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 endedMarch 31, 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 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.
Distribution Agreement with Church & Dwight
Our distribution agreement with Church & Dwight Co., Inc. and our subsidiary,Neoteric Cosmetics, Inc. , was not extended beyond the Expiration Date ofDecember 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$1,961 for the three months endedMarch 31, 2021 .
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 2 - "Discontinued Operations" in the Notes to Condensed Consolidated Financial Statements for further information. 15 --------------------------------------------------------------------------------
Results of Operations
Three months endedMarch 31, 2022 compared to three months endedMarch 31, 2021 Three Months Ended March 31, (in thousands) Increase / (Decrease) 2022 2021 $ % Net sales$ 5,790 $ 8,844 $ (3,054 ) (34.5 %) Cost of sales 2,856 4,840 (1,984 ) (41.0 %) Gross profit 2,934 4,004 (1,070 ) (26.7 %) Gross margin 50.7 % 45.3 % Operating expenses: Advertising 135 159 (24 ) (15.1 %) Selling 2,204 2,415 (211 ) (8.7 %) General and administrative 791 1,285 (494 ) (38.5 %) Intangible asset amortization 105 265 (160 ) (60.4 %) Total operating expenses 3,235 4,124 (729 ) (21.6 %) Loss from operations (301 ) (120 ) (341 ) (150.6 %) Interest expense (150 ) (35 ) (115 ) (328.6 %) Loss before income taxes and discontinued operations (451 ) (155 ) (296 ) (190.8 %) Income tax benefit - 41 (41 ) (100.0 %) Loss from continuing operations$ (451 ) $ (114 ) (337 ) (295.4 %) Loss from discontinued operations - (166 ) 166 100.0 % Net loss$ (451 ) $ (280 ) $ (171 ) (61.0 %)
Change in net loss was primarily due to the following:
• Lower sales and gross profits from the conclusion of our distribution
agreement with Church and Dwight for Batiste product, as well as reduced
sales and gross profits from our BIZ, Alpha, and Liquid Gold product
lines.
• Increased rates for transportation and labor costs associated with our
logistics and warehousing partners that continue to remain elevated.
• Favorable reductions in general and administrative costs due to decreasesin personnel and related costs.
• Decreased intangible asset amortization from reduced carrying amounts
related to impairments recognized in 2021.
16--------------------------------------------------------------------------------
Segment Results
Household products
The following table shows comparative net sales, gross margin, gross profit,
income (loss) from operations, volume and percentage changes for household
products between periods:
Three Months Ended March 31, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales $ 3,210 $ 3,856 $ (646 ) (16.8 %)
Gross profit $ 1,491 $ 1,866 $ (375 ) (20.1 %)
Gross margin 46.4 % 48.4 %
Loss from operations $ (334 ) $ (367 ) $ 33 8.9 %
• Household products experienced lower sales of various brands: BIZ
products decreased due to product shortages caused by supply chain
disruptions, and Liquid Gold products decreased due to the return of
other competitive products to the shelves throughout 2021 as well as some
limited reductions in store counts featuring the products.
• Gross margins decreased due to continued increased costs of components
and other underlying raw materials of our products.
Health and beauty care products
The following table shows comparative net sales, gross margin, gross profit, income (loss) from operations, volume and percentage changes for health and beauty care products between periods:
Three Months Ended March 31, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales - distributed products $ -
(1,982 ) (100.0 %)
Net sales - manufactured products $ 2,580 3,006 (426 ) (14.2 %)
Total health and beauty net sales $ 2,580 $ 4,988 $ (2,408 ) (48.3 %)
Gross profit $ 1,443 $ 2,138 $ (695 ) (32.5 %)
Gross margin 55.9 % 42.9 %
Income from operations $ 33 $ 247 $ (214 ) (86.6 %)
• Net sales of distributed health and beauty care products decreased due to
the termination of our Batiste distribution agreement with Church and
Dwight.
• Net sales and gross profits from manufactured products decreased due to
decreased sales of Alpha from COVID-19 outbreaks in
in government-enforced lockdowns and delayed shipments to our exclusive
• Gross margins increased due to the elimination of our Church and Dwight
distribution agreement, as distributed products required higher
promotional activity with customers which reduced our margins.
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
AtMarch 31, 2022 , we had$3,235 available on our revolving credit facility with UMB, and approximately$397 in cash on hand, a decrease of$873 when compared to the balance as ofDecember 31, 2021 . 17 --------------------------------------------------------------------------------
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)
2022 2021 $ %
Operating activities $ (4 ) $ 346 $ (350 ) (101.2 %)
Investing activities (99 ) - (99 ) (100.0 %)
Financing activities (770 ) (350 ) (420 ) (120.0 %)
• Net cash used in operating activities was primarily related to our net
loss, which was offset by the conversion of working capital from accounts
receivable.
• Net cash used in investing activities was due to purchases relating to
our ERP software.
• Net cash used in financing activities related to net repayments of our
UMB revolving credit facility, UMB term loan, and La Plata term loan.
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.
18--------------------------------------------------------------------------------
© Edgar Online, source
