10-K
1
slgd-10k_20201231.htm
10-K
slgd-10k_20201231.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2020
OR
Commission File Number 001-13458
SCOTT’S LIQUID GOLD-INC.
(Exact name of Registrant as specified in its Charter)
8400 E. Crescent Parkway, Suite 450, Greenwood Village, CO 80111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (303) 373-4860
Securities registered pursuant to Section 12(b) of the Act.
Title of each class Trading Symbol Name of exchange on which registered
None None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 Par Value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐No☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes☐No☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐No☒
The aggregate market value of the common stock held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on June 30, 2020, was $13,635,868.
The number of shares of Registrant’s Common Stock outstanding as of March 8, 2021 was 12,617,924.
Certain information required by Part III is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders for fiscal year ended December 31, 2020, to be filed within 120 days after December 31, 2020.
CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, in addition to historical information. All statements, other than statements of historical facts, included in this Report that address activities, events, or developments with respect to our financial condition, results of operations, or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements.You can typically identify forward-looking statements by the use of words, such as “may,” “could,” “should,” “assume,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” and other similar words. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements contained in this Report are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Forward-looking statements and our performance inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to:
• dependence on third-party vendors and on sales to major customers;
• continuation of our distributorship agreement for Batiste Dry Shampoos;
• competition from large consumer products companies in the United States;
• new competitive products and/or technological changes;
• unfavorable economic conditions;
• the degree of success of any new product or product line introduction by us;
• potential increases in raw material prices;
• the loss of any executive officer or other personnel;
• future losses which could affect our liquidity;
We caution you that forward-looking statements are not guarantees of future performance and that actual results or performance may be materially different from those expressed or implied in the forward-looking statements.The forward-looking statements in this Report speak as of the filing date of this Report. Although we may from time to time voluntarily update our prior forward-looking statements, we undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Report.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 8
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Mine Safety Disclosures 9
PART II
Item 6. Selected Financial Data 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9A. Controls and Procedures 38
Item 9B. Other Information 38
PART III
Item 10. Directors, Executive Officers and Corporate Governance 39
Item 11. Executive Compensation 39
Item 14. Principal Accounting Fees and Services 39
PART IV
Item 15. Exhibits and Financial Statement Schedules 39
PART I
(in thousands, except per share data)
ITEM 1. BUSINESS
Overview
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954. In this Report the terms “we”, “us” or “our” refer to Scott’s Liquid Gold-Inc. and our subsidiaries, collectively. We develop, market, and sell high-quality, high-value household and personal care products. Our business is divided into two operating segments; household products and personal care products. Our family of brands include:
• Scott’s Liquid Gold®;
• Alpha® Skin Care;
• Prell®;
• Denorex®;
• Kids N Pets®;
• Biz®; and
• Dryel®.
We also act as the exclusive brand distributor in certain markets for Batiste Dry Shampoo.
Financial Information About Segments and Principal Products
The table set forth below shows the percentage of our net sales contributed by each operating segment during 2020 and 2019:
% of Net Sales
Personal care
Total personal care 56.1 % 80.9 %
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
The principal products in our household products segment include:
• Scott’s Liquid Gold® Wood Care;
• Scott’s Liquid Gold® Floor Restore; and
• Kids N Pets® and Messy Pet®;
• Biz® and Dryel®.
Scott’s Liquid Gold® Wood Care has been our core product since our inception. It has been sold in the United States for over 70 years. Unlike leading furniture polishes, our higher quality product contains natural oils that penetrate the wood’s surface to clean, replace lost moisture, minimize the appearance of scratches and bring out the natural beauty of wood. Our Scott’s Liquid Gold® Floor Restore product is a quick and easy way to renew and protect hardwood floors.
On October 1, 2019, we acquired Kids N Pets® brands, which includes Messy Pet®. Founded in 1989, Kids N Pets® brands are award winning, safe, stain and odor removing products targeted toward households with children and pets. These high-quality, high-
1
value brands currently encompass six SKUs exceptional at controlling odor and cleaning up kid and pet accidents, and food and drink stains while being products that parents can feel safe using around their children and pets. Kids N Pets®’ primary sales channel is through retail stores such as Walmart and Home Depot, and online through properties such as such as Amazon and Chewy.
On July 1, 2020, we acquired Biz® and Dryel®brands. Biz is the top performing laundry additive in the market, utilizing a proprietary enzyme-based formula to fight stains and eliminate odors. It was established by Proctor & Gamble in 1968 and is sold in Powder, Liquid, and Liquid Booster Pack for a total of seven SKUs. Dryel is the market leader in the at-home dry cleaning category, representing approximately 65% of the at-home dry cleaning market in 2019. It was established by Proctor & Gamble in 1998 and is sold primarily in a consumer starter kit with refills.
Personal Care Products
The principal products in our personal care products segment include:
• Alpha® Skin Care products;
• Prell® hair care products;
• Denorex® hair care products; and
• Batiste Dry Shampoo.
Our Alpha® Skin Care brand was one of the first to use alpha hydroxy acids (“AHAs”) in lines of facial care products, body lotion, and body wash. Products containing AHAs gently slough off dead skin cells to promote a healthier, more youthful appearance and help to diminish fine lines and wrinkles.
In 2016, we acquired the Prell®, Denorex® and Zincon® brands of hair and scalp care products. Prell® Shampoo, an iconic brand since 1947, is a classic clean shampoo for healthy hair. Our Denorex® products are dermatologist-recommended medicated hair care products to control the symptoms of dandruff and other scalp conditions. Our Zincon® product is a medicated anti-dandruff shampoo.
