HKHC 10-Q
Horizon Kinetics Holding Corp (HKHC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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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.
Large accelerated filer |
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Accelerated filer |
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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 ☐ No
As of May 7, 2024 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:
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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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
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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March 31, |
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2024 |
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2023 |
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Net sales |
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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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- |
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Total operating expenses |
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Loss from operations |
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Interest income |
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- |
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Interest expense |
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- |
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Loss before income taxes and discontinued operations |
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Income tax benefit |
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- |
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Loss from continuing operations |
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Income from discontinued operations |
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- |
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Net (loss) income |
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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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Income from discontinued operations |
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$ |
- |
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$ |
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Net (loss) income |
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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
(in thousands, except par value amounts)
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March 31, |
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December 31, |
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2024 |
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2023 |
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(Unaudited) |
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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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Prepaid expenses |
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Total current assets |
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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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- |
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Operating lease liabilities, current portion |
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Total current liabilities |
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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, |
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Common Stock; $ |
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Capital in excess of par |
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Accumulated deficit |
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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
(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, 2023 |
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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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Balance, March 31, 2024 (unaudited) |
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$ |
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$ |
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$ |
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$ |
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Balance, December 31, 2022 |
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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 income |
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- |
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- |
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- |
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Balance, March 31, 2023 (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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Three Months Ended |
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March 31, |
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2024 |
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2023 |
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Cash flows from operating activities: |
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Net (loss) income |
$ |
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$ |
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Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: |
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Depreciation and amortization |
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- |
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Gain on disposal of discontinued operations |
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- |
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Stock-based compensation |
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Change in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other assets |
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Income taxes receivable |
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- |
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Accounts payable, accrued expenses, and other liabilities |
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( |
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( |
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Total adjustments to net (loss) income |
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Net cash (used in) provided by operating activities |
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Cash flows from investing activities: |
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Proceeds from sale of discontinued operations |
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- |
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Net cash provided by investing activities |
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- |
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Cash flows from financing activities: |
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Proceeds from term loans |
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- |
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Repayments on term loans |
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- |
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Proceeds from revolving credit facility |
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- |
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Repayments of revolving credit facility |
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- |
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Net cash used in 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)
Note 1. Organization and Summary of Significant Accounting Policies
(a) Company Background
Scott’s Liquid Gold-Inc., a Colorado corporation was incorporated on February 15, 1954. Scott’s Liquid Gold-Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” or “us”) develop, market and sell high quality products. Our business is comprised of one household products segment.
On December 19, 2023, Scott’s Liquid Gold-Inc. (the “Company”), Horizon Kinetics LLC (“Horizon Kinetics”) and HKNY ONE, LLC, a wholly-owned subsidiary of the Company (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for the acquisition of Horizon Kinetics by the Company. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, upon obtaining the requisite shareholder approval, (i) the Company will convert from a Colorado to a Delaware corporation, increase its authorized shares of common stock and change its name and (ii) Merger Sub will be merged with and into Horizon Kinetics, with Horizon Kinetics being the surviving entity (collectively, the "Merger").
(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.
(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 March 31, 2024 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, 2023. The results of operations for the period ended March 31, 2024 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:
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March 31, 2024 |
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December 31, 2023 |
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Cash |
$ |
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$ |
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Restricted Cash |
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$ |
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$ |
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As part of the Stock Purchase Agreement with the Neoteric Buyer, we agreed to maintain at least $
5
(f) Discontinued Operations
As discussed in Note 3, during 2023 the Company disposed of several brands that represented reporting units. Disposal groups that meet the discontinued operations criteria by the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 205-20-45 are classified as discontinued operations and are excluded from continuing operations and segment results for all periods presented.
(g) Financial Instruments
Financial instruments which potentially subject us to concentrations of credit risk include cash and cash equivalents and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. We establish an allowance for doubtful accounts, which is generally not material to our financial statements, based upon factors surrounding the credit risk of specific customers, historical trends and other information. We have
The recorded amounts for cash and cash equivalents, restricted cash, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
(h) Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.
Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of customer allowances and promotional programs for consumers are estimated using either the expected value or most likely amount approach, depending on the nature of the allowance, using all reasonably available information, including our historical experience and current expectations. Customer allowances and promotional programs for consumers are reflected in the transaction price when sales are recorded. We may adjust our estimates based on actual results and consideration of other factors that cause allowances. In the event that actual results differ from our estimates, the results of future periods may be impacted.
Sales returns are generally not material to our financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce our revenue in that period.
Sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
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 were as follows:
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March 31, 2024 |
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December 31, 2023 |
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Trade promotions |
$ |
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$ |
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Allowance for doubtful accounts |
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$ |
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$ |
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6
(i) Advertising Costs
We expense advertising costs as incurred.
(j) 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 earnings per share reflecting the average number of shares that would be issued based on the highest 30-day average market price at the end during the reporting periods, if their effect is dilutive. If the condition is based on an average of market prices over some period of time, the corresponding average for the period is used.
(p) Recently Issued Accounting Standards
Other recent accounting pronouncements and guidance issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.
Note 2. Liquidity
The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
Primarily due to a decline in net sales, disruption of our international sales to China, and increases in costs associated with the manufacture and distribution of our products, the Company sustained significant losses from operations in several reporting periods since 2019, had experienced cash used in operations in excess of its current cash position, and had an accumulated deficit as of December 31, 2022. As such, the Company previously believed at December 31, 2022 that it would require additional liquidity to continue its operations over the next 12 months.
As a result of the sales of our various brands as disclosed in Note 3 to the Condensed Consolidated Financial Statements, we fully repaid all long-term debt during 2023. As of March 31, 2024, have a cash balance of $
The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future or raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing, or grant unfavorable terms in licensing future licensing agreements.
Note 3. Discontinued Operations
Neoteric Cosmetics, Inc.
On September 15, 2023, we entered into and consummated a Stock Purchase Agreement with Neoteric Beauty Holdings, LLC, a Delaware limited liability company, pursuant to which the Company agreed to sell
7
The closing consideration paid to the Company was $
Alpha® Skin Care
Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Alpha® Skin Care brand. The Company received payments of $
BIZ®
Effective June 30, 2023, we entered into, and in July 2023 we closed, a purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the BIZ® brand. The transactions contemplated by the BIZ® Purchase Agreement were consummated on July 7, 2023. The total consideration paid to us was $
Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore
On January 23, 2023, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell all of our right, title and interest in and to certain assets of the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore product lines. The total consideration paid to us was $
Additionally, the buyer will pay a royalty equal to
Prell®
On December 15, 2022, we entered into an asset purchase agreement with a buyer, pursuant to which we agreed to sell to all of our right, title and interest in and to certain assets of the Prell® product line. The total consideration paid to us was $
8
equal to
Our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. Our Condensed Consolidated Statements of Equity and Statements of Cash Flows combine the results of continuing and discontinued operations. A summary of financial information related to our discontinued operations is as follows:
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 months ended March 31:
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2023 |
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Neoteric |
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Alpha® |
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BIZ® |
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Scott's Liquid Gold® |
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Prell® |
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Total |
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Net sales |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Advertising |
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|||||
General and administrative |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Intangible asset amortization |
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Gain on sale of discontinued operations |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Interest expense |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Income (loss) from discontinued operations |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
There was no activity constituting pretax loss from discontinued operations to the after-tax loss from discontinued operations in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2024.
The following table presents the cash flows from discontinued operations for the three months ended March 31:
|
2024 |
|
|
2023 |
|
||
Net cash provided by operating activities - discontinued operations |
$ |
- |
|
|
$ |
|
|
Net cash provided by investing activities - discontinued operations |
$ |
- |
|
|
$ |
|
|
There were
There were
Note 4. Stock-Based Compensation
Compensation cost related to RSUs vesting during the period totaled $
9
Note 5. 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 impact is anti-dilutive and when the Company has a net loss because the impact is also anti-dilutive.
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
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 March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
Stock options |
|
|
|
|
|
||
Restricted stock units |
|
|
|
|
|
||
Note 6. Segment Information
We previously operated in
In the third quarter of 2023, in conjunction with the divestitures brands, the Company determined it has
Note 7. Intangible Assets
There were
Amortization expense for the three months ended March 31, 2024 and 2023 was $
Note 8. Long-Term Debt and Line-of-Credit
UMB Loan Agreement
On July 1, 2020, we entered into a Loan and Security Agreement (as amended, the “UMB Loan Agreement”) with UMB Bank, N.A. Under the UMB Loan Agreement we obtained a $
10
which was repaid in full in the second quarter of 2022, and a revolving credit facility, with a maximum commitment of $
The UMB Loan Agreement was terminated on
La Plata Loan Agreement
On
Unamortized loan costs were $
On July 7, 2023, the La Plata term loans were paid in full and the La Plata Loan Agreement was terminated.
