Horizon Kinetics Holding Corp: Form 10-K for the period ended Dec 31, 2022

Overview

Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954. In this Report the terms “we,” “us,” or “our” refer to Scott’s Liquid Gold-Inc. and our subsidiaries, collectively. We develop, market, and sell high-quality, high-value household and health and beauty care products. Our business is divided into two operating segments; household products and health and beauty care products. During 2022, our family of brands included:

• Scott’s Liquid Gold®;
• Alpha® Skin Care;
• Prell®;
• Neoteric Diabetic Skin Care®;
• Denorex®;
• Zincon®;
• Kids N Pets®;
• Messy Pet®; and
• BIZ®.

In 2021, we sold the Dryel® brand and concluded our distribution agreement of Batiste Dry Shampoo. In December 2022, we sold the Prell® brand, and in January 2023 we sold the Scott’s Liquid Gold® brand.

Financial Information About Segments and Principal Products

The table set forth below shows the percentage of our net sales from continuing operations contributed by each operating segment during 2022 and 2021:

For more financial information on our operating segments, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12 to our Consolidated Financial Statements in Item 8.

Household Products

During 2022, products in our household segment included:

• Scott’s Liquid Gold® Wood Care;
• Scott’s Liquid Gold® Floor Restore;
• Kids N Pets® and Messy Pet®; and
• BIZ®.

Scott’s Liquid Gold® Wood Care has been sold in the United States for over 70 years. Our Scott’s Liquid Gold® Floor Restore product is a quick and easy way to renew and protect hardwood floors. On January 23, 2023, we sold the Scott’s Liquid Gold® brand, including the Wood Care and Floor Restore products, to a company that markets and distributes wood care products.

On October 1, 2019, we acquired the Kids N Pets® and Messy Pet® brands. Founded in 1989, Kids N Pets® brands are award-winning, safe, stain and odor removing products targeted toward households with children and pets. These high-quality, high-value products excel at controlling odor and cleaning up kid and pet accidents, and food and drink stains while being products that parents can feel safe using around their children and pets. The primary sales channels for Kids N Pets® and Messy Pet® are through retail stores such as Walmart and Home Depot, and online through e-commerce retailers such as Amazon.

On July 1, 2020, we acquired BIZ® and Dryel® brands. BIZ® is a top performing detergent in the market, utilizing a proprietary enzyme-based formula to fight stains and eliminate odors. It was established by Procter & Gamble in 1968 and is sold in Powder, Liquid, and Liquid Booster Packs.

On December 23, 2021, we sold the Dryel® brand. We have reflected the operations of Dryel® as discontinued operations for all periods presented. See Note 3 - “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information.

Health and Beauty Care Products

During 2022, products in our health and beauty care segment included:

• Alpha® Skin Care;
• Neoteric Diabetic Skin Care® ;
• Prell® and;
• Denorex® and Zincon®.

Our Alpha® Skin Care brand was one of the first to use alpha hydroxy acids (“AHAs”) in lines of facial care products, body lotion, and body wash. Products containing AHAs gently slough off dead skin cells to promote a healthier, more youthful appearance and help to diminish fine lines and wrinkles.

In 2016, we acquired the Prell®, Denorex® and Zincon® brands of hair and scalp care products. Our Denorex® products are dermatologist-recommended medicated hair care products to control the symptoms of dandruff and other scalp conditions. Our Zincon® product is a medicated anti-dandruff shampoo.

We were a distributor in the United States for Batiste Dry Shampoo from 2009 through 2021. Under our distribution agreement with the manufacturer of Batiste Dry Shampoo, Church & Dwight Co. Inc. (“Church & Dwight”), we were the exclusive specialty retail distributor in the United States of Batiste Dry Shampoo until our agreement expired on December 31, 2021.

On December 15, 2022, we sold the Prell® brand to a company that markets and distributes natural hair and skin care products. We have reflected the operations of Prell® as discontinued operations for all periods presented. See Note 3 - “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information.

Marketing and Distribution

We primarily market our products through: (1) trade promotions to support price features, displays, slotting fees and other merchandising of our products by our retail customers; (2) consumer marketing in print, social and digital media; and (3) to a lesser extent, consumer incentives such as coupons and rebates.

Our products are sold nationally through our sales force to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, and other retail outlets and to wholesale distributors. Our products were previously sold internationally through independent distributors in Canada and China.

The table set forth below shows net sales to our significant customers as a percentage of consolidated net sales during 2022 and 2021:

As is typical in our industry, we do not have long-term contracts with Walmart, Ulta, or any other retail customer.

