Horizon Kinetics Holding Corp 10-Q for FY2021 Q3
Horizon Kinetics Holding Corp (HKHC)
About this 10-Q
Horizon Kinetics Holding Corp filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.56M
- up 18.9% from $7.2M a year earlier
- Net loss
- $2.47M
- compared with a net loss of $517K a year earlier
- Diluted EPS
- -$0.20
- compared with -$0.04 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:
SCOTT’S LIQUID GOLD-INC.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(Address of principal executive offices) |
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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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None |
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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 November 12, 2021, 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 dependence on the efforts of our exclusive distributor in the PRC to market and sell our products there; |
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conclusion of our distributorship agreement for Batiste Dry Shampoos; |
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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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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, 2020 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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22 |
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Item 1A. |
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23 |
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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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Nine Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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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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Total operating expenses |
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Loss from operations |
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Interest income |
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- |
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- |
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- |
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Interest expense |
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( |
) |
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( |
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( |
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( |
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Income from distribution agreement termination |
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- |
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- |
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- |
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Loss before income taxes |
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( |
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( |
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( |
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Income tax (expense) benefit |
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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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Net loss per common share |
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Basic |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Diluted |
$ |
( |
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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 |
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Diluted |
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See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).
1
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except par value amounts)
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September 30, |
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December 31, |
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2021 |
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2020 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Income taxes receivable |
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Prepaid expenses |
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Other current assets |
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- |
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Total current assets |
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Property and equipment, net |
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Deferred tax asset |
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- |
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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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Other current liabilities |
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- |
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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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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 (Unaudited).
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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Retained Earnings |
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Total |
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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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( |
) |
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Balance, March 31, 2021 |
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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 |
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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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- |
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( |
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Stock options exercised |
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- |
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Restricted stock unit vesting |
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- |
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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, September 30, 2021 |
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$ |
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$ |
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$ |
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$ |
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Balance, December 31, 2019 |
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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, 2020 |
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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, 2020 |
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Stock-based compensation |
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- |
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- |
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- |
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Stock options exercised |
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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, September 30, 2020 |
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See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).
3
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
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Nine Months Ended |
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September 30, |
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2021 |
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2020 |
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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 (used) provided 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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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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( |
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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 (used) provided by operating activities |
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( |
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Cash flows from investing activities: |
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Acquisition |
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- |
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( |
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Purchase of software |
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( |
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- |
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Purchase of property and equipment |
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- |
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( |
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Proceeds from sale of property and equipment |
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- |
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Cash paid for leasehold improvements |
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- |
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( |
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Reimbursement of leasehold improvements |
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- |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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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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Proceeds from term loan |
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- |
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|
|
Repayments of term loan |
|
( |
) |
|
|
( |
) |
|
Payments for debt issuance costs |
|
- |
|
|
|
( |
) |
|
Proceeds from PPP loan |
|
- |
|
|
|
|
|
|
Repayment of PPP loan |
|
- |
|
|
|
( |
) |
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
$ |
|
|
|
$ |
|
|
See accompanying notes to these Condensed Consolidated Financial Statements (Unaudited).
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 quality household and personal care products. We are also a distributor in the United States of personal care products manufactured by another company. Our business is comprised of
|
(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 September 30, 2021 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, 2020. The results of operations for the period ended September 30, 2021 are not necessarily indicative of the operating results for the full year.
|
(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 Equivalents |
We consider all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents.
(f)Inventories Valuation 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 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.
5
Inventories were comprised of the following at:
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Finished goods |
$ |
|
|
|
$ |
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
Impairment of inventories |
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
|
$ |
|
|
Our remaining raw materials balance is to be sold to contract manufacturing partners based on production demand. During the three and nine months ended September 30, 2021, we recognized $
|
(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 |
Intangible assets consist of customer relationships, trade names, formulas, batching processes, internal-use software and a non-compete agreement. The fair value of the intangible assets is amortized over their estimated useful lives and range from a period of
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 is recorded straight-line over the estimated useful life of the software once the software is ready for its intended use. As of September 30, 2021, our internal-use software was not ready for its intended use. The estimated useful life for internal-use software will be determined and periodically reassessed based on considerations for obsolescence, technology, competition, and other economic factors.
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests, and in certain circumstances these assets are written down to fair value if impaired.