We have been a distributor in the United States for Batiste Dry Shampoo since 2009. Under our distribution agreement with the manufacturer of Batiste Dry Shampoo, Church & Dwight Co. Inc. (“Church & Dwight”), we are the exclusive specialty retail distributor in the United States of Batiste Dry Shampoo. The specialty retailer channel includes primarily beauty supply stores, such as Ulta Beauty, Inc. (“Ulta”), our second largest customer, apparel retailers, and department stores. Dry shampoo is a quick and convenient way to refresh hair between washes.
Marketing and Distribution
We primarily market our products through: (1) trade promotions to support price features, displays, slotting fees and other merchandising of our products by our retail customers; (2) consumer marketing in print, social and digital media and television advertising; and (3) to a lesser extent, consumer incentives such as coupons and rebates.
Our products are sold nationally through our sales force and internationally (Canada and China) through independent distributors, to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, and other retail outlets and to wholesale distributors.
The table set forth below shows net sales to our significant customers as a percentage of consolidated net sales during 2020 and 2019:
% of Net Sales
Walmart Inc. ("Walmart") 29 % 27 %
As is typical in our industry, we do not have long-term contracts with Walmart, Ulta, or any other retail customer.
We also use our websites for sales of our products directly to consumers. These sales accounted for approximately 2% of total net sales in 2020 and 2019, respectively.
2
Currently, our international sales are made to distributors who are responsible for the selling and marketing of the products, and we are paid for these products in United States dollars.
From time to time, our customers return products to us. For our household products, we permit returns only for a limited time. For our personal care products, returns are accepted for a greater period of time in order to maintain or enhance our relationship with the customer. Typically, customers are granted a credit equal to the original sale price plus a handling charge.
Manufacturing and Suppliers
On March 10, 2020, we consummated an agreement with Colorado Quality Products LLC (“Elevation”), pursuant to which Elevation (i) acquired certain of our assets, which included all fixed assets utilized in the manufacturing and warehouse operations of the Company, (ii) assumed all of the Company’s obligations under its existing real property leases, (iii) manufactured certain products of the Company for a transitional period, and (iv) paid cash consideration of $500,000 (collectively, the “Elevation Transaction”).
Subsequent to the Elevation Transaction, we identified third-party logistics and contract manufacturing partners for our product lines. As of December 31, 2020, we no longer manufacture or ship any of our products directly to our retail partners.
Under our distribution agreement with Church & Dwight, we are the exclusive distributor of Batiste Dry Shampoo products in the specialty retailer channel in the United States. The specialty retailer channel includes primarily beauty supply stores, such as Ulta, apparel retailers and department stores. Church & Dwight retained the rights to sell Batiste products to the remainder of the market in the United States. The distribution agreement with Church & Dwight provides that we will not be permitted to manufacture, distribute or sell any products that are competitive with Batiste Dry Shampoo products. The initial pricing terms for the Batiste products were negotiated with Church & Dwight but may be increased by Church & Dwight at any time upon 90 days’ prior written notice of any price increase. On November 9, 2020, we executed the Fifth Amendment to the Customer Agreement with Church & Dwight, which extends the term of our distribution agreement through December 31, 2021, requires 120 days’ advance notice of non-renewal of future one-year terms, and adjusts the process for selling inventory after expiration or termination of the agreement. We have been a distributor for Church & Dwight since 2009.
Competition
Both the household and personal 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 personal care category, several of our competitors are also significantly larger than us and each of these competitors produces several competing products.
Regulation
We are subject to various federal, state and local laws and regulations that pertain to the types of consumer products that we manufacture and sell. Many chemicals used in consumer products, some of which are used in several of our product formulations, have come under scrutiny by various state governments and the Federal government. These chemicals are called volatile organic compounds (“VOCs”). All of our products currently meet the most stringent VOC regulations and may be sold throughout the United States. Many of our skin care products, several of which contain AHAs, are considered cosmetics within the definition of the Federal Food Drug and Cosmetic Act (the “FFDCA”). Our cosmetic products are subject to the regulations under the FFDCA and the Fair Packaging and Labeling Act. The relevant laws and regulations are enforced by the FDA. We believe that we are producing and marketing all of our products in compliance with all applicable laws and regulations in the markets in which we participate.
Prior to the Elevation Transaction, our production facility was subject to Federal, state, and local regulations governing water quality, air quality, and waste related to stationary sources and we held required permits from the state of Colorado, which implements the delegated Federal programs. These programs regulate the emissions, discharges, and waste generated in the production of our products.
The laws and regulations applicable to our production facility will no longer impact us following the consummation of the Elevation Transaction.
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.
3
Our international sales are primarily conducted in China and we rely on the efforts of our exclusive distributor in the PRC to market and sell our products there. As such, we may be impacted by regulations, economic conditions, and tariffs imposed by the PRC. In 2019, we were impacted by regulatory changes imposed on over-the-counter (“OTC”) products by the PRC’s National Medical Products Administration (“NMPA”).
Employees
As of December 31, 2020, we employed 36 people, which work in administrative, sales, advertising, marketing and operational functions. We believe our employees are critical to providing the public with high-quality, high-value products and find it crucial to continue to attract and retain experienced employees. We strive to offer a competitive compensation and benefits program, foster a community where everyone feels included and empowered to do to their best work, and give employees the opportunity to give back to their communities and make a social impact.