Historically, we have used our websites for sales of our products directly to consumers. Beginning in January 2022, our websites redirect consumers to our e-commerce retail partners to fulfill sales of our products directly to our consumers.

International sales were historically made to distributors who were responsible for the selling and marketing of the products, and we were paid for these products in United States dollars. In February 2022, we discontinued sales of our Denorex® products to Canada due to uneconomic results. With the sale of the Scott’s Liquid Gold® brand in January 2023, we no longer have any products distributed in Canada.

We terminated our exclusive distribution agreement for sales in China with HK NFS Limited (“HK NFS”) on July 12, 2022 due to breaches of the distribution agreement by HK NFS, and began establishing a direct model to resume sales of our products to consumers in China.

Under our distribution agreement with Church & Dwight, we were the exclusive distributor of Batiste Dry Shampoo products in the specialty retailer channel in the United States through December 31, 2021.

From time to time, our customers return products to us. For our household products, we permit returns only for a limited time. For our health and beauty care products, returns are accepted for a greater period of time in order to maintain or enhance our relationship with the customer. Typically, customers are granted a credit equal to the original sale price plus a handling charge.

Manufacturing and Suppliers

As of March 2020, we identified third-party logistics and contract manufacturing partners for our product lines, and we no longer manufacture or ship any of our products directly to our retail partners.

Almost all of the raw and packaging materials used by the Company are purchased from third parties, some of whom are single-source suppliers. The prices we pay for materials and other commodities are subject to fluctuation. Due primarily to COVID-19 related supply chain disruptions that have continued as the economy re-opens, we experienced limited supply constraints and commodity costs increases for certain raw materials and finished goods. When prices for these items change, we may or may not be able to pass the change to our customers. The Company expects continued volatility and increased cost pressures in both commodities and transportation to continue in fiscal year 2023.

Competition

Both the household and health and beauty care product categories are highly competitive and innovative. We compete in both categories against a range of competitors, most of which are significantly larger and have greater financial resources, name recognition, innovation capabilities, and product and market diversification than us. We compete in both categories primarily on the basis of quality, brand recognition, and the distinguishing characteristics of our products. The wood care and laundry care product categories are dominated by a small number of companies that are significantly larger than us and each of these competitors produces several competing products. In the health and beauty care category, several of our competitors are also significantly larger than us and each of these competitors produces several competing products.

Regulation

We are subject to various federal, state and local laws and regulations that pertain to the types of consumer products that we manufacture and sell. Many chemicals used in consumer products, some of which are used in several of our product formulations, have come under scrutiny by various state governments and the federal government. Some of these chemicals are called volatile organic compounds (“VOCs”). All of our products currently meet the most stringent VOC regulations and may be sold throughout the United States. Many of our skin care products, several of which contain AHAs, are considered cosmetics within the definition of the Federal Food Drug and Cosmetic Act (the “FFDCA”). Our cosmetic products are subject to the regulations under the FFDCA and the Fair Packaging and Labeling Act. The relevant laws and regulations are enforced by the FDA. We believe that we are producing and marketing all of our products in compliance with all applicable laws and regulations in the markets in which we participate.

Our advertising is subject to regulation under the Federal Trade Commission Act and related regulations, which prohibit false and misleading claims in advertising. Private and derivative labeling claims are common in this industry and can result in costly settlements and distraction of management. Changes in these regulations, or interpretations or enforcement of these regulations, could adversely affect our profitability, result in regulatory actions, or private or derivative claims.

Our international sales are primarily conducted in China. As such, we may be impacted by regulations, economic conditions, and tariffs imposed by the PRC.

Employees

As of December 31, 2022, we employed 22 people, who work in administrative, sales, advertising, marketing and operational functions. Through our history, we appreciate the importance of retention, growth and development of our employees. We believe we offer competitive compensation (including salary, incentive bonus, and equity) and benefits packages to our employees. We are also focused on understanding our diversity and inclusion strengths and opportunities and executing on a strategy to support further progress. We continue to focus on building a pipeline for talent to create more opportunities for workplace diversity and to support greater representation within the Company.

No contracts exist between us and any union. The compensation of our executive officers is subject to annual review by the Compensation Committee of our Board of Directors.

