Horizon Kinetics Holding Corp: Form 10-Q for the period ended Sep 30, 2023

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 ended December 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 ended December 31, 2022 for a discussion of the uncertainties, risks and assumptions associated with these statements.

Executive Overview

Our Business

Scott’s Liquid Gold-Inc. exists to positively impact consumers’ lives in the markets we serve while creating shareholder value. We have developed, marketed, and sold high-quality, high-value household products nationally and internationally to mass merchandisers, drugstores, supermarkets, hardware stores, e-commerce retailers, other retail outlets, and to wholesale distributors.

Primarily due to increases in costs associated with the manufacture and distribution of our products, the Company has experienced negative cash flows from operations for several reporting periods. In efforts to improve our financial position and liquidity, the Company has pursued asset sales of certain brands where management has determined that the brand(s) are not aligned with our long-term goals for growth and profitability.

The Company is considering a wide range of options, including one or more of the following: the sale of additional brands; a sale, merger, or other strategic transaction involving the entire company; acquisitions of other brands or companies; issuance of additional debt or equity; and continuing to operate as a public, independent company. We continue to operate our pet care brands, which is a product category we believe to have potential for organic or inorganic future growth opportunities.

Divestitures

On September 15, 2023, we entered into and consummated a Stock Purchase Agreement with a buyer to sell 100% of the outstanding stock of Neoteric. Effective June 30, 2023, and closed in July 2023, we sold the Alpha® Skin Care product line to a company that markets and distributes skin care products. Effective June 30, 2023, and closed in July 2023, we sold the BIZ® product line to a company that markets and distributes laundry products. On January 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. On December 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 Alpha® Skin Care, BIZ®, Scott's Liquid Gold® and Prell® as discontinued operations for all periods presented.

See Note 3 - “Discontinued Operations and Assets Held for Sale” in the Notes to Condensed Consolidated Financial Statements for further information on the sale of these 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 on January 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.

Results of Operations

Three months ended September 30, 2023 compared to three months ended September 30, 2022

Our operating results were primarily impacted by the following:

• Increases in net sales and cost of sales are due to increased distribution of our products sold at existing and certain new customers. The decrease in gross profit and gross margin are primarily due to higher costs from our manufacturers and a change in the mix of our product sales to customers.
• Decrease in advertising expenses is primarily due to a reduction in personnel costs related to the creation of advertising materials due to asset divestitures.
• Decrease in selling expenses is primarily due to lower logistics and warehousing costs from a consolidation of our third-party logistics partners, and a reduction in personnel costs related to asset divestitures.
• Increased general and administrative costs primarily due to increase in performance-related incentives for personnel and professional expenses related to strategic initiatives.
• Decreased intangible asset amortization from reduced carrying amounts related to impairments recognized in 2022.
• Results from discontinued operations, which are disclosed in Note 3 to the Condensed Consolidated Financial Statements.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Our operating results were primarily impacted by the following:

• Increases in net sales and cost of sales are due to increased distribution of our products sold at existing and certain new customers. The decrease in gross profit and gross margin are primarily due to higher costs from our manufacturers and a change in the mix of our product sales to customers.
• Decrease in advertising expenses is primarily due to a reduction in personnel costs related to the creation of advertising materials due to asset divestitures.
• Decrease in selling expenses is primarily due to lower logistics and warehousing costs from a consolidation of our third-party logistics partners, and a reduction in personnel costs related to asset divestitures.
• Decreased general and administrative costs primarily due to lower bank charges from the termination of our UMB Loan Agreement and reduced personnel costs, which are offset by performance-related incentives for personnel and professional expenses related to strategic initiatives.
• Decreased intangible asset amortization from reduced carrying amounts related to impairments recognized in 2022.
• Results from discontinued operations, which are disclosed in Note 3 to the Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

Overview

Our primary sources of funds include cash from the sales of assets and cash from operating activities. Our principal uses of cash are to fund planned operating expenditures as well as historical debt paydown. Working capital movements are influenced by the sourcing of materials related to the production of products.

Financing Agreements

Please see Note 8 to our Condensed Consolidated Financial Statements for information on our La Plata Loan Agreement, which was satisfied and terminated in July 2023, and our UMB Loan Agreement, which was satisfied and terminated in February 2023.

Liquidity and Changes in Cash Flows

At September 30, 2023, we had approximately $4,665 in cash on hand, an increase of $4,616 from December 31, 2022.

The following is a summary of cash provided by or (used in) each of the indicated types of activities:

• Net cash used by operating activities was primarily related to conversion of working capital from accounts receivable and inventories.
• Net cash provided by investing activities was due to the sale of our Scott's Liquid Gold®, Biz®, Alpha® Skin Care and Neoteric brands.
• Net cash used in financing activities was from repayments and termination of our UMB and La Plata Loan Agreements.

The cash received from the sales of our BIZ® and Alpha® Skin Care brands in July 2023 was $3,700 and was partially used to pay off and terminate our La Plata Loan Agreement. Cash proceeds from the sale of Neoteric will be used to fund operations as we seek to grow our existing business or pursue other strategic transactions. While we believe that our current cash reserves represent sufficient cash to fund our operations, 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 will be sufficient to meet operational cash needs during the next twelve months, but further economic impacts to our sales to customers or supply chain disruptions in the short-term could impact our liquidity.

Disclosure Controls and Procedures

An evaluation was performed as of September 30, 2023, under the supervision and with the participation of our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the previously disclosed material weakness in our internal controls resulting from our finance department not being able to process and account for complex, non-routine transactions in accordance with GAAP. Management concluded that we lack a sufficient number of trained professionals with technical accounting expertise to process and account for complex and non-routine transactions. We believe the actions described in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2023 will be sufficient to remediate the identified material weakness and related disclosure controls and procedures. However, we do not believe that the new and enhanced controls and procedures have been implemented for a sufficient amount of time for management to conclude that the material weakness in the Company’s internal controls over financial reporting and effectiveness of related disclosure controls and procedures has been fully remediated, and we are still in the process of improving those controls and procedures. We will continue to improve and monitor the effectiveness of these controls and will make any further changes that management determines to be appropriate.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the three months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We have identified a material weakness in our internal control over financial reporting.

We are a public reporting company subject to the rules and regulations established from time to time by the SEC. As a public company we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting.

As disclosed in Part I, Item 4, “Disclosure Controls and Procedures,” we have identified a material weakness in our controls related to our finance department lacking a sufficient number of trained professionals with technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP as of June 30, 2023.

This material weakness did not result in any restatements to our Condensed Consolidated Financial Statements. Our management is committed to remediating this material weakness and is in the process of developing a remediation plan to address the material weakness.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and subsequent quarterly reports on Form 10-Q, which could materially affect our business, financial condition, or future results.