Notes to Consolidated Financial Statements
(in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954. Scott’s Liquid Gold-Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or “us”) develop, market, and sell quality household and personal care products. We are also a distributor in the United States of personal care products manufactured by two other companies. Our business is comprised of two segments; household products and personal care products.
(b)
|
Principles of Consolidation
|
Our Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
(c)
|
Basis of Presentation
|
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with GAAP.
Due to changes in our business as we acquired and began manufacturing new products in recent periods, the Company implemented a change in the allocation of certain operational and administrative expenses between our two operating segments to more accurately reflect our operational activity. For comparison purposes, the Company presented 2018 results to reflect the revised allocation of these costs. This segment reporting change has no impact on our operating results. See Note 11 “Segment Information,” of the Notes to the Consolidated Financial Statements for further information.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, the realization of deferred tax assets, reserves for slow moving and obsolete inventory, customer returns and allowances, intangible asset useful lives and amortization method, fair value of assets acquired in business combinations, and stock-based compensation. Actual results could differ from our estimates.
We consider all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents.
(f)
|
Inventories Valuation and Reserves
|
Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We estimate an inventory reserve, which is generally not material to our financial statements, for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.
(g)
|
Property and Equipment
|
Property and equipment are recorded at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from three to 20 years. Production equipment and production support equipment are estimated to have useful lives of 15 to 20 years and three to 10 years, respectively. Office furniture and office machines are estimated to have useful lives of 10 to 20 and three to five years, respectively. Maintenance and repairs are expensed as incurred. Improvements that extend the useful lives of the asset or provide improved efficiency are capitalized.
21
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
Certain nonlease components, such as maintenance and other services provided by the lessor, are included in the valuation of the lease. Leases with an initial term of 12 months or less, which are not material to our financial statements, are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term. Lease agreements with lease and nonlease components are combined as a single lease component.
(i)
|
Intangible Assets and Goodwill
|
Intangible assets consist of customer relationships, trade names, formulas, batching processes, and a non-compete agreement. The fair value of the intangible assets is amortized over their estimated useful lives and range from a period of five to 25 years. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired.
Internal-use software costs recognized as an intangible asset relates to capitalizable costs of computer software obtained for internal-use as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40-30-1. All other internal-use software costs are expensed as incurred by the Company. Amortization will be recorded straight-line over the estimated useful life of the software once the software is ready for its intended use. As of December 31, 2019, our internal-use software was not ready for its intended use. The estimated useful life for internal-use software will be determined and periodically reassessed based on considerations for obsolescence, technology, competition, and other economic factors.
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests, and in certain circumstances these assets are written down to fair value if impaired. In accordance with ASC 350, on December 31, 2019, we assessed and determined that our goodwill and intangible assets were not impaired.
(j)
|
Financial Instruments
|
Financial instruments which potentially subject us to concentrations of credit risk include cash and cash equivalents and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. As of December 31, 2019, and periodically throughout the year, we have maintained balances in various operating accounts in excess of federally insured limits. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, based upon factors surrounding the credit risk of specific customers, historical trends and other information. We have no significant financial instruments with off-balance sheet risk of accounting loss, such as foreign exchange contracts, option contracts or other foreign currency hedging arrangements.
The recorded amounts for cash and cash equivalents, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
(k)
|
Purchase Accounting for Acquisitions
|
We apply the acquisition method of accounting for a business combination. In general, this methodology requires us to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. For certain acquisitions, we also record a liability for contingent consideration based on estimated future business performance. We monitor our assumptions surrounding these estimated future cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow.
If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. If the contingent consideration paid for any of our acquisitions differs from the amount initially recorded, we would record either income or expense associated with the change in liability.
22
Income taxes reflect the tax effects of transactions reported in the Consolidated Financial Statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. A valuation allowance is established when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. We classify penalty and interest expense related to income tax liabilities as an income tax expense. There are no significant interest and penalties recognized in the Consolidated Statements of Income or accrued on the Consolidated Balance Sheets.
The effective tax rate for the years ended December 31, 2019 and 2018 was 43.8% and 21.7% respectively, which can differ from the statutory income tax rate due to permanent book-to-tax differences.
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.
Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted.
Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce our revenue in that period.
Sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
We have also established an allowance for doubtful accounts. We estimate this allowance based upon, among other things, an assessment of the credit risk of specific customers and historical trends. We believe our allowance for doubtful accounts is adequate to absorb any losses which may arise. In the event that actual losses differ from our estimates, the results of future periods may be impacted.
