10-Q 1 slgd-20230930.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

OR

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

For the transition period from to

Commission File Number: 001-13458

SCOTT’S LIQUID GOLD-INC.

(Exact name of registrant as specified in its charter)

Colorado

84-0920811

(State or other jurisdiction of
incorporation or organization)

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

8400 E. Crescent Parkway, Suite 450, Greenwood Village, CO

80111

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (303) 373-4860

Securities registered pursuant to Section 12(b) of the Exchange Act.

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

None

 

None

 

None

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

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

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

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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

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

As of November 6, 2023, the registrant had 12,999,790 shares of its common stock, $0.10 par value per share, outstanding.

 


 

CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION

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

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

disruptions or inefficiencies in the supply chain;
dependence on third-party vendors and on sales to major customers;
competition from large consumer products companies in the United States;
competitive factors, including any decrease in distribution of (i.e., retail stores carrying) our significant products;
new competitive products and/or technological changes;
the need for effective advertising of our products and limited resources available for such advertising;
unfavorable economic conditions;
changing consumer preferences and the continued acceptance of each of our significant products in the marketplace;
the degree of success of any new product or product line introduction by us;
the degree of success of the integration of product lines or businesses we may acquire;
changes in the regulation of our products, including applicable environmental, U.S. and international Food and Drug Administration regulations and process-audit compliance;
the loss of any executive officer or other personnel;
future losses which could affect our liquidity;
the risk that we may not be able to remediate the existing material weakness and develop and maintain effective internal controls over financial reporting;
other matters discussed in this Report, including the risks described in the Risk Factors section of this Report and in our Annual Report on Form 10-K for the year ended December 31, 2022 and subsequent Quarterly Reports on Form 10-Q.

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

 

 

 


 

TABLE OF CONTENTS

Page

PART I

 

Item 1.

Financial Statements

1

Item 2.

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

17

Item 4.

Controls and Procedures

20

PART II

 

Item 1A.

Risk Factors

21

Item 6.

Exhibits

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

PART I

 

ITEM 1. FINANCIAL STATEMENTS.

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

$

907

 

 

$

733

 

 

$

2,623

 

 

$

2,315

 

Cost of sales

 

552

 

 

 

319

 

 

 

1,564

 

 

 

1,255

 

Gross profit

 

355

 

 

 

414

 

 

 

1,059

 

 

 

1,060

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

89

 

 

 

166

 

 

 

363

 

 

 

492

 

Selling

 

382

 

 

 

606

 

 

 

1,276

 

 

 

2,326

 

General and administrative

 

811

 

 

 

655

 

 

 

2,069

 

 

 

2,164

 

Intangible asset amortization

 

45

 

 

 

65

 

 

 

135

 

 

 

313

 

Impairment of goodwill and intangible assets

 

-

 

 

 

-

 

 

 

-

 

 

 

3,589

 

Total operating expenses

 

1,327

 

 

 

1,492

 

 

 

3,843

 

 

 

8,884

 

Loss from operations

 

(972

)

 

 

(1,078

)

 

 

(2,784

)

 

 

(7,824

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(32

)

 

 

(27

)

 

 

(145

)

 

 

(83

)

Interest income

 

16

 

 

 

-

 

 

 

16

 

 

 

-

 

Loss before income taxes and discontinued operations

 

(988

)

 

 

(1,105

)

 

 

(2,913

)

 

 

(7,907

)

Income tax expense

 

(4

)

 

 

(2

)

 

 

(6

)

 

 

(55

)

Loss from continuing operations

 

(992

)

 

 

(1,107

)

 

 

(2,919

)

 

 

(7,962

)

Income from discontinued operations, net of taxes

 

3,987

 

 

 

363

 

 

 

5,830

 

 

 

2,434

 

Net income (loss)

$

2,995

 

 

$

(744

)

 

$

2,911

 

 

$

(5,528

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

$

(0.08

)

 

$

(0.09

)

 

$

(0.23

)

 

$

(0.62

)

Income from discontinued operations

$

0.31

 

 

$

0.03

 

 

$

0.45

 

 

$

0.19

 

Net income (loss) per common share

$

0.23

 

 

$

(0.06

)

 

$

0.22

 

 

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

12,997

 

 

 

12,749

 

 

 

12,901

 

 

 

12,747

 

 




 

 

 

 

 

 

 

 

 

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)

 

 