6
|
(j) |
Financial Instruments |
Financial instruments which potentially subject us to concentrations of credit risk include cash and cash equivalents and accounts receivable. We maintain our cash balances in the form of bank demand deposits with financial institutions that we believe are creditworthy. 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 and cash equivalents, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
|
(k) |
Purchase Accounting for Acquisitions |
We apply the acquisition method of accounting for a business combination. In general, this methodology requires us to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. For certain acquisitions, we also record a liability for contingent consideration based on estimated future business performance. We monitor our assumptions surrounding these estimated future cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow.
If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. If the contingent consideration paid for any of our acquisitions differs from the amount initially recorded, we would record either income or expense associated with the change in liability.
|
(l) |
Income Taxes |
Income taxes reflect the tax effects of transactions reported in the 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
The effective tax rate for the nine months ended September 30, 2021 and 2020 was
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. The tax impact of the carryback of 2019 losses was recorded in the first quarter income tax provision.
7
|
(m) |
Revenue Recognition |
Our revenue recognition policy is significant because the amount and timing of revenue is a key component of our results of operations. Certain criteria are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until it is met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Our revenue contracts are identified when purchase orders are received and accepted from customers and represent a single performance obligation to sell our products to a customer.
Net sales reflect the transaction prices for contracts, which include products shipped at selling list prices reduced by variable consideration. Variable consideration includes estimates for expected customer allowances, promotional programs for consumers, and sales returns. Based on our customer-by-customer history, our variable consideration estimates are generally accurate and subsequent adjustments are generally immaterial.
Variable consideration is primarily comprised of customer allowances. Customer allowances primarily include reserves for trade promotions to support price features, displays, slotting fees, and other merchandising of our products to our customers. Promotional programs for consumers primarily include coupons, rebates, and certain other promotional programs, and do not represent a significant portion of variable consideration. The costs of 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 at:
|
|
2021 |
|
|
2020 |
|
||
|
Trade promotions |
$ |
|
|
|
$ |
|
|
|
Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(n) |
Advertising Costs |
We expense advertising costs as incurred.
8
|
(o) |
Stock-Based Compensation |
We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of stock options with only service conditions using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the vesting period using the straight-line method, which approximates the service period.
The Company issued restricted stock unit (“RSUs”) awards with restrictions that lapse upon the passage of time (service vesting) and satisfaction of market conditions targeted to our Company’s stock price. For those restricted stock unit awards with only service vesting, the Company recognizes compensation cost on a straight-line basis over the service period. For awards with both market and service conditions, the Company starts recognizing compensation cost over the requisite service period, with the effect of the market conditions reflected in the calculation of the award’s fair value at grant date. The Company values awards with only service vesting requirements based on the grant date share price. The Company values awards with market and service conditions using a Monte Carlo simulation. The Company determines the requisite service period for awards with both market and service conditions based on the longer of the explicit service period and the derived service period. Stock awards that contain market vesting conditions are included in the computations of diluted EPS reflecting the average number of shares that would be issued based on the highest 30-day average market price during the reporting periods, if their effect is dilutive. If the condition is based on an average of market prices over some period of time, the corresponding average for the period is used.
|
(p) |
Operating Costs and Expenses Classification |
Cost of sales includes costs associated with manufacturing and distribution including labor, materials, freight-in, purchasing and receiving, quality control, repairs, maintenance, and other indirect costs, as well as warehousing and distribution costs. We classify freight-out as selling expenses. Other selling expenses consist primarily of costs for sales and sales support personnel, brokerage commissions, and promotional costs. Freight-out costs included in selling expenses totaled $
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
|
(q) |
Recently Issued Accounting Standards |
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. We continue to assess the impact of this guidance.
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
9
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.