Customer allowances for trade promotions and allowance for doubtful accounts at December 31 were as follows:
23
|
2019
|
|
|
2018
|
|
Trade promotions
|
$
|
943
|
|
|
$
|
1,096
|
|
Allowance for doubtful accounts
|
|
51
|
|
|
|
88
|
|
|
$
|
994
|
|
|
$
|
1,184
|
|
Trade promotions to our customers and incentives such as coupons to our consumers are deducted from gross sales and totaled $3,309 and $3,335 for the years ended December 31, 2019 and 2018, respectively.
We expense advertising costs as incurred.
(o)
|
Stock-Based Compensation
|
We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options with only service conditions using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the vesting period using the straight-line method, which approximates the service period.
The Company issues restricted stock unit ("RSUs") awards with restrictions that lapse upon the passage of time (service vesting) and satisfaction of market conditions targeted to our Company’s stock price. For those restricted stock unit awards with only service vesting, the Company recognizes compensation cost on a straight-line basis over the service period. For awards with both market and service conditions, the Company starts recognizing compensation cost over the requisite service period, with the effect of the market conditions reflected in the calculation of the award's fair value at grant date. The Company values awards with only service vesting requirements based on the grant date share price. The Company values awards with market and service conditions using a Monte Carlo simulation. The Company determines the requisite service period for awards with both market and service conditions based on the longer of the explicit service period and the derived service period. Stock awards that contain market vesting conditions are included in the computations of diluted EPS reflecting the average number of shares that would be issued based on the highest 30-day average market price at the end during the reporting periods, if their effect is dilutive. If the condition is based on an average of market prices over some period of time, the corresponding average for the period is used.
(p)
|
Operating Costs and Expenses Classification
|
Cost of sales includes costs associated with 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 $2,523 and $2,791, for the years ended December 31, 2019 and 2018, 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.
(q)
|
Recently Issued Accounting Standards
|
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This guidance, as amended by subsequent ASUs on the topic, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating to determine the full impact at adoption, but ASU 2016-13 is not expected to have a material impact on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods
24
within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company is currently evaluating to determine the full impact at adoption, but ASU 2018-13 is not expected to have a material impact on our financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. ASU 2019-12 is not expected to have a material impact on our financial statements.
(r)
|
Recently Adopted Accounting Standards
|
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). This guidance, as amended by subsequent ASUs on the topic, requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with such classification affecting the pattern of expense recognition in the income statement.
Effective January 1, 2019, we adopted the guidance and elected the option not to restate comparative periods. We also elected the package of practical expedients within the standard which permits us not to reassess prior conclusions about lease identification, lease classification, and initial direct costs. Additionally, we elected not to separate lease and non-lease components for all leases. The adoption of the new standard resulted in the recognition of operating lease liabilities on January 1, 2019 of approximately $141, with corresponding right of use assets, and no material cumulative effect adjustment to our Consolidated Balance Sheets, and $2,862 of net assets obtained in exchange for new operating lease liabilities during the year ended December 31, 2019. Adoption of the new standard did not have a material impact on our Consolidated Statements of Income or Cash Flows.
Note 2. Inventories
Inventories, consisting of materials, labor and overhead at December 31 were comprised of the following:
|
2019
|
|
|
2018
|
|
Finished goods
|
$
|
5,730
|
|
|
$
|
5,448
|
|
Raw materials
|
|
2,218
|
|
|
|
2,414
|
|
Inventory reserve for obsolescence
|
|
(107
|
)
|
|
|
(45
|
)
|
|
$
|
7,841
|
|
|
$
|
7,817
|
|
Note 3. Property and Equipment
On December 3, 2019, we entered into an Asset Purchase Agreement with Colorado Quality Products LLC (“Elevation”) pursuant to which Elevation will (i) acquire certain of our assets, which include all fixed assets utilized in the manufacturing and warehouse operations of the Company, (ii) assume all of the Company’s obligations under its existing real property leases, (iii) manufacture certain products of the Company at a competitive fixed rate, and (iv) pay cash consideration of $500 (collectively, the “Elevation Transaction”). The Elevation Transaction closed on March 10, 2020.
We concluded that the property and equipment we will conveyed as part of the Elevation Transaction met held for sale classification and treatment as of the effective Purchase Agreement date. These long-lived assets did not qualify as a discontinued operation.
