Horizon Kinetics Holding Corp 10-Q for FY2022 Q2
Horizon Kinetics Holding Corp (HKHC)
About this 10-Q
Horizon Kinetics Holding Corp filed this 10-Q on August 12, 2022, covering the quarter ended June 30, 2022 (FY2022 Q2).
Headline figures
Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.38M
- down 30.7% from $7.77M a year earlier
- Net loss
- $4.33M
- compared with a net loss of $1.07M a year earlier
- Diluted EPS
- -$0.34
- compared with -$0.08 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Exchange Act.
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of, August 12, 2022 the registrant had
CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, in addition to historical information. All statements, other than statements of historical facts, included in this Report that address activities, events, or developments with respect to our financial condition, results of operations, or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. You can typically identify forward-looking statements by the use of words, such as “may,” “could,” “should,” “assume,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” and other similar words. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements contained in this Report are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Forward-looking statements and our performance inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to:
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the impact of the COVID-19 pandemic on our business, suppliers, consumers, customers, and employees; |
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disruptions or inefficiencies in the supply chain, including any impact of the COVID-19 pandemic; |
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dependence on third-party vendors and on sales to major customers; |
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regulations, economic conditions, and tariffs in the People’s Republic of China (“PRC”), as well as the transition from our exclusive distributor in the PRC to market and sell our products there; |
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a continued shift in the retail market from food and drug stores to mass merchandisers, club stores, dollar stores, e-commerce retailers, and subscription services; |
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competition from large consumer products companies in the United States; |
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competitive factors, including any decrease in distribution of (i.e., retail stores carrying) our significant products; |
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new competitive products and/or technological changes; |
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the need for effective advertising of our products and limited resources available for such advertising; |
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unfavorable economic conditions; |
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changing consumer preferences and the continued acceptance of each of our significant products in the marketplace; |
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the degree of success of any new product or product line introduction by us; |
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the degree of success of the integration of product lines or businesses we may acquire; |
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the degree of success of our conversion to outsourced manufacturing and dependence on third-party manufacturers; |
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changes in the regulation of our products, including applicable environmental, U.S. and international Food and Drug Administration regulations and process-audit compliance; |
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the loss of any executive officer or other personnel; |
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future losses which could affect our liquidity; |
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the risk that we may not be able to remediate the existing material weakness related to the impairment assessment of goodwill and develop and maintain effective internal controls over financial reporting; |
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other matters discussed in this Report, including the risks described in the Risk Factors section of this Report and in our Annual Report on Form 10-K for the year ended December 31, 2021 and subsequent Quarterly Reports on Form 10-Q. |
We caution you that forward-looking statements are not guarantees of future performance and that actual results or performance may be materially different from those expressed or implied in the forward-looking statements. The forward-looking statements in this Report speak as of the filing date of this Report. Although we may from time to time voluntarily update our prior forward-looking statements, we undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Report.
TABLE OF CONTENTS
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Item 1. |
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1 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 4. |
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Item 1A. |
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Item 6. |
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PART I
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ITEM 1. |
FINANCIAL STATEMENTS. |
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
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Three months ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net sales |
$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Advertising |
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Selling |
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General and administrative |
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Intangible asset amortization |
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Impairment of goodwill and intangible assets |
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- |
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- |
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Total operating expenses |
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Loss from operations |
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Interest expense |
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Loss before income taxes and discontinued operations |
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Income tax (expense) benefit |
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Loss from continuing operations |
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Income (loss) from discontinued operations, net of taxes |
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- |
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- |
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Net loss |
$ |
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$ |
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$ |
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$ |
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Basic and diluted net loss per common shares: |
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Loss from continuing operations |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Loss from discontinued operations |
$ |
- |
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$ |
- |
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$ |
- |
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$ |
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Net loss |
$ |
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$ |
( |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic and diluted |
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See accompanying notes to these Condensed Consolidated Financial Statements.
1
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except par value amounts)
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June 30, |
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December 31, |
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2022 |
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2021 |
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Assets |
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Current assets: |
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Cash |
$ |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Inventories |
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Income taxes receivable |
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Prepaid expenses |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Operating lease right-of-use assets |
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Other assets |
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Total assets |
$ |
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$ |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued expenses |
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Current portion of long-term debt |
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Operating lease liabilities, current portion |
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Total current liabilities |
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Long-term debt, net of current portion and debt issuance costs |
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Operating lease liabilities, net of current |
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Other liabilities |
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Total liabilities |
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Shareholders’ equity: |
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Preferred Stock, no par value, authorized |
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Common Stock; $ |
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Capital in excess of par |
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(Accumulated deficit) retained earnings |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ |
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$ |
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See accompanying notes to these Condensed Consolidated Financial Statements.
2
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands)
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Common Stock |
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Shares |
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Amount |
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Capital in Excess of Par |
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(Accumulated Deficit) Retained Earnings |
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Total |
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Balance, December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Restricted stock unit vesting |
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- |
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Balance, March 31, 2022 (Unaudited) |
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Stock-based compensation |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, June 30, 2022 (Unaudited) |
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$ |
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$ |
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$ |
( |
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$ |
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Balance, December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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Stock-based compensation |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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Balance, March 31, 2021 (Unaudited) |
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Stock-based compensation |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, June 30, 2021 (Unaudited) |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to these Condensed Consolidated Financial Statements.
3
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
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Six Months Ended |
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June 30, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided (used) by operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Deferred income taxes |
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- |
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( |
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Impairment of goodwill and intangible assets |
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- |
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Change in operating assets and liabilities: |
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Accounts receivable |
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( |
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Inventories |
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( |
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Prepaid expenses and other assets |
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Income taxes receivable |
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Accounts payable, accrued expenses, and other liabilities |
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Total adjustments to net loss |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Purchase of software |
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( |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Repayments on term loans |
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Proceeds from revolving credit facility |
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Repayments of revolving credit facility |
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( |
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( |
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Net cash (used in) provided by financing activities |
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( |
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Net (decrease) increase in cash and restricted cash |
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Cash and restricted cash, beginning of period |
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Cash and restricted cash, end of period |
$ |
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$ |
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Supplemental disclosures: |
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Cash paid during the period for interest |
$ |
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$ |
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See accompanying notes to these Condensed Consolidated Financial Statements.
4
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands, except per share data)
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Note 1. |
Organization and Summary of Significant Accounting Policies |
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(a) |
Company Background |
Scott’s Liquid Gold-Inc., a Colorado corporation was incorporated on February 15, 1954. Scott’s Liquid Gold-Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” or “us”) develop, market and sell high quality products. Our business is comprised of
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(b) |
Principles of Consolidation |
Our Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
On December 23, 2021, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Dryel® product line. We have reflected the operations of the Dryel® product line as discontinued operations for all periods presented, which were previously classified under our household products segment. See Note 2 for further information.
|
(c) |
Basis of Presentation |
The unaudited Condensed Consolidated Statements of Operations, Condensed Consolidated Balance Sheets, and Condensed Consolidated Statements of Cash Flows included in this Report have been prepared by the Company. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at June 30, 2022 and results of operations and cash flows for all periods have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the period ended June 30, 2022 are not necessarily indicative of the operating results for the full year and are unaudited.
|
(d) |
Use of Estimates |
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, the realization of deferred tax assets, reserves for slow moving and obsolete inventory, customer returns and allowances, intangible asset useful lives and amortization method, fair value of assets acquired in business combinations, operating lease right-of-use assets and operating lease liabilities, and stock-based compensation. Actual results could differ from our estimates.
|
(e) |
Cash and Restricted Cash |
Cash and restricted cash consist of the following:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Cash |
$ |
|
|
|
$ |
|
|
|
Restricted Cash |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
5
(f)Inventories Valuation and Reserves
Inventories consist of raw materials and finished goods and are stated at the lower of cost (first-in, first-out method) or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We estimate an inventory reserve, which is generally not material to our financial statements, for slow moving and obsolete products and raw materials based upon, among other things, an assessment of historical and anticipated sales of our products. In the event that actual results differ from our estimates, the results of future periods may be impacted.