Note 9. Leases
We have entered into a lease for our corporate headquarters with a remaining lease term of
As part of our continued cost savings initiative in response to negative future recurring cash flows, on November 29, 2023, the Company entered into a sublease agreement with a third party, effective
Information related to leases was as follows:
|
Three Months Ended March 31, |
|
||||
|
2024 |
|
2023 |
|
||
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
Future minimum annual lease payments are as follows:
Future
Remainder of 2024 |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
Thereafter |
|
|
|
Total minimum lease payments |
$ |
|
|
Less imputed interest |
|
( |
) |
|
|
|
|
Total operating lease liability |
$ |
|
|
11
Note 10. Subsequent Events
One May 2, 2024, the Company filed a Preliminary Proxy Statement that provides additional information regarding the Merger and a special meeting of shareholders to vote on the following proposals; a reverse stock split, a reincorporation of the Company in the state of Delaware, and to approve an adjournment of the special meeting if necessary to solicit additional proxies. While it was previously announced that the Company expected the Merger to close during the second quarter of 2024, management now believes that the Merger will close during the third quarter, pending the outcome of the shareholder vote and the satisfaction of the closing conditions of the Merger.
12
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 Condensed Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2023 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 have developed, marketed, and sold high-quality, high-value household products nationally and internationally to mass merchandisers, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors.
Primarily due to increases in costs associated with the manufacture and distribution of our products, the Company has experienced negative cash flows from operations for several reporting periods. In efforts to improve our financial position and liquidity, the Company has pursued asset sales of certain brands where management has determined that the brand(s) are not aligned with our long-term goals for growth and profitability.
Looking forward, we are focused on both short- and long-term strategies that we believe will enhance our financial health and deliver shareholder value. The Company entered into the Merger Agreement with the purpose of creating meaningful shareholder value for all shareholders of the combined entity and to alleviate negative operating trends.
Divestitures
On September 15, 2023, we entered into and consummated a Stock Purchase Agreement with a buyer to sell 100% of the outstanding stock of our wholly owned subsidiary Neoteric Cosmetics, Inc. ("Neoteric). Effective June 30, 2023, and closed in July 2023, we sold the Alpha® Skin Care product line to a company that markets and distributes skin care products. Effective June 30, 2023, and closed in July 2023, we sold the BIZ® product line to a company that markets and distributes laundry products. On January 23, 2023, we sold the Scott's Liquid Gold® Wood Care and Scott's Liquid Gold® Floor Restore product lines to a company that markets and distributes wood care products. On December 15, 2022, we sold the Prell® brand to a company that markets and distributes natural hair and skincare products. We have reflected the operations of Neoteric, Alpha® Skin Care, BIZ®, Scott's Liquid Gold® and Prell® as discontinued operations for all periods presented.
See Note 3 - “Discontinued Operations” in the Notes to Condensed Consolidated Financial Statements for further information on the sale of these brands.
In conjunction with the sale of the Scott’s Liquid Gold® brand, as discussed below, the Company may continue to use names “Scott’s Liquid Gold” and “SLG” for up to eighteen months following the closing date of the agreement on January 23, 2023. Following this transitional name period, the Company will only be able to use the aforementioned names in connection with retaining records and other historical or archived documents and any use required by or permitted as a fair use or otherwise under applicable law.
Our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. Our Condensed Consolidated Statements of Equity and Statements of Cash Flows combine the results of continuing and discontinued operations. A summary of financial information related to our discontinued operations is as follows:
13
Results of Operations
Three months ended March 31, 2024 compared to three months ended March 31, 2023
|
Three Months Ended March 31, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||||
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
Net sales |
$ |
859 |
|
|
$ |
852 |
|
|
$ |
7 |
|
|
|
0.8 |
% |
Cost of sales |
|
501 |
|
|
|
487 |
|
|
|
14 |
|
|
|
2.9 |
% |
Gross profit |
|
358 |
|
|
|
365 |
|
|
|
(7 |
) |
|
|
(1.9 |
%) |
Gross margin |
|
41.7 |
% |
|
|
42.8 |
% |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
||||
Advertising |
|
17 |
|
|
|
109 |
|
|
|
(92 |
) |
|
|
(84.4 |
%) |
Selling |
|
188 |
|
|
|
406 |
|
|
|
(218 |
) |
|
|
(53.7 |
%) |
General and administrative |
|
674 |
|
|
|
622 |
|
|
|
52 |
|
|
|
8.4 |
% |
Intangible asset amortization |
|
- |
|
|
|
45 |
|
|
|
(45 |
) |
|
|
(100.0 |
%) |
Total operating expenses |
|
879 |
|
|
|
1,182 |
|
|
|
(303 |
) |
|
|
(25.6 |
%) |
Loss from operations |
|
(521 |
) |
|
|
(817 |
) |
|
|
296 |
|
|
|
36.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
29 |
|
|
|
- |
|
|
|
29 |
|
|
|
100.0 |
% |
Interest expense |
|
- |
|
|
|
(152 |
) |
|
|
152 |
|
|
|
100.0 |
% |
Loss before income taxes and discontinued operations |
|
(492 |
) |
|
|
(969 |
) |
|
|
477 |
|
|
|
49.2 |
% |
Income tax benefit |
|
- |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
(100.0 |
%) |
Loss from continuing operations |
|
(492 |
) |
|
|
(965 |
) |
|
|
473 |
|
|
|
49.0 |
% |
Income from discontinued operations |
|
- |
|
|
|
1,334 |
|
|
|
(1,334 |
) |
|
|
(100.0 |
%) |
Net (loss) income |
$ |
(492 |
) |
|
$ |
369 |
|
|
$ |
(861 |
) |
|
|
(233.3 |
%) |
Our operating results were primarily impacted by the following:
Liquidity and Capital Resources
Overview
Our primary sources of funds include cash from the sales of assets and cash from operating activities. Our principal uses of cash are to maintain inventories and fund planned operating expenditures. Working capital movements are influenced by the sourcing of materials related to the production of products.
