EXHIBIT 99.2
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Financial Statements
On October 1, 2019, SLG Chemicals, Inc. (“SLG”), a wholly-owned subsidiary of Scott’s Liquid Gold-Inc. (the “Company” or “we”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Paramount Chemical Specialties, Inc. (“Paramount”) and consummated the transaction, pursuant to which SLG purchased from Paramount all intangible assets, finished goods inventory, and all assets used in connection with the manufacture, sale and distribution of the Kids N Pets, Kids N Pets No No No! and Messy Pet brands (the “Acquired Brands”). The total consideration SLG paid initially for the Acquired Brands was $5.5 million, plus or minus any inventory adjustment based on the value of the inventory of finished goods as of the closing compared to the target inventory of $223,000. The Purchase Agreement also includes a $1.5 million maximum contingent consideration wherein we would pay Paramount 20% of brand-specific revenue, in conformity with generally accepted accounting principles in the United States, in excess of $3.5 million for each of calendar years 2021, 2022, 2023, and 2024 (the “Paramount Acquisition”).
The Company financed the Paramount Acquisition at closing with $4.5 million of cash on hand and $1.0 million from a revolving line-of-credit. The subsequent adjustment to inventory resulted in an additional payment of $83,000 to Paramount.
The following unaudited condensed combined pro forma financial information is presented to illustrate the estimated effects of the acquisition and the financing transactions.
The unaudited condensed combined pro forma balance sheet as of September 30, 2019 combines the historical balance sheets of the Company and Paramount as of September 30, 2019 and gives effect to the acquisition as if it occurred on September 30, 2019. The unaudited condensed combined pro forma statements of income for the year ended December 31, 2018 combines the Company’s audited consolidated statements of income with Paramount’s audited statements of income statement for the year ended December 31, 2018. The unaudited condensed combined pro forma statements of income for the nine months ended September 30, 2019 combines the Company’s condensed unaudited consolidated statements of income with Paramount’s unaudited statements of income for the nine months ended September 30, 2019. The unaudited pro forma statements of income for the fiscal year ended 2018 give effect to the acquisition as if it occurred on January 1, 2018.
The unaudited condensed combined pro forma financial information is presented for illustrative purposes only and should not be considered indicative of the actual financial position or results that would have been achieved had the Paramount Acquisition been consummated on the dates indicated and do not purport to indicate balance sheet data or results of operations as of any future date or any future period. In applying the acquisition method of accounting for the transaction, the tangible and intangible assets acquired and the liabilities assumed will be recognized at their respective fair values at the time the transaction is consummated based on preliminary appraisal estimates and certain assumptions that management believes are reasonable. The actual allocation is subject to finalization of the appraisal and the determination of any adjustment to inventory, and the actual allocation of the purchase cost and the resulting effect on income from operations may differ significantly from the pro forma amounts included herein. The estimated adjustments are described in the accompanying footnotes.
The unaudited condensed combined pro forma financial statements and accompanying notes thereto should be read in conjunction with the Company’s historical financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and the Company’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2019.
1
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2019
(in thousands, except par value amounts)
| Scott's Liquid |
|
| Paramount Acquisition |
|
| Pro Forma |
|
| Pro Forma |
| ||||
| Gold-Inc. |
|
| Brands |
|
| Adjustments |
|
| Combined |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 7,110 |
|
| $ | 44 |
|
