SCOTT'S LIQUID GOLD-INC. 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 endedDecember 31, 2021 . This Item 2 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. Please refer to "Item 1A. Risk Factors" in this Report and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a discussion of the uncertainties, risks and assumptions associated with these statements. Executive Overview Our BusinessScott's Liquid Gold-Inc. exists to positively impact consumers' lives in the markets we serve while creating shareholder value. We develop, market, and sell high-quality, high-value household and health and beauty care products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors. COVID-19 Pandemic For our fiscal quarter endedSeptember 30, 2022 , the coronavirus (COVID-19) pandemic continued to cause economic and social disruptions that led to ongoing uncertainties. During the first quarter of 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic. Such impacts have included significant volatility in the global stock markets, and uncertainty in the costs and performance of our supply chain and logistics partners. We expect to see continued volatility in these areas, which could impact our operating results in future periods.
As a result of COVID-19, we have encountered, and expect to continue to experience, various supply chain disruptions impacting the availability and lead times of certain raw materials for our finished goods products. We have been proactively identifying alternative sources for raw materials to mitigate the impacts of these disruptions. All of our outsourcing partners, including contract manufacturing plants and third-party logistics warehouses, have remained open during the entirety of COVID-19, however, they have had difficulties with staffing their workforce to keep production lines running.
Inflation
Inflationary trends in certain markets and global supply chain challenges have, and are expected to continue to, negatively affect our sales and operating performance. We experienced the impact of greater inflation on material, logistical and other costs during the third quarter. We are aiming to offset these inflationary costs through a combination of pricing and cost savings strategies. We currently anticipate the impact of inflation in certain markets will be increasingly significant continuing into the fourth quarter and fiscal 2023. We will continue to implement mitigation strategies and price increases to offset these trends; however, such measures may not fully offset the impact to our operating performance.
Distribution Agreement with Church & Dwight
Our distribution agreement with Church & Dwight Co., Inc. ("Church & Dwight")
and our subsidiary, Neoteric Cosmetics, Inc. , was not extended beyond the
Expiration Date of December 31, 2021 . As a result, the distribution agreement
expired on its own terms as of the Expiration Date and the Company ceased to
distribute Batiste Dry Shampoo products. Unless offset by increased sales of our
other products, the conclusion of this distribution agreement is expected to
have a material impact on our net sales and result of operations. Net sales of
Batiste were $4,704 for the nine months ended September 30, 2021 .
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--------------------------------------------------------------------------------Sale of Dryel® Brand
OnDecember 23, 2021 , we sold the Dryel® brand to a company that markets and distributes household cleaning products. We have reflected the operations of Dryel® as discontinued operations for all periods presented. These results are excluded from our segment results of household products, which previously included Dryel® operating results. See Note 3 - "Discontinued Operations" in the Notes to Condensed Consolidated Financial Statements for further information.
Results of Operations
Three months endedSeptember 30, 2022 compared to three months endedSeptember 30, 2021 Three Months Ended September 30, (in thousands) Increase / (Decrease) 2022 2021 $ % Net sales$ 4,277 $ 7,970 $ (3,693 ) (46.3 %) Cost of sales 2,358 5,100 (2,742 ) (53.8 %) Gross profit 1,919 2,870 (951 ) (33.1 %) Gross margin 44.9 % 36.0 % Operating expenses: Advertising 166 144 22 15.3 % Selling 1,691 2,542 (851 ) (33.5 %) General and administrative 578 836 (258 ) (30.9 %) Intangible asset amortization 87 278 (191 ) (68.7 %) Total operating expenses 2,522 3,800 (1,278 ) (33.6 %) Loss from operations (603 ) (930 ) 327 35.2 % Interest expense (139 ) (109 ) (30 ) (27.5 %) Loss before income taxes and discontinued operations (742 ) (1,039 ) 297 28.6 % Income tax expense (2 ) (1,224 ) 1,222 99.8 % Loss from continuing operations (744 ) (2,263 ) 1,519 67.1 % Loss from discontinued operations - (205 ) 205 100.0 % Net loss$ (744 ) $ (2,468 ) $ 1,724 69.9 %
Change in net loss was primarily due to the following:
•
Lower sales and gross profits from the conclusion of our distribution agreement with Church & Dwight for Batiste products, as well as reduced sales and gross profits from various product lines due to changes in our customers' purchasing strategies related to inventory and inflationary pressures.