Patents and Trademarks

At present, we own one patent for our Neoteric Diabetic® Healing Cream. Additionally, we actively use our registered trademarks for Alpha® Skin Care, Denorex®, Zincon®, Neoteric Diabetic Skin Care®, Neoteric®, Kids N Pets®, Messy Pet®, and BIZ® in the United States and have registered trademarks in a number of additional countries. Our registered trademarks protect names and logos relating to our products as well as the design of boxes for certain of our products. We transferred all registered trademarks of our Scott’s Liquid Gold® brand as part of the sale of that brand in January 2023.

Public Information

Our website address is www.slginc.com (http://www.slginc.com). The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available, free of charge, on our website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, shareholder proxy statements on Schedule 14A, interactive data files posted pursuant to Rule 405 of Regulation S-T, our Current Reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the United States Securities and Exchange Commission (the “SEC”). You may also access and read our filings without charge through the SEC’s website at www.sec.gov (http://www.sec.gov).

Our Code of Business Conduct and Ethics Policy, Audit Committee Charter, Governance and Nominating Committee Charter, and Compensation Committee Charter, are all available, free of charge, on our website. The documents referenced above are available in print at no cost to any stockholder who requests them from our Corporate Secretary at 8400 East Crescent Parkway, Suite 450, Greenwood Village, Colorado 80111.

The following is a discussion of certain material risks that may affect our business. These risks may negatively impact our existing business, future business opportunities, our financial condition or our financial results. In such case, the trading price of our common stock could also decline. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also negatively impact our business.

Business and Industry Risks

A loss of one or more of our major customers could have a material adverse effect on our product sales.

For a majority of our sales, we are dependent upon a small number of major retail customers. The easy access of consumers to our products is dependent upon these major retail stores and other retail stores carrying our products. The willingness of retail customers to carry any of our products depends on various factors, including the level of sales of the product at their stores. In addition, private label products sold by retail trade chains, which are typically sold at lower prices than branded products, are a source of competition for certain of our product lines.

Any declines in sales of our products to consumers could result in the loss of retail customers and a corresponding decrease in the distribution of the products, as well as increased costs related to any markdown or return of our products. It is uncertain whether the consumer base served by these stores would purchase our products at other retail stores.

Our sales of Alpha® Skin Care products to China have been interrupted by the termination of our exclusive distribution agreement.

We terminated our arrangement with our exclusive distributor due to breaches of the distribution agreement by HK NFS and are establishing a direct model to resume sales of our products to consumers in China. The reestablishment of an effective business model in China is dependent on deploying significant resources to marketing and advertising efforts and regulatory compliance, as well as the successful shutdown of our former distributor’s storefronts on various e-commerce platforms. We possess limited resources to fund marketing and regulatory efforts, and as a result our success in these efforts is not guaranteed, which could adversely affect our operating results.

Our international operations in China expose us to a number of risks.

There is both cost and risk associated with establishing, developing, and maintaining international sales operations, and promoting our brand internationally. The PRC’s economic, political, and social conditions, and its government policies, could adversely affect our business. We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our operating results.

Our international operations also subject us to changes in trade policies and agreements and other foreign or domestic legal and regulatory requirements, including those resulting in potentially adverse tax consequences or the imposition of onerous trade restrictions such as tariffs, sanctions, and price controls. Any changes in these international trade policies could adversely affect our profitability and stock price.

A continued change in the consumer product retail market may cause our sales to decline.

Our performance depends upon the general health of the economy and of the retail environment in particular. Consumer products, such as those marketed by us, are increasingly being sold by club stores, dollar stores, mass merchandisers, e-commerce retailers and subscription services. The retail environment is changing with the growth of third-party resellers and alternative retail channels that could significantly change the way traditional retailers do business. If we are not effective in limiting these third-party resellers in selling our products, or if the alternative retail channels were to take significant market share away from traditional retailers or we are not successful in these alternative retail channels, our margins and results of operations may be negatively impacted.

In both health and beauty care and household products, our competitors include some of the largest consumer products companies in the United States.

The markets in which our products compete are intensely competitive, and many of the other competitors in these markets are larger multi-national consumer products companies. These competitors have much greater financial, technical, and other resources than us, and as a result, are able to regularly introduce new products and spend considerably more on advertising. The distribution and sales of our products can be adversely impacted by the actions of our competitors, and we may have little or no ability to take action to prevent or mitigate these adverse impacts.

We have limited resources to promote our products with advertising and marketing effectiveness.