| $ | (4,627 | ) | (a) (b) | $ | 2,527 |
|
Accounts receivable, net |
| 2,711 |
|
|
| 351 |
|
|
| (351 | ) | (b) |
| 2,711 |
|
Inventories, net |
| 7,030 |
|
|
| 306 |
|
|
| - |
|
|
| 7,336 |
|
Income taxes receivable |
| 507 |
|
|
| - |
|
|
| - |
|
|
| 507 |
|
Prepaid expenses and other current assets |
| 350 |
|
|
| 4 |
|
|
| (4 | ) | (b) |
| 350 |
|
Total current assets |
| 17,708 |
|
|
| 705 |
|
|
| (4,982 | ) |
|
| 13,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
| 986 |
|
|
| - |
|
|
| - |
|
|
| 986 |
|
Deferred tax asset |
| 384 |
|
|
| - |
|
|
| - |
|
|
| 384 |
|
Goodwill |
| 1,521 |
|
|
| - |
|
|
| 1,709 |
| (c) |
| 3,230 |
|
Intangible assets, net |
| 5,348 |
|
|
| - |
|
|
| 3,595 |
| (c) |
| 8,943 |
|
Operating lease right-of-use assets |
| 2,299 |
|
|
| - |
|
|
| - |
|
|
| 2,299 |
|
Other assets |
| 71 |
|
|
| - |
|
|
| - |
|
|
| 71 |
|
Total assets | $ | 28,317 |
|
| $ | 705 |
|
| $ | 322 |
|
| $ | 29,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
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|
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|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 1,943 |
|
| $ | 63 |
|
| $ | (63 | ) | (b) | $ | 1,943 |
|
Accrued expenses |
| 470 |
|
|
| 21 |
|
|
| 6 |
| (b) (d) |
| 497 |
|
Operating lease liabilities, current portion |
| 946 |
|
|
| - |
|
|
| - |
|
|
| 946 |
|
Total current liabilities |
| 3,359 |
|
|
| 84 |
|
|
| (57 | ) |
|
| 3,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities, net of current |
| 1,373 |
|
|
| - |
|
|
| - |
|
|
| 1,373 |
|
Line-of-credit |
| - |
|
|
| - |
|
|
| 1,000 |
| (a) |
| 1,000 |
|
Total liabilities |
| 4,732 |
|
|
| 84 |
|
|
| 943 |
|
|
| 5,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, authorized 20,000 shares; no shares issued and outstanding |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Common stock; $0.10 par value, authorized 50,000 shares; issued and outstanding 12,462 shares (2019) and 12,408 shares (2018) |
| 1,246 |
|
|
| - |
|
|
| - |
|
|
| 1,246 |
|
Capital in excess of par |
| 7,220 |
|
|
| - |
|
|
| - |
|
|
| 7,220 |
|
Retained earnings |
| 15,119 |
|
|
| 621 |
|
|
| (621 | ) | (e) |
| 15,119 |
|
Total shareholders’ equity |
| 23,585 |
|
|
| 621 |
|
|
| (621 | ) |
|
| 23,585 |
|
Total liabilities and shareholders’ equity | $ | 28,317 |
|
| $ | 705 |
|
| $ | 322 |
|
| $ | 29,344 |
|
See accompanying notes to pro forma financial information.
2
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2018
(in thousands, except per share data)
| Scott's Liquid |
|
| Paramount Acquisition |
|
| Pro Forma |
|
| Pro Forma |
| ||||
| Gold-Inc. |
|
| Brands |
|
| Adjustments |
|
| Combined |
| ||||
Net sales | $ | 37,058 |
|
| $ | 2,860 |
|
| $ | - |
|
| $ | 39,918 |
|
Cost of sales |
| 20,847 |
|
|
| 1,123 |
|
|
| 36 |
| (f) |
| 22,006 |
|
Gross Profit |
| 16,211 |
|
|
| 1,737 |
|
|
| (36 | ) |
|
| 17,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
| 1,479 |
|
|
| 96 |
|
|
| - |
|
|
| 1,575 |
|
Selling |
| 7,357 |
|
|
| 687 |
|
|
| - |
|
|
| 8,044 |
|
General and administrative |
| 4,464 |
|
|
| 381 |
|
|
| 240 |
| (f) |
| 5,085 |
|
Total operating expenses |
| 13,300 |
|
|
| 1,164 |
|
|
| 240 |
|
|
| 14,704 |
|
Income (loss) from operations |
| 2,911 |
|
|
| 573 |
|
|
| (276 | ) |
|
| 3,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| 17 |
|
|
| - |
|
|
| - |
|
|
| 17 |
|
Interest expense |
| (82 | ) |
|
| - |
|
|
| (42 | ) | (g) |
| (124 | ) |
Income (loss) before income taxes |
| 2,846 |
|
|
| 573 |
|
|
| (318 | ) |
|
| 3,101 |
|
Income tax benefit (expense) |
| (619 | ) |
|
| - |
|
|
| (63 | ) | (h) |
| (682 | ) |
Net income (loss) | $ | 2,227 |
|
| $ | 573 |
|
| $ | (381 | ) |
| $ | 2,419 |
|
|
|
|
|
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|
|
|
|
Net income (loss) per common share |
|
|
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|
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|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.18 |
|
|
|
|
|
|
|
|
|
| $ | 0.20 |
|
Diluted | $ | 0.18 |
|
|
|
|
|
|
|
|
|
| $ | 0.19 |
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 12,132 |
|
|
|
|
|
|
|
|
|
|
| 12,132 |
|
Diluted |
| 12,581 |
|
|
|
|
|
|
|
|
|
|
| 12,581 |
|
See accompanying notes to pro forma financial information.