No contracts exist between us and any union. The compensation of our executive officers is subject to annual review by the Compensation Committee of our Board of Directors.
Patents and Trademarks
At present, we own one patent for our Neoteric Diabetic® Healing Cream. Additionally, we actively use our registered trademarks for Scott’s Liquid Gold®, Alpha® Skin Care, Prell®, Denorex®, Zincon®, and Neoteric® in the United States and have registered trademarks in a number of additional countries. Our registered trademarks protect names and logos relating to our products as well as the design of boxes for certain of our products.
Public Information
Our website address is www.slginc.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available, free of charge, on our website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, proxy statements, 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.
We will also provide to any person without charge, upon request, a copy of our Code of Business Conduct and Ethics Policy. A request for our reports filed with the SEC or our Code of Business Conduct and Ethics Policy may be made to: Corporate Secretary, Scott’s Liquid Gold-Inc., 8400 East Crescent Parkway, Suite 450, Greenwood Village, Colorado 80111.
4
ITEM 1A. RISK FACTORS.
The following is a discussion of certain 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.
Disruptions in our supply chain and other factors affecting the distribution of our finished goods inventory could adversely impact our business.
A disruption within our logistics or supply chain network could adversely affect our ability to maintain appropriate inventory or deliver products in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation. As a result of COVID-19, we have encountered shortages of raw materials for certain of our products and delays in receiving finished goods product from contract manufacturers, which has prevented us from meeting certain customer demands for our products. Along with many other industry participants, we have experienced great difficulty procuring containers and caps.
COVID-19 could also negatively impact the operations of our third-party manufacturing and logistics partners, resulting in an adverse impact to our ability to meet customer demand. Disruption to our supply chain and manufacturing and logistics partners is not limited to COVID-19, as other factors beyond our control could also result in a negative impact to our financial performance and condition.
COVID-19 disruptions could continue to impact our ability to meet debt requirements and lead to increased debt costs.
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, including Walmart and Ulta. 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.
A significant part of our sales of personal care products are represented by Batiste Dry Shampoo products, which depends upon the continuation of our distributorship agreement with the manufacturer of these products.
If our distribution agreement with Church & Dwight is terminated, we would no longer be able to distribute Batiste Dry Shampoo products for Church & Dwight and sales in our personal care segment would be adversely affected. Sales of our distributed products represent a significant portion of our consolidated net sales, and the loss of those products could affect our relationships with customers who purchase those products from us.
On November 9, 2020, we renewed our distribution agreement with Church & Dwight, which extended the term of our distribution agreement through December 31, 2021. We have been a distributor for Church & Dwight since 2009 and have renewed our distribution agreement five times.
Our international operations in China expose us to a number of risks.
We have limited experience with distribution in China. 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.
5
Our international operations also subject us to changes in trade policies and agreements and other foreign or domestic legal and regulatory requirements, including those resulting in potentially adverse tax consequences or the imposition of onerous trade restrictions such as tariffs, sanctions, and price controls. Any changes in these international trade policies could adversely affect our profitability and stock price.
A continued change in the consumer product retail market may cause our sales to decline.
Our performance depends upon the general health of the economy and of the retail environment in particular. Consumer products, such as those marketed by us, are increasingly being sold by club stores, dollar stores, mass merchandisers, e-commerce retailers and subscription services. The retail environment is changing with the growth of alternative retail channels and this could significantly change the way traditional retailers do business. If these alternative retail channels were to take significant market share away from traditional retailers or we are not successful in these alternative retail channels, our margins and results of operations may be negatively impacted.
In both personal 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.
Unfavorable and uncertain economic conditions could adversely affect our profitability.
Unfavorable and uncertain economic conditions in the past have adversely affected, and in the future may adversely affect, consumer demand for some of our products, resulting in reduced sales volume and a decrease in our overall profitability. Factors that can affect consumer demand for our products include rates of unemployment, consumer confidence, health care costs, fuel and other energy costs and other economic factors affecting consumer spending behavior.
Our products are subject to trucking costs, both in delivery to us at our production facility as well as transportation to our customers. As a result, we are exposed to volatility in the freight industry that could affect our costs, including changes in regulations and labor costs. Any increases in transportation costs could adversely affect our profitability if we are not able to pass those costs on to our customers.
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 personal 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.
6
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.
We face the risk that raw materials for our products may not be available or that costs for these materials will increase.
Raw materials required for our products are sourced are obtained from third party suppliers, some of which are sole source suppliers. We have no long-term contracts with such suppliers and are subject to cost increases. Manufacturers of our products may not have sufficient raw materials for production if there is a shortage in raw materials or other disruption in the supply chain or if suppliers terminate their relationships or are otherwise unable to supply raw materials. In addition, if our contract manufacturers change suppliers it could involve delays that restrict our ability to have our products manufactured or to buy products in a timely manner to meet delivery requirements of our customers. Suppliers of raw materials for our products can also be subject to the same risk with their vendors.
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 household products to comply with environmental regulations and may be required to do so again in the future if the applicable regulations are further amended. Most recently, in 2019, we were impacted by regulatory changes imposed on OTC products by the PRC’s NMPA, which negatively impacted our sales during the year.
Labeling practices in our industry have recently experienced an increase of warning letters admonishing cosmetics manufacturers for promotional claims on their websites and product labels deemed by the FDA to blur the line between “cosmetics” and “drugs.” The increase of warning letters by the FDA has also triggered a wave of follow-on class action lawsuits against cosmetic manufacturers in general, including manufacturers not singled out via FDA warning letters. Any claims levied against us could result in costly settlements, distract management and have an adverse effect on our operating results.