We believe the growth of our net sales is dependent upon our ability to introduce our products to current and new consumers through advertising and marketing. At present, we have limited resources compared to many of our competitors to spend on advertising and marketing our products. Advertising and marketing can be important in reaching consumers, although the effectiveness of any particular advertisement and marketing cannot be predicted. Additionally, we may not be able to obtain optimal effectiveness at our current advertising and marketing budget. Our limited resources to promote our products through advertising and marketing may adversely affect our net sales and operating results.

Sales of our existing products are affected by changing consumer preferences.

Our primary market is retail stores in the United States which sell to consumers or end users in the mass market. Consumer preferences can change rapidly and are affected by new competitive products. This situation is true for both health and beauty care and household products. Any changes in consumer preferences can materially affect the sales of our products and the results of our operations.

Our future performance and growth is dependent, in part, on the introduction of new or acquired products that are successful in the marketplace.

Our future performance and growth is partially dependent on our ability to successfully identify, develop and introduce new products and product line extensions. The successful development and introduction of new products involves substantial research, development, marketing and promotional expenditures, which we may be unable to recover if the new products do not gain widespread market acceptance.

We have pursued and may continue to pursue acquisitions of brands or businesses. Acquisitions involve numerous potential risks, including, among other things, the successful integration of the acquired products or brands and realization of the full extent of expected benefits or synergies. Acquisitions could also result in additional debt, exposure to liabilities, the potential impairment of goodwill or other intangible assets, or transaction costs. Any of these risks, should they materialize, could adversely impact our operating results.

Any loss of our key executives or other personnel could harm our business.

Our success has depended on the experience and continued service of our executive officers and key employees. If we fail to retain these officers or key employees, our ability to continue our business and effectively compete may be substantially diminished.

Our stock price can be volatile and can decline substantially.

Our stock is traded on the OTC Pink Market tier of the OTC Markets. The volume of trades in our stock varies from day to day but is relatively limited. As a result, any events can result in volatile movements in the price of our stock and can result in significant declines in the market price of our stock.

We rely on trademark, copyright, and trade secret laws, which may not be sufficient to protect our intellectual property.

We rely on a combination of laws, such as copyright, trademark and trade secret laws, as well as confidentiality provisions and limited licenses, to establish and protect our intellectual property. We have registered U.S. and foreign country trademarks, and HK NFS has contractually agreed to undertake steps to prevent counterfeiting of our products and to otherwise protect our trademarks in the PRC. These forms of intellectual property protection are critically important to our ability to establish and maintain our competitive position. However, it is possible that laws, contractual restrictions, and other efforts may not be sufficient to prevent misappropriation of our property or to deter others from developing similar intellectual property.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers, and business partners on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen, resulting in legal claims or proceedings, which could disrupt our operations and damage our reputation, adversely affect our operating results and stock price.

We may from time to time expand our business through acquisitions, which could disrupt our business.

We have completed, and may pursue in the future, acquisitions of businesses or assets that are complementary to our business. Such acquisitions involve a number of risks, including:

• failure of the acquired businesses to achieve the results we expect;
• substantial cash expenditures;
• diversion of capital and management attention from operational matters;
• our inability to retain key personnel of the acquired businesses;
• possible impairment of substantial intangible assets if performance doesn’t meet expectations;
• incurrence of debt and contingent liabilities and risks associated with unanticipated events or liabilities; and
• the potential disruption and strain on our existing business and resources that could result from our planned growth and continuing integration of our acquisitions.

If we fail to properly evaluate acquisitions, we may not achieve the anticipated benefits of such acquisitions, we may incur costs in excess of what is anticipated, and management resources and attention may be diverted from other necessary or valuable activities. Any acquisition may not result in short-term or long-term benefits to us. If we are unable to integrate or successfully manage any business that we acquire, we may not realize anticipated cost savings, improved efficiencies or revenue growth, which may result in reduced profitability or operating losses.

There is substantial doubt about our ability to continue as a going concern, and if we are unable to continue our business, our shares may have little or no value.

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 incurred net losses and uses of operating cash flows that likely will require additional liquidity to continue its operations over the next 12 months. Management has implemented actions to reduce the Company’s operating expenses and has restructured debt facilities, and is considering various strategic actions including asset sales, obtaining additional debt or equity financing (potentially in conjunction with acquisitions), and further reduction of operating costs. However, given the impact of the economic downturn in the U.S., the Company may be unable to execute these plans under acceptable terms, which may make it difficult to raise sufficient capital for the Company to continue to finance our operations.

Operational Risks

Disruptions in our supply chain and other factors affecting the distribution of our finished goods inventory could adversely impact our business.