As a result of held for sale classification for certain of our property and equipment under the Elevation Transaction, we compared the carrying value of the assets to the fair value of the assets less cost to sell, resulting in an impairment to our property and equipment of approximately $342 for the year ended December 31, 2019. Given that much of our property and equipment is specific to our own products and intended use, and therefore unrealistic to actively market, we concluded that the most appropriate representation of the assets’ fair value was the unsolicited offer presented by Elevation. For the year ended December 31, 2019, our household products and personal care products segments included impairment of $188 and $154, respectively.
25
As of December 31, 2019, the net book value of our held for sale fixed assets, before our impairment charge, was $842, comprised of gross property and equipment of $4,222 and accumulated depreciation of $3,380.
Property and equipment at December 31 were comprised of the following:
|
2019
|
|
|
2018
|
|
Production equipment
|
$
|
129
|
|
|
$
|
5,600
|
|
Office furniture and equipment
|
|
134
|
|
|
|
724
|
|
Other
|
|
34
|
|
|
|
218
|
|
|
|
297
|
|
|
|
6,542
|
|
Less accumulated depreciation
|
|
(173
|
)
|
|
|
(5,571
|
)
|
|
$
|
124
|
|
|
$
|
971
|
|
Depreciation expense for the years ended December 31, 2019 and 2018 was $105 and $160, respectively.
Note 4. Acquisition
On October 1, 2019, we entered into an Asset Purchase Agreement (the “Paramount Purchase Agreement”) with Paramount Chemical Specialties, Inc. (“Paramount”). Pursuant to the Purchase Agreement, we purchased all of Paramount’s intangible assets, finished goods inventory, and assets used in connection with the manufacture, sale and distribution of the Kids N Pets® and Messy Pet® brands (collectively, the “Acquisition”).
The total consideration paid for the Acquisition was $5,500, plus or minus any inventory adjustment based on the value of finished goods inventory as of the closing compared to the target inventory of $223. Subsequently, the inventory adjustment of $83 increased the total consideration we paid to approximately $5,583.
In addition to the above consideration, the Paramount Purchase Agreement included contingent consideration, requiring us to pay Paramount 20% of brand-specific GAAP revenue in excess of $3,500 for each of calendar years 2021, 2022, 2023, and 2024 (the “Earnout Payment”).
The Company concluded that the Acquisition qualified as a business combination under ASC 805.
For the year ended December 31, 2019, we incurred approximately $116 of transaction costs related to the Acquisition. These expenses were recorded in general and administrative expense in the consolidated statement of operations.
|
|
(a)
|
Purchase Price Allocation
|
The following summarizes the aggregate fair values of the assets acquired during 2019 as of the date of the Acquisition:
Inventories
|
$
|
306
|
|
Intangible assets
|
|
3,595
|
|
Goodwill
|
|
1,709
|
|
Total assets acquired
|
$
|
5,610
|
|
Intangible assets in the table above consist of the following:
|
Intangible Assets
|
|
|
Useful Life
|
|
Customer relationships - Walmart
|
$
|
1,900
|
|
|
|
13
|
|
Customer relationships - other customers
|
|
430
|
|
|
|
10
|
|
Trade names - Kids N Pets
|
|
700
|
|
|
|
25
|
|
Trade names - Messy Pet
|
|
180
|
|
|
|
10
|
|
Formulas and batching processes
|
|
370
|
|
|
|
10
|
|
Non-compete
|
|
15
|
|
|
|
5
|
|
|
$
|
3,595
|
|
|
|
|
|
26
In addition to the assets described above, the Company recorded a $27 liability associated with the Earnout Payment, as fair valued through the use of a Monte Carlo Simulation. The Earnout Payment liability is presented in other liabilities on the consolidated balance sheets.
The estimates of the fair value of the assets acquired assumed at the date of the Acquisition are subject to adjustment during the measurement period (up to one year from the Acquisition date). The primary areas of the accounting for the Acquisition that are not yet finalized relate to the fair value of intangible assets acquired, residual goodwill and any related tax impact. The fair value of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While the Company believes that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired, it evaluates any necessary information prior to finalization of the fair value. During the measurement period, the Company will adjust assets if new information is obtained about facts and circumstances that existed as of the Acquisition date that, if known, would have resulted in the revised estimated values of those assets as of that date. The impact of all changes that do not qualify as measurement period adjustments are included in current period earnings. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could be subject to a possible impairment of the intangible assets or goodwill, or require acceleration of the amortization expense of intangible assets in subsequent periods.