|
Note 2. |
Stock-Based Compensation |
During the nine months ended September 30, 2021 and 2020, respectively, we did
Compensation cost related to stock options totaled $
Compensation cost related to RSUs totaled $
|
Note 3. |
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 September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
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 September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
Note 4. |
Segment Information |
We operate in
The following provides information on our segments for the three and nine months ended September 30:
|
|
Three Months Ended September 30, 2021 |
|
|||||||||
|
|
Household Products |
|
|
Personal Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020 |
|
|||||||||
|
|
Household Products |
|
|
Personal Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021 |
|
|||||||||
|
|
Household Products |
|
|
Personal Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Loss from operations |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020 |
|
|||||||||
|
|
Household Products |
|
|
Personal Care Products |
|
|
Total |
|
|||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(Loss) Income from operations |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Capital and intangible asset expenditures |
|
|
|
|
|
- |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. |
Acquisition |
On June 25, 2020, we entered into an Asset Purchase Agreement (the “CR Brands Purchase Agreement”) with CR Brands, Inc., a Delaware corporation (“CR Brands”), and Sweep Acquisition Company, a Delaware corporation (“Sweep” and together with CR Brands, “Sellers”), pursuant to which we agreed to purchase from Sellers substantially all of the assets, properties, rights and interests of Sellers primarily used in the business of designing, formulating, marketing and selling laundry care products to retail and wholesale customers under the BIZ® and Dryel® brand names. The transactions contemplated by the CR Brands Purchase Agreement were consummated on July 1, 2020 (the “CR Brands Acquisition”). The Company concluded that the CR Brands Acquisition qualified as a business combination under ASC 805. The total cash consideration paid for the CR Brands Acquisition was $
Financial information associated with the CR Brands Acquisition is part of our household segment.
11
|
(a) |
Purchase Price Allocation |
The following summarizes the aggregate fair values of the assets acquired as part of the CR Brands Acquisition:
|
Inventories |
$ |
|
|
|
Intangible assets |
|
|
|
|
Goodwill |
|
|
|
|
Total assets acquired |
$ |
|
|
Intangible assets for the CR Brands Acquisition consist of the following:
|
|
Intangible Assets |
|
|
Useful Life |
|
||
|
Customer relationships |
$ |
|
|
|
|
|
|
|
Trade names |
|
|
|
|
|
|
|
|
Formulas and batching processes |
|
|
|
|
|
|
|
|
Non-compete |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
In addition to the assets described above, the Company recorded a $
|
(b) |
Pro Forma Results of Operations (Unaudited) |
The following tables summarize selected unaudited pro forma condensed consolidated statements of operations data for the nine months ended September 30, 2020, as if the CR Brands Acquisition had been completed on January 1, 2020.
|
|
|
|
Nine Months Ended September 30, 2020 |
|
|
|
Net sales |
|
|
$ |
|
|
|
Net income |
|
|
|
|
|
This selected unaudited pro forma condensed consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the CR Brands Acquisition had been completed on that date. Moreover, this information does not indicate what our future operating results will be. The information for 2020 prior to the CR Brands Acquisition is based on prior accounting records maintained by CR Brands. In some cases, CR Brands’ accounting policies may differ materially from accounting policies adopted by the Company following the CR Brands Acquisition.
The pro forma amounts above reflect the application of accounting policies and adjustment of the results of the CR Brands Acquisition to reflect: (1) the additional amortization that would have been charged to the acquired intangible assets; (2) additional interest expense relating to the borrowings on our Chase line of credit and UMB term loan and revolving credit facility, respectively; and (3) the tax impacts.
|
Note 6. |
Goodwill and Intangible Assets |
Goodwill and intangible assets, which are related to our acquisition of our Prell®, Denorex®, Kids N Pets®, BIZ®, and Dryel® brands, consisted of the following:
12
|
|
As of September 30, 2021 |
|
|
As of December 31, 2020 |
|
||||||||||||||||||
|
|
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 (not placed in service) |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Non-compete agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Amortization expense for the three months ended September 30, 2021 and 2020 was $
Estimated amortization expense for 2021 and subsequent years is as follows:
|
Remainder of 2021 |
$ |
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
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 the our ability to: create, incur or assume any indebtedness or lien on our assets; pay dividends or make other distributions; redeem, retire or acquire outstanding common stock, options, warrants or other rights; make fundamental changes to our corporate structure or business; make investments or sell assets; or engage in certain other activities as set forth in the UMB Loan Agreement.
On November 9, 2021, we entered into the Fourth Amendment to the Loan and Security Agreement (“Fourth Amendment”), effective September 30, 2021, which, among other things, amends our tangible net worth and cumulative cash flow after debt service requirements, as well as the timing in which the minimum fixed charge coverage ratio is applicable.
The Company was in compliance with the UMB Loan Agreement financial covenants as of September 30, 2021.