September 30,

 

 

December 31,

 

 

2023

 

 

2022

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

4,415

 

 

$

49

 

Restricted cash

 

250

 

 

 

-

 

Accounts receivable, net

 

1,083

 

 

 

1,833

 

Inventories

 

370

 

 

 

775

 

Income taxes receivable

 

-

 

 

 

239

 

Prepaid expenses

 

168

 

 

 

243

 

Assets of discontinued operations

 

-

 

 

 

4,261

 

Total current assets

 

6,286

 

 

 

7,400

 

 

 

 

 

 

 

Intangible assets, net

 

658

 

 

 

793

 

Operating lease right-of-use assets

 

2,299

 

 

 

2,491

 

Other assets

 

39

 

 

 

47

 

Total assets

$

9,282

 

 

$

10,731

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

753

 

 

$

1,407

 

Accrued expenses

 

132

 

 

 

311

 

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

 

-

 

 

 

3,384

 

Operating lease liabilities, current portion

 

285

 

 

 

270

 

Total current liabilities

 

1,170

 

 

 

5,372

 

 

 

 

 

 

 

Operating lease liabilities, net of current

 

2,296

 

 

 

2,512

 

Other liabilities

 

27

 

 

 

27

 

Total liabilities

 

3,493

 

 

 

7,911

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

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

 

-

 

 

 

-

 

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

 

1,300

 

 

 

1,280

 

Capital in excess of par

 

7,950

 

 

 

7,912

 

Accumulated deficit

 

(3,461

)

 

 

(6,372

)

Total shareholders’ equity

 

5,789

 

 

 

2,820

 

Total liabilities and shareholders’ equity

$

9,282

 

 

$

10,731

 

 

 




 

 

 

 

 

 

 

 

See accompanying notes to these Condensed Consolidated Financial Statements.

2


 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

 

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(in thousands)

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital in Excess of Par

 

 

(Accumulated Deficit) Retained Earnings

 

 

Total

 

Balance, December 31, 2022

 

12,797

 

 

$

1,280

 

 

$

7,912

 

 

$

(6,372

)

 

$

2,820

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

369

 

 

 

369

 

Balance, March 31, 2023 (Unaudited)

 

12,797

 

 

 

1,280

 

 

 

7,919

 

 

 

(6,003

)

 

 

3,196

 

Stock-based compensation

 

200

 

 

 

20

 

 

 

30

 

 

 

-

 

 

 

50

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(453

)

 

 

(453

)

Balance, June 30, 2023 (Unaudited)

 

12,997

 

 

$

1,300

 

 

$

7,949

 

 

$

(6,456

)

 

$

2,793

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

2,995

 

 

 

2,995

 

Balance, September 30, 2023 (Unaudited)

 

12,997

 

 

$

1,300

 

 

$

7,950

 

 

$

(3,461

)

 

$

5,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

12,727

 

 

$

1,273

 

 

$

7,789

 

 

$

2,479

 

 

$

11,541

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

35

 

 

 

-

 

 

 

35

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(451

)

 

 

(451

)

Restricted stock unit vesting

 

22

 

 

 

2

 

 

 

26

 

 

 

-

 

 

 

28

 

Balance, March 31, 2022 (Unaudited)

 

12,749

 

 

 

1,275

 

 

 

7,850

 

 

 

2,028

 

 

 

11,153

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

22

 

 

 

-

 

 

 

22

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,333

)

 

 

(4,333

)

Balance, June 30, 2022 (Unaudited)

 

12,749

 

 

$

1,275

 

 

$

7,872

 

 

$

(2,305

)

 

$

6,842

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

28

 

 

 

-

 

 

 

28

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(744

)

 

 

(744

)

Balance, September 30, 2022 (Unaudited)

 

12,749

 

 

$

1,275

 

 

$

7,900

 

 

$

(3,049

)

 

$

6,126

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these Condensed Consolidated Financial Statements.

