June 29, 2007
Ms. Nudrat Salik
Staff Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Scott's Liquid Gold-Inc.
Form 10-KSB for the fiscal year ended December 31, 2006'
Form 10-QSB for the period ended March 31, 2007
File No. 1-13458
Dear Ms. Salik:
This letter responds to the comments of the staff of the
Securities and Exchange Commission in its letter dated June 15, 2007 with
respect to the Form 10-KSB Report of Scott's Liquid Gold-Inc. (the
"Company") listed above. The text of the staff's comments is set forth
below in bold type followed in each case by the response.
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2006
Notes to Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies
(k) Revenue Recognition, page 29
1. We note your response to prior comment 3. You state that skin care
products throughout the industry are sold with an unwritten "right of
return" such that products will be repurchased if not sold through to the
consumer. Please address the following:
.. Please provide us with an explanation of how you meet each of the
criteria of paragraph 6 of SFAS 48 to demonstrate how you determined it
is appropriate to recognize revenue at the time of sale for your skin care
products. For example, it is not clear if the customer would be required
to pay you for products in the event of theft or physical destruction or
damage. In a similar manner to your response, please address your
manufactured line of premium products separately from your value priced
skin care products;
Ms. Nadrat Salik
June 29, 2007
Page 2
Response:
We want to clarify what we have called the right of return. The
Company may choose to accept a proposed return from a retailer. The
Company will first discuss any proposed return with a customer to analyze
the reasons and will determine whether to accept the return on a case-
by-case basis. Returns are commonly accepted to retain or enhance the
relationship.
Paragraph 6 of SFAS 48 specifies the criteria for recognizing revenue
when a right of return exists. Set forth below is an explanation of
each of these criteria, including separate analysis for the products
manufactured by the Company (our premium skin care products) and for the
products for which the Company acts as a distributor (our value priced
skin care products which are Montagne Jeunesse sachets). The text of the
criteria in Paragraph 6 of SFAS 48 are set forth below in quotes:
"a. The seller's price to the buyer is substantially fixed or
determinable at the date of sale."
. Premium Priced: The Company's price to its customers for
premium priced products is fixed at the date of sale. The
price for each product sold is set forth in a purchase order
detailing each sale. The Company generally receives purchase
orders by Electronic Data Interchange (EDI) or by facsimile
from the customers.
. Value Priced: The analysis above applies equally to the
Company's value priced products.
"b. The buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on resale of the product."
. Premium Priced: Sales by the Company are contractual sales,
not contingent on resales, as described in (a) above. The
Company's customers payment terms are set forth in the
purchase orders for each sale as described above. Terms for
payment in such purchase orders generally range from 30-60
days from date of delivery, and the average number of days for
such a receivable to remain outstanding was 30.4 days in 2006.
The Company does not engage in "consignment" type transactions.
. Value Priced: The analysis above applies equally to the
Company's value priced products.
"c. The buyer's obligation to the seller would not be changed in the
event of theft or physical destruction or damage of the product."
. Premium Priced: The Company and its customers treat all
sales as FOB delivery. Therefore, product sold by the
Company to its customers becomes the legal property of the
customer when delivery has occurred. After delivery, any loss
Ms. Nudrat Salik
June 29, 2007
Page 3
such as theft or physical destruction is the responsibility
of the customer and not the Company.
. Value Priced: The analysis above applies equally to the
Company's value priced products.
"d. The buyer acquiring the product for resale has economic substance
apart from that provided by the seller."
All of the Company's customers, whether for premium priced or value
priced products, exist in their own right and for their own benefit. The
Company has no customers that might be considered "related parties"
through either investment, lending agreements, management, operational
control or any other means. To its knowledge, none of the Company's
customers relies on its products for their livelihood or survival.
"e. The seller does not have significant obligations for future
performance to directly bring about resale of the product by the buyer".
Following delivery of its products, the Company has no significant
obligations for future performance to directly bring about the resale of
the products by the customers. This applies equally to the Company's
premium priced and value priced products."
"f. The amount of future returns can be reasonably estimated."
. Premium Priced: The Company's process for determining
estimates for product returns is detailed below on page 10
of this letter. The Company has been selling to the retail
trade for more than 55 years, and has been selling retail skin
care products for 15 years. The types of customers for the
skin care products and household products of the Company are
the same - mass merchandisers, drugstores, grocery stores and
other retail outlets. The Company's reserves for product
returns are detailed on page 10 of this letter and have
historically been adequate. The Company believes that its
experience and its estimation processes allow the Company to
reasonably estimate the amount of future returns.