As of September 30, 2021, our term loan and revolving credit facility had an outstanding balance of $
13
As of September 30, 2021, the total principal payments due on our outstanding debt were as follows:
|
|
Revolving Credit Facility |
|
|
Term Loan |
|
|
Total |
|
|||
|
Remainder of 2021 |
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
2022 |
|
- |
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum principal payments |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
On November 9, 2021, we entered into a loan and security agreement (the “La Plata Loan Agreement”) with La Plata Capital, LLC (“La Plata”). Under the La Plata Loan Agreement, we obtained a $
|
Note 8. |
Leases |
We have entered into leases for our corporate headquarters and office equipment with remaining lease terms up to
On March 11, 2020, we executed an office lease for a new corporate headquarters. As of that date, we had the right to control the use of the asset, which qualified as an operating lease. There were no initial direct costs associated with our new office lease and our deposit is fully refundable.
Information related to leases was as follows:
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
||
|
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 2021 |
$ |
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total minimum lease payments |
$ |
|
|
|
Less imputed interest |
|
( |
) |
|
|
|
|
|
|
Total operating lease liability |
$ |
|
|
14
Note 9.Subsequent Events
Effective as of October 22, 2021, Tisha Pedrazzini will serve as President and Principal Executive Officer. Tisha Pedrazzini, age 46, served as the Interim Co-President since April 26, 2021, and is a member of the Company’s Board of Directors
Effective as of October 22, 2021, David Arndt, age 37, will serve as Chief Financial Officer, Principal Accounting Officer, Treasurer and Corporate Secretary. Mr. Arndt was employed by the Company beginning in 2017, serving as the VP of Finance of the Company since April 2021 and, prior to that, serving as Director of FP&A and Treasury, Controller, and Director of Financial Reporting. Before joining the Company, Mr. Arndt was employed by EKS&H LLLP (now Plante & Moran, PLLC) for seven years.
On November 9, 2021, we entered into the Fourth Amendment with UMB and the La Plata Loan Agreement.
On November 9, 2021, we issued restricted stock unit awards to certain executive officers. These compensatory awards were issued under the Company’s 2015 Equity and Incentive Plan. David M. Arndt and Michael B. Hyman, each an executive officer of the Company, received restricted stock unit awards that will vest in thirds on next three anniversaries of the grant date.
15
|
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, 2020. 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, 2020 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 personal care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors.
Distribution Agreement with Church & Dwight
Our distribution agreement with Church & Dwight Co., Inc. and our subsidiary, Neoteric Cosmetics, Inc., will not be extended beyond its existing expiration date of December 31, 2021 (the “Expiration Date”). As a result, the distribution agreement will expire on its own terms as of the Expiration Date and the Company will cease to distribute Batiste Dry Shampoo products. Unless offset by increased sales of our other products, the conclusion of this distribution agreement will have a material impact on our net sales and result of operations beginning in 2022. Net sales of Batiste were $5,327 and $8,797 for the years ended December 31, 2020 and 2019, respectively.
COVID-19 Pandemic
In 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic. While many businesses resumed operations towards the end of the second quarter of 2020, the effects of the pandemic have continued into 2021 and the duration of the impact still remains uncertain. We expect to see continued volatility in the economic markets and government responses to the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on our operating results for the remainder of the year or longer.
Supply Chain and Outsourcing Partners
As a result of COVID-19, we have encountered various supply chain disruptions impacting the availability of certain raw materials for our finished goods products. We have been proactively identifying alternative sources for delayed raw materials. At times, our highest demand products were impacted by supply chain disruptions, but availability continues to improve primarily as a result of our actions to mitigate such disruptions. Our third-party logistics partners are facing challenges with availability of staffing and transportation sources, which could cause product shipments to be delayed.
Health and Safety
We have taken proactive, aggressive action to protect the health and safety of our employees, customers, and partners. We monitor national, state, and local health recommendations and regulations, and will implement additional protective measures as appropriate.
Customer Demand
At the onset of the pandemic, as a result of government-mandated stay-at-home orders, some of our customers were impacted and forced to cease operations. Customer closings primarily impacted revenue for our Batiste Dry Shampoo distributed products during the last part of March 2020. Shipments to our major Batiste Dry Shampoo customers resumed in May 2020, but at lower levels than preceded the pandemic.
16
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.