A disruption within our logistics or supply chain network could adversely affect our ability to maintain appropriate inventory or deliver products in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation. As a result of COVID-19, we have encountered shortages of raw materials for certain of our products and delays in receiving finished goods product from contract manufacturers, which has prevented us from meeting certain customer demands for our products. Along with many other industry participants, our contract manufacturing partners have experienced difficulty procuring certain raw materials and components.

Continued increases in costs as well as any impacts to our partners' abilities to fulfill sales to our customers could continue to affect our ability to meet debt requirements and lead to increased debt costs.

We face the risk that raw materials for our products may not be available or that costs for these materials will increase.

Raw materials required for our products are sourced and obtained from third party suppliers, some of which are sole source suppliers. We have no long-term contracts with such suppliers and are subject to cost increases. Manufacturers of our products may not have sufficient raw materials for production if there is a shortage in raw materials or other disruption in the supply chain or if suppliers terminate their relationships or are otherwise unable to supply raw materials. In addition, if our contract manufacturers change suppliers it could involve delays that restrict our ability to have our products manufactured or to buy products in a timely manner to meet delivery requirements of our customers. Suppliers of raw materials for our products can also be subject to the same risk with their vendors.

Financial and Economic Risks

Unfavorable and uncertain economic conditions could adversely affect our profitability.

Unfavorable and uncertain economic conditions in the past have adversely affected, and in the future may adversely affect, consumer demand for some of our products, resulting in reduced sales volume and a decrease in our overall profitability. Factors that can affect consumer demand for our products include inflation, slower growth or recession, rates of unemployment, consumer confidence, tighter credit, higher interest rates, health care costs, fuel and other energy costs and other economic factors affecting consumer spending behavior.

Our products are subject to transportation costs, both in delivery to us at our production facility as well as shipments to our customers. As a result, we are exposed to volatility in the freight industry that could affect our costs, including changes in regulations and labor costs. Any increases in transportation costs could adversely affect our profitability if we are not able to pass those costs on to our customers.

Changes in the economic environment have resulted, and could further result, in significant impairments of certain of our goodwill and long-lived assets.

Under U.S. generally accepted accounting principles (“GAAP”), we review the carrying value of our goodwill on an annual basis. We also review the carrying value of our long-lived assets when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable, based on their expected future cash flows. The impact of reduced expected future cash flow could require the write-down of all or a portion of the carrying value for these assets, which would result in additional impairments, resulting in decreased earnings. During 2022 and 2021, we determined that the fair values of goodwill and certain intangible assets in our Detergent, All-Purpose, and Shampoo reporting units were less than their carrying values which resulted in impairment charges.

Legal and Regulatory Risks

Changes in the regulation of our products, including environmental regulations, could have an adverse effect on the distribution, cost or function of our products.

Regulations affecting our products include requirements of the FDA and NMPA for cosmetic products and environmental regulations. In the past, the FDA has mentioned the treatment of products with AHAs as drugs, which could make our production and sale of certain Alpha® Skin Care products more expensive or prohibitive. Also, in the past, we have been required to change the formulation of our products to comply with environmental regulations and may be required to do so again in the future if the applicable regulations are further amended.

Labeling practices in our industry have recently experienced an increase of warning letters admonishing cosmetics manufacturers for promotional claims on their websites and product labels deemed by the FDA to blur the line between “cosmetics” and “drugs.” The increase of warning letters by the FDA has also triggered a wave of follow-on class action lawsuits against cosmetic manufacturers in general, including manufacturers not singled out via FDA warning letters. We have in the past and may in the future receive claims that our labeling is inaccurate or non-compliant. Any claims levied against us could result in costly settlements, distract management and have an adverse effect on our operating results.

Any adverse developments in litigation could have a material impact on us.

We are subject to lawsuits from time to time in the ordinary course of business. While we expect those lawsuits not to have a material effect on us, an adverse development in any such lawsuit or the insurance coverage for a lawsuit could materially and adversely affect our operating results.

We lease our corporate headquarter facilities in Greenwood Village, Colorado. Please see Note 8 to our Consolidated Financial Statements for more information on our facilities.