Inventories were comprised of the following at:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Finished goods |
|
|
|
|
$ |
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Our remaining raw materials balance is to be sold to contract manufacturing partners based on production demand.
|
(g) |
Property and Equipment |
Property and equipment are recorded at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from
|
(h) |
Leases |
Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
Certain nonlease components, such as maintenance and other services provided by the lessor, are included in the valuation of the lease. Leases with an initial term of 12 months or less, which are not material to our financial statements, are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term. Lease agreements with lease and nonlease components are combined as a single lease component.
The Company evaluates reimbursable leasehold improvements based on whether improvements are indicative of a lessor or lessee asset. The Company concluded that all of its reimbursable leasehold improvement payments have qualified as lessor assets and, as such, have accounted for leasehold improvement payments as prepaid rent included in prepaid expenses on the Condensed Consolidated Balance Sheets.
|
(i) |
Intangible Assets and Goodwill |
Goodwill is subject to impairment tests at least annually or when events or changes in circumstances indicate that an asset may be impaired. Other intangible assets with finite lives, such as customer relationships, trade names, and formulas, are amortized over their estimated useful lives, generally ranging from
Internal-use software costs recognized as an intangible asset relates to capitalizable costs of computer software obtained for internal-use as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40-30-1. All other internal-use software costs are expensed as incurred by the Company. Amortization will be recorded over the estimated useful life of the software once the software is ready for its intended use and placed into service. In the second quarter of 2022, our internal-use software was implemented for its intended use. The estimated useful life for internal-use software is five years and will be periodically reassessed based on considerations for obsolescence, technology, competition, and other economic factors.
6
|
(j) |
Financial Instruments |
Financial instruments which potentially subject us to concentrations of credit risk include cash, restricted cash, and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. Historically, we have maintained balances in various operating accounts in excess of federally insured limits. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, based upon factors surrounding the credit risk of specific customers, historical trends and other information. We have
The recorded amounts for cash, restricted cash, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
|
(k) |
Income Taxes |
Income taxes reflect the tax effects of transactions reported in the Condensed Consolidated Financial Statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. A valuation allowance is established when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. We classify penalty and interest expense related to income tax liabilities as an income tax expense. There are
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three and six months ended June 30, 2022 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, and permanent differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to realize deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more likely than not threshold for realizability. Accordingly, a valuation allowance has been recorded against the Company’s net deferred tax assets as of June 30, 2022, and December 31, 2021.
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. The tax impact of the carryback of the 2020 loss was recorded in the first quarter 2021 income tax provision. We elected to defer our portion of social security tax payments, and we paid this liability in the third quarter of 2021.
7
|
(l) |
Revenue Recognition |
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.
Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of both customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted.
Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce our revenue in that period.
Sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
We have also established an allowance for doubtful accounts. We estimate this allowance based upon, among other things, an assessment of the credit risk of specific customers and historical trends. We believe our allowance for doubtful accounts is adequate to absorb any losses which may arise. In the event that actual losses differ from our estimates, the results of future periods may be impacted.
Customer allowances for trade promotions and allowance for doubtful accounts are included in net accounts receivable on the Condensed Consolidated Balance Sheets and were as follows:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Trade promotions |
$ |
|
|
|
$ |
|
|
|
Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(m) |
Advertising Costs |
We expense advertising costs as incurred.
8
|
(n) |
Stock-Based Compensation |
We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options with only service conditions using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the vesting period using the straight-line method, which approximates the service period.
The Company issues restricted stock unit ("RSUs") awards with restrictions that lapse upon the passage of time (service vesting) and satisfaction of market conditions targeted to our Company’s stock price. For those RSU awards with only service vesting, the Company recognizes compensation cost on a straight-line basis over the service period. For awards with both market and service conditions, the Company starts recognizing compensation cost over the requisite service period, with the effect of the market conditions reflected in the calculation of the award's fair value at grant date. The Company values awards with only service vesting requirements based on the grant date share price. The Company values awards with market and service conditions using a Monte Carlo simulation. The Company determines the requisite service period for awards with both market and service conditions based on the longer of the explicit service period and the derived service period. Stock awards that contain market vesting conditions are included in the computations of diluted EPS reflecting the average number of shares that would be issued based on the highest 30-day average market price during the reporting periods, if their effect is dilutive. If the condition is based on an average of market prices over some period of time, the corresponding average for the period is used.
|
(o) |
Operating Costs and Expenses Classification |
Cost of sales includes costs associated with manufacturing and distribution including labor, materials, freight-in, purchasing and receiving, quality control, repairs, maintenance, and other indirect costs, as well as warehousing and distribution costs. We classify freight-out as selling expenses. Other selling expenses consist primarily of costs for sales and sales support personnel, brokerage commissions, and promotional costs. Freight-out costs included in selling expenses totaled $
General and administrative expenses consist primarily of wages and benefits associated with management and administrative support departments, business insurance costs, professional fees, office facility related expenses, and other general support costs.
On April 29, 2021, the Company announced that Mark E. Goldstein, the President and Chief Executive Officer of the Company and a member of the Board of Directors, retired effective as of
|
(p) |
Recently Issued Accounting Standards |
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The purpose of ASU 2020-04 is to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance primarily provides temporary optional expedients which simplify the accounting for contract modifications to existing debt agreements expected to arise from the market transition from LIBOR to alternative reference rates. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply amendments prospectively through December 31, 2022. The 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 Condensed Consolidated Financial Statements.
9
Note 2. Discontinued Operations
On December 23, 2021, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Dryel® product line. The total consideration paid to us was $
Under ASC 360, a long-lived asset group should be classified as held for sale if all of the established criteria are met. The sale of Dryel® did not meet these criteria in the year ending December 31, 2021, because we had not established an active program to locate a buyer and because the brand was not being marketed for sale. All efforts between the buyer and the Company occurred during the fourth quarter of 2021. As a result, there was no adjustment to fair value under ASC 360 guidance related to held for sale assets, and the difference between the consideration paid to us and the carrying amount of all assets is reflected in the loss on sale of discontinued operations.
We have reflected the operations of the Dryel® product line as discontinued operations. Our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. Our Condensed Consolidated Statements of Equity and Statements of Cash Flows combine the results of continuing and discontinued operations. As of the three and six months ended June 30, 2022, there were
Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Loss from Discontinued Operations in the Condensed Consolidated Statements of Operations for the three and six months ended June 30:
|
|
Three Months Ended June 30, 2021 |
|
|
Six Months Ended June 30, 2021 |
|
||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Operating expenses: |
|
|
|
|
|
||
|
Selling |
|
|
|
|
|
|
|
|
Intangible asset amortization |
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before tax |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
( |
) |
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
$ |
|
|
|
$ |
( |
) |
|
Note 3. |
Stock-Based Compensation |
On January 18, 2022, we granted
On March 2, 2022, we granted
10
Compensation cost related to stock options totaled $
Compensation cost related to RSUs totaled $
|
Note 4. |
Earnings per Share |
Per share data is determined by using the weighted average number of common shares outstanding. Common equivalent shares are considered only for diluted earnings per share, unless considered anti-dilutive. Common equivalent shares, determined using the treasury stock method, result from stock options with exercise prices that are below the average market price of the common stock.
Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in our earnings.