Any adverse developments in litigation could have a material impact on us.
We are subject to lawsuits from time to time in the ordinary course of business. While we expect those lawsuits not to have a material effect on us, an adverse development in any such lawsuit or the insurance coverage for a lawsuit could materially and adversely affect our operating results.
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 Bulletin Board. The volume of trades in our stock varies from day to day but is relatively limited. As a result, any events can result in volatile movements in the price of our stock and can result in significant declines in the market price of our stock.
We rely on trademark, copyright, and trade secret laws, which may not be sufficient to protect our intellectual property.
We rely on a combination of laws, such as copyright, trademark and trade secret laws, as well as confidentiality provisions and limited licenses, to establish and protect our intellectual property. We have registered U.S. and foreign country trademarks, and HK NFS Limited (“HK NFS”) has contractually agreed to undertake steps to prevent counterfeiting of our products and to otherwise protect our trademarks in the PRC. These forms of intellectual property protection are critically important to our ability to establish and maintain our competitive position. However, it is possible that laws, contractual restrictions, and other efforts may not be sufficient to prevent misappropriation of our property or to deter others from developing similar intellectual property.
7
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;
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.
Manufacturing relationships with third parties.
We currently outsource our manufacturing to one or more third parties, which we intend to expand. Failure by one or more of these third parties to complete activities on schedule or in accordance with our expectations, meet their contractual or other obligations to us, or comply with applicable laws or regulations, or any disruption in the relationships between us and one or more of these third parties, could delay or prevent the development, approval, manufacturing, or commercialization of our products, could expose us to suboptimal quality of service delivery or deliverables, could result in repercussions such as missed deadlines or other timeliness issues, erroneous data and supply disruptions, and could also result in non-compliance with legal or regulatory requirements or industry standards or reputational harm, all with potential negative implications for our product pipeline and business.
Currently, as a result of COVID, our third-party manufacturers are having delays due to material shortages and delays and difficulty staffing workforce to keep production lines moving efficiently, which is forcing them to restructure their planning to produce products in a timely manner.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
8
ITEM 2. PROPERTIES.
We lease our corporate headquarter facilities in Greenwood Village, Colorado. Please see Note 7 to our Consolidated Financial Statements in Item 8 for more information on our facilities.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to lawsuits from time to time in the ordinary course of business. While we expect those lawsuits not to have a material effect on us, an adverse development in any such lawsuit or the lack of insurance coverage for a lawsuit could materially and adversely affect our financial condition and cash flow.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
9
PART II
(in thousands, except per share data)
Market Information
Our $0.10 par value common stock is traded on the OTC Bulletin Board (an electronic inter-dealer quotation system) under the ticker symbol “SLGD.” Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The high and low prices of our common stock as traded on the OTC Bulletin Board were as follows:
High Low High Low
Shareholders of Record
As of March 8, 2021, based on inquiry, we had approximately 640 shareholders of record.
Dividends
We did not pay any cash dividends during the two most recent fiscal years. We do not anticipate paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
10
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
During the first quarter of 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic. Such impacts have included significant volatility in the global stock markets, a significant reduction in the target federal funds rate, the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the Payroll Protection Program (PPP) administered by the Small Business Administration (SBA), and a variety of local, state and federal restrictions, measures and guidance. While many businesses resumed operations towards the end of the second quarter of 2020, the duration of the impact still remains uncertain. We expect to see continued volatility in the economic markets and government responses to the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on our operating results during future periods.
Supply Chain and Outsourcing Partners
As a result of COVID-19, we have encountered various supply chain disruptions impacting the availability and lead times of certain raw materials for our finished goods products. We have been proactively identifying alternative sources for delayed raw materials and our highest demand products remain unaffected. All of our outsourcing partners, including contract manufacturing plants and third-party logistics warehouses, have remained open during the entirety of COVID-19, however, they have had difficulties with staffing their workforce to keep production lines running.
Health and Safety
We have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners and other counterparties. We have implored employees to continue to work from home and have strict requirements for employees who must enter our corporate office, such as body temperature documentation, mask requirements, and scheduling that limits physical employee interaction. We have continued our travel suspension and workspace disinfection. We expect to continue to implement these and other measures as appropriate.
Customer Demand
At the onset of the pandemic, as a result of government-mandated stay-at-home orders, some of our customers were impacted and forced to cease operations. Customer closings primarily impacted revenue for our Batiste Dry Shampoo distributed products during the last part of March 2020. Shipments to our major Batiste Dry Shampoo customers resumed in May 2020, but at lower levels than preceded the pandemic due to lower foot traffic, which has been largely caused by the new work-from-home environment and retail closures. Any future customer closures, customer restrictions, or continued foot traffic decrease would negatively impact our business.
Liquidity
Although there is uncertainty related to the anticipated impact of the COVID-19 outbreak on our future results, we believe our business model, available COVID-19 relief programs and our new debt agreement with UMB leave us well-positioned to manage our business through this crisis as it continues to develop and will be sufficient to meet our operational cash needs during the next twelve months.
COVID-19 has impacted our ability to meet customer demand, has delayed our ability to quickly repay debt, and has resulted in increased financing costs.
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. Given the dynamic nature of
11
this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
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 personal care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors. Our long history of selling household products has generated strong consumer and customer loyalty for our brands.
On an ongoing basis, management focuses on a variety of key indicators to monitor our business health and performance. These key indicators include (but are not limited to) the following:
• 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.
