Horizon Kinetics Holding Corp: Form 10-Q for the period ended Jun 30, 2024

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 ended December 31, 2023. 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 the section “Cautionary Note on Forward Looking Information” in this Report as well as “Item 1A. Risk Factors” in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2023, as well as in the section “Risk Factors” in the Company’s Definitive Proxy Statement on Schedule 14A filed on May 13, 2024 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, 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.

Looking forward, we are focused on both short- and long-term strategies that we believe will enhance our financial health and deliver shareholder value. The Company entered into the Merger Agreement with the purpose of creating meaningful shareholder value for all shareholders of the combined entity and to alleviate negative operating trends. The Merger is currently expected to close during the third quarter of 2024.

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 our wholly owned subsidiary Neoteric Cosmetics, Inc. (“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 Neoteric, Alpha® Skin Care, BIZ®, 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 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 twenty-one months 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.

Our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations report discontinued operations separate from continuing operations. Our Condensed Consolidated Statements of Equity and Statements of Cash Flows combine the results of continuing and discontinued operations. A summary of financial information related to our discontinued operations is as follows:

Results of Operations

Three months ended June 30, 2024 compared to three months ended June 30, 2023

Our operating results were primarily impacted by the following:

• 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 personnel costs related to asset divestitures.
• Decreased intangible asset amortization from reduced carrying amounts related to impairment of internal-use software during the year ended December 31, 2023.
• Increase in interest income from investment of proceeds from asset divestitures into cash equivalents.
• Decrease in interest expense due to the termination of the La Plata loan in July 2023 and from the termination of our credit facility with UMB in February 2023.
• Results from discontinued operations, which are disclosed in Note 3 to the Condensed Consolidated Financial Statements.

Six months ended June 30, 2024 compared to six months ended June 30, 2023

Our operating results were primarily impacted by the following:

• 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 personnel costs related to asset divestitures.
• Increase in general and administrative due to professional related costs related to the Merger Agreement.
• Decreased intangible asset amortization from reduced carrying amounts related to impairment of internal-use software during the year ended December 31, 2023.
• Increase in interest income from investment of proceeds from asset divestitures into cash equivalents.
• Decrease in interest expense due to the termination of the La Plata loan in July 2023 and from the termination of our credit facility with UMB in February 2023.
• 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 maintain inventories and fund planned operating expenditures. 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 June 30, 2024, we had approximately $2,916 in cash on hand, a decrease of $1,011 from December 31, 2023.

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

• Net cash used in operating activities was primarily related to our loss from continuing operations and investment in finished goods inventories and partially offset by conversion of working capital from accounts receivable.
• Net cash provided by investing activities in the prior period was due to the sale of our Scott's Liquid Gold® brand.
• Net cash used by financing activities in the prior period was from repayments and termination of our UMB Loan Agreement and offset by proceeds from our La Plata Loan Agreement.

The cash received from the sales of our various brands in 2023 and 2022 was used to satisfy and terminate debt agreements and will be used to fund operations as we seek to grow our existing business while closing the Merger. 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.

Critical Accounting Estimates

See Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2023.

Disclosure Controls and Procedures

As of June 30, 2024, we conducted an evaluation, 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. Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024 due to the material weakness in our internal control over financial reporting described below.

Notwithstanding the material weakness, which still existed as of June 30, 2024, the Company’s President and Chief Financial Officer has concluded that the consolidated financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.

Material Weakness

A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s financial statements will not be prevented or detected on a timely basis. The material weakness that we previously reported was identified as of June 30, 2023 and relates 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. The material weakness was detailed in Item 4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023. This material weakness still existed as of June 30, 2024.

The Company is continuing the process of remediating its material weakness. However, the material weakness in internal control over financial reporting that has been identified will not be remediated until we are able to add a sufficient number of trained professionals to our finance department, who have technical accounting expertise to process and account for complex, non-routine transactions in accordance with GAAP, our control is implemented and operates for a period of time, is tested, and the Company is able to conclude that such internal controls are operating effectively. The Company cannot provide assurance that these procedures will be successful in identifying material errors that may exist in the financial statements. The Company cannot make assurances that it will not identify additional material weaknesses in its internal control over financial reporting in the future. Management plans, as capital becomes available to the Company, to increase the accounting and financial reporting staff and provide future investments in the continuing education and public company accounting training of our accounting and financial professionals. In this context, please consider also the risk factor titled “Both Horizon Kinetics and the Company have identified material weaknesses in their internal control over financial reporting, which make those controls ineffective. If the combined company fails to maintain an effective system of disclosure controls and internal control over financial reporting, its ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired,” in the “Risk Factors” section of the Company’s Definitive Proxy Statement on Schedule 14A filed on May 13, 2024, which is incorporated herein by reference.

Changes in Internal Control over Financial Reporting

Other than as identified above, there was no change in our internal control over financial reporting during the three months ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Report, including the “Cautionary Note on Forward-Looking Information,” 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, 2023 and subsequent quarterly reports on Form 10-Q.

In addition, you should carefully consider the factors discussed in the section “Risk Factors” in the Company’s Definitive Proxy Statement on Schedule 14A filed on May 13, 2024, which is incorporated herein by reference.

All of the factors referenced above could materially affect our, or the combined company’s, business, financial condition, or future results.