. Value Priced: The Company has been selling its value priced skin care
products for five years. The customers for the value priced skin care products
are the same customers or the same types of customers as those who purchase the
premium priced products. The Company believes that this experience and the
Company's estimation processes allow the Company to reasonably estimate the
amount of future returns.
.. Please provide us with additional information regarding the terms under
which you are obligated to repurchase your skin care products, including the
price at which you are required to repurchase at the price the products were
originally sold. Please address whether the price you are required to
repurchase the products will be adjusted to cover
Ms. Nudrat Salik
June 29, 2007
Page 4
any costs incurred by the customer in purchasing or holding the products.
Refer to Question 2 of SAB Topic 13:A.2;
Response:
The Company is not obligated to repurchase products at all, but may
chose to do so (referred to as "authorizing" a return) upon request by
customers in order to retain or enhance the customer relationship. Return
price credit (used in exchanges typically or, rarely, refunded in cash)
when authorized is based on the original sale price, plus a handling
charge that ranges from 8-10%. The handling charge covers costs associated
with the return and shipping of the product.
Question 2 of SAB Topic 13:A.2 details the Staff's considerations
related to consignment transactions. Set forth below is an explanation of
each of these criteria. The text of the relevant portion of Question 2
of SAB Topic 13:A.2 is set forth below in quotes:
"1. The buyer has the right to return the product and:
(a) the buyer does not pay the seller at the time of sale and the buyer
is not obligated to pay the seller at a specified date or dates,
(b) the buyer does not pay the seller at the time of sale but rather is
obligated to pay at a specified date or dates, and the buyer's obligation
to pay is contractually or implicitly excused until the buyer resells the
product or subsequently consumes or uses the product,
(c) the buyer's obligation to the seller would be changed (e.g., the
seller would forgive the obligation or grant a refund) in the event of
theft or physical destruction or damage of the product,
(d) the buyer acquiring the product for resale does not have economic
substance apart from that provided by the seller, or
(e) the seller has significant obligations for future performance to
directly bring about the resale of the product by the buyer."
The analysis of these criteria is the same as the analysis of
Paragraph 6 of SFAS 48 set forth above.
"2. The seller is required to repurchase the product (or a substantially
identical product or processed goods of which the product is a component)
at specified prices that are not subject to change except for fluctuations
due to finance and holding costs, and the amounts to be paid by the seller
will be adjusted, as necessary, to cover substantially all fluctuations in
costs incurred by the buyer in purchasing and holding the product
(including interest). The staff believes that indicators of the latter
condition include:
(a) the seller provides interest-free or significantly below market
financing to the buyer beyond the seller's customary sales terms and until
the products are resold,
Ms. Nudrat Salik
June 29, 2007
Page 5
(b) the seller pays interest costs on behalf of the buyer under a
third-party financing arrangement, or
(c) the seller has a practice of refunding (or intends to refund) a
portion of the original sales price representative of interest expense
for the period from when the buyer paid the seller until the buyer
resells the product."
Return price credit (used in exchanges typically, or, rarely,
refunded in cash) when authorized is based on the original sale price
plus a handling charge that ranges from 8-10%. The handling charge
covers only those costs associated with the return and shipping of the
product. Handling charges are not intended to, and do not, cover all
costs incurred by the customer in purchasing and holding the product.
"3. The transaction possesses the characteristics set forth in EITF
Issue 95-1 and does not qualify for sales-type lease accounting."
None of the Company's skin care products are sold via transactions
which possess the characteristics set forth in EITF Issue 95-1 entitled
"Revenue Recognition on Sales with a Guaranteed Minimum Resale Value."
"4. The product is delivered for demonstration purposes."
None of the Company's skin care products is delivered for
demonstration purposes. The Company's products are not provided to a
customer of the Company on a temporary basis in order for the customer to
decide whether or not to purchase or retain the product.
