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 Condensed Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . 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, 2022 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. Sale of Brands OnJanuary 23, 2023 , we sold the Scott's Liquid Gold®Wood Care and Scott's Liquid Gold® Floor Restore product lines to a company that markets and distributes wood care products. OnDecember 15, 2022 , we sold the Prell® brand to a company that markets and distributes natural hair and skincare products. We have reflected the operations of Scott's Liquid Gold® and Prell® as discontinued operations for all periods presented.
See Note 3 - "Discontinued Operations" in the Notes to Condensed Consolidated Financial Statements for further information on the sale of both brands.
In conjunction with the sale of the Scott's Liquid Gold® brand, as discussed below, the Company may continue to use names "Scott's Liquid Gold" and "SLG" for up to one year following the closing date of the agreement onJanuary 23, 2023 . Following this transitional name period, the Company will only be able to use the aforementioned names in connection with retaining records and other historical or archived documents and any use required by or permitted as a fair use or otherwise under applicable law. 15 --------------------------------------------------------------------------------
Results of Operations
Three months endedMarch 31, 2023 compared to three months endedMarch 31, 2022 Three Months Ended March 31, (in thousands) Increase / (Decrease) 2023 2022 $ % Net sales$ 3,248 $ 3,729 $ (481 ) (12.9 %) Cost of sales 1,849 1,886 (37 ) (2.0 %) Gross profit 1,399 1,843 (444 ) (24.1 %) 43.1 % 49.4 % Operating expenses: Advertising 154 135 19 14.1 % Selling 865 1,625 (760 ) (46.8 %) General and administrative 618 791 (173 ) (21.8 %) Intangible asset amortization 56 93 (37 ) (39.8 %) Total operating expenses 1,693 2,644 (951 ) (36.0 %) Loss from operations (294 ) (801 ) 507 63.3 % Interest expense (152 ) (82 ) (70 ) (85.4 %) Loss before income taxes and discontinued operations (446 ) (883 ) 437 49.5 % Income tax benefit 4 - 4 100.0 % Loss from continuing operations (442 ) (883 ) 441 49.9 % Gain from discontinued operations, net of taxes 811 432 379 87.7 % Net income (loss)$ 369 $ (451 ) $ 820 181.9 %
Our operating results were primarily impacted by the following:
•
Lower sales, gross profits, and gross margin decreased primarily due to the
elimination of sales to our exclusive
•
Decrease in selling expenses due to the consolidation of third-party logistics partners and implementation of minimum order quantity thresholds with our customers.
•
Decrease in general and administrative due to reductions in personnel and professional related costs.
•
Decrease in intangible asset amortization from impairment of intangible assets in 2022.
•
Increase in interest expense due to the accelerated recognition of unamortized loan costs from the termination of our credit facility with UMB debt payoff inFebruary 2023 .
•
Results from discontinued operations, which are disclosed in Note 3 to the Condensed Consolidated Financial Statements.
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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 March 31, (in thousands)
Increase / (Decrease)
2023 2022 $ %
Net sales $ 1,975 $ 1,987 $ (12 ) (0.6 %)
Gross profit $ 712 $ 742 $ (30 ) (4.0 %)
Gross margin 36.1 % 37.3 %
Loss from operations $ (386 ) $ (793 ) $ 407 51.3 %
•
Gross profit and gross margin were lower due to increases in the manufacture and cost of our products that we were not fully able to pass on to our customers.
•
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 March 31, (in thousands)
Increase / (Decrease)
2023 2022 $ %
Net sales 1,273 1,742 (469 ) (26.9 %)
Gross profit $ 687 $ 1,101 $ (414 ) (37.6 %)
Gross margin 54.0 % 63.2 %
Income (loss) from operations
1,250.0 %
•
Lower net sales and gross profits due to the elimination of sales to our
exclusive
•
Income from operations due to decreases in selling expenses and general and administrative costs.
Liquidity and Capital Resources
Overview
Our primary sources of funds include cash expected to be generated from operations. Our principal uses of cash are to fund planned operating expenditures, interest payments, and principal payments on our debt. 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. 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 La Plata Loan Agreement and UMB Loan Agreement, which was
terminated in
Liquidity and Changes in Cash Flows
At
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--------------------------------------------------------------------------------The following is a summary of cash provided by or (used in) each of the indicated types of activities:
Three Months Ended March 31, (in thousands)
Increase / (Decrease)
2023 2022 $ %
Operating activities $ 756 $ (4 ) $ 760 19,000.0 %
Investing activities 1,936 (99 ) 2,035 2,055.6 %
Financing activities (2,284 ) (770 ) (1,514 ) (196.6 %)
•
Net cash provided by operating activities was primarily related to conversion of
working capital from accounts receivable and offset by investments in finished
goods inventories.
•
Net cash provided by investing activities was due to the sale of our Scott's Liquid Gold® brand.
•
Net cash used by financing activities was from repayments and termination of our UMB Loan Agreement and offset by proceeds from our La Plata Loan Agreement.
The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. However, substantial doubt about the Company's ability to continue as a going concern exists. Primarily due to a decline in net sales, disruption of our international sales toChina , and increases in costs associated with the manufacture and distribution of our products, the Company has sustained significant losses from operations in several reporting periods since 2019. All proceeds from the sale of our Scott's Liquid Gold brand inJanuary 2023 were used to reduce outstanding debt. InFebruary 2023 , the Company terminated its Loan and Security Agreement withUMB Bank, N.A , and repaid its revolving credit facility in full. The Company's debt agreement withLa Plata Capital, LLC matures onNovember 9, 2023 . 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 restructured debt facilities through the adjustments to the timing of required principal payments and covenant compliance periods. Management is considering additional various strategic actions including asset sales, obtaining additional debt or equity financing (potentially in conjunction with acquisitions), 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. However, given the impact of the economic downturn on theU.S. , the Company may be unable to sell assets or access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. The Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
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