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 endedJune 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 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 may negatively affect our sales and operating performance. We experienced the impact of greater inflation on material, logistical and other costs during the current 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 $3,170 for the six months ended June 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 2 - "Discontinued Operations" in the Notes to Condensed Consolidated Financial Statements for further information.
Results of Operations
Three months endedJune 30, 2022 compared to three months endedJune 30, 2021 Three Months Ended June 30, (in thousands) Increase / (Decrease) 2022 2021 $ % Net sales$ 5,383 $ 7,769 $ (2,386 ) (30.7 %) Cost of sales 3,108 4,662 (1,554 ) (33.3 %) Gross profit 2,275 3,107 (832 ) (26.8 %) Gross margin 42.3 % 40.0 % Operating expenses: Advertising 174 203 (29 ) (14.3 %) Selling 1,844 2,392 (548 ) (22.9 %) General and administrative 698 1,687 (989 ) (58.6 %) Intangible asset amortization 121 264 (143 ) (54.2 %) Impairment of goodwill and intangible assets 3,589 - 3,589 100.0 % Total operating expenses 6,426 4,546 1,880 41.4 % Loss from operations (4,151 ) (1,439 ) (2,712 ) (188.5 %) Interest expense (130 ) (76 ) (54 ) (71.1 %) Loss before income taxes and discontinued operations (4,281 ) (1,515 ) (2,766 ) (182.6 %) Income tax (expense) benefit (52 ) 400 (452 ) (113.0 %) Loss from continuing operations (4,333 ) (1,115 ) (3,218 ) (288.6 %) Income from discontinued operations - 49 (49 ) (100.0 %) Net loss$ (4,333 ) $ (1,066 ) $ (3,267 ) (306.5 %)
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 ourcustomers' 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.
• Decreased 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 from reduced carrying amounts
related to impairments recognized in 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:
Three Months Ended June 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales $ 3,145 $ 3,072 $ 73 2.4 %
Gross profit $ 1,139 $ 962 $ 177 18.4 %
Gross margin 36.2 % 31.3 %
Loss from operations $ (4,148 ) $ (1,138 ) $ (3,010 ) (264.5 %)
• Net sales, gross profit, and gross margin increased due to higher
in-stock levels of our Scott's Liquid Gold®
partially offset by shortages of our BIZ® powder items and decreases in
our other products due to changes in our customers' purchasing strategies
related to inventory and inflationary pressures.
• Loss from operations primarily due to the impairment of goodwill and
intangible assets associated with our All-Purpose reporting unit.
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 June 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales - distributed products $ -
(1,209 ) (100.0 %) Net sales - manufactured products$ 2,238 $ 3,488 $ (1,250 ) (35.8 %)
Total health and beauty net sales
(2,459 ) (52.4 %) Gross profit$ 1,136 $ 2,145 $ (1,009 ) (47.0 %) Gross margin 50.8 % 45.7 % Loss from operations $ (3 )$ (301 ) $ 298 99.0 %
• Net sales of distributed health and beauty care products decreased due to
the termination of our Batiste distribution agreement with Church &
Dwight.
• Net sales and gross profits from manufactured products decreased due to
decreased sales of Alpha®
well as elimination of sales of our Prell® and Denorex® brands to certain
customers with minimal profitability.
• 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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Six months ended
Six Months Ended June 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Net sales $ 11,172 $ 16,613 $ (5,441 ) (32.8 %)
Cost of sales 5,978 9,525 (3,547 ) (37.2 %)
Gross profit 5,194 7,088 (1,894 ) (26.7 %)
Gross margin 46.5 % 42.7 %
Operating expenses:
Advertising 326 362 (36 ) (9.9 %)
Selling 4,061 4,801 (740 ) (15.4 %)
General and administrative 1,444 2,972 (1,528 ) (51.4 %)
Intangible asset amortization 226 529 (303 ) (57.3 %)
Impairment of goodwill and
intangible assets 3,589 - 3,589 100.0 %
Total operating expenses 9,646 8,664 (2,607 ) (11.3 %)
Loss from operations (4,452 ) (1,576 ) 713 182.5 %
Interest expense (280 ) (110 ) (170 ) (154.5 %)
Loss before income taxes and
discontinued operations (4,732 ) (1,686 ) (3,046 ) (180.7 %)
Income tax benefit (52 ) 445 (497 ) (111.7 %)
Loss from continuing operations (4,784 ) (1,241 ) (3,000 ) (285.5 %)
Loss from discontinued operations - (105 ) 105 0.0 %
Net loss $ (4,784 ) $ (1,346 ) $ (2,895 ) (255.4 %)
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 ourcustomers' 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.
• Decreased 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 from reduced carrying amounts
related to impairments recognized in 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:
Increase / (Decrease)
2022 2021 $ %
Net sales $ 6,355 $ 6,928 $ (573 ) (8.3 %)
Gross profit $ 2,630 $ 2,711 $ (81 ) (3.0 %)
Gross margin 41.4 % 39.1 %
Loss from operations
• Net sales, gross profit, and gross margin increased due to higher
in-stock levels of our Scott's Liquid Gold®
partially offset by shortages of our BIZ® powder items and decreases in
our other products due to changes in our customers' purchasing strategies
related to inventory and inflationary pressures.
• Loss from operations primarily due to the impairment of goodwill and
intangible assets associated with our All-Purpose reporting unit.
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:
Increase / (Decrease)
2022 2021 $ %
Health and beauty care net sales
Distributed products $ - $ 3,170 $ (3,170 ) (100.0 %)
Manufactured products 4,817 6,515 (1,698 ) (26.1 %)
Total personal care net sales $ 4,817 $ 9,685 $ (4,868 ) (50.3 %)
Gross profit $ 2,563 $ 4,377 $ (1,814 ) (41.4 %)
Gross margin 53.2 % 45.2 %
Income (Loss) from operations $ 32 $ (54 ) $ 86 159.2 %
• Net sales of distributed health and beauty care products decreased due to
the termination of our Batiste distribution agreement with Church &
Dwight.
• Net sales and gross profits from manufactured products decreased due to
decreased sales of Alpha®
well as elimination of sales of our Prell® and Denorex® brands to certain
customers with minimal profitability.
• 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 materials related to the production of products.
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
AtJune 30, 2022 , we had$2,392 available on our revolving credit facility with UMB, and approximately$316 in cash on hand, a decrease of$954 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:
Six Months Ended June 30, (in thousands)
Increase / (Decrease)
2022 2021 $ %
Operating activities $ 466 $ (705 ) $ 1,171 166.1 %
Investing activities (142 ) (113 ) (29 ) (25.7 %)
Financing activities (1,278 ) 833 (2,111 ) (253.4 %)
• Net cash provided by operating activities was primarily related
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 used in financing activities related to net repayments of our
various debt facilities.
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 inflationary pressures at our customers which have caused sales
decreases and higher costs on materials, logistics, and other purchases. We
expect that our current cash reserves 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.
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