We are subject to lawsuits from time to time in the ordinary course of business. While we expect those lawsuits not to have a material effect on us, an adverse development in any such lawsuit or the lack of insurance coverage for a lawsuit could materially and adversely affect our financial condition and cash flow.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements. This Item 7 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please refer to “Item 1A. Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

COVID-19 Pandemic

The COVID-19 pandemic and government steps to reduce the spread and address the impact of COVID-19 have had and continue to have an impact on the way people live, work, interact and shop. While the impact of COVID-19 on our business has largely abated at this time, uncertainties continue. We have also experienced certain disruptions to our supply chain due to COVID-19, which have impacted and may continue to impact sales of and consumer access to our products. In addition, we have experienced changes in the purchasing patterns of our customers, including a shift in many markets to purchasing our products online. COVID-19 may continue to impact consumers’ behavior, shopping patterns and consumption preferences.

While we currently expect to be able to continue operating our business as described above, uncertainty resulting from COVID-19 could result in unforeseen additional disruptions to our business, including our global supply chain and retailer network, and/or require us to incur additional operational costs.

Sale of Brands

On December 15, 2022, we sold the Prell® brand to a company that markets and distributes natural hair and skincare products. We have reflected the operations of Prell® as discontinued operations for all periods presented. On December 23, 2021, we sold the Dryel® brand to a company that markets and distributes household cleaning products. We have reflected the operations of Dryel® as discontinued operations for all periods presented.

See Note 3 - “Discontinued Operations” in the Notes to Consolidated Financial Statements for further information on the sale of both brands.

On January 23, 2023, we sold the Scott’s Liquid Gold® brand, including the Wood Care and Floor Restore products, to a company that markets and distributes wood care products.

Distribution to China

We terminated our exclusive distribution agreement of Alpha® Skin Care products with HK NFS on July 12, 2022 due to breaches of the distribution agreement by HK NFS, and are establishing a direct model to resume sales of our products to consumers in China. The reestablishment of an effective business model in China is dependent on deploying significant resources to marketing and advertising efforts and regulatory compliance, as well as the successful shutdown of our former distributor’s storefronts on various e-commerce platforms.

Throughout 2020 and early 2021, we obtained components and produced finished goods specifically designed and formulated for distribution in the PRC. Our exclusive distributor ultimately did not purchase these products in accordance with their minimum order requirements. Due to the difficulties we have encountered in establishing our own e-commerce storefronts, this has resulted in our accumulation of high amounts of finished goods inventories and raw materials specifically designed for China. Due to uncertainties of future production requirements, raw materials that we have acquired is included in our impairment of inventories for the years ended December 31, 2022 and 2021, respectively.

Distribution Agreement with Church & Dwight

Our distribution agreement with Church & Dwight Co., Inc. and our subsidiary, Neoteric Cosmetics, Inc., was not extended beyond December 31, 2021. As a result, the distribution agreement expired on its own terms as of December 31, 2021 and the Company ceased to distribute Batiste Dry Shampoo products. Unless offset by increased sales of our other products, the conclusion of this distribution agreement is expected to have a material impact on our net sales and result of operations. Net sales of Batiste were $7,155 for the year ended December 31, 2021.

Executive Overview

Our Business

Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve and create shareholder value. We develop, market, and sell high-quality, high-value household and health and beauty care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors. Our long history has generated strong consumer and customer loyalty for our brands.

On an ongoing basis, management focuses on a variety of key indicators to monitor our business health and performance. These key indicators include (but are not limited to) the following:

• Net sales (collectively and by operating segment);
• Profitability, focusing on gross margins and net income; and
• Cash flow.

To achieve our business and financial objectives, we focus on initiatives to drive the growth of the key indicators above. Our ability to drive and generate growth depends on consumer demand for our products and retail customers’ willingness to carry our products in a competitive marketplace. In this environment, we intend to continue to focus on our key indicators to remain competitive, sustain our current level of operations, and drive further growth in future periods.

During 2022, the Company achieved objectives focused on optimization, cost reduction, and modernization of our business. These included (but were not limited to) the following:

• Implementation of new, scalable enterprise resource planning software, replacing our prior software which had been in place for over 30 years;
• Sales of assets with low margins or limited future growth potential to optimize our product portfolio;
• Restructure and consolidation of business departments to facilitate greater cross-functional teamwork and workplace efficiency;
• Elimination of unprofitable sales arrangements with customers;
• Implementation of minimum order quantity thresholds on customer orders to reduce fulfillment costs; and
• Consolidation of third-party logistics and warehousing partners to achieve reduced costs and compliance fines.

Outlook

Looking forward, we are focused on both short- and long-term strategies that we believe will enhance our financial health and deliver shareholder value. While the marketplace in which we operate has always been highly competitive, we expect that the category challenges and the level of competition will continue to rise. We believe that some of the trends in our business and industry could adversely affect our profitability, including the following:

• Changes in national and international regulations;
• Changes in policies or practices of some of our key retail customers;
• Rapid growth of e-commerce and alternative retail channels; and
• Inflationary impacts to the costs of products, transportation, and labor associated with our logistics and warehousing partners.