•
Gross margin increased due to product sales mix including the elimination of our Church and Dwight distribution agreement, as distributed products required higher promotional activity with customers which reduced our margins.
•
Decrease in selling expenses was a result of lower logistics and warehousing costs from lower sales as well as a reduction in personnel costs.
•
Decrease in general and administrative costs due to changes in personnel and related costs.
•
Decrease in income tax expense as a valuation allowance on our deferred tax asset was established during the third quarter of 2021.
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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)
2022 2021 $ %
Net sales $ 2,748 $ 3,846 $ (1,098 ) (28.5 %)
Gross profit $ 1,084 $ 1,514 $ (430 ) (28.4 %)
Gross margin 39.4 % 39.4 %
Loss from operations $ (371 ) $ (382 ) $ 11 2.9 %
•Net sales and gross profits decreased due to changes in our customers' purchasing strategies related to inventory and inflationary pressures. In addition, supply chain affected in-stock levels of certain products. Due to low inventory levels in the third quarter of 2022, sales of BIZ powder products decreased compared to the same period in the prior year.
•
Loss from operations was offset due to decreases in selling expenses and general and administrative costs.
Health and beauty care products
The following table shows comparative net sales, gross margin, gross profit,
loss from operations, volume and percentage changes for health and beauty care
products between periods:
Three Months Ended September 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales - distributed products $ -
(1,535 ) (100.0 %)
Net sales - manufactured products 1,529 2,589 (1,060 ) (40.9 %)
Total health and beauty net sales $ 1,529 $ 4,124 $ (2,595 ) (62.9 %)
Gross profit $ 835 $ 1,356 $ (521 ) (38.4 %)
Gross margin 54.6 % 32.9 %
Loss from operations $ (232 ) $ (548 ) $ 316 57.7 %
•
Net sales of distributed health and beauty care products decreased due to the
termination of our Batiste distribution agreement with Church & Dwight in
•
Net sales and gross profits from manufactured products decreased due to the
elimination of sales to our exclusive
•
Gross margins increased due to the elimination of our Church & Dwight distribution agreement and elimination of sales of our shampoo products to certain customers, as these sales required higher promotional activity which reduced our margins.
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Nine months ended September 30, 2022 compared to nine months ended September 30,
2021
Nine Months Ended September 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales $ 15,449 $ 24,583 $ (9,134 ) (37.2 %)
Cost of sales 8,337 14,624 (6,287 ) (43.0 %)
Gross profit 7,112 9,959 (2,847 ) (28.6 %)
Gross margin 46.0 % 40.5 %
Operating expenses:
Advertising 492 506 (14 ) (2.8 %)
Selling 5,752 7,388 (1,636 ) (22.1 %)
General and administrative 2,020 3,782 (1,762 ) (46.6 %)
Intangible asset amortization 313 834 (521 ) (62.5 %)
Impairment of goodwill and
intangible assets 3,589 - 3,589 100.0 %
Total operating expenses 12,166 12,510 (344 ) (2.7 %)
Loss from operations (5,054 ) (2,551 ) (2,503 ) (98.1 %)
Interest expense (419 ) (219 ) (200 ) (91.3 %)
Loss before income taxes and
discontinued operations (5,473 ) (2,770 ) (2,703 ) (97.6 %)
Income tax expense (55 ) (798 ) 743 93.1 %
Loss from continuing operations (5,528 ) (3,568 ) (1,960 ) (54.9 %)
Loss from discontinued
operations - (246 ) 246 100.0 %
Net loss $ (5,528 ) $ (3,814 ) $ (1,714 ) (44.9 %)
Change in net loss was primarily due to the following:
•
Lower sales and gross profits from the conclusion of our distribution agreement with Church & Dwight for Batiste products, as well as reduced sales and gross profits from various product lines due to changes in our customers' purchasing strategies related to inventory and inflationary pressures. In addition, supply chain affected in-stock levels of certain products and impacted our sales to customers.
•
Gross margin increased due to product sales mix including the elimination of our Church and Dwight distribution agreement, as distributed products required higher promotional activity with customers which reduced our margins.
•
Decrease in selling expenses caused by lower logistics and warehousing costs from lower sales as well as a reduction in personnel costs.