Results of Operations
Three months ended September 30, 2021 compared to three months ended September 30, 2020
|
|
Three Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
8,555 |
|
|
$ |
7,197 |
|
|
$ |
1,358 |
|
|
|
18.9 |
% |
|
Cost of sales |
|
5,413 |
|
|
|
3,973 |
|
|
|
1,440 |
|
|
|
36.2 |
% |
|
Gross profit |
|
3,142 |
|
|
|
3,224 |
|
|
|
(82 |
) |
|
|
(2.5 |
%) |
|
Gross margin |
|
36.7 |
% |
|
|
44.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
144 |
|
|
|
169 |
|
|
|
(25 |
) |
|
|
(14.8 |
%) |
|
Selling |
|
2,686 |
|
|
|
2,168 |
|
|
|
518 |
|
|
|
23.9 |
% |
|
General and administrative |
|
836 |
|
|
|
976 |
|
|
|
(140 |
) |
|
|
(14.3 |
%) |
|
Intangible asset amortization |
|
401 |
|
|
|
401 |
|
|
|
- |
|
|
|
0.0 |
% |
|
Total operating expenses |
|
4,067 |
|
|
|
3,714 |
|
|
|
353 |
|
|
|
9.5 |
% |
|
Loss from operations |
|
(925 |
) |
|
|
(490 |
) |
|
|
(435 |
) |
|
|
(88.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(208 |
) |
|
|
(137 |
) |
|
|
(71 |
) |
|
|
(51.8 |
%) |
|
Loss before income taxes |
|
(1,133 |
) |
|
|
(627 |
) |
|
|
(506 |
) |
|
|
(80.7 |
%) |
|
Income tax (expense) benefit |
|
(1,335 |
) |
|
|
110 |
|
|
|
(1,445 |
) |
|
|
(1,313.3 |
%) |
|
Net loss |
$ |
(2,468 |
) |
|
$ |
(517 |
) |
|
$ |
(1,951 |
) |
|
|
(377.3 |
%) |
Net loss primarily due to the following:
|
|
• |
Despite increased sales from additional foot traffic at our retail customers and restored finished goods inventory of key products, we experienced a decrease in gross margin. This decrease was due to the sales mix and cost increases in our manufacturing partners’ raw materials. Additionally, we impaired inventories related to slow moving and obsolete raw materials and finished goods. |
|
|
• |
Increase in selling expenses primarily from transportation and labor associated with our logistics and warehousing partners. |
|
|
• |
Increase in interest expense associated with our UMB Loan Agreement. The increased debt resulting from simultaneous supply chain shortages and investment in building depleted finished goods inventories has also increased our interest expense. |
|
|
• |
Increase in income tax expense due to the establishment of a valuation allowance against our deferred tax asset. |
|
|
• |
Decrease in general and administrative expenses, which included acquisition-related expenses in the third quarter of 2020. |
17
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 September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
4,431 |
|
|
$ |
4,178 |
|
|
$ |
253 |
|
|
|
6.1 |
% |
|
Gross profit |
$ |
1,786 |
|
|
$ |
1,824 |
|
|
$ |
(38 |
) |
|
|
(2.1 |
%) |
|
Gross margin |
|
40.3 |
% |
|
|
43.7 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(377 |
) |
|
$ |
(90 |
) |
|
$ |
(287 |
) |
|
|
(318.9 |
%) |
|
|
• |
Household products increase in net sales was attributable to additional foot traffic at our retail customers from eased restrictions related to the COVID-19 pandemic in 2021. |
|
|
• |
Gross profit and margin decreased due to cost increases in our manufacturing partners’ raw materials and inventory impairment related to slow moving and obsolete raw materials and finished goods. |
|
|
• |
Additional loss from operations was related to increases in transportation and labor associated with our logistics and warehousing partners. |
Personal Care Products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume and percentage changes for personal care products between periods:
|
|
Three Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Personal care net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales - distributed products |
$ |
1,535 |
|
|
$ |
943 |
|
|
$ |
592 |
|
|
|
62.8 |
% |
|
Net sales - manufactured products |
|
2,589 |
|
|
|
2,076 |
|
|
|
513 |
|
|
|
24.7 |
% |
|
Total personal care net sales |
$ |
4,124 |
|
|
$ |
3,019 |
|
|
$ |
1,105 |
|
|
|
36.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
$ |
1,356 |
|
|
$ |
1,400 |
|
|
$ |
(44 |
) |
|
|
(3.1 |
%) |
|
Gross margin |
|
32.9 |
% |
|
|
46.4 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(548 |
) |
|
$ |
(400 |
) |
|
$ |
(148 |
) |
|
|
(37.0 |
%) |
|
|
• |
