DEF 14A: Scotts Liquid Gold-Inc. Proposes Merger with Horizon Kinetics LLC, Seeks Shareholder Approval for Reverse Stock Split and Reincorporation

Scotts Liquid Gold-Inc. is seeking shareholder approval for a reverse stock split and reincorporation in Delaware to facilitate its merger with Horizon Kinetics LLC.

Summary

• Scotts Liquid Gold-Inc. (SLGD) has entered into a merger agreement with Horizon Kinetics LLC, contingent upon shareholder approval of a reverse stock split and reincorporation.
• A special meeting of shareholders is scheduled for June 20, 2024, to vote on the reverse stock split (1-for-20), reincorporation in Delaware, and a name change to Horizon Kinetics Holding Corporation.
• If approved, the merger will result in Horizon Kinetics security holders receiving shares of SLGD common stock, with legacy SLGD shareholders expected to own between 3.2% and 4.3% of the pro forma combined company.
• The value of Horizon Kinetics' operating business is stipulated at $200 million if its regulatory assets under management (AUM) are between $6 billion and $8 billion; otherwise, it's calculated by multiplying AUM by 0.03.
• The SLGD Board of Directors recommends voting FOR the reverse stock split, reincorporation, and adjournment proposals.
• The merger aims to strengthen SLGD's financial liquidity, cash flow, and market capitalization.
• Completion of the merger is expected in the first half of July 2024, pending shareholder and regulatory approvals.
• The transaction is intended to qualify as a tax-deferred exchange under Section 351(a) of the Internal Revenue Code.

Sentiment

Score: 6

Explanation: The document is a formal proxy statement, so the sentiment is neutral. The merger is presented as a positive step for the company, but there are also risks and uncertainties involved.

Positives

• The merger is expected to significantly strengthen the company's financial liquidity and cash flow.
• The combined company is expected to have a stronger balance sheet with more working capital.
• The merger may lead to greater interest from institutional investors and ease the attraction of talent.
• The Board of Directors believes the merger is a superior path forward compared to liquidating the company or continuing operations with only pet care brands.

Negatives

• Current SLGD shareholders will experience significant dilution, owning only 3.2% to 4.3% of the pro forma combined company.
• The exact percentage of ownership for legacy shareholders will not be known until the closing date, creating uncertainty.
• The formula for calculating the merger consideration was arbitrarily determined without a fairness opinion or independent valuation.
• The pendency of the merger could disrupt the businesses of both companies and divert management's attention.