A reconciliation of the weighted average number of common shares outstanding (in thousands) is as follows. The dilutive effect of stock options and RSUs are excluded for periods in which the Company has a net loss because the impact is anti-dilutive.
|
|
Three months ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Common shares outstanding, beginning of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares issued |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common share equivalents |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Diluted weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents (in thousands) that have been excluded from the calculation of earnings per share because they would have been anti-dilutive:
|
|
Three months ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. |
Segment Information |
We operate in
The following provides information on our segments for the three and six months ended June 30:
|
|
For the Three Months Ended June 30, 2022 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
11
|
|
For the Three Months Ended June 30, 2021 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2022 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(Loss) Income from operations |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2021 |
|
|||||||||
|
|
Household Products |
|
|
Health and Beauty Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. |
Goodwill and Intangible Assets |
During the second quarter of 2022,
|
|
Intangible Assets |
|
|
Goodwill |
|
|
Total |
|
|||
|
All-Purpose |
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2022 and 2021 were as follows:
|
|
Detergent |
|
|
Shampoo |
|
|
All-Purpose |
|
|
Total |
|
|
||||
|
Balance, January 1, 2022 |
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
|
Additions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Impairment |
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
Balance, June, 30, 2022 |
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2021 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Additions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
12
Intangible assets, which are comprised of our capitalized costs of software obtained for internal-use or are related to our acquisition of our Prell®, Denorex®, BIZ® and Kids N Pets® brands, consisted of the following:
|
|
As of June 30, 2022 |
|
|
As of December 31, 2021 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||||
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formulas and batching processes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal-use software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Non-compete agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The change in the net carrying amounts of intangible assets during 2022 was due to capitalization of costs related to our internal-use software, the impact of impairment charges related to intangible assets in our All-Purpose reporting unit, and amortization expense. Amortization expense for the three months ended June 30, 2022 and 2021 was $
Estimated amortization expense for 2022 and subsequent years is as follows:
|
Remainder of 2022 |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
$ |
|
|
|
Note 7. |
Long-Term Debt and Line-of-Credit |
On July 1, 2020, we entered into a Loan and Security Agreement (as amended, the “UMB Loan Agreement”) with UMB Bank, N.A. (“UMB”) and we terminated our Credit Agreement, dated June 30, 2016, with JPMorgan Chase Bank, N.A., (as amended, the “Prior Credit Agreement”). Under the UMB Loan Agreement we obtained a $
The UMB Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis. The UMB Loan Agreement also contains covenants typical of transactions of this type, including among others, limitations on our ability to: create, incur or assume any indebtedness or lien on our assets; pay dividends or make other distributions; redeem, retire or acquire outstanding common stock, options, warrants or other rights; make fundamental changes to our corporate structure or business; make investments or sell assets; or engage in certain other activities as set forth in the UMB Loan Agreement.
As of June 30, 2022, the Company was in violation of the financial covenant related to minimum monthly cash flow after debt service.
On August 10, 2022, we entered into the Fifth Amendment to the Loan and Security Agreement, effective May 31, 2022, which, among other things, amends our minimum monthly cash flow after debt service requirement, raises the applicable margin on our interest rate which will increase the interest rate on the revolving credit facility to
As of June 30, 2022, our UMB revolving credit facility and UMB term loan had an outstanding balance of $
13
On
The La Plata Loan Agreement requires compliance with affirmative, negative, and financial covenants, as determined on a monthly basis beginning in July 2022. The La Plata Loan Agreement is secured by all of the assets of the Company and all of its subsidiaries, subordinate to the security of the UMB Loan Agreement. In conjunction with this agreement, we also entered into an intercreditor and subordination agreement with UMB and La Plata, effective November 9, 2021. The Company was in compliance with the La Plata Loan Agreement as of June 30, 2022.
As of June 30, 2022, our La Plata term loan had an outstanding balance of $
As of June 30, 2022, the total principal payments due on our outstanding debt were as follows:
|
|
Revolving Credit Facility |
|
|
Term Loan |
|
|
Total |
|
|||
|
Remainder of 2022 |
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum principal payments |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Note 8. |
Leases |
We have entered into a lease for our corporate headquarters with a remaining lease term of
Information related to leases was as follows:
|
|
Three Months Ended June 30, 2022 |
|
Six Months Ended June 30, 2022 |
|
||
|
Operating lease information: |
|
|
|
|
|
|
|
Operating lease cost |
$ |
|
|
$ |
|
|
|
Operating cash flows from operating leases |
|
|
|
|
|
|
|
Net assets obtained in exchange for new operating lease liabilities |
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term in years |
|
|
|
|
|
|
|
Weighted average discount rate |
|
|
% |
|
|
% |
Future minimum annual lease payments are as follows:
|
Remainder of 2022 |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total minimum lease payments |
$ |
|
|
|
Less imputed interest |
|
( |
) |
|
|
|
|
|
|
Total operating lease liability |
$ |
|
|
14
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. This Item 2 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Please refer to "Item 1A. Risk Factors" in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of the uncertainties, risks and assumptions associated with these statements.
Executive Overview
Our Business
Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve while creating shareholder value. We develop, market, and sell high-quality, high-value household and health and beauty care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors.
COVID-19 Pandemic
For our fiscal quarter ended June 30, 2022, the coronavirus (COVID-19) pandemic continued to cause economic and social disruptions that led to ongoing uncertainties. During the first quarter of 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic. Such impacts have included significant volatility in the global stock markets, and uncertainty in the costs and performance of our supply chain and logistics partners. We expect to see continued volatility in these areas, which could impact our operating results in future periods.
Supply Chain and Outsourcing Partners
As a result of COVID-19, we have encountered various supply chain disruptions impacting the availability and lead times of certain raw materials for our finished goods products. We have been proactively identifying alternative sources for raw materials to mitigate the impacts of these disruptions. All of our outsourcing partners, including contract manufacturing plants and third-party logistics warehouses, have remained open during the entirety of COVID-19, however, they have had difficulties with staffing their workforce to keep production lines running.
Inflation
Inflationary trends in certain markets and global supply chain challenges may negatively affect our sales and operating performance. We experienced the impact of greater inflation on material, logistical and other costs during the current quarter. We are aiming to offset these inflationary costs through a combination of pricing and cost savings strategies. We currently anticipate the impact of inflation in certain markets will be increasingly significant continuing into the fourth quarter and fiscal 2023. We will continue to implement mitigation strategies and price increases to offset these trends; however, such measures may not fully offset the impact to our operating performance.
Distribution Agreement with Church & Dwight
Our distribution agreement with Church & Dwight Co., Inc. (“Church & Dwight”) and our subsidiary, Neoteric Cosmetics, Inc., was not extended beyond the Expiration Date of December 31, 2021. As a result, the distribution agreement expired on its own terms as of the Expiration Date and the Company ceased to distribute Batiste Dry Shampoo products. Unless offset by increased sales of our other products, the conclusion of this distribution agreement is expected to have a material impact on our net sales and result of operations. Net sales of Batiste were $3,170 for the six months ended June 30, 2021.
15
Sale of Dryel® Brand
On December 23, 2021, we sold the Dryel® brand to a company that markets and distributes household cleaning products. We have reflected the operations of Dryel® as discontinued operations for all periods presented. These results are excluded from our segment results of household products, which previously included Dryel® operating results. See Note 2 - “Discontinued Operations” in the Notes to Condensed Consolidated Financial Statements for further information.