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;
• Potential continuation of decreasing sales of our distributed products;
• Rapid growth of e-commerce and alternative retail channels; and
• Volatility in the costs of raw materials.
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 2021:
• Optimizing our supply chain, third-party logistics partners, and operations.
12
Results of Operations
For the Year Ended December 31, (in thousands)
Increase / (Decrease)
Operating expenses:
Increase in net loss changed primarily due to the following:
• Increase in interest expense related to our UMB debt financing.
• Partially offset by:
o Increase in gross margins due to outsourcing our product manufacturing.
13
Segment Results
The following tables show comparative net sales, gross margin, gross profit, income (loss) from operations, volume and percentage changes for our household and personal care products between periods:
Household products
For the Year Ended December 31, (in thousands)
Increase / (Decrease)
Personal care products
For the Year Ended December 31, (in thousands)
Increase / (Decrease)
Personal care net sales
Liquidity and Capital Resources
Financing Agreements
Please see Note 6 to our Consolidated Financial Statements for information on our Loan Agreement (defined below) with UMB, which replaced our Prior Credit Agreement with Chase on July 1, 2020.
Liquidity and Changes in Cash Flows
At December 31, 2020, we had $3,578 available on our revolving credit facility with UMB, and approximately $5 in cash on hand, a decrease of $1,089 from December 31, 2019 due to our acquisition of Biz and Dryel, which will help grow our household
14
segment.
The following is a summary of cash provided by or used in each of the indicated types of activities:
For the Year Ended December 31, (in thousands)
Change
We anticipate that our existing cash and our anticipated future cash flow from operations, together with our Loan Facility, will be sufficient to meet our cash requirements for the 12 months following the filing date of this Report. Beginning on April 1, 2021, we expect to incur additional capital expenditures associated with our ERP system implementation. These capital expenditures are fixed and recurring $38 monthly payments for implementation services and we have already paid for our ERP software.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment and make estimates. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could ultimately differ from those estimates. The accounting policies that are most critical in the preparation of the Company’s Consolidated Financial Statements are those that are both important to the presentation of the Consolidated Financial Statements and require significant or complex judgments and estimates on the part of management.
Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. See Note 1(m), “Revenue Recognition” in our Consolidated Financial Statements for additional discussion.
Intangible Assets and Goodwill
Our intangible assets and goodwill policy is significant because the amount is a significant component of our consolidated balance sheets. Further, determining estimated useful lives of our intangible assets is subjective and can change the impact on our results of operations. See Note 1(i), “Intangible Assets and Goodwill” in our Consolidated Financial Statements for additional discussion.
InventoriesValuation
Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We specifically identify impairment write downs for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.
As of December 31, 2020, we specifically identified slow moving and obsolete raw material inventory, resulting in an impairment of $876.
15
Income Taxes
Our income taxes policy is significant because our estimate for taxes is a key component of our results of operations. See Note 1(l), “Income Taxes” in our Consolidated Financial Statements for additional discussion.
Recently Issued Accounting Standards
For information on recently issued accounting standards, see Note 1(q), “Recently Issued Accounting Standards,” to our Consolidated Financial Statements in Item 8.
Subsequent Events
On March 26, 2021, we amended our Loan Agreement with UMB with the First Amendment to Loan and Security Agreement (“First Amendment”) to provide additional covenant flexibility as a result of pandemic related supply chain issues. The First Amendment is effective as of December 31, 2020. The Company’s fixed charge coverage ratio, applicable for the months ending August 31, 2021 through December 31, 2021, on a trailing 12-month basis, and net equity covenant targets were modified and the interest rate for both our revolving credit facility and term loan will increase by 2.0%. The interest rate increase will remain until we have a consecutive three-month period of no defaults or events of default and our fixed charge coverage ratio is greater than or equal to 1.20 to 1.00. Finally, the First Amendment provided minimum cumulative cash flow after debt service amounts for each monthly year-to-date period from January 1, 2021 through July 31, 2021.
The First Amendment is attached as Exhibit 10.22 to this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Scott’s Liquid Gold - Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidating balance sheets of Scott’s Liquid Gold - Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill – Refer to Notes 1(i) and 5 to the consolidated financial statements
Critical Audit Matter Description
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired. Goodwill is subject to annual impairment tests, and if it is determined to be impaired, goodwill is written down to fair value.
We identified the Company's goodwill as a critical audit matter because of the significant estimates and assumptions management makes to estimate the fair value of its reporting units, especially considering the acquisition of new product lines and recent impact of the COVID-19 pandemic. This required a high degree of auditor judgment and an increased extent of effort was required when performing the audit procedures to evaluate the methodology and the reasonableness of related assumptions, as well as the inputs and calculations related to the forecasts of future net sales and earnings and the allocation of fair value to the Company’s reporting units.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to management’s annual goodwill impairment test included the following, among others:
17
Business Combination – Refer to Notes 1(k) and 4 to the consolidated financial statements
Critical Audit Matter Description
The Company applied the acquisition method of accounting for the CR Brands business combination. This methodology requires the Company 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. In connection with the CR Brands acquisition the Company also recorded a liability for contingent consideration related to an earn-out payable upon the achievement of future sales to a specific customer.