3


 

SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

Nine Months Ended

 

 

September 30,

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

Net income (loss)

$

2,911

 

 

$

(5,528

)

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

 

 

 

 

 

Depreciation and amortization

 

281

 

 

 

480

 

Gain on disposal of discontinued operations

 

(4,654

)

 

 

-

 

Stock-based compensation

 

58

 

 

 

113

 

Impairment of goodwill and intangible assets

 

-

 

 

 

3,589

 

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

915

 

 

 

1,725

 

Inventories

 

961

 

 

 

(612

)

Prepaid expenses and other assets

 

84

 

 

 

222

 

Income taxes receivable

 

239

 

 

 

73

 

Accounts payable, accrued expenses, and other liabilities

 

(842

)

 

 

(1,251

)

Total adjustments to net income (loss)

 

(2,958

)

 

 

4,339

 

Net cash used in operating activities

 

(47

)

 

 

(1,189

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Proceeds from sale of discontinued operations

 

8,167

 

 

 

-

 

Purchase of software

 

-

 

 

 

(142

)

Net cash provided by (used in) investing activities

 

8,167

 

 

 

(142

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

Proceeds from term loans

 

250

 

 

 

-

 

Repayments of term loans

 

(1,250

)

 

 

(2,000

)

Proceeds from revolving credit facility

 

2,795

 

 

 

20,763

 

Repayments of revolving credit facility

 

(5,299

)

 

 

(18,563

)

Net cash (used in) provided by financing activities

 

(3,504

)

 

 

200

 

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

4,616

 

 

 

(1,131

)

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash, beginning of period

 

49

 

 

 

1,270

 

Cash, cash equivalents, and restricted cash, end of period

$

4,665

 

 

$

139

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

Cash paid during the period for interest

$

132

 

 

$

256

 



 

 

 

 

 

 

 

 

 

 

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. Our business is comprised of one segment, household products.

(b) Principles of Consolidation

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

On September 15, 2023, we entered into and consummated a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Neoteric Beauty Holdings, LLC, a Delaware limited liability company (the “Neoteric Buyer”), pursuant to which the Company agreed to sell 100% of the outstanding stock of Neoteric Cosmetics, Inc. (“Neoteric”) to the Neoteric Buyer. Neoteric owned and operated the Denorex®, Zincon®, and Neoteric Diabetic Skin Care® brands. We have reflected the operations of the Neoteric brands as discontinued operations for all periods presented. The Neoteric brands were previously classified under our health and beauty care products segment. See Note 3 for further information.

Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Alpha® Skin Care brand (the "Alpha Purchase Agreement"). We have reflected the operations of the Alpha® Skin Care brand as discontinued operations for all periods presented. The Alpha product line was previously classified under our health and beauty care products segment. See Note 3 for further information.

Effective July 2023 we entered into, and in July 2023 closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the BIZ® brand. We have reflected the operations of the BIZ® brand as discontinued operations for all periods presented. The BIZ® product line was previously classified under our household products segment. See Note 3 for further information.

On January 23, 2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Scott's Liquid Gold® brand, including the Wood Care and Floor Restore products. We have reflected the operations of the Scott's Liquid Gold® brand as discontinued operations for all periods presented, which was previously classified under our household products segment. See Note 3 for further information.

On December 15, 2022, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Prell® product line. We have reflected the operations of the Prell® product line as discontinued operations for all periods presented, which was previously classified under our health and beauty care products segment. See Note 3 for further information.

(c) Basis of Presentation

The unaudited Condensed Consolidated Statements of Operations, Condensed Consolidated Balance Sheets, and Condensed Consolidated Statements of Cash Flows included in this Report have been prepared by the Company. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at September 30, 2023 and results of operations and cash flows for all periods have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements 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, 2022. The results of operations for the period ended September 30, 2023 are not necessarily indicative of the operating results for the full year and are unaudited. Certain prior year amounts have been reclassified to conform to the current period presentation.

5


 

(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, operating lease right-of-use assets and operating lease liabilities, and stock-based compensation. Actual results could differ from our estimates.

(e) Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less at the date of acquisition to be cash equivalents.
 

 

September 30, 2023

 

 

December 31, 2022

 

Cash

$

4,415

 

 

$

49

 

Restricted Cash

 

250

 

 

 

-

 

 

$

4,665

 

 

$

49

 

(f) Inventories Valuation and Reserves

Inventories can 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. Raw materials balance are sold to contract manufacturing partners based on production demand.

(g) Discontinued Operations

Disposal groups that meet the discontinued operations criteria by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 205-20-45 are classified as discontinued operations and are excluded from continuing operations and segment results for all periods presented.

(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

Internal-use software costs recognized as an intangible asset relates to capitalizable costs of computer software obtained for internal-use as defined by 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.