Results of Operations
Three months ended June 30, 2022 compared to three months ended June 30, 2021
|
|
Three Months Ended June 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
5,383 |
|
|
$ |
7,769 |
|
|
$ |
(2,386 |
) |
|
|
(30.7 |
%) |
|
Cost of sales |
|
3,108 |
|
|
|
4,662 |
|
|
|
(1,554 |
) |
|
|
(33.3 |
%) |
|
Gross profit |
|
2,275 |
|
|
|
3,107 |
|
|
|
(832 |
) |
|
|
(26.8 |
%) |
|
Gross margin |
|
42.3 |
% |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
174 |
|
|
|
203 |
|
|
|
(29 |
) |
|
|
(14.3 |
%) |
|
Selling |
|
1,844 |
|
|
|
2,392 |
|
|
|
(548 |
) |
|
|
(22.9 |
%) |
|
General and administrative |
|
698 |
|
|
|
1,687 |
|
|
|
(989 |
) |
|
|
(58.6 |
%) |
|
Intangible asset amortization |
|
121 |
|
|
|
264 |
|
|
|
(143 |
) |
|
|
(54.2 |
%) |
|
Impairment of goodwill and intangible assets |
|
3,589 |
|
|
|
- |
|
|
|
3,589 |
|
|
|
100.0 |
% |
|
Total operating expenses |
|
6,426 |
|
|
|
4,546 |
|
|
|
1,880 |
|
|
|
41.4 |
% |
|
Loss from operations |
|
(4,151 |
) |
|
|
(1,439 |
) |
|
|
(2,712 |
) |
|
|
(188.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(130 |
) |
|
|
(76 |
) |
|
|
(54 |
) |
|
|
(71.1 |
%) |
|
Loss before income taxes and discontinued operations |
|
(4,281 |
) |
|
|
(1,515 |
) |
|
|
(2,766 |
) |
|
|
(182.6 |
%) |
|
Income tax (expense) benefit |
|
(52 |
) |
|
|
400 |
|
|
|
(452 |
) |
|
|
(113.0 |
%) |
|
Loss from continuing operations |
|
(4,333 |
) |
|
|
(1,115 |
) |
|
|
(3,218 |
) |
|
|
(288.6 |
%) |
|
Income from discontinued operations |
|
- |
|
|
|
49 |
|
|
|
(49 |
) |
|
|
(100.0 |
%) |
|
Net loss |
$ |
(4,333 |
) |
|
$ |
(1,066 |
) |
|
$ |
(3,267 |
) |
|
|
(306.5 |
%) |
Change in net loss was primarily due to the following:
|
|
• |
Lower sales and gross profits from the conclusion of our distribution agreement with Church & Dwight for Batiste products, as well as reduced sales and gross profits from various product lines due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures. |
|
|
• |
Gross margin increased due to product sales mix including the elimination of our Church and Dwight distribution agreement, as distributed products required higher promotional activity with customers which reduced our margins. |
|
|
• |
Decreased in selling expenses caused by lower logistics and warehousing costs from lower sales as well as a reduction in personnel costs. |
|
|
• |
Decrease in general and administrative costs due to changes in personnel and related costs as well as reductions in restructuring costs associated with separation of employees during 2021. |
|
|
• |
Decreased intangible asset amortization from reduced carrying amounts related to impairments recognized in 2021. |
|
|
• |
Impairment of goodwill and intangible assets associated with our All-Purpose reporting unit. |
16
Segment Results
Household products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume, and percentage changes for household products between periods:
|
|
Three Months Ended June 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
3,145 |
|
|
$ |
3,072 |
|
|
$ |
73 |
|
|
|
2.4 |
% |
|
Gross profit |
$ |
1,139 |
|
|
$ |
962 |
|
|
$ |
177 |
|
|
|
18.4 |
% |
|
Gross margin |
|
36.2 |
% |
|
|
31.3 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(4,148 |
) |
|
$ |
(1,138 |
) |
|
$ |
(3,010 |
) |
|
|
(264.5 |
%) |
|
|
• |
Net sales, gross profit, and gross margin increased due to higher in-stock levels of our Scott’s Liquid Gold® Wood Care product, which were partially offset by shortages of our BIZ® powder items and decreases in our other products due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures. |
|
|
• |
Loss from operations primarily due to the impairment of goodwill and intangible assets associated with our All-Purpose reporting unit. |
Health and beauty care products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume and percentage changes for health and beauty care products between periods:
|
|
Three Months Ended June 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales - distributed products |
$ |
- |
|
|
$ |
1,209 |
|
|
$ |
(1,209 |
) |
|
|
(100.0 |
%) |
|
Net sales - manufactured products |
$ |
2,238 |
|
|
$ |
3,488 |
|
|
$ |
(1,250 |
) |
|
|
(35.8 |
%) |
|
Total health and beauty net sales |
$ |
2,238 |
|
|
$ |
4,697 |
|
|
$ |
(2,459 |
) |
|
|
(52.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
$ |
1,136 |
|
|
$ |
2,145 |
|
|
$ |
(1,009 |
) |
|
|
(47.0 |
%) |
|
Gross margin |
|
50.8 |
% |
|
|
45.7 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(3 |
) |
|
$ |
(301 |
) |
|
$ |
298 |
|
|
|
99.0 |
% |
|
|
• |
Net sales of distributed health and beauty care products decreased due to the termination of our Batiste distribution agreement with Church & Dwight. |
|
|
• |
Net sales and gross profits from manufactured products decreased due to decreased sales of Alpha® Skin Care to our exclusive China distributor as well as elimination of sales of our Prell® and Denorex® brands to certain customers with minimal profitability. |
|
|
• |
Gross margins increased due to the elimination of our Church & Dwight distribution agreement and elimination of sales of our shampoo products to certain customers, as these sales required higher promotional activity which reduced our margins. |
17
Six months ended June 30, 2022 compared to six months ended June 30, 2021
|
|
Six Months Ended June 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
11,172 |
|
|
$ |
16,613 |
|
|
$ |
(5,441 |
) |
|
|
(32.8 |
%) |
|
Cost of sales |
|
5,978 |
|
|
|
9,525 |
|
|
|
(3,547 |
) |
|
|
(37.2 |
%) |
|
Gross profit |
|
5,194 |
|
|
|
7,088 |
|
|
|
(1,894 |
) |
|
|
(26.7 |
%) |
|
Gross margin |
|
46.5 |
% |
|
|
42.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
326 |
|
|
|
362 |
|
|
|
(36 |
) |
|
|
(9.9 |
%) |
|
Selling |
|
4,061 |
|
|
|
4,801 |
|
|
|
(740 |
) |
|
|
(15.4 |
%) |
|
General and administrative |
|
1,444 |
|
|
|
2,972 |
|
|
|
(1,528 |
) |
|
|
(51.4 |
%) |
|
Intangible asset amortization |
|
226 |
|
|
|
529 |
|
|
|
(303 |
) |
|
|
(57.3 |
%) |
|
Impairment of goodwill and intangible assets |
|
3,589 |
|
|
|
- |
|
|
|
3,589 |
|
|
|
100.0 |
% |
|
Total operating expenses |
|
9,646 |
|
|
|
8,664 |
|
|
|
(2,607 |
) |
|
|
(11.3 |
%) |
|
Loss from operations |
|
(4,452 |
) |
|
|
(1,576 |
) |
|
|
713 |
|
|
|
182.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(280 |
) |
|
|
(110 |
) |
|
|
(170 |
) |
|
|
(154.5 |
%) |
|
Loss before income taxes and discontinued operations |
|
(4,732 |
) |
|
|
(1,686 |
) |
|
|
(3,046 |
) |
|
|
(180.7 |
%) |
|
Income tax benefit |
|
(52 |
) |
|
|
445 |
|
|
|
(497 |
) |
|
|
(111.7 |
%) |
|
Loss from continuing operations |
|
(4,784 |
) |
|
|
(1,241 |
) |
|
|
(3,000 |
) |
|
|
(285.5 |
%) |
|
Loss from discontinued operations |
|
- |
|
|
|
(105 |
) |
|
|
105 |
|
|
|
0.0 |
% |
|
Net loss |
$ |
(4,784 |
) |
|
$ |
(1,346 |
) |
|
$ |
(2,895 |
) |
|
|
(255.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net loss was primarily due to the following:
|
|
• |
Lower sales and gross profits from the conclusion of our distribution agreement with Church & Dwight for Batiste products, as well as reduced sales and gross profits from various product lines due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures. |
|
|
• |
Gross margin increased due to product sales mix including the elimination of our Church and Dwight distribution agreement, as distributed products required higher promotional activity with customers which reduced our margins. |
|
|
• |
Decreased in selling expenses caused by lower logistics and warehousing costs from lower sales as well as a reduction in personnel costs. |
|
|
• |
Decrease in general and administrative costs due to changes in personnel and related costs as well as reductions in restructuring costs associated with separation of employees during 2021. |
|
|
• |
Decreased intangible asset amortization from reduced carrying amounts related to impairments recognized in 2021. |
|
|
• |
Impairment of goodwill and intangible assets associated with our All-Purpose reporting unit. |
18
Segment Results
Household products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume, and percentage changes for household products between periods:
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
6,355 |
|
|
$ |
6,928 |