We identified the Company's business combination as a critical audit matter because of the significant estimates and judgment in determining the fair values assigned to the acquired assets and assumed liabilities especially considering management’s assumptions surrounding estimated future cash flows. The Company determines fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates, net sales growth rates, gross margins, operating expenses, income and future cash flows.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the CR Brands business combination included the following, among others:
Income Taxes – Refer to Notes 1(l) and 8 to the consolidated financial statements
Critical Audit Matter Description
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. 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. 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 identified accounting for income taxes as a critical audit matter because of the degree of subjectively involved in evaluating tax positions, the future realization of deferred tax assets and the complexity of tax laws and regulations. Performing audit procedures and evaluating audit evidence obtained related to these considerations required a high degree of judgment and effort.
How the Critical Audit Matter was Addressed in the Audit
18
Our audit procedures related to the accounting for income taxes included the following, among others:
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2003.
March 29, 2021
Denver, Colorado
19
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended
December 31,
Impairment of inventories 876 107
Operating expenses:
Intangible asset amortization 1,195 634
Impairment of property and equipment 107 342
Interest income 3 93
Interest expense (345 ) (22 )
Gain on sale of equipment - 110
Other income 350 -
Loss before income taxes (2,245 ) (1,170 )
Net loss per common share
Weighted average shares outstanding
See accompanying notes to these Consolidated Financial Statements.
20
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except par value amounts)
December 31, December 31,
Assets
Current assets:
Cash and cash equivalents $ 5 $ 1,094
Income taxes receivable 535 705
Property and equipment held for sale - 500
Other current assets 112 71
Property and equipment, net 18 124
Operating lease right-of-use assets 2,985 188
Other assets 38 -
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt 1,000 -
Operating lease liabilities, current portion 249 197
Other current liabilities 67 -
Long-term debt, net of current portion and debt issuance costs 4,521 -
Operating lease liabilities, net of current 3,032 19
Shareholders’ equity:
Total liabilities and shareholders’ equity $ 33,556 $ 26,091
See accompanying notes to these Consolidated Financial Statements.
21
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(in thousands)
Common Stock
Shares Amount Capital in Excess of Par Retained Earnings Total
Stock-based compensation - - 149 - 149
Stock options exercised 54 5 38 - 43
Stock-based compensation - - 176 - 176
Stock options exercised 51 5 62 - 67
See accompanying notes to these Consolidated Financial Statements.
22
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended
December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 1,430 796
Stock-based compensation 332 149
Deferred income taxes (229 ) (322 )
Gain on sale of equipment - (110 )
Impairment of equipment 107 342
Impairment of inventories 876 107
Change in operating assets and liabilities, net of the effects of acquisitions:
Prepaid expenses and other assets (323 ) 178
Income taxes receivable 170 (197 )
Accounts payable, accrued expenses, and other liabilities 331 (134 )
Total adjustments to net loss 5,133 1,336
Net cash provided by operating activities 3,582 679
Cash flows from investing activities:
Proceeds from sale of property and equipment 500 110
Purchase of internal-use software - (286 )
Purchase of property and equipment (17 ) (101 )
Cash paid for leasehold improvements (484 ) -
Reimbursement for leasehold improvements 433 -
Net cash used in investing activities (10,097 ) (5,860 )
Cash flows from financing activities:
Proceeds from revolving credit facility 16,995 4,000
Repayments of revolving credit facility (13,573 ) (4,000 )
Proceeds from term loan 3,000 -
Repayments of term loan (417 ) -
Proceeds from PPP loan 600 -
Repayment of PPP loan (600 ) -
Payments for debt issuance costs (646 ) -
Proceeds from exercise of stock options 67 43
Net cash provided by financing activities 5,426 43
Net decrease in cash and cash equivalents (1,089 ) (5,138 )
Cash and cash equivalents, beginning of period 1,094 6,232
Cash and cash equivalents, end of period $ 5 $ 1,094
Supplemental disclosures:
Cash paid during the period for interest $ 183 $ 22
See accompanying notes to these Consolidated Financial Statements.
23
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies
(a) Company Background
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954. Scott’s Liquid Gold-Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or “us”) develop, market, and sell quality household and personal care products. We are also a distributor in the United States of personal care products manufactured by another company. 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”).
(d) Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, the realization of deferred tax assets, reserves for slow moving and obsolete inventory, customer returns and allowances, intangible asset useful lives and amortization method, fair value of assets acquired in business combinations, and stock-based compensation. Actual results could differ from our estimates.
(e) Cash Equivalents
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
Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We specifically identify impairment write downs for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.
As of December 31, 2020, we specifically identified slow moving and obsolete raw material inventory, resulting in an impairment of $876.
(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. 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.
(h) Leases
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present
24
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, 2020, 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, 2020, 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. 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.
(l) Income Taxes
Income taxes reflect the tax effects of transactions reported in the Consolidated Financial Statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
25
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, 2020 and 2019 was 30.9% and 43.8% respectively, which can differ from the statutory income tax rate due to permanent book-to-tax differences.
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. The tax impact of the carryback of 2019 losses was recorded in the first quarter income tax provision. We elected to defer our portion of employee social security taxes, of which 50% is payable by December 31, 2021 and the remaining is payable by December 31, 2022.
(m) Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.
Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted.
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.
26
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:
Allowance for doubtful accounts 183 51
(n) Advertising Costs
We expense advertising costs as incurred.
(o) Stock-Based Compensation
We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options with only service conditions using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the vesting period using the straight-line method, which approximates the service period.
