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, 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 endedDecember 31, 2020 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 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 ofDecember 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 endedDecember 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.
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 ofMarch 2020 . Shipments to our major Batiste Dry Shampoo customers resumed inMay 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 endedSeptember 30, 2021 compared to three months endedSeptember 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.
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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)
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 ourmanufacturing 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 intransportation 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 intransportation and labor associated with our logistics and warehousing
partners.
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-------------------------------------------------------------------------------- Nine months endedSeptember 30, 2021 compared to nine months endedSeptember 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 .
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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)
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
• 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
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.
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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
AtSeptember 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 ofSeptember 30, 2021 , an increase of$7 when compared to the balance as ofDecember 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.
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