|
|
$ |
(573 |
) |
|
|
(8.3 |
%) |
|
Gross profit |
$ |
2,630 |
|
|
$ |
2,711 |
|
|
$ |
(81 |
) |
|
|
(3.0 |
%) |
|
Gross margin |
|
41.4 |
% |
|
|
39.1 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(4,484 |
) |
|
$ |
(1,522 |
) |
|
$ |
(2,962 |
) |
|
|
(194.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• |
Net sales, gross profit, and gross margin increased due to higher in-stock levels of our Scott’s Liquid Gold® Wood Care product, which were partially offset by shortages of our BIZ® powder items and decreases in our other products due to changes in our customers’ purchasing strategies related to inventory and inflationary pressures. |
|
|
• |
Loss from operations primarily due to the impairment of goodwill and intangible assets associated with our All-Purpose reporting unit. |
Health and beauty care products
The following table shows comparative net sales, gross margin, gross profit, income (loss) from operations, volume and percentage changes for health and beauty care products between periods:
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Health and beauty care net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed products |
$ |
- |
|
|
$ |
3,170 |
|
|
$ |
(3,170 |
) |
|
|
(100.0 |
%) |
|
Manufactured products |
|
4,817 |
|
|
|
6,515 |
|
|
|
(1,698 |
) |
|
|
(26.1 |
%) |
|
Total personal care net sales |
$ |
4,817 |
|
|
$ |
9,685 |
|
|
$ |
(4,868 |
) |
|
|
(50.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
$ |
2,563 |
|
|
$ |
4,377 |
|
|
$ |
(1,814 |
) |
|
|
(41.4 |
%) |
|
Gross margin |
|
53.2 |
% |
|
|
45.2 |
% |
|
|
|
|
|
|
|
|
|
Income (Loss) from operations |
$ |
32 |
|
|
$ |
(54 |
) |
|
$ |
86 |
|
|
|
159.2 |
% |
|
|
• |
Net sales of distributed health and beauty care products decreased due to the termination of our Batiste distribution agreement with Church & Dwight. |
|
|
• |
Net sales and gross profits from manufactured products decreased due to decreased sales of Alpha® Skin Care to our exclusive China distributor as well as elimination of sales of our Prell® and Denorex® brands to certain customers with minimal profitability. |
|
|
• |
Gross margins increased due to the elimination of our Church & Dwight distribution agreement and elimination of sales of our shampoo products to certain customers, as these sales required higher promotional activity which reduced our margins. |
19
Liquidity and Capital Resources
Overview
Our primary sources of funds include cash expected to be generated from operations and borrowings from our line of credit. Our principal uses of cash are to fund planned operating expenditures, interest payments, and any principal payments on our line of credit. Working capital movements are influenced by the sourcing of materials related to the production of products.
Financing Agreements
Please see Note 7 to our Condensed Consolidated Financial Statements for information on our UMB Loan Agreement and La Plata Loan Agreement.
Liquidity and Changes in Cash Flows
At June 30, 2022, we had $2,392 available on our revolving credit facility with UMB, and approximately $316 in cash on hand, a decrease of $954 when compared to the balance as of December 31, 2021 as this cash was utilized to reduce long-term debt balances.
The following is a summary of cash provided by or (used in) each of the indicated types of activities:
|
|
Six Months Ended June 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Operating activities |
$ |
466 |
|
|
$ |
(705 |
) |
|
$ |
1,171 |
|
|
|
166.1 |
% |
|
Investing activities |
|
(142 |
) |
|
|
(113 |
) |
|
|
(29 |
) |
|
|
(25.7 |
%) |
|
Financing activities |
|
(1,278 |
) |
|
|
833 |
|
|
|
(2,111 |
) |
|
|
(253.4 |
%) |
|
|
• |
Net cash provided by operating activities was primarily related conversion of working capital from accounts receivable and offset by investments in finished goods inventories. |
|
|
• |
Net cash used in investing activities was due to purchases relating to our internal-use software. |
|
|
• |
Net cash used in financing activities related to net repayments of our various debt facilities. |
The uncertainty related to the COVID-19 outbreak has impacted our operations and could affect our future results. While we believe that our business model will allow us to generate sufficient operating cash flows, our liquidity has been affected by inflationary pressures at our customers which have caused sales decreases and higher costs on materials, logistics, and other purchases. We expect that our current cash reserves and availability under our UMB Loan Agreement and La Plata Loan Agreement will be sufficient to meet operational cash needs during the next twelve months, but further supply chain disruptions in the short-term could limit our liquidity.
|
ITEM 4. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of June 30, 2022, we conducted an evaluation, under the supervision and with the participation of our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2022 due to the operating effectiveness of the review of the impairment assessment of goodwill prepared by a third-party firm.
20
Remediation Plan
We are committed to maintaining a strong internal control environment and we are developing a remediation plan designed to help ensure that this material weakness is remediated as soon as possible, which may include the following measures:
|
|
a. |
refine the scope of the Company’s external impairment assessment advisors to provide advice related to complex or unusual items; and |
|
|
b. |
enhance the design and precision of the Company’s controls related to the impairment assessment calculations and documentation, including controls related to the review of the valuation reports utilized in the impairment assessment. |
The material weakness will not be considered remediated until a sustained period of time has passed to allow management to test the design and operational effectiveness of the corrective actions. Until the material weakness is remediated, we plan to continue to perform additional analyses and other procedures to ensure that our Condensed Consolidated Financial Statements are prepared in accordance with GAAP.
Notwithstanding such material weakness in internal control over financial reporting, our President and Chief Financial Officer have concluded that the Condensed Consolidated Financial Statements in Part I, Item 1 of this report, present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with GAAP.
Changes in Internal Control over Financial Reporting
In June 2022, we implemented an enterprise resource planning (“ERP”) software system on a company-wide basis. Despite this transition in software, there has not been a significant change in internal controls over financial reporting. Over the remainder of 2022, certain internal controls over financial reporting will be automated, modified, or implemented to address the new control environment associated with the ERP system. Additionally, the Company completed pre-implementation and post-implementation internal control monitoring associated with the launch. While we believe that this new system will enhance its internal control over financial reporting, there are inherent risks in implementing any new system, and we will continue to monitor and evaluate these control changes as part of our assessment of the control design and effectiveness throughout 2022.
There have been no other changes in our internal control over financial reporting that occurred during the second quarter of 2022 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
21
PART II
|
ITEM 1A. |
RISK FACTORS |
We have identified a material weakness in our internal control over financial reporting.
We are a public reporting company subject to the rules and regulations established from time to time by the SEC. As a public company we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting.
As disclosed in Part I, Item 4, “Disclosure Controls and Procedures,” we have identified a material weakness in our controls related to the operating effectiveness of the review of the impairment assessment of goodwill prepared by a third-party firm as of June 30, 2022. We did not maintain effective controls to sufficiently review the completeness and accuracy of the impairment assessment.