The Company issues restricted stock unit ("RSUs") awards with restrictions that lapse upon the passage of time (service vesting) and satisfaction of market conditions targeted to our Company’s stock price. For those restricted stock unit awards with only service vesting, the Company recognizes compensation cost on a straight-line basis over the service period. For awards with both market and service conditions, the Company starts recognizing compensation cost over the requisite service period, with the effect of the market conditions reflected in the calculation of the award's fair value at grant date. The Company values awards with only service vesting requirements based on the grant date share price. The Company values awards with market and service conditions using a Monte Carlo simulation. The Company determines the requisite service period for awards with both market and service conditions based on the longer of the explicit service period and the derived service period. Stock awards that contain market vesting conditions are included in the computations of diluted EPS reflecting the average number of shares that would be issued based on the highest 30-day average market price at the end during the reporting periods, if their effect is dilutive. If the condition is based on an average of market prices over some period of time, the corresponding average for the period is used.
(p) Operating Costs and Expenses Classification
Cost of sales includes costs associated with purchasing finished goods from contract manufacturers, labor, freight-in, quality control, repairs, maintenance, and other indirect costs, 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 $3,008 and $2,523, for the years ended December 31, 2020 and 2019, 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 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. We continue to assess the impact of this guidance.
27
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The purpose of ASU 2020-04 is to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance primarily provides temporary optional expedients which simplify the accounting for contract modifications to existing debt agreements expected to arise from the market transition from LIBOR to alternative reference rates. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply amendments prospectively through December 31, 2022. The optional expedients were available to be used upon issuance of this guidance but we have not yet applied the guidance because we have not yet modified any of our existing contracts for reference rate reform. The Company is currently assessing the impact of ASU 2020-04 on our Consolidated Financial Statements.
(r) Recently Adopted 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. This guidance was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-11 required entities that did not adopt the amendments in ASU 2016-13 as of November 2019 to adopt ASU 2019-11. This ASU contains the same effective dates and transition requirements as ASU 2016-13. We adopted ASU 2016-13 and ASU 2019-11 effective January 1, 2020. The Company determined the standards did not have a material impact on our consolidated 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 modified disclosure requirements related to fair value measurement. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Effective January 1, 2020, the Company adopted ASU 2018-13 and concluded the standard did not have a material impact on our consolidated financial statements.
Note 2. Inventories
Inventories, consisting of materials, labor and overhead at December 31 were comprised of the following:
Impairment of raw materials (876 ) (107 )
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 (i) acquired certain of our assets, which included all fixed assets utilized in the manufacturing and warehouse operations of the Company, (ii) assumed all of the Company’s obligations under its existing real property leases, (iii) manufactured certain products of the Company on a transitional basis, and (iv) paid cash consideration of $500 (collectively, the “Elevation Transaction”). The Elevation Transaction closed on March 10, 2020.
We concluded that the property and equipment we 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. For the year ended December 31, 2020, we recorded an additional impairment of $107 associated with plant equipment for which we had no current active market or reasonably estimable disposition price.
28
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:
Production equipment $ - $ 129
Office furniture and equipment 151 134
Less accumulated depreciation (167 ) (173 )
Depreciation expense for the years ended December 31, 2020 and 2019 was $17 and $105, respectively.
Note 4. Acquisitions
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 “Paramount Acquisition”). The Company concluded that the Paramount Acquisition qualified as a business combination under ASC 805. The total cash consideration paid for the Paramount Acquisition was $5,583. The Paramount Acquisition included contingent consideration we valued at $27. As of December 31, 2020, we determined that no revaluation of the initial contingent consideration value was necessary.
On June 25, 2020, we entered into an Asset Purchase Agreement (the “CR Brands Purchase Agreement”) with CR Brands, Inc., a Delaware corporation (“CR Brands”), and Sweep Acquisition Company, a Delaware corporation (“Sweep” and together with CR Brands, “Sellers”), pursuant to which we agreed to purchase from Sellers substantially all of the assets, properties, rights and interests of Sellers primarily used in the business of designing, formulating, marketing and selling laundry care products to retail and wholesale customers under the Biz® and Dryel® brand names. The transactions contemplated by the CR Brands Purchase Agreement were consummated on July 1, 2020 (the “CR Brands Acquisition”). The Company concluded that the CR Brands Acquisition qualified as a business combination under ASC 805. The total cash consideration paid for the CR Brands Acquisition was $10,529. The CR Brands Acquisition included contingent consideration we valued at $35. As of December 31, 2020, we determined that no revaluation of the initial contingent consideration value was necessary.
Both acquisitions and related financial information are part of our household segment.
(a) Purchase Price Allocation
The following summarizes the aggregate fair values of the assets acquired as part of the Paramount Acquisition:
Inventories $ 306
Intangible assets 3,595
Total assets acquired $ 5,610
The following summarizes the aggregate fair values of the assets acquired as part of the CR Brands Acquisition:
Intangible assets 7,235
Total assets acquired $ 10,564
Intangible assets for the Paramount Acquisition consist of the following:
29
Intangible Assets Useful Life
Customer relationships $ 2,330 10 to 13 years
Formulas and batching processes 370 10 years
Non-compete 15 5 years
Intangible assets for the CR Brands Acquisition consist of the following:
Intangible Assets Useful Life
Customer relationships $ 4,500 9 years
Formulas and batching processes 930 8 years
Non-compete 25 5 years
In addition to the assets described above, the Company recorded a $27 and a $35 liability associated with contingent consideration for the Paramount Acquisition and CR Brands Acquisition, respectively, which are 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 CR Brands Acquisition are subject to adjustment during the measurement period (up to one year from each acquisition date). The primary areas of the accounting for the CR Brands 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 is 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 date of the CR Brands Acquisition 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 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.