6


 

(j) Financial Instruments

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

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

(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 no significant interest and penalties recognized in the Condensed Consolidated Statements of Operations or accrued on the Condensed Consolidated Balance Sheets.

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three and nine months ended September 30, 2023 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily due to valuation allowance. The effective tax rate for the nine months ended September 30, 2023 and 2022 was 0.2% and 0.7% respectively.

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

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

(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, 2023

 

 

December 31, 2022

 

Trade promotions

$

94

 

 

$

361

 

Allowance for doubtful accounts

 

14

 

 

 

59

 

 

$

108

 

 

$

420

 

(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 manufacturing and distribution including labor, materials, freight-in, purchasing and receiving, quality control, repairs, maintenance, and other indirect costs, as well as warehousing and distribution costs. We classify freight-out as selling expenses. Other selling expenses consist primarily of costs for sales and sales support personnel, brokerage commissions, and promotional costs. Freight-out costs included in selling expenses totaled $75 and $64 for the three months ended September 30, 2023 and 2022, respectively, and totaled $157 and $443 for the nine months ended September 30, 2023 and 2022, respectively.

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

(p) Supplier Finance Programs

In September 2022, the FASB issued ASU No. 2022-04, “Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” This ASU requires a buyer that uses supplier finance programs to make annual disclosures about the programs’ key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period and associated roll-forward information. The guidance was effective for the Company beginning on January 1, 2023, except for the roll-forward information, which is effective beginning on January 1, 2024. This guidance has not had and is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.

During 2022, we entered into an agreement with a third-party financial institution and an agreement with an insurance agency which allows us to obtain extended payment terms for our insurance policies. The insurance policies can be canceled by the Company at any time with 10 days’ notice. The financial institution may cancel this agreement after providing 10 days’ notice if the Company does not pay any installment payment according to the terms of the agreement. We do not provide any forms of guarantees under these agreements. Payments of our obligations are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. Outstanding confirmed amounts are $0 and $218 as of September 30, 2023 and December 31, 2022, respectively, which will be recognized on the Condensed Consolidated Financial Statements as payments are due.

(q) Recently Issued Accounting Standards

In October 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2023-06, “Disclosure Improvements-Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU modified the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations. This guidance is effective for the Company no later than June 30, 2027 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Note 2. Liquidity

Primarily due to a decline in net sales, disruption of our international sales to China, and increases in costs associated with the manufacture and distribution of our products, the Company has sustained significant losses from operations in several reporting periods since 2019. Absent any other action, the Company previously believed it would require additional liquidity to continue its operations over the next 12 months.

Due to the sales of our various brands as disclosed in Note 3 to the Condensed Consolidated Financial Statements, which generated $6,396 of cash in the third quarter of 2023, we have fully repaid all long-term debt as of July 2023. While, absent any other actions, our operating activities are still expected to result in negative cash flows, we now expect to have enough liquidity to finance operations for the next 12 months. Management has recently implemented actions to reduce the Company’s operating expenses through asset sales, consolidation of vendors, and personnel reductions. To further reduce operating losses, the Company is considering additional various strategic actions including asset sales, obtaining additional debt or equity financing (potentially in conjunction with mergers or acquisitions), workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to ensure alignment with customer demand in order to address long-term liquidity needs and pursue its business plan. The Company expects that these strategic actions will further reduce expenses and provide required liquidity for ongoing operations.

9


 

Note 3. Divestitures

Neoteric Cosmetics, Inc.

On September 15, 2023, we entered into and consummated a Stock Purchase Agreement with Neoteric Beauty Holdings, LLC, a Delaware limited liability company, pursuant to which the Company agreed to sell 100% of the outstanding stock of Neoteric Cosmetics, Inc to the Neoteric Buyer. Neoteric owned and operated the Denorex®, Zincon®, and Neoteric Diabetic Skin Care® brands. The closing consideration paid to the Company was $1,750, with an initial deposit of $175 paid on September 5, 2023. The operations of the Neoteric brands have been classified as income from discontinued operations for all periods presented. As part of the Stock Purchase Agreement, we agreed to maintain at least $250 in accounts at our primary bank for a period of nine months following closing which is designated as restricted cash on the Condensed Consolidated Balance Sheets. Concurrent with the entry into the Stock Purchase Agreement, the Company entered into a transition services agreement with the Neoteric Buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the Stock Purchase Agreement. This transition services agreement has a term of 90 days which can be extended by the Neoteric Buyer for up to three additional 30 day periods or extended as consented by both parties.