This material weakness did not result in any restatements to our Condensed Consolidated Financial Statements. Our management is committed to remediating this material weakness and is in the process of developing a remediation plan to address the material weakness.
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition, or future results.
|
ITEM 6. |
EXHIBITS |
|
Exhibit Number |
|
Document |
|
10.1 |
|
Fifth Amendment to Loan and Security Agreement, Dated August 10, 2022. |
|
31.1 |
|
|
|
31.2 |
|
Rule 13a-14(a) Certification of the Chief Financial Officer. |
|
32.1* |
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRLtags are embedded within the Inline XBRL document. |
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
* |
Furnished, not filed. |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
SCOTT’S LIQUID GOLD-INC. |
|||
|
By: |
|
/s/ Tisha Pedrazzini |
|
|
|
|
Tisha Pedrazzini, President |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
By: |
|
/s/ David M. Arndt |
|
|
|
|
David M. Arndt, Chief Financial Officer |
|
|
|
|
(Principal Financial and Chief Accounting Officer) |
|
Date: August 12, 2022
23
EXHIBIT 10.1
FIFTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”) dated as of August 10, 2022, is entered into by umb bank, n.a. (together with its successors and assigns, “Lender”), SCOTT’S LIQUID GOLD-INC., a Colorado corporation (“SLG”), SLG CHEMICALS, INC., a Colorado corporation (“Chemicals”), and NEOTERIC COSMETICS, INC., a Colorado corporation (“NC”, and together with SLG and Chemicals, collectively, “Borrowers” and each, a “Borrower”) and each of the undersigned guarantors (collectively “Guarantors” and together with Borrowers, “Obligors”), with reference to the following facts:
RECITALS
|
A. |
Lender and Borrowers are parties to a Loan and Security Agreement dated as of July 1, 2020 (as amended, supplemented, replaced, restated or otherwise modified, the “Loan Agreement”), pursuant to which Lender has provided certain credit facilities to Borrowers. |
|
B. |
Borrowers have requested that Lender make certain modifications to the Loan Agreement. |
|
C. |
Lender is willing to provide such accommodations to the Borrowers on the terms and conditions set forth below. |
NOW, THEREFORE, the parties hereby agree as follows:
|
1. |
Defined Terms. Any and all initially capitalized terms used in this Amendment (including, without limitation, in the Recitals to this Amendment) without definition shall have the respective meanings assigned thereto in the Loan Agreement. The following defined terms in Section 1.1 of the Loan Agreement are hereby added or amended and restated in their entirety, as appropriate, to read as follows: |
“‘Applicable Margin’ means 6.75%.
‘Base Rate’ means for any day a rate per annum equal to the greater of (a) one percent (1.00%), or (b) Daily Adjusting Term SOFR Rate plus the SOFR Adjustment.
‘Benchmark Replacement Supplement’ means the Amended and Restated Benchmark Replacement Supplement dated as of August 10, 2022.
‘Borrowing Base’ means, as of any date of determination, an amount equal to:
(a)85% (or such lesser percentage as Lender may in its Permitted Discretion determine from time to time) of the Net Amount of Eligible Accounts; plus
(b)the least of:
-1-
(i)50% minus the Inventory Advance Reduction Amount (or such lesser percentage as Lender may in its Permitted Discretion determine from time to time) of the Net Amount of Eligible Inventory;
(ii)85% minus the Inventory Advance Reduction Amount (or such lesser percentage as Lender may in its Permitted Discretion determine from time to time) of the Net Orderly Liquidation Value of Eligible Inventory; plus; and
(iii)$2,000,000, minus
(c)the sum of all Reserves.
Without limiting Lender’s Permitted Discretion to implement other Reserves, Lender shall have the option to institute Reserves with respect to Eligible Accounts in the event that dilution exceeds 5.00% such that the advance rate on such account shall be reduced by 1.00% for each percentage of dilution in excess of 5.00%.
‘Daily Adjusting Term SOFR Rate’ means, for any day, the rate per annum equal to the Term SOFR Rate. The Daily Adjusting Term SOFR Rate shall be adjusted on a daily basis; provided that, if such rate is not published on such determination date then the rate will be the Term SOFR Rate on the first Business Day immediately prior thereto. The determination of the Daily Adjusting Term SOFR Rate by Lender shall be conclusive in the absence of manifest error.
‘Inventory Advance Reduction Amount’ means for each period set forth in the table below, the corresponding percentage:
|
Period |
Inventory Advance Reduction Amount |
|
September 1, 2022 through September 30, 2022 |
1% |
|
October 1, 2022 through October 31, 2022 |
2% |
|
November 1, 2022 through November 30, 2022 |
3% |
|
December 1, 2022 through December 31, 2022 |
4% |
|
January 1, 2023 through January 31, 2023 |
5% |
|
February 1, 2023 through February 28, 2023 |
6% |
|
March 1, 2023 through March 31, 2023 |
7% |
|
April 1, 2023 through April 30, 2023 |
8% |
-2-
|
May 1, 2023 through May 31, 2023 |
9% |
|
From and after June 1, 2023 |
10% |
‘Revolving Facility Limit’ means $4,000,000.
‘SOFR Adjustment’ means 0.08%.
‘Term SOFR Rate’ means, subject to the terms of the Benchmark Replacement Supplement, on any date of determination, the greater of (a) 0.00% and (b) the 1 Month Term SOFR published by CME Group Benchmarks Administration Limited (or a successor administrator designated by the relevant authority) as reported on Bloomberg Screen SR1M or other similar service selected by Lender subject to the provisions of the Benchmark Replacement Supplement.”
|
2. |
Financial Covenants. Effective as of May 31, 2022, Section 9.1 of the Loan Agreement is hereby amended to read in full as follows: |
“‘Section 9.1Financial Covenants.
(a)Minimum Tangible Net Worth. Tangible Net Worth as of the last day of each month, shall not be less than the Tangible Net Worth Requirement. As used herein:
(i)‘Tangible Net Worth Requirement’ means as the Tangible Net Worth of Borrowers on December 31, 2022, determined as of the first Determination Date following December 31, 2022, which Tangible Net Worth Requirement shall be increased (but not decreased) on each Determination Date thereafter by an amount equal to 25% of positive Net Income for the fiscal year immediately preceding such Determination Date, based on the audited financial statements required by Section 8.1(a) with respect to the fiscal year ending prior to such Determination Date.
(ii)‘Determination Date’ means the date that Borrowers are required to deliver audited financial statements as set forth in Section 8.1(a).
(b)Minimum Fixed Charge Coverage Ratio. Commencing with the month ended June 30, 2023, Borrowers’ Fixed Charge Coverage Ratio as of each month-end shall not be less than 1.20 to 1.00. Borrowers’ Fixed Charge Coverage Ratio shall be measured on a trailing twelve month basis.