We believe our history of providing high-quality, high-value products to consumers positions us to meet the challenges in our marketplace by continuing to focus on the following key priorities in 2023:

• Paydown of debt and improving cash flows from operations through growth of sales and optimization of cost structure;
• Pursuing growth opportunities, including distributing Alpha® Skin Care, Kids N Pets®, Messy Pet®, and other products to broader markets;
• Improving our processes and systems;
• Optimizing our inventories, supply chain, and operations, as well as further consolidation of third-party logistics partners; and
• Exploration of one or more of the following: the sale of additional brands; a sale, merger, or other strategic transaction involving the entire company; acquisitions of other brands or companies; issuance of additional debt or equity; and continuing to operate as a public, independent company.

Results of Operations

Net loss changed primarily due to the following:

• Lower sales and gross profits from the conclusion of our distribution agreement with Church and Dwight for Batiste products, as well as reduced sales and gross profits from various product lines due to changes in our customers' purchasing strategies related to inventory and inflationary pressures. In addition, supply chain affected in-stock levels of certain products and impacted our sales to customers.
• Decrease in selling expenses caused by lower logistics and warehousing costs from lower sales, a transition to a different third-party logistics provider during the fourth quarter of 2022, and a reduction in personnel costs.
• Decrease in general and administrative costs due to changes in personnel and related costs as well as reductions in restructuring costs associated with separation of employees during 2021.
• Increase in interest expense associated with additional debt in 2022 and increases in variable interest rates.
• Decrease in intangible asset amortization from impairments of intangible assets in the fourth quarter of 2021 and second quarter of 2022.
• Impairment of goodwill and intangible assets.

Segment Results

The following tables show comparative net sales, gross margin, gross profit, loss from operations, volume and percentage changes for our household and health and beauty care products between periods:

Household products

• Net sales and gross profit decreased due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures as well as supply chain disruptions.
• Loss from operations was reduced primarily related to less goodwill and intangible asset impairments and was partially offset by reductions in selling and general and administrative costs.

Health and beauty care products

• Net sales of distributed health and beauty care products decreased due to the termination of our Batiste distribution agreement with Church & Dwight in December 2021.
• Net sales and gross profits from manufactured products decreased due to the elimination of sales to our exclusive China distributor of Alpha® Skin Care products as well as reduced sales of Alpha® from certain customers' changes in inventory management practices. During the first quarter of 2022 we also eliminated sales of our Denorex® brands to certain customers with minimal profitability.

Liquidity and Capital Resources

Financing Agreements

Please see Note 7 to our Consolidated Financial Statements for information on our debt facilities with UMB Bank, N.A. (“UMB”) and La Plata Capital, LLC (“La Plata”).

Liquidity and Changes in Cash Flows

At December 31, 2022, we had approximately $49 in cash on hand, a decrease of $1,221 from December 31, 2021.

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

• Net cash used in operating activities was primarily related to our net loss and partially offset by conversion of working capital from accounts receivable and reduction in finished goods inventories.
• Net cash provided by investing activities was due to purchases relating to our internal use software offset by the sale of our Prell® brand.
• Net cash provided by financing activities was from proceeds of our various debt facilities which is used for working capital.

The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.

Primarily due to a decline in net sales, disruption of our international sales to China, and increases in costs associated with the manufacture and distribution of our products, the Company used net cash in operating activities of $1,849 during the year ended December 31, 2022. All proceeds from the sale of our Scott's Liquid Gold® brand in January 2023 were used to reduce outstanding debt. In February 2023, the Company terminated its Loan and Security Agreement with UMB Bank, N.A. and repaid its revolving credit facility in full. The Company's debt agreement with La Plata Capital, LLC matures on November 9, 2023, which will require repayments of all principal amounts outstanding during 2023. Management’s assessment of cash flow forecasts indicate that, absent any other action, the Company likely will require additional liquidity to continue its operations over the next 12 months.

Management has implemented actions to reduce the Company’s operating expenses and has restructured debt facilities through the adjustments to the timing of required principal payments and covenant compliance periods. Management is considering additional various strategic actions including asset sales, obtaining additional debt or equity financing (potentially in conjunction with acquisitions), workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to 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. However, given the impact of the economic downturn on the U.S., the Company may be unable to sell assets or access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

The Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment and make estimates. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could ultimately differ from those estimates. The accounting policies that are most critical in the preparation of the Company’s Consolidated Financial Statements are those that are both important to the presentation of the Consolidated Financial Statements and require significant or complex judgments and estimates on the part of management.