Alpha® Skin Care

Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Alpha® Skin Care brand. The Company received payments of $2,500 and $200 in July 2023 and August 2023, respectively, representing total consideration for the sale of the Alpha Skin Care brand in the amount of $2,700. The operations of Alpha® have been classified as income from discontinued operations for all periods presented. Concurrent with the entry into the Alpha® Purchase Agreement, the Company entered into a transition services agreement with the buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the Alpha® Purchase Agreement. This transition services agreement has a term of 90 days which can be extended by the buyer for up to three additional 30 day periods or extended as consented by both parties.

BIZ®

Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the BIZ® brand. The transactions contemplated by the BIZ® Purchase Agreement were consummated on July 7, 2023. The total consideration paid to us was $1,000, plus an amount equal to the value of the BIZ® inventory, valued at $946 as of the effective date of the agreement, subject to post-close adjustment. The operations of BIZ® have been classified as income from discontinued operations for all periods presented. Concurrent with the entry into the BIZ® Purchase Agreement, the Company entered into a transition services agreement with the buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the BIZ® Purchase Agreement. This transition services agreement has a term of 90 days which can be extended by the buyer for up to three additional 30 day periods or extended as consented by both parties.

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

On January 23, 2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore product lines. The total consideration paid to us was $800, plus an amount equal to the value of the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore inventory of $1,136, subject to post-close adjustment. The Company may continue to use the name “Scott’s Liquid Gold” and “SLG” in a manner consistent with all past and current practices for a period of 1 year following the closing date of the asset purchase agreement, at which point the Company may only use the aforementioned names in connection with retaining records and other historical documentation. Concurrent with the entry into the asset purchase agreement, the Company entered into a transition services agreement with the buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the asset purchase agreement. This transition services agreement concluded in accordance with the end of its term on July 22, 2023.

10


 

Additionally, the buyer will pay a royalty equal to 2% of gross sales for two years after the closing date (the "Scott's Liquid Gold® Royalty"). The Scott's Liquid Gold® Royalty resulted in recognition of a gain upon the sale of assets. Because the Scott's Liquid Gold® Royalty is variable consideration and is contingent on the outcome of future events that are largely outside of the Company’s control, the variable consideration from the Scott's Liquid Gold® Royalty was initially fully constrained and no amount was included in the results from discontinued operations. During the three months ended September 30, 2023, we assessed the variable consideration and concluded that the volatility of external factors continue to exist and, as a result, consideration for the Scott's Liquid Gold® Royalty continues to be recognized as received from the buyer. The constraint on the variable consideration will be reassessed at each subsequent reporting period. We have reflected the operations of the Scott's Liquid Gold® product lines as discontinued operations.

Prell®

On December 15, 2022, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Prell® product line. The total consideration paid to us was $150, plus an amount equal to the value of the Prell® inventory of $330, subject to post-close adjustment. Additionally, the buyer will pay a royalty equal to 3% of collections on net sales for four years after the closing date (the “Prell® Royalty”). The Prell® Royalty resulted in recognition of a gain upon the sale of assets. Because the Prell® Royalty is variable consideration and is contingent on the outcome of future events that are largely outside of the Company’s control, the variable consideration from the Prell® Royalty was initially fully constrained and no amount was included in the results from discontinued operations. During the three months ended September 30, 2023, we assessed the variable consideration and concluded that the volatility of external factors continue to exist and, as a result, consideration continues to be recognized as received from the buyer. The constraint on the variable consideration will be reassessed at each subsequent reporting period. We have reflected the operations of the Prell® product line as discontinued operations. Concurrent with the entry into the asset purchase agreement, the Company entered into a transition services agreement with the buyer where both parties would perform certain identified services related to the operations of the brands contemplated in the asset purchase agreement. This transition services agreement concluded in accordance with the end of its term on June 15, 2023.

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. A summary of financial information related to our discontinued operations is as follows:

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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, 2023

 

 

Neoteric

 

 

Alpha®

 

 

BIZ®

 

 

Prell®

 

 

Scott's Liquid Gold®

 

 

Total

 

Net sales

$

592

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

592

 

Cost of sales

 

318

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

318

 

Gross profit

 

274

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

90

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

90

 

General and administrative

 

47

 

 

 

13

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60

 

Intangible asset amortization