14
Financing Agreements
Please see Note 8 to our Condensed Consolidated Financial Statements for information on our La Plata Loan Agreement, which was satisfied and terminated in July 2023, and our UMB Loan Agreement, which was satisfied and terminated in February 2023.
Liquidity and Changes in Cash Flows
At March 31, 2024, we had approximately $3,277 in cash on hand, a decrease of $650 from December 31, 2023.
The following is a summary of cash provided by or (used in) each of the indicated types of activities:
|
Three Months Ended March 31, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
|
|
||||
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
Operating activities |
$ |
(650 |
) |
|
$ |
756 |
|
|
$ |
(1,406 |
) |
|
|
(186.0 |
%) |
Investing activities |
|
- |
|
|
|
1,936 |
|
|
|
(1,936 |
) |
|
|
(100.0 |
%) |
Financing activities |
|
- |
|
|
|
(2,284 |
) |
|
|
2,284 |
|
|
|
100.0 |
% |
The cash received from the sales of our various brands in 2023 and 2022 was used to satisfy and terminate debt agreements and will be used to fund operations as we seek to grow our existing business while closing the Merger. While we believe that our current cash reserves represent sufficient cash to fund our operations, 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 will be sufficient to meet operational cash needs during the next twelve months, but further economic impacts to our sales to customers or supply chain disruptions in the short-term could impact our liquidity.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of March 31, 2024, we conducted an evaluation, under the supervision and with the participation of our President and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2024 due to the material weakness in our internal controls over financial reporting described below.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our President and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2024, based on the criteria for effective internal control described in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that the Company's internal control over financial reporting was not effective as of March 31, 2024 because there is a material weakness in our internal control over financial reporting. The material weakness identified, as described below, did not result in the restatement of any previously reported financial statements or any related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period.
15
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permits us to provide only management’s report in this Report.
Management’s report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Material Weakness
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s financial statements will not be prevented or detected on a timely basis. The material weakness that we previously reported was identified as of June 30, 2023 related to our finance department lacking a sufficient number of trained professionals with technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP. The deficiencies in internal control over financial reporting were detailed in Item 4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.
The Company is continuing the process of remediating its control deficiencies. However, the material weakness in internal control over financial reporting that has been identified will not be remediated until we are able to add a sufficient number of trained professionals to our finance department, who have technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP, our control is implemented and operates for a period of time, is tested, and the Company is able to conclude that such internal controls are operating effectively. The Company cannot provide assurance that these procedures will be successful in identifying material errors that may exist in the financial statements. The Company cannot make assurances that it will not identify additional material weaknesses in its internal control over financial reporting in the future. Management plans, as capital becomes available to the Company, to increase the accounting and financial reporting staff and provide future investments in the continuing education and public company accounting training of our accounting and financial professionals.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the three months ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
16
PART II
ITEM 1A. RISK FACTORS
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, 2023 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 |
31.1 |
|
Rule 13a-14(a) Certification of the President and 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 With Embedded Linkbase Documents. |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
* Furnished, not filed.
17
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., a Colorado corporation |
||
By: |
|
/s/ David M. Arndt |
|
|
David M. Arndt, President, Principal Executive Officer, and Chief Financial Officer |
|
|
(Principal Financial and Chief Accounting Officer) |
Date: May 8, 2024
18