Risks

• The Company and Horizon Kinetics may not realize all of the anticipated benefits of the Merger.
• Horizon Kinetics is a private company, making it difficult to determine its value.
• The pendency of the Merger could adversely affect the Company's stock price and could adversely affect the Company's and Horizon Kinetics' respective businesses, financial condition, results of operations or business prospects.
• Provisions of the Merger Agreement limit the Company's and Horizon Kinetics' ability to pursue other business combinations and may deter third parties from proposing alternative transactions.
• Future financial results of the combined company may differ materially from the unaudited pro forma combined financial statements presented in this proxy statement and any financial forecasts prepared in connection with discussions concerning the Merger.
• Both Horizon Kinetics and the Company have identified material weaknesses in their internal control over financial reporting, which make those controls ineffective.
• Failure to complete or delay of the Merger could negatively impact the Company's and Horizon Kinetics' respective businesses, financial condition or results of operations.
• The combined company's future operating results will be adversely affected if it does not effectively manage its expanded operations following the Merger.
• The market price of the Company's Common Stock after the Merger is likely to be affected by factors different from those affecting the market price of the Company's shares prior to the Merger.
• The issuance of shares of the Company's Common Stock to Horizon Kinetics security holders in connection with the Merger will significantly reduce the percentage ownership of the Company's current shareholders.
• Following the closing of the Merger, the ownership of the Company's Common Stock will be concentrated and our directors and officers will collectively hold enough shares to determine the outcome of shareholder votes.
• Retention of key personnel may be difficult.
• The Merger may be completed on different terms from those contained in the Merger Agreement.
• As a result of the Merger, the combined company could record goodwill on its balance sheet, which could result in significant future impairment charges and negatively affect the combined company's future financial condition, results of operations and stock price.
• We will incur significant transaction costs in connection with the Merger.
• As a result of the Merger, the combined company is not expected to be able to fully use the Company's net operating loss (NOL) carryforwards.
• The combined company will continue to be a smaller reporting company after the Merger, and the reduced disclosure requirements applicable to smaller reporting companies may make our Common Stock less attractive to investors.
• A Reverse Stock Split may not result in the desired increase in share price or liquidity, may increase the number of odd lots, and may be construed as having an anti-takeover effect.
• Some of the risks relating to the Merger described above and relating to the Company described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and incorporated by reference may also apply to Horizon Kinetics.
• Unfavorable market conditions could adversely affect Horizon Kinetics' business in many ways, including by reducing the fees revenue and distributions received from its funds, if any, or reducing the ability of its funds to raise or deploy capital on favorable terms, or at all.
• Several of Horizon Kinetics' funds and separately-managed accounts, or SMAs, hold significant investments in Texas Pacific Land Corp., or TPL. In many cases, such investments represent a material portion of the funds or SMAs total assets. If TPL's operating or market performance deteriorates for any reason, then Horizon Kinetics' resulting advisory fees and reputation could be negatively impacted.
• Murray Stahl is member of the Board of Directors of Texas Pacific Land Corporation, or TPL, a large holding in SMAs and funds managed by Horizon Kinetics' investment adviser subsidiary. In many cases, such investments represent a material portion of the SMAs or funds' assets. On December 31, 2023 and March 31, 2024, respectively, approximately 32% and 32% of Horizon Kinetics' AUM consisted of common stock of TPL. This significant investment and corresponding lack of diversification disproportionately exposes Horizon Kinetics' SMAs and funds to fluctuations in TPL's stock price, which therefore affects Horizon Kinetics' subsidiary's adviser fees and assets under management. In addition, Horizon Kinetics is itself invested in TPL. On December 31, 2023 and March 31, 2024, respectively, approximately $30.1 million and $33.2 million of Horizon Kinetics' assets consisted of common stock of TPL.
• Horizon Kinetics and its employees may invest in other companies or funds in which its clients also invest, which may create conflicts of interest. Conflicts of interests are also present when Horizon Kinetics receives performance fees.
• Horizon Kinetics, and the funds and SMAs managed by its subsidiary, are exposed to risks relating to cryptocurrencies and related investments, either directly or through cryptocurrency-linked ETFs.
• Horizon Kinetics' success depends highly on its senior executives, and the loss of their services would have a material adverse effect on its business, results and financial condition.
• Poor performance of Horizon Kinetics' funds would cause a decline in its revenue, income and cash flow and could adversely affect its ability to raise capital for future funds.
• Horizon Kinetics' investment philosophy makes a rebalancing of portfolios unlikely, which could result in concentrated positions, adversely impacting Horizon Kinetics' business and reputation if those positions decline.
• The asset management business is intensely competitive.
• Extensive regulation of Horizon Kinetics' businesses affects its activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on its business.
• Horizon Kinetics faces legal, regulatory and contractual risks in case its policies, procedures and controls fail.
• Horizon Kinetics may have to sell or retain assets when it would otherwise not wish to do so in order to avoid registration under the 1940 Act.
• Horizon Kinetics has and will continue to incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on its business, financial condition and results of operations.
• The capital markets are currently in a period of disruption and economic uncertainty. Such market conditions have materially and adversely affected debt and equity capital markets, which have had, and may continue to have, a negative impact on Horizon Kinetics' business and operations.
• Cybersecurity risks and cyber incidents may adversely affect Horizon Kinetics' business by causing a disruption to our operations, or the operations of our funds or the businesses in which they invest, compromise or corrupt of confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.
• We are dependent on information systems, and systems failures could significantly disrupt our business.

Future Outlook

The Company and Horizon Kinetics currently expect to complete the Merger in the first half of July 2024, subject to shareholder and regulatory approvals. The combined company will focus on strategies to enhance financial health and deliver shareholder value.

Management Comments

• The Company entered into the Merger Agreement with the purpose of creating meaningful shareholder value for all shareholders of the combined entity.
• The Company believes that the Merger is a superior path forward for the Company compared to a number of other paths that were considered, including (1) the possibility of liquidating the Company, (2) the possibility of the Company continuing its operations using only the Company's pet care brands, and (3) a different strategic transaction or potential recapitalization.
• The Company believes that the Merger will increase its market capitalization, total assets, total shareholder equity, revenue, and profitability.

Industry Context

The announcement comes amid a highly competitive marketplace for household products and attractive opportunities in the asset management industry, where Horizon Kinetics has successfully grown its presence.

Comparison to Industry Standards

• The document does not provide specific details to assess the results in the context of global benchmarks.
• The document does not list specific comparable companies, projects, and results.

Management Changes

Corporate Governance

Stakeholder Impact

• Shareholders will experience dilution but may benefit from increased liquidity and a stronger balance sheet.
• Employees may experience uncertainty regarding their future roles with the combined company.
• Customers and suppliers may delay or defer certain business decisions due to the merger.

Next Steps

• Shareholders to vote on the reverse stock split, reincorporation, and adjournment proposals at the Special Meeting on June 20, 2024.
• If approved, the Company and Horizon Kinetics will work to satisfy all remaining conditions to complete the Merger in the first half of July 2024.

Key Dates

Keywords

Merger, Horizon Kinetics, Reverse Stock Split, Reincorporation, Proxy Statement, Shareholder Approval, Scotts Liquid Gold, AUM, Delaware, Investment Management