(c)Minimum Monthly Cash Flow After Debt Service. Borrowers’ monthly Cash Flow After Debt Service, for each Test Period below, shall not be less than the amount opposite such Test Period through June 30, 2023:
|
Test Period |
Cumulative Cash Flow After Debt Service |
|
May 1, 2022 through May 31, 2022 |
-$360,000 |
-3-
|
June 1, 2022 through June 30, 2022 |
-$150,000 |
|
July 1, 2022 through July 31, 2022 |
-$550,000 |
|
July 1, 2022 through August 31, 2022 |
-$850,000 |
|
July 1, 2022 through September 30, 2022 |
-$850,000 |
|
July 1, 2022 through October 31, 2022 |
-$850,000 |
|
July 1, 2022 through November 30, 2022 |
-$850,000 |
|
July 1, 2022 through December 31, 2022 |
-$850,000 |
|
July 1, 2022 through January 31, 2023 |
-$800,000 |
|
July 1, 2022 through February 28, 2023 |
-$750,000 |
|
July 1, 2022 through March 31, 2023 |
-$750,000 |
|
July 1, 2022 through April 30, 2023 |
-$750,000 |
|
July 1, 2022 through May 31, 2023 |
-$750,000 |
|
July 1, 2022 through June 30, 2023 |
-$750,000” |
|
|
(a) |
Lender has a valid, perfected and first priority security interest and lien upon all of the Collateral to secure the Obligations; |
|
|
(b) |
Each of the Loan Documents is in full force and effect, and is enforceable against such Obligor and the Collateral in accordance with its respective terms; and |
|
|
(c) |
Such Obligor has no defenses, offsets, recoupments or counterclaims to: (i) its obligation to pay all amounts from time to time owing and to perform all obligations required to be performed under the Loan Documents, (ii) enforcement of Lender’s rights in and to the Collateral, or (iii) enforcement of any other of Lender’s rights or remedies. |
4.Representations and Warranties. Each Obligor represents and warrants to Lender that:
|
|
(a) |
Upon the effectiveness of this Amendment, there exists no Default or Event of Default, or any other condition or occurrence of events that constitutes or with the passage of time or the giving of notice or both, would constitute a Default or Event of Default, under the Loan Agreement or any other Loan Document. |
|
|
(b) |
Each Obligor executing and delivering this Amendment, has been duly authorized to execute and deliver this Amendment by all necessary corporate action on the part of such Obligor. |
-4-
|
|
(c) |
All representations and warranties of the Obligors contained in the Loan Documents, except for those that speak as of a particular date, are and remain true and correct in all material respects as of the date of this Amendment. |
|
5. |
Conditions Precedent. The effectiveness of this Amendment shall be subject to the prior satisfaction of each of the following conditions: |
|
|
(a) |
This Amendment. Lender shall have received this Amendment duly executed by an authorized officer of Borrowers and Guarantors; |
|
|
(b) |
Revolving Note. Lender shall have received the Amended and Restated Revolving Note duly executed by an authorized officer of Borrowers; |
|
|
(c) |
Benchmark Replacement Supplement. Lender shall have received the Amended and Restated Benchmark Replacement Supplement duly executed by an authorized officer of Borrowers; |
|
|
(d) |
Officers Certificate. Lender shall have received a duly executed Officer’s Certificate in form acceptable to Lender. |
|
7. |
Integration. This Amendment, and the documents referred to herein constitute the entire agreement of the parties in connection with the subject matter hereof and cannot be changed or terminated orally. All prior agreements, understandings, representations, warranties and negotiations regarding the subject matter hereof, if any, are merged into this Amendment. |
-5-
|
ordinances and statutory, regulatory, or judicially created laws or rules of any other jurisdiction), which provides: |
“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR OR RELEASING PARTY DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR OR RELEASED PARTY.”
|
11. |
Costs and Expenses. Borrowers agree to pay upon demand all of Lender’s expenses, including without limitation reasonable, reasonably documented attorneys’ fees, charges and disbursements of outside counsel for Lender, incurred in connection with the preparation, negotiation, review, analysis, administration, enforcement or modification of, and collection and other litigation relating to, or arising out of the Loan Agreement or any other Loan Document, or any amounts owing thereunder. Lender may pay someone else to help collect such amounts and to enforce the Loan Agreement or any other Loan Document, and Borrowers will pay that amount. This includes, subject to any limits under applicable law, reasonable, reasonably documented Lender’s attorneys’ fees and legal expenses, whether or not there is a lawsuit, including attorneys’ fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), foreclosure costs, appeals, and any anticipated post-judgment collection services. Borrowers will pay any court costs, in addition to all other sums provided by law. |
|
12. |
Governing Law. This Amendment, the interpretation and construction of this Amendment and any provision of this Amendment and of any issue relating to the transactions contemplated by this Amendment shall be governed by the laws of the State of CALIFORNIA, not including conflicts of law rules. |
|
14. |
Further Assurances. Borrowers agree to execute and deliver such other agreements, documents and instruments and take such other actions as Lender may reasonably request in connection with the transactions contemplated by this Amendment. |
|
15. |
ENTIRE AGREEMENT. THIS AMENDMENT, THE LOAN AGREEMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH |
-6-
[Signature Page Follows]
-7-
IN WITNESS WHEREOF, Obligors and Lender have executed this Amendment by their respective duly authorized officers as of the date first above written.
-8-
|
|
GUARANTORS: By: /s/ David Arndt |
[Fifth Amendment to
Loan and Security Agreement]
-9-
AMENDED AND RESTATED REVOLVING NOTE
FOR VALUE RECEIVED, SCOTT’S LIQUID GOLD-INC., a Colorado corporation (“SLG”), SLG CHEMICALS, INC., a Colorado corporation (“Chemicals”), and NEOTERIC COSMETICS, INC., a Colorado corporation (“NC”, and together with SLG and Chemicals, collectively, “Borrowers” and each, a “Borrower”), hereby promise to pay to the order of UMB BANK, N.A. (“Lender”), in lawful money of the United States of America and in immediately available funds, the principal amount of FOUR MILLION DOLLARS AND NO/100 ($4,000,000) or such lesser amount as shall equal the aggregate unpaid principal amount of the Revolving Loans made by Lender to Borrowers under the Loan Agreement (defined below) on the dates and in the principal amounts provided in the Loan Agreement and to pay interest on the unpaid principal amount of each such Revolving Loan, at such office, in like money and funds, for the period commencing on the date of such Revolving Loan until such Revolving Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement.
This promissory note (this “Note”) is executed and delivered by Borrowers pursuant to the certain Loan and Security Agreement dated as of July 1, 2020, between Borrowers, the Guarantors from time to time party thereto, and Lender (as amended, supplemented or otherwise modified from time to time, the “Loan Agreement”). Capitalized terms used but not defined herein have the respective meaning ascribed to them in the Loan Agreement. This Note further evidences the Revolving Loans made by Lender to Borrowers under the Loan Agreement. This Note, the Revolving Loans made by Lender to Borrowers hereunder, accrued interest thereon and all rights and remedies of Lender in respect thereof are subject to the terms of the Loan Agreement and nothing herein shall limit or otherwise impair any provision of the Loan Agreement. The Loan Agreement, among other things, contains provisions for acceleration of the maturity of the principal indebtedness evidenced by this Note upon the happening of certain stated events and for prepayments of Loans prior to the maturity of this Note upon the terms and conditions specified in the Loan Agreement.
Borrowers hereby authorize the Lender to record in its records the amount of the Revolving Loans and all payments of principal and interest in respect thereof, which records shall, in the absence of manifest error, be conclusive; provided, however, that the failure to make such notation with respect to the Revolving Loans or payment shall not limit or otherwise affect the obligations of Borrowers under the Loan Agreement or this Note.
Except as may be otherwise provided by the Loan Agreement and without impairing or otherwise limiting any waivers provided by the Loan Agreement and the other Loan Documents, each Borrower and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally hereby waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind with respect to the obligations evidenced by this Note.
In no contingency or event whatsoever shall the amount of interest (including the aggregate of all charges, fees, benefits, or other compensation which constitutes interest under any applicable law) under this Note and the other Loan Documents paid by any Borrower, received by Lender, agreed to be paid by any Borrower, or requested or demanded to be paid by Lender, exceed the Maximum Rate, and all provisions of this Note and the other Loan Documents in respect of the contracting for, charging, or receiving compensation for the use, forbearance, or detention of money shall be limited as provided by Section 3.8 of the Loan Agreement (which is deemed to be incorporated herein by reference).
This Note, the interpretation and construction of this Note and of any provision of this Note and of any issue relating to the transactions contemplated by this Note shall be governed by the laws of the State of CALIFORNIA not including conflict of laws rules.