Net sales of distributed and manufactured personal care products increased due to additional foot traffic at our retail customers from eased restrictions related to the COVID-19 pandemic in 2021. Additionally, net sales increased due to restored finished goods inventory of key products in 2021. |
|
|
• |
Decreased gross margin was driven by product sales mix and increasing costs in our manufacturing partners’ raw materials. Additionally, we impaired inventories related to slow moving and obsolete raw materials and finished goods. |
|
|
• |
Additional loss from operations was related to increases in transportation and labor associated with our logistics and warehousing partners. |
18
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
26,439 |
|
|
$ |
21,134 |
|
|
$ |
5,305 |
|
|
|
25.1 |
% |
|
Cost of sales |
|
15,637 |
|
|
|
11,578 |
|
|
|
4,059 |
|
|
|
35.1 |
% |
|
Gross profit |
|
10,802 |
|
|
|
9,556 |
|
|
|
1,246 |
|
|
|
13.0 |
% |
|
Gross margin |
|
40.9 |
% |
|
|
45.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
506 |
|
|
|
531 |
|
|
|
(25 |
) |
|
|
(4.7 |
%) |
|
Selling |
|
7,755 |
|
|
|
5,371 |
|
|
|
2,384 |
|
|
|
44.4 |
% |
|
General and administrative |
|
3,782 |
|
|
|
3,435 |
|
|
|
347 |
|
|
|
10.1 |
% |
|
Intangible asset amortization |
|
1,203 |
|
|
|
849 |
|
|
|
354 |
|
|
|
41.7 |
% |
|
Total operating expenses |
|
13,246 |
|
|
|
10,186 |
|
|
|
3,060 |
|
|
|
30.0 |
% |
|
Loss from operations |
|
(2,444 |
) |
|
|
(630 |
) |
|
|
(1,814 |
) |
|
|
(287.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
- |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
(100.0 |
%) |
|
Interest expense |
|
(517 |
) |
|
|
(215 |
) |
|
|
(302 |
) |
|
|
(140.5 |
%) |
|
Other Income |
|
- |
|
|
|
350 |
|
|
|
(350 |
) |
|
|
(100.0 |
%) |
|
Loss before income taxes |
|
(2,961 |
) |
|
|
(492 |
) |
|
|
(2,469 |
) |
|
|
(501.8 |
%) |
|
Income tax (expense) benefit |
|
(853 |
) |
|
|
174 |
|
|
|
(1,027 |
) |
|
|
(590.2 |
%) |
|
Net loss |
$ |
(3,814 |
) |
|
$ |
(318 |
) |
|
$ |
(3,496 |
) |
|
|
(1,099.4 |
%) |
Net loss primarily due to the following:
|
|
• |
Decrease in gross margin due to the sales mix and cost increases in our manufacturing partners’ raw materials. Additionally, we impaired inventories related to slow moving and obsolete raw materials and finished goods. |
|
|
• |
Increase in selling expenses primarily from transportation and labor associated with our logistics and warehousing partners. |
|
|
• |
Increase in general and administrative expenses is due to restructuring costs associated with separation of employees in 2021, which were offset by reduced professional costs from acquisition-related expenses that were incurred in 2020. |
|
|
• |
Increase in interest expense associated with our UMB Loan Agreement. The increased debt resulting from simultaneous supply chain shortages and investment in building depleted finished goods inventories has also increased our interest expense. |
|
|
• |
Increase in income tax expense due to the establishment of a valuation allowance against our deferred tax asset. |
|
|
• |
Increase in gross profit, attributable to the acquisition of our BIZ and Dryel products in July 2020. |
19
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:
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Net sales |
$ |
12,618 |
|
|
$ |
8,582 |
|
|
$ |
4,036 |
|
|
|
47.0 |
% |
|
Gross profit |
$ |
5,056 |
|
|
$ |
4,251 |
|
|
$ |
805 |
|
|
|
18.9 |
% |
|
Gross margin |
|
40.1 |
% |
|
|
49.5 |
% |
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
$ |
(1,853 |
) |
|
$ |
163 |
|
|
$ |
(2,016 |
) |
|
|
(1,236.8 |
%) |
|
|
• |
Household products increase in net sales and gross profit was attributable to our BIZ and Dryel acquisitions. This was offset by a decrease in net sales from key product shortages, including our Scott’s Liquid Gold Wood Care product, where we experienced supply chain shortages until the third quarter of 2021. |
|
|
• |
Gross margin decreased due to cost increases in our manufacturing partners’ raw materials and inventory impairment related to slow moving and obsolete raw materials and finished goods. |
|
|
• |
Additional loss from operations was related to increases in transportation and labor associated with our logistics and warehousing partners. |
Personal Care Products