Goodwill recorded in connection with the Acquisition represents, among other things, future economic benefits expected to be recognized from the Company’s expansion of the products it offers to the household segment, as well as expected future synergies and operating efficiencies from combining the acquired products with the brands we market and distribute. All of the recorded goodwill is tax-deductible.
|
|
(b)
|
Pro Forma Results of Operations (Unaudited)
|
The following table summarizes selected unaudited pro forma condensed consolidated statements of operations data for the years ended December 31, 2019 and 2018 as if the Paramount Acquisition had been completed on January 1, 2018.
|
2019
|
|
|
2018
|
|
Net sales
|
$
|
30,834
|
|
|
$
|
39,918
|
|
Net (loss) income
|
$
|
(489
|
)
|
|
$
|
2,419
|
|
This selected unaudited pro forma condensed consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the Acquisition had been completed on that date. Moreover, this information does not indicate what our future operating results will be. The information for 2018 and 2019 prior to the Acquisition is based on prior accounting records maintained by Paramount. In some cases, Paramount’s accounting policies may differ materially from accounting policies adopted by the Company following the Acquisition. For 2019, this information includes actual operating results recorded in the financial statements for the period subsequent to the date of the Acquisition on October 1, 2019. The Company’s consolidated statements of operations for the year ended December 31, 2019 includes net sales and net income of $755 and $447, respectively, attributable to the Acquisition.
The pro forma amounts included in the table above reflect the application of accounting policies and adjustment of the results of the Acquisition to reflect: (1) the additional amortization that would have been charged to the acquired intangible assets; (2) additional interest expense relating to the borrowings on the our line of credit; and (3) the tax impacts.
27
Note 5. Goodwill and Intangible Assets
Intangible assets consisted of the following:
|
As of December 31, 2019
|
|
|
As of December 31, 2018
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Value
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
6,352
|
|
|
$
|
1,455
|
|
|
$
|
4,897
|
|
|
$
|
4,022
|
|
|
$
|
1,005
|
|
|
$
|
3,017
|
|
Trade names
|
|
3,242
|
|
|
|
563
|
|
|
|
2,679
|
|
|
|
2,362
|
|
|
|
393
|
|
|
|
1,969
|
|
Formulas and batching processes
|
|
1,039
|
|
|
|
204
|
|
|
|
835
|
|
|
|
669
|
|
|
|
140
|
|
|
|
529
|
|
Internal-use software
|
|
286
|
|
|
|
-
|
|
|
|
286
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-compete agreement
|
|
41
|
|
|
|
19
|
|
|
|
22
|
|
|
|
26
|
|
|
|
13
|
|
|
|
13
|
|
|
|
10,960
|
|
|
|
2,241
|
|
|
|
8,719
|
|
|
|
7,079
|
|
|
|
1,551
|
|
|
|
5,528
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
3,230
|
|
|
|
|
|
|
|
|
|
|
|
1,521
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
$
|
11,949
|
|
|
|
|
|
|
|
|
|
|
$
|
7,049
|
|
Amortization expense for the years ended December 31, 2019 and 2018 was $690 and $620, respectively.
Estimated amortization expense for 2020 and subsequent years is as follows:
2020
|
$
|
895
|
|
2021
|
|
893
|
|
2022
|
|
891
|
|
2023
|
|
891
|
|
2024
|
|
890
|
|
Thereafter
|
|
3,973
|
|
Total
|
$
|
8,433
|
|
Note 6. Long-Term Debt and Line-of-Credit
On June 30, 2016, the Company and Neoteric Cosmetics, Inc., a wholly-owned subsidiary of the Company, collectively as borrowers, entered into a credit agreement, as amended (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“Chase”), as lender, pursuant to which Chase provided a term loan and a revolving credit facility that were related to our acquisition of the Prell®, Denorex®, and Zincon® brands.
In October 2019, we drew $4,000 and repaid $3,000 on our revolving credit facility. In December 2019, we repaid the remaining $1,000 balance on our revolving credit facility. There were no debt issuance costs associated with our 2019 line of credit activity.
In June 2018, we paid the remaining principal balance of the term loan ahead of schedule in the amount of $1,000. There were no additional costs incurred associated with the prepayment of the term loan.