•
Decrease in general and administrative costs due to changes in personnel and related costs as well as reductions in restructuring costs associated with separation of employees during 2021.
•
Decreased intangible asset amortization is primarily from reduced carrying amounts related to impairments recognized in the fourth quarter of 2021.
•
Impairment of goodwill and intangible assets associated with our All-Purpose reporting unit.
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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)
2022 2021 $ %
Net sales $ 9,103 $ 10,762 $ (1,659 ) (15.4 %)
Gross profit $ 3,714 $ 4,213 $ (499 ) (11.8 %)
Gross margin 40.8 % 39.1 %
Loss from operations $ (4,854 ) $ (1,960 ) $ (2,894 ) (147.7 %)
•
Net sales and gross profit decreased due to changes in our customers' purchasing
strategies related to inventory and inflationary pressures as well as supply
chain disruptions.
•
Loss from operations primarily due to the impairment of goodwill and intangible assets associated with our All-Purpose reporting unit and partially offset by reductions in selling and general and administrative costs.
Health and beauty care products
The following table shows comparative net sales, gross margin, gross profit,
loss from operations, volume and percentage changes for health and beauty care
products between periods:
Nine Months Ended September 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales- distributed products $ -
6,346 9,117 (2,771 ) (30.4 %)
Total healthcare and beauty net sales $ 6,346 $ 13,821 $ (7,475 ) (54.1 %)
Gross profit $ 3,398 $ 5,746 $ (2,348 ) (40.9 %)
Gross margin 53.5 % 41.6 %
Loss from operations $ (200 ) $ (591 ) $ 391 66.2 %
•
Net sales of distributed health and beauty care products decreased due to the
termination of our Batiste distribution agreement with Church & Dwight in
•
Net sales and gross profits from manufactured products decreased due to the
elimination of sales to our exclusive
•
Gross margins increased due to the elimination of our Church & Dwight distribution agreement and elimination of sales of our shampoo products to certain customers, as these sales required higher promotional activity which reduced our margins.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
Our primary sources of funds include cash expected to be generated from operations and borrowings from our line of credit. Our principal uses of cash are to fund planned operating expenditures, interest payments, and any principal payments on our line of credit. Working capital movements are influenced by the sourcing of finished goods inventories.
Financing Agreements
Please see Note 8 to our Condensed Consolidated Financial Statements for information on our UMB Loan Agreement and La Plata Loan Agreement.
Liquidity and Changes in Cash Flows
AtSeptember 30, 2022 , we had$944 available on our revolving credit facility with UMB, and$139 in cash on hand, a decrease of$1,131 when compared to the balance as ofDecember 31, 2021 as this cash was utilized to reduce long-term debt balances.
The following is a summary of cash provided by or (used in) each of the indicated types of activities:
Nine Months Ended September 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Operating activities $ (1,189 ) $ (1,394 ) $ 205 14.7 %
Investing activities (142 ) (262 ) 120 45.8 %
Financing activities 200 1,909 (1,709 ) (89.5 %)
•
Net cash used in operating activities was primarily related to conversion of
working capital from accounts receivable and offset by investments in finished
goods inventories.
•
Net cash used in investing activities was due to purchases relating to our internal-use software.
•
Net cash provided by financing activities was from proceeds of our various debt facilities which is used for working capital.
The uncertainty related to the COVID-19 outbreak has impacted our operations and could affect our future results. 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. Primarily due to a decline in net sales and increases in costs associated with the manufacture and distribution of our products, the Company used net cash in operating activities of$1,189 during the nine months endedSeptember 30, 2022 . The Company's debt agreements withUMB Bank, N.A . andLa Plata Capital, LLC mature onJuly 1, 2023 andNovember 9, 2023 , respectively. Management's assessment of cash flow forecasts indicate that, absent any other action, the Company likely will require additional liquidity to continue its operations over the next 12 months. Management has implemented actions to reduce the Company's operating expenses and has approved a plan to extend and restructure debt facilities. Management is considering additional various strategic actions including asset sales, workforce reduction, deferring or eliminating certain capital expenditures, and further reduction of other operating expenses to ensure alignment with customer demand in order to address liquidity needs and pursue its business plan. The Company expects that these strategic actions will reduce expenses and outstanding debt balances and provide required liquidity for ongoing operations. If these plans aren't successfully implemented there could be substantial doubt about the Company's ability to continue as a going concern. 21
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