Revenue Recognition

Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. See Note 1(l), “Revenue Recognition” in our Consolidated Financial Statements in Item 8 for additional discussion.

Intangible Assets and Goodwill

Goodwill is tested for impairment at the reporting unit level, which is the level at which discrete financial information is available and reviewed by management. For fiscal year 2022, the Company’s reporting units for goodwill impairment testing purposes were its individual components, which are differentiated by their product categories.

Determining the fair value of the Company’s reporting units for goodwill and the fair value of its intangible assets requires significant estimates and judgments by management. When a quantitative analysis is performed, the Company generally uses the income approach, which requires several estimates, including future cash flows consistent with management’s strategic plans, sales growth rates, and the selection of royalty rates and a discount rate. Estimating sales growth rates requires significant judgment by management in areas such as future economic conditions, category growth rates, product pricing, consumer tastes and preferences and future expansion expectations. In selecting an appropriate royalty rate, the Company considers recent market transactions for similar brands and products. In determining an appropriate discount rate, the Company considers the current interest rate environment and its estimated cost of capital. Other qualitative factors the Company considers, in addition to those quantitative measures discussed above, include assessments of general macroeconomic conditions, industry-specific considerations and historical financial performance. The Company generally engages a third-party valuation firm to assist it in determining the fair value of intangible assets acquired in business combinations.

In determining the fair value of the Company’s reporting units, fair value is also determined using the market approach, which is generally derived from metrics of comparable publicly traded companies. As multiple valuation methodologies are used, the Company also performs a qualitative analysis comparing the fair value of a reporting unit under each method to assess its reasonableness and ensure consistency of results.

Determining the expected life of a brand requires management judgment and is based on an evaluation of several factors including market share, brand history, future expansion expectations, the level of in-market support anticipated by management, legal or regulatory restrictions and the economic environment where the products are sold.

We made revisions to the internal forecasts relating to all reporting units during the second quarter of 2022 due to changes in the economic outlook of our All-Purpose reporting unit, and during the fourth quarter of 2022 related to our annual assessment of all reporting units. Through our assessments, we concluded that the changes in circumstances in these reporting units triggered the need for a quantitative review of the carrying values of goodwill and certain intangible assets and resulted in impairment charges to each of our reporting units during the year ended December 31, 2022, and resulted in the following impairment charges:

Inventories Valuation

Our inventory valuation policy is significant because the costs and valuation of slow-moving or obsolete inventories are key components of our results of operations. See Note 1(f), “Inventories Valuation” in our Consolidated Financial Statements in Item 8 for additional discussion.

During the years ended December 31, 2022 and 2021, we specifically identified slow moving and obsolete inventories, resulting in an impairment of $461 and $404, respectively.

Income Taxes

Our income taxes policy is significant because our estimate for taxes is a key component of our results of operations. See Note 1(k), “Income Taxes” in our Consolidated Financial Statements in Item 8 for additional discussion.

Recently Issued Accounting Standards

For information on recently issued accounting standards, see Note 1(p), “Recently Issued Accounting Standards,” to our Consolidated Financial Statements.

Disclosure Controls and Procedures

As of December 31, 2022, we conducted an evaluation, under the supervision and with the participation of our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of December 31, 2022.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, including our President and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, based on the criteria for effective internal control described in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022.

This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permits us to provide only management’s report in this Report.

Management’s report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Remediation of Material Weakness

A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s financial statements will not be prevented or detected on a timely basis. The material weakness that we previously reported was identified as of June 30, 2022 related to the review of the impairment assessment of goodwill prepared by a third-party firm. The deficiencies in internal control over financial reporting were detailed in Item 4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.

During the fourth quarter of 2022, management of the Company implemented measures that it believes are sufficient to fully remediate each of the deficiencies resulting in the material weakness, which measures are described in Item 4 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022. During the fourth quarter of fiscal 2022, we successfully completed the testing necessary to conclude that the material weakness has been remediated. We will continue to monitor the effectiveness of these and other processes, procedures, and controls and will make any further changes that management determines to be appropriate.

Changes in Internal Control over Financial Reporting

Other than the remediation of the material weakness referenced above, there was no change in our internal control over financial reporting during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.