(b) Pro Forma Results of Operations (Unaudited)
The following table summarizes selected unaudited pro forma consolidated statements of operations data for the year ended December 31, 2019, as if the Paramount Acquisition had been completed on January 1, 2019.
The following table summarizes selected unaudited pro forma consolidated statements of operations data for the years ended December 31, 2020 and 2019, as if the CR Brands Acquisition had been completed on January 1, 2019.
This selected unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the Paramount Acquisition and the CR Brands Acquisition had been completed on that date. Moreover, this information does not indicate what our future operating results will be. The information for 2019 prior to the Paramount Acquisition and for 2019 and 2020 prior to the CR Brands Acquisition is based on prior accounting records maintained by Paramount and CR Brands. In some cases, Paramount’s and CR Brands’ accounting policies may differ materially from accounting policies adopted by the Company following the Paramount Acquisition and the CR Brands Acquisition.
30
The pro forma amounts above reflect the application of accounting policies and adjustment of the results of the Paramount Acquisition and CR Brands Acquisition to reflect: (1) the additional amortization that would have been charged to the acquired intangible assets; (2) additional interest expense relating to the borrowings on our Chase line of credit and UMB term loan and revolving credit facility, respectively; and (3) the tax impacts.
Note 5. Goodwill and Intangible Assets
Intangible assets consisted of the following:
Intangible assets:
Internal-use software (not placed in service) 286 - 286 286 - 286
Amortization expense for the years ended December 31, 2020 and 2019 was $1,251 and $690, respectively.
Estimated amortization expense for 2021 and subsequent years is as follows:
Note 6. Long-Term Debt and Line-of-Credit
On July 1, 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”) with UMB Bank, N.A. (“UMB”) and we terminated our Credit Agreement, dated June 30, 2016, with JPMorgan Chase Bank, N.A., (as amended, the “Prior Credit Agreement”). Under the Loan Agreement we obtained a $3,000 term loan, with equal monthly payments fully amortized over three years, and interest at the LIBOR Rate + 4.50% with a floor of 5.50%, and a revolving credit facility, with a maximum commitment of $7,000 with interest at the LIBOR Rate + 3.75%, with a floor of 4.75%. The revolving credit facility will terminate on July 1, 2023, unless terminated earlier pursuant to the terms of the Loan Agreement. The loans are secured by all of the assets of the Company and all of its subsidiaries.
The Loan Agreement requires, among other affirmative, negative and financial covenants, that we maintain a Fixed Charge Coverage Ratio of no less than 1.20 to 1.0, determined on a monthly basis. The Loan Agreement also contains covenants typical of transactions of this type, including among others, limitations on the our ability to: create, incur or assume any indebtedness or lien on our assets; pay dividends or make other distributions; redeem, retire or acquire outstanding common stock, options, warrants or other rights; make fundamental changes to our corporate structure or business; make investments or sell assets; or engage in certain other activities as set forth in the Loan Agreement.
The Company was in compliance with the Loan Agreement financial covenants as of December 31, 2020.
31
As of December 31, 2020, our term loan and revolving credit facility had an outstanding balance of $2,583 and $3,422, respectively, with an all-in interest rate of 5.50% and 4.75%, respectively. Unamortized loan costs were $484 as of December 31, 2020.
As of December 31, 2020, the total principal payments due on our outstanding debt were as follows:
Revolving Credit Facility Term Loan Total
Note 7. Leases
We have entered into leases for our corporate headquarters and office equipment with remaining lease terms up to 10 years. Some of these leases include both lease and non-lease components, which are accounted for 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.
On March 11, 2020, we executed an office lease for a new corporate headquarters. As of that date, we had the right to control the use of the asset, which qualified as an operating lease. There were no initial direct costs associated with our new office lease and our deposit is fully refundable.
Information related to leases was as follows:
Operating lease information:
Operating lease cost $ 355 $ 793
Operating cash flows from operating leases 61 773
Net assets obtained in exchange for new operating lease liabilities 3,156 2,862
Weighted average remaining lease term in years 9.86 0.51
Weighted average discount rate 5.1 % 5.0 %
Future minimum annual lease payments are as follows:
Total minimum lease payments $ 4,216
Less imputed interest (935 )
Total operating lease liability $ 3,281
32
Note 8. Income Taxes
The provision for income tax for the years ended December 31 is as follows:
Current benefit:
Total current benefit (465 ) (191 )
Deferred benefit:
Total deferred benefit (229 ) (322 )
Benefit:
Total benefit $ (694 ) $ (513 )
Income tax expense at the statutory tax rate is reconciled to the overall income tax expense for the years ended December 31 as follows:
Federal income tax benefit at statutory rates $ (469 ) $ (246 )
State income tax benefit, net of federal tax effect (73 ) (38 )
Permanent differences 2 3
Nondeductible stock-based compensation 5 13
Foreign-derived intangible income deduction - (183 )
Rate difference in NOL Carryback (167 ) -
Benefit for income taxes $ (694 ) $ (513 )
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, 2020 and 2019 are comprised of the following:
Deferred tax assets:
Net operating loss carryforwards $ 42 $ 156
Accrued vacation and bonus 60 38
Intangibles and Goodwill 137 112
Operating lease liabilities 801 53
Deferred tax liabilities:
Operating lease right-of-use assets (729 ) (46 )
Accumulated depreciation for tax purposes - (89 )
Total deferred tax liabilities (729 ) (135 )