The revolving credit facility amount is $4 million with interest of: (i) the LIBO Rate + 2.5%; or (ii) the Prime Rate, with a floor of the one month LIBO Rate + 2.5%, and will terminate on June 30, 2021 or any earlier date on which the revolving commitment is otherwise terminated pursuant to the Credit Agreement. Under the Credit Agreement we are obligated to pay quarterly an unused commitment fee equal to 0.5% per annum on the daily amount of the undrawn portion of the revolving line-of-credit. The loans are collateralized by all of the assets of the Company and its subsidiaries.
The Credit Agreement requires the Company to be subject to affirmative, negative, and financial covenants on a quarterly basis. The Company was in compliance with the covenants in the Credit Agreement as of December 31, 2019 and 2018, respectively.
28
Note 7. Leases
As part of the Elevation Transaction disclosed in Note 2 above, Elevation assumed our warehouse leases on March 10, 2020 and will assume our office lease at the end of March 2020, at which point we will enter into a sublease agreement with Elevation as our lessor of half of our office space. Given that the sublease will result in the termination of the right to use our warehouse office space, and the lease conveyances were probable and estimable as of December 31, 2019, we reduced our previously capitalized right-of-use assets and lease liabilities to reflect two months of our warehouse leases and three months of our office lease as of December 31, 2019.
The accounting treatment for our leases remains the same. We treat our leases as a single lease component as we have elected the practical expedient to combine these components for all leases. As most of the leases do not provide an implicit rate, we calculated the right-of-use assets and lease liabilities using our secured incremental borrowing rate at the lease commencement date. We currently do not have any finance leases outstanding.
Information related to leases was as follows:
|
|
2019
|
|
Operating lease information:
|
|
|
|
|
Operating lease cost
|
|
$
|
793
|
|
Operating cash flows from operating leases
|
|
|
773
|
|
Net assets obtained in exchange for new operating lease liabilities
|
|
|
2,862
|
|
|
|
|
|
|
Weighted average remaining lease term in years
|
|
|
0.51
|
|
Weighted average discount rate
|
|
|
5.0
|
%
|
Future minimum annual lease payments are as follows:
2020
|
|
|
178
|
|
2021
|
|
|
7
|
|
2022
|
|
|
1
|
|
Total minimum lease payments
|
|
$
|
186
|
|
Less imputed interest
|
|
|
(30
|
)
|
|
|
|
|
|
Total operating lease liability
|
|
$
|
156
|
|
Note 8. Income Taxes
The provision for income tax for the years ended December 31 is as follows:
|
2019
|
|
|
2018
|
|
Current (benefit) provision:
|
|
|
|
|
|
|
|
Federal
|
$
|
(158
|
)
|
|
$
|
392
|
|
State
|
|
(33
|
)
|
|
|
77
|
|
Total current (benefit) provision
|
|
(191
|
)
|
|
|
469
|
|
Deferred (benefit) provision:
|
|
|
|
|
|
|
|
Federal
|
|
(264
|
)
|
|
|
122
|
|
State
|
|
(58
|
)
|
|
|
28
|
|
Total deferred (benefit) provision
|
|
(322
|
)
|
|
|
150
|
|
(Benefit) provision:
|
|
|
|
|
|
|
|
Federal
|
|
(422
|
)
|
|
|
514
|
|
State
|
|
(91
|
)
|
|
|
105
|
|
Total (benefit) provision
|
$
|
(513
|
)
|
|
$
|
619
|
|
29
Income tax expense at the statutory tax rate is reconciled to the overall income tax expense for the years ended December 31 as follows:
|
2019
|
|
|
2018
|
|
Federal income tax at statutory rates
|
$
|
(246
|
)
|
|
$
|
598
|
|
State income taxes, net of federal tax effect
|
|
(38
|
)
|
|
|
83
|
|
Permanent differences
|
|
3
|
|
|
|
7
|
|
Nondeductible stock-based compensation
|
|
13
|
|
|
|
30
|
|
Impact of change in federal tax rate
|
|
-
|
|
|
|
(56
|
)
|
Foreign-derived intangible income deduction
|
|
(183
|
)
|
|
|
(40
|
)
|
Other
|
|
(62
|
)
|
|
|
(3
|
)
|
(Benefit) provision for income taxes
|
$
|
(513
|
)
|
|
$
|
619
|
|
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period.The net deferred tax assets and liabilities as of December 31, 2019 and 2018 are comprised of the following:
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
156
|
|
|
$
|
-
|
|
Accounts receivable
|
|
168
|
|
|
|
171
|
|
Inventories
|
|
124
|
|
|
|
66
|
|
Accrued vacation and bonus
|
|
38
|
|
|
|
36
|
|
Intangibles and Goodwill
|
|
112
|
|
|
|
89
|
|
Operating lease liabilities
|
|
53
|
|
|
|
-
|
|
Other
|
|
40
|
|
|
|
21
|
|
Total deferred tax assets
|
|
691
|
|
|
|
383
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
(46
|
)
|
|
|
-
|
|
Accumulated depreciation for tax purposes