3
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Statement of Income
For the Nine Months Ended September 30, 2019
(in thousands, except per share data)
| Scott's Liquid |
|
| Paramount Acquisition |
|
| Pro Forma |
|
| Pro Forma |
| ||||
| Gold-Inc. |
|
| Brands |
|
| Adjustments |
|
| Combined |
| ||||
Net sales | $ | 20,365 |
|
| $ | 2,384 |
|
| $ | - |
|
| $ | 22,749 |
|
Cost of sales |
| 12,877 |
|
|
| 905 |
|
|
| 27 |
| (f) |
| 13,809 |
|
Gross Profit |
| 7,488 |
|
|
| 1,479 |
|
|
| (27 | ) |
|
| 8,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
| 491 |
|
|
| 84 |
|
|
| - |
|
|
| 575 |
|
Selling |
| 4,381 |
|
|
| 577 |
|
|
| - |
|
|
| 4,958 |
|
General and administrative |
| 3,604 |
|
|
| 318 |
|
|
| 104 |
| (f) (i) |
| 4,026 |
|
Total operating expenses |
| 8,476 |
|
|
| 979 |
|
|
| 104 |
|
|
| 9,559 |
|
(Loss) income from operations |
| (988 | ) |
|
| 500 |
|
|
| (131 | ) |
|
| (619 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| 89 |
|
|
| - |
|
|
| - |
|
|
| 89 |
|
Interest expense |
| (14 | ) |
|
| - |
|
|
| (32 | ) | (g) |
| (46 | ) |
Gain on sale of equipment |
| 110 |
|
|
| - |
|
|
| - |
|
|
| 110 |
|
(Loss) income before income taxes |
| (803 | ) |
|
| 500 |
|
|
| (163 | ) |
|
| (466 | ) |
Income tax benefit (expense) |
| 144 |
|
|
| - |
|
|
| (40 | ) | (h) |
| 104 |
|
Net (loss) income | $ | (659 | ) |
| $ | 500 |
|
| $ | (203 | ) |
| $ | (362 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | (0.05 | ) |
|
|
|
|
|
|
|
|
| $ | (0.03 | ) |
Diluted | $ | (0.05 | ) |
|
|
|
|
|
|
|
|
| $ | (0.03 | ) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 12,435 |
|
|
|
|
|
|
|
|
|
|
| 12,435 |
|
Diluted |
| 12,582 |
|
|
|
|
|
|
|
|
|
|
| 12,582 |
|
See accompanying notes to pro forma financial information.
4
SCOTT’S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1. Basis of Presentation
The Paramount Acquisition has been accounted for using the acquisition method of accounting for the transaction, where tangible and intangible assets acquired and the liabilities assumed will be recognized at their respective fair values at the time the transaction is consummated based upon preliminary appraisal estimates and certain assumptions that management believes are reasonable. The excess of the estimated purchase cost over the net assets acquired is recognized as goodwill.
The following table summarizes the preliminary amounts recognized for assets acquired and liabilities assumed as of the acquisition date. The allocation of the purchase price is still preliminary as the Company is in the process of finalizing valuations currently in process. Any post-closing true-up adjustments will have a corresponding purchase price adjustment. Based on preliminary figures of Paramount’s finished goods inventory, the Company estimates the finished goods inventory adjustment to be an additional $83,000, which has been included in the preliminary estimated allocation of the fair values as follows (amounts in thousands):
Fair value of consideration transferred: |
|
|
|
Actual and expected cash payments | $ | 5,583 |
|
Contingent consideration |
| 27 |
|
|
|
|
|
Preliminary purchase price allocation | $ | 5,610 |
|
|
|
|
|
Inventories, net |
| 306 |
|
Intangible assets |
| 3,595 |
|
Goodwill |
| 1,709 |
|
Total purchase price | $ | 5,610 |
|
Note 2. Description of Pro Forma Adjustments
Adjustments included in the column under the heading “Pro Forma Adjustments” relate to the following:
| (a) | To record cash and line-of-credit in connection with the purchase consideration paid. |
| (b) | To eliminate assets not acquired and liabilities not assumed. |
| (c) | To record the estimated fair value of intangible assets and residual goodwill. |
| (d) | To record the estimated fair value of the contingent consideration assumed. |
| (e) | To eliminate historical owner’s net investment in Paramount. |
| (f) | To record additional amortization expense from acquired intangible assets. |
| (g) | To record incremental interest expense from debt incurred in conjunction with the Paramount Acquisition. |
| (h) | To reflect income tax impact of acquired business results and pro forma adjustments. |
| (i) | To eliminate transaction costs incurred by Paramount |
5