The following table shows comparative net sales, gross margin, gross profit, loss from operations, volume and percentage changes for personal care products between periods:
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Personal care net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed products |
$ |
4,704 |
|
|
$ |
5,064 |
|
|
$ |
(360 |
) |
|
|
(7.1 |
%) |
|
Manufactured products |
|
9,117 |
|
|
|
7,488 |
|
|
|
1,629 |
|
|
|
21.7 |
% |
|
Total personal care net sales |
$ |
13,821 |
|
|
$ |
12,552 |
|
|
$ |
1,269 |
|
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
$ |
5,746 |
|
|
$ |
5,305 |
|
|
$ |
441 |
|
|
|
8.3 |
% |
|
Gross margin |
|
41.6 |
% |
|
|
42.3 |
% |
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(591 |
) |
|
$ |
(793 |
) |
|
$ |
202 |
|
|
|
25.5 |
% |
|
|
• |
Net sales of distributed personal care products decreased due to the conclusion of our distribution arrangement with Montagne Jeunesse in the second quarter of 2020. |
|
|
• |
Net sales of manufactured personal care products increased primarily due to higher sales of our Alpha Skin Care line to China and e-commerce partners as well as higher sales of our shampoo brands due to additional foot traffic at our retail customers from eased restrictions related to the COVID-19 pandemic in 2021. |
|
|
• |
Decreased gross margin was driven by product sales mix and increasing costs in our manufacturing partners raw materials. Additionally, we impaired inventories related to slow moving and obsolete raw materials and finished goods. |
|
|
|
20
Liquidity and Capital Resources
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 September 30, 2021, we had $976 capacity on our revolving credit facility with UMB, with $954 available based on our collateralized assets. Our cash on hand was $12 as of September 30, 2021, an increase of $7 when compared to the balance as of December 31, 2020. Cash on hand is kept at low levels to minimize interest expense based on availability of the revolving credit facility.
The following is a summary of cash provided by or (used in) each of the indicated types of activities:
|
|
Nine Months Ended September 30, (in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Operating activities |
$ |
(1,640 |
) |
|
$ |
4,302 |
|
|
$ |
(5,942 |
) |
|
|
(138.1 |
%) |
|
Investing activities |
|
(262 |
) |
|
|
(10,283 |
) |
|
|
10,021 |
|
|
|
97.5 |
% |
|
Financing activities |
|
1,909 |
|
|
|
5,061 |
|
|
|
(3,152 |
) |
|
|
(62.3 |
%) |
|
|
• |
Net cash used in operating activities was primarily related to our investments in finished goods inventories. |
|
|
• |
Net cash used in investing activities was related to capital expenditures associated with our ERP software implementation. |
|
|
• |
Net cash provided by financing activities was attributable to financing from our UMB Loan Agreement to fund our operating and investing activities. |
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 the timing of our build of depleted finished goods inventories, while our net sales have been delayed due to supply chain shortages. 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.
21
|
ITEM 4. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of September 30, 2021, we conducted an evaluation, under the supervision and with the participation of our interim co-presidents 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 interim co-presidents concluded that our disclosure controls and procedures are effective as of September 30, 2021.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the nine months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
22
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, 2020 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 |
|
Consent and Fourth Amendment to Loan and Security Agreement, dated November 9, 2021. |
|
10.2 |
|
|
|
10.3 |
|
|
|
10.4 |
|
|
|
31.1 |
|
|
|
31.2 |
|
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 XBRL tags 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.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
* |
Furnished, not filed. |
23
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 |
|
|
By: |
|
/s/ David M. Arndt |
|
|
|
|
David M. Arndt |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial and Chief Accounting Officer) |
|
Date: November 15, 2021
24