|
|
(89
|
)
|
|
|
(149
|
)
|
Total deferred tax liabilities
|
|
(135
|
)
|
|
|
(149
|
)
|
Net deferred tax asset
|
$
|
556
|
|
|
$
|
234
|
|
Net operating losses and tax credit carryforwards as of December 31, 2019 are as follows:
|
|
|
|
|
Expiration Years
|
Net operating losses, federal (After December 31, 2017)
|
$
|
632
|
|
|
Do not expire
|
Net operating losses, state (After December 31, 2017)
|
|
629
|
|
|
Do not expire
|
Tax credits, federal
|
|
14
|
|
|
2040
|
Accounting for uncertainty in income taxes is based on a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize in our consolidated financial statements only those tax positions that are more-likely-than-not to be sustained as of the adoption date, based on the technical merits of the position. Each year we perform a comprehensive review of our material tax positions.
Our policy is to recognize interest and penalties related to uncertain tax benefits in income tax expense. As we had no uncertain tax benefits during 2019 and 2018, we had no accrued interest or penalties related to uncertain tax positions in either year.
We and our subsidiaries are subject to the following material taxing jurisdictions: United States and Colorado. The tax years that remain open to examination by the Internal Revenue Service are 2016 and years thereafter. The tax years that remain open to examination by the State of Colorado are 2015 and years thereafter.
30
Note 9. Shareholders’ Equity
2005 Plan:
In 2005, we adopted a stock option plan for our employees, officers and directors (the “2005 Plan”). At the Annual Shareholders’ Meeting in May 2011, shareholders approved an amendment to the 2005 Plan to increase the number of shares issuable under the plan from 1.5 million shares to a total of 3 million shares. As of December 31, 2019, there were no shares available for issuance under the 2005 Plan.
2015 Plan:
In 2015, we adopted, and shareholders approved, a stock option plan for our employees, officers and directors (the “2015 Plan”) to replace the 2005 Plan, which expired on March 31, 2015.
Under the 2015 Plan, we awarded 20,000 RSUs to our four independent directors on November 14, 2019 (the “Grant Date”). The director RSUs will vest one-third, ratably, over three years on each anniversary of the Grant Date. Additionally, under the 2015 Plan and on the Grant Date, we awarded RSUs to our named executive officers (“NEO”) and employees, vesting of which is subject to specific market conditions as well as service conditions. The NEO and employee RSUs will vest on the third anniversary of the Grant Date, or November 14, 2022 (the “Vest Date”), if the Company’s average stock price for any consecutive 30-day period is at or above $2.75 (Tier 1 – 133,445 shares vest), $3.50 (Tier 2 – 208,643 shares vest), or $4.25 (Tier 3 – 257,078 shares vest) during the three year vesting period (the “Restricted Period”). Both grants were approved by our Compensation Committee as of the Grant Date.
During 2019, we did not grant any options to acquire shares of our common stock.
During 2018, we granted options to acquire: (i) 40 thousand shares of our common stock to employees at prices ranging from $2.17 to $3.35 per share; (ii) 105 thousand shares of our common stock to executive officers at prices ranging from $2.09 to $2.17 per share; and (iii) 90 thousand shares of our common stock to non-employee board members at a price of $2.17 per share.
The weighted average fair market value of the options granted during the years ended December 31 were estimated on the date of grant, using a Black-Scholes option pricing model with the following assumptions:
|
2018
|
|
Expected life of options (using the “simplified” method)
|
4 years
|
|
Average risk-free interest rate
|
2.63%
|
|
Average expected volatility of stock
|
69%
|
|
Expected dividend rate
|
None
|
|
Fair value of options granted
|
$282
|
|
Compensation cost related to stock options recognized in operating results (included in general and administrative expenses) totaled $141 and $227 for the years ended December 31, 2019 and 2018, respectively. Approximately $176 of total unrecognized compensation costs related to non-vested stock options is expected to be recognized over the next three years, depending on the vesting provisions of the options. There was no tax benefit from recording the non-cash expense as it relates to the options granted to employees, as these were qualified stock options which are not normally tax deductible.
