness of the review of the impairment assessment of goodwill prepared by a third-party firm as of June 30, 2022. We did not maintain effective controls to sufficiently review the completeness and accuracy of the impairment assessment.
This material weakness did not result in any restatements to our Condensed Consolidated Financial Statements. Our management is committed to remediating this material weakness and is in the process of developing a remediation plan to address the material weakness.
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition, or future results.
ITEM 6. EXHIBITS
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Exhibit Number |
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Document |
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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 XBRLtags 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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|
* Furnished, not filed.
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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. |
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By: |
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/s/ Tisha Pedrazzini |
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Tisha Pedrazzini, President |
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(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) |
Date: November 14, 2022
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