This Note amends and restates, but does not constitute a novation of, the Revolving Note dated July 1, 2020 in the principal amount of $7,000,000.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
Executed as of the date set forth above.
SCOTT’S LIQUID GOLD-INC.,
a Colorado corporation
By: /s/ David Arndt
Name: David Arndt
Title: Chief Financial Officer
SLG CHEMICALS, INC.,
a Colorado corporation
By: /s/ David Arndt
Name: David Arndt
Title: Chief Financial Officer
NEOTERIC COSMETICS, INC.,
a Colorado corporation
By: /s/ David Arndt
Name: David Arndt
Title: Chief Financial Officer
AMENDED AND RESTATED BENCHMARK REPLACEMENT SUPPLEMENT
This Amended and Restated Benchmark Replacement Supplement (this “Supplement”) is entered into as of August 10, 2022, between umb bank, n.a. (together with its successors and assigns, “Lender”), SCOTT’S LIQUID GOLD-INC., a Colorado corporation (“SLG”), SLG CHEMICALS, INC., a Colorado corporation (“Chemicals”), and NEOTERIC COSMETICS, INC., a Colorado corporation (“NC”, and together with SLG and Chemicals, collectively, “Borrowers” and each, a “Borrower”) and supplements the Loan and Security Agreement dated as of July 1, 2020 (as has been or may be amended, supplemented, replaced, restated or otherwise modified, the “Loan Agreement”).
(a)Benchmark Replacement. Notwithstanding anything to the contrary herein or in any other Loan Document, upon the occurrence of a Benchmark Transition Event, the Benchmark Replacement will replace the then-current Benchmark for all purposes this Agreement or any other Loan Document in respect of any Benchmark setting at or on the first (1st) day of the month immediately following the month in which Lender provides written notice to Borrower of the Benchmark Transition Event (the “Benchmark Transition Start Date”). Such amendment shall become effective without any further action or consent of any Borrower; provided, however, that Borrower shall execute any amendment(s) evidencing the Benchmark Replacement and any Benchmark Replacement Conforming Changes within ten (10) Business Days of delivery of such amendment by Lender to Borrowers.
(b)Benchmark Replacement Conforming Changes. In connection with the implementation of a Benchmark Replacement, Lender will have the right to make Benchmark Replacement Conforming Changes from time to time and, notwithstanding anything to the contrary herein or in any other Loan Document, any amendment(s) implementing such Benchmark Replacement Conforming Changes will become effective without any further action or consent of Borrower, but shall be subject to Borrower’s obligation to execute any amendment(s) evidencing the same.
(c)Notices; Standards for Decisions and Determinations. Lender will promptly notify Borrower of: (i) any occurrence of a Benchmark Transition Event and its Benchmark Transition Start Date; (ii) implementation of any Benchmark Replacement, (iii) the effect of any Benchmark Replacement Conforming Changes. Any determination, decision, or election that may be made by Lender pursuant to this Supplement, including any determination with respect to a tenor, rate, or adjustment, or of the occurrence or non-occurrence of an event, circumstance, or date, and any decision to take or refrain from taking any action, will be conclusive and binding absent manifest error and may be made in Lender’s sole discretion and without the consent of Borrower except, in each case, as expressly required pursuant to this Supplement.
(d)Alternative Base Rate Until Benchmark Replacement is Selected. Upon the occurrence of a Benchmark Transition Event, commencing on the first Business Day of the following month and continuing until the Benchmark Replacement has been determined by Lender, the Term SOFR Rate shall be the Alternative Base Rate.
(e)Certain Defined Terms. As herein:
“Alternative Base Rate” means the Prime Rate plus or minus a spread adjustment (which may be a positive or negative value or zero), as determined by Lender (with
the intention that the Prime Rate plus or minus such spread shall be substantially equivalent to the previously available Base Rate).
“Benchmark” means initially, the Term SOFR Rate; provided that if a replacement of the Benchmark has occurred pursuant to clause (a), then “Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has replaced such prior benchmark rate.
“Benchmark Replacement” means the sum of: (a) the alternate benchmark rate that has been selected by Lender plus (b) the Benchmark Replacement Adjustment; provided that, if the Benchmark Replacement as so determined would be less than one percent (1.00%), then the Benchmark Replacement will be deemed to be one percent (1.00%) for the purposes of this Agreement.
“Benchmark Replacement Adjustment” means, with respect to any replacement of a Benchmark with an alternate benchmark rate, the spread adjustment applied to said alternate benchmark rate (which may be a positive or negative value or zero), or the method for calculating or determining such spread adjustment, that has been selected by Lender.
“Benchmark Replacement Conforming Changes” means, with respect to any Benchmark Replacement, any technical, administrative, or operational changes (including timing and frequency of determining rates and making payments of interest and other administrative matters) that Lender determines may be appropriate to reflect the adoption and implementation of such Benchmark Replacement and to permit the administration thereof by Lender in a manner substantially consistent with market practice (or, if Lender were to determine that adoption of any portion of such market practice is not administratively feasible, or if Lender were to determine that no market practice for the administration of the Benchmark Replacement exists, in such other manner of administration as Lender would determine is reasonably necessary in connection with the administration of this Agreement).
“Benchmark Transition Event” means, with respect to any then-current Benchmark, (a) the occurrence of a public statement or publication of information by or on behalf of the administrator of the then-current Benchmark, the regulatory supervisor for the administrator of such Benchmark, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, an insolvency official with jurisdiction over the administrator for such Benchmark, a resolution authority with jurisdiction over the administrator for such Benchmark or a court or an entity with similar insolvency or resolution authority over the administrator for such Benchmark, announcing or stating that (i) such administrator has ceased or will cease on a specified date to provide the relevant tenor of such Benchmark, permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide the equivalent tenor of such Benchmark or (ii) the relevant tenor of such Benchmark is or will no longer be representative of the underlying market and economic reality that such Benchmark is intended to measure and that representativeness will not be restored, or (b) a determination by Lender that (i) adequate and fair means do not exist for ascertaining any then-current Benchmark; or (ii) any then-current Benchmark does not accurately reflect the cost to the Lender of the Loans.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have duly executed this Supplement as of the date first written above.
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LENDER: By: /s/ John Watkins |
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BORROWERS: By: /s/ David Arndt |
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SLG CHEMICALS, INC. By: /s/ David Arndt |
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NEOTERIC COSMETICS, INC. By: /s/ David Arndt |
EXHIBIT 31.1
CERTIFICATION
I, Tisha Pedrazzini, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Scott’s Liquid Gold-Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Dated: August 12, 2022 |
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/s/ Tisha Pedrazzini |
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Tisha Pedrazzini |
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President |
EXHIBIT 31.2
CERTIFICATION
I, David M. Arndt, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Scott’s Liquid Gold-Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Dated: August 12, 2022 |
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/s/ David M. Arndt |
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David M. Arndt |
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Chief Financial Officer
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EXHIBIT 32.1
CERTIFICATION OF ANNUAL REPORT ON FORM 10-Q OF
SCOTT’S LIQUID GOLD-INC.
FOR THE QUARTER ENDED JUNE 30, 2022
Each of the undersigned hereby certifies, for the purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his or her capacity as an officer of Scott’s Liquid Gold-Inc. (“Scott’s Liquid Gold”), that to his or her knowledge:
1. This Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Scott’s Liquid Gold.
This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Quarterly Report on Form 10-Q. A signed original of this statement has been provided to Scott’s Liquid Gold and will be retained by Scott’s Liquid Gold and furnished to the Securities and Exchange Commission or its staff upon request.
This Certification is executed as of August 12, 2022.
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/s/ Tisha Pedrazzini |
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Tisha Pedrazzini |
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President |
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/s/ David M. Arndt |
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David M. Arndt |
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Chief Financial Officer
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