Compensation cost related to RSUs recognized in operating results (included in general and administrative expenses) totaled $8 for the year ended December 31, 2019. Approximately $175 of total unrecognized compensation costs related to non-vested RSUs is expected to be recognized over the next three years.
31
Stock option activity under the expired 2005 and current 2015 Plans are as follows:
|
Number of Options
(in thousands)
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
2005 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number of shares under the plan
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
492
|
|
|
$
|
0.73
|
|
|
3.8 years
|
|
|
$
|
1,067
|
|
Granted
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(376
|
)
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
(62
|
)
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
54
|
|
|
$
|
0.79
|
|
|
0.4 years
|
|
|
$
|
95
|
|
Exercisable, December 31, 2018
|
|
54
|
|
|
$
|
0.79
|
|
|
0.4 years
|
|
|
$
|
95
|
|
Available for issuance, December 31, 2018
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(54
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable, December 31, 2019
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Available for issuance, expired as of December 31, 2019
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number of shares under the plan
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
785
|
|
|
$
|
1.32
|
|
|
6.4 years
|
|
|
$
|
1,238
|
|
Granted
|
|
235
|
|
|
$
|
2.26
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(147
|
)
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
(167
|
)
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
706
|
|
|
$
|
1.66
|
|
|
4.7 years
|
|
|
$
|
660
|
|
Exercisable, December 31, 2018
|
|
422
|
|
|
$
|
1.44
|
|
|
4.4 years
|
|
|
$
|
473
|
|
Available for issuance, December 31, 2018
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
(31
|
)
|
|
$
|
1.90
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
675
|
|
|
$
|
1.66
|
|
|
3.6 years
|
|
|
$
|
231
|
|
Exercisable, December 31, 2019
|
|
526
|
|
|
$
|
1.51
|
|
|
3.4 years
|
|
|
$
|
226
|
|
Available for issuance, December 31, 2019
|
|
1,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of additional information related to the options outstanding as of December 31, 2019 under the 2005 and 2015 Plans are as follows:
Range of Exercise Prices
|
|
Number of Options
(in thousands)
|
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
2015 Plan
|
|
|
|
|
|
|
|
|
|
|
$1.20-$1.25
|
|
|
214
|
|
|
4.3 years
|
|
$
|
1.25
|
|
$1.26-$1.38
|
|
|
200
|
|
|
2.3 years
|
|
$
|
1.32
|
|
$1.80-$2.25
|
|
|
236
|
|
|
3.5 years
|
|
$
|
2.15
|
|
$3.15-$3.35
|
|
|
25
|
|
|
8.2 years
|
|
$
|
3.23
|
|
Total
|
|
|
675
|
|
|
3.6 years
|
|
$
|
1.66
|
|
We have an Employee Stock Ownership Plan (“Plan”) to provide retirement benefits for our employees. The Plan is designed to invest primarily in our common stock and is non-contributory on the part of our employees. Contributions to the Plan are discretionary
32
as determined by our Board of Directors. We expense the cost of contributions to the Plan. No contributions were made to the Plan in 2019 and 2018. At December 31, 2019 and 2018, a total of 473 and 491 shares of our common stock, respectively, have been allocated and earned by our employees.
Note 10. Earnings per Share
Per share data is determined by using the weighted average number of common shares outstanding. Common equivalent shares are considered only for diluted earnings per share, unless considered anti-dilutive. Common equivalent shares, determined using the treasury stock method, result from stock options with exercise prices that are below the average market price of the common stock.
Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in our earnings.
A reconciliation of the weighted average number of common shares outstanding (in thousands) for the years ended December 31 is as follows:
|
2019
|
|
|
2018
|
|
Common shares outstanding, beginning of the year
|
|
12,408
|
|
|
|
11,886
|
|
Weighted average common shares issued
|
|
34
|
|
|
|
246
|
|
Weighted average number of common shares outstanding
|
|
12,442
|
|
|
|
12,132
|
|
Dilutive effect of stock options and RSUs (1)
|
|
-
|
|
|
|
449
|
|
Diluted weighted average number of common shares outstanding
|
|
12,442
|
|
|
|
12,581
|
|
|
(1)
|
Stock options and RSUs are excluded for periods presented in which the Company has a net loss because the effects are anti-dilutive.
|
Common stock equivalents (in thousands) that have been excluded from the calculation of earnings per share as of December 31 because they would have been anti-dilutive are as follows:
|
2019
|
|
|
2018
|
|
Stock options
|
|
398
|
|
|
|
252
|
|
None of our RSUs met vesting conditions during 2019.
Note 11. Segment Information
Segments
We operate in two different segments: household products and personal care products. We have chosen to organize our business around these segments based on differences in the products sold. Accounting policies for our segments are the same as those described in Note 1. We evaluate segment performance based on segment income or loss before income taxes.
Due to changes in our business as we acquired and began to manufacture additional products in recent periods under our Personal Care Products segment, the Company implemented a change in the allocation of certain operational and administrative expenses to more accurately reflect our operational activity. For comparison purposes, the Company presented 2018 results to reflect the revised allocation of these costs.
The following provides information on our segments as of and for the years ended December 31:
33
|
2019
|
|
|
Household Products
|
|
|
Personal Care Products
|
|
|
Corporate
|
|
|
Total
|
|
Net sales
|
$
|
5,421
|
|
|
$
|
23,029
|
|
|
$
|
-
|
|
|
$
|
28,450
|
|
Operating (loss) income
|
|
(420
|
)
|
|
|
(931
|
)
|
|
|
-
|
|
|
|
(1,351
|
)
|
Identifiable assets
|
|
7,827
|
|
|
|
17,003
|
|
|
|
1,261
|
|
|
|
26,091
|
|
Capital and intangible asset expenditures
|
|
5,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,970
|
|
Depreciation and amortization
|
|
107
|
|
|
|
689
|
|
|
|
-
|
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Household Products
|
|
|
Personal Care Products
|
|
|
Corporate
|
|
|
Total
|
|
Net sales
|
$
|
5,157
|
|
|
$
|
31,901
|
|
|
$
|
-
|
|
|
$
|
37,058
|
|
Operating (loss) income
|
|
(297
|
)
|
|
|
3,208
|
|
|
|
-
|
|
|
|
2,911
|
|
Identifiable assets
|
|
2,297
|
|
|
|
23,436
|
|
|
|
742
|
|
|
|
26,475
|
|
Capital and intangible asset expenditures
|
|
18
|
|
|
|
204
|
|
|
|
-
|
|
|
|
222
|
|
Depreciation and amortization
|
|
123
|
|
|
|
695
|
|
|
|
-
|
|
|
|
818
|
|
Corporate assets noted above are comprised of our income tax receivable and deferred tax assets.
Customers
Net sales to significant customers were the following for the years ended December 31, 2019 and 2018, respectively:
|
2019
|
|
|
2018
|
|
Walmart
|
$
|
7,703
|
|
|
$
|
9,939
|
|
Ulta
|
|
7,528
|
|
|
|
8,947
|
|
HK NFS
|
|
2,469
|
|
|
|
6,401
|
|
Outstanding accounts receivable from significant customers represented the following percentages of our total accounts receivable as of December 31, 2019 and 2018, respectively:
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Walmart
|
|
45.0
|
%
|
|
|
45.7
|
%
|
Ulta
|
|
21.2
|
%
|
|
|
26.4
|
%
|
A loss of any of our significant customers could have a material adverse effect on us because it is uncertain whether our consumer base served by these customers would purchase our products at other retail outlets. Our distribution agreement with HK NFS renewed on January 1, 2020 and is effective for a one-year term. This agreement automatically renews for additional successive one-year terms unless and until either party provides notice of nonrenewal at least 90 days before the end of the then-current term. No long-term contracts exist between us and our other significant customers.
Note 12. Commitments and Contingencies
As of December 31, 2019, the Company had no material commitments or contingencies.
Note 13. Subsequent Events
On March 10, 2020, we consummated the Elevation Transaction pursuant to which Elevation will (i) acquire certain assets of the Company, which include all fixed assets utilized in the manufacturing and warehouse operations of the Company, (ii) assume all of the Company’s obligations under its existing real property leases, (iii) manufacture certain products of the Company at a competitive fixed rate, and (iv) pay cash consideration of $500,000.
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