.. Please provide us with an analysis which addresses each of the
factors listed in paragraph 8 of SFAS 48 and Question 1 of SAB Topic
13:A.4.b. to demonstrate your ability to make a reasonable estimate of
your returns related to your skin care products. If any of these factors
do exist, please address how you are able to overcome the factor to arrive
at a reasonable estimate. In a similar manner to your response, please
address your manufactured line of premium products separately from your
value priced skin care products; and
Response:
The Company's process for making reserve estimates for product
returns related to skin care products is detailed in this letter below on
page 10 of this letter. Paragraph 8 of SFAS 48 details certain factors
that impair the ability of a company to make reasonable estimates of future
returns. Set forth below is an explanation of each of these factors,
including separate analysis for the Company's premium priced products and
for the Company's value priced products. The text of Paragraph 8 of
SFAS 48 is set forth below in quotes:
"The ability to make a reasonable estimate of the amount of future
returns depends on many factors and circumstances that will vary from one
case to the next. However, the following factors may impair the ability
to make a reasonable estimate:
Ms. Nudrat Salik
June 29, 2007
Page 6
a. The susceptibility of the product to significant external factors,
such as technological obsolescence or changes in demand"
Premium Priced: The Company's products are subject to the
external factors of new competitive products and new
advertising campaigns on a regular basis. The Company believes
that the new products do not make the Company's skin care
products obsolete but have in the past gradually affected the
demand for the Company's products. These effects on product
demand are taken into account when developing reserve estimates
for product returns along with information provided by the
Company's sales personnel and management. These external factors
do not impair the Company's ability to make reasonable estimates
because such changes are gradual and are reflected in information
taken into account in connection with the reserve estimation
process.
Value Priced: The analysis above applies equally to the
Company's value priced products to the extent that Montagne
Jeunesse sachets are affected by new products or advertising
campaigns. The impact of these factors on Montagne Jeunesse
products are less because they are single use sachets purchased
at an inexpensive price.
"b. Relatively long periods in which a particular product may be returned"
. Premium Priced: The Company's typical return period is within
6 months following the date of sale and seldom exceeds 12
months. Drugstores are the most likely customer of the Company
to return product, and such stores are likely to return a
product only when it is slow moving. Such retailers regularly
review their merchandise sales performance and shelf space
allocations, and re-allocate shelf space quickly if products
are not being purchased by consumers in sufficient quantity.
The Company's sales personnel and management communicate with
our customers regularly, and we keep track of reorders, both of
which allow us to be aware of how a product is moving at retail
stores. These factors are considered in our analysis and do
not limit the Company's ability to make estimates of future
product returns.
Value Priced: The analysis above applies equally to the
Company's value priced products.
"c. Absence of historical experience with similar types of sales of
similar products, or inability to apply such experience because of
changing circumstances, for example, changes in the selling enterprise's
marketing policies or relationships with its customers"
Premium Priced: The Company has been manufacturing and
marketing its premium priced skin care products to the retail
industry for 15 years and as such has extensive experience with
sales of these products and the customers. Little
Ms. Nudrat Salik
June 29, 2007
Page 7
has changed in the Company's marketing policies and relationships
with its customers over this period. This factor does not limit
the Company's ability to make estimates of future product returns.
Value Priced: The Company has been distributing and marketing
its value priced skin care products to the retail industry for
over 5 years. Many of the customers are the same as those who
purchase our premium priced products. As such, the Company has
extensive experience with similar sales of similar products. As
with the premium priced products, little has changed in the
Company's marketing policies and relationships with its customers
over this period. This factor does not limit the Company's
ability to make estimates of future product returns.
"d. Absence of a large volume of relatively homogeneous transactions"
. Premium Priced: The Company's premium priced skin care product
business is based on large volumes of homogeneous transactions.
The Company's premium priced skin care product revenue is comprised
of sales of significant quantities of product primarily to large
retailers and also to smaller retail stores or chains. This
factor does not limit the Company's ability to make estimates of
future product returns.
. Value Priced: The Company's value priced skin care product
business is also based on large volumes of homogeneous transactions.
The Company's value priced skin care product revenue is comprised
almost entirely of sales of significant quantities of product to
large retailers. This factor does not limit the Company's ability
to make estimates of future product returns.
Question 1 of SAB Topic 13:A.4.b sets forth additional factors that may
affect or preclude the Company's ability to make reasonable and reliable
estimates of product returns. The text of those additional factors is set
forth below in quotes with a separate analysis for the Company's premium
priced products and for the Company's value priced products.
"(1) significant increases in or excess levels of inventory in a distribution
channel (sometimes called channel stuffing),"
The Company sells its skin care products directly to major retailers
and, to a very limited extent, through distributors that resell the product
to retailers. The Company has neither tried nor would expect to be successful
in any effort to engage in channel stuffing. This factor does not adversely
impact the Company's ability to estimate returns.
"(2) lack of "visibility" into or inability to determine or observe the
levels of inventory in a distribution channel and the current levels of
sales to end users,"
The Company's sales personnel and management are in regular contact with
the Company's customers as to both premium priced and value priced products.
The Company is also aware of reorders from its customers or the lack of
Ms Nudrat Salik
June 29, 2007
Page 7
reorders. For sales to Wal-Mart, K-Mart, Target, and Rite Aid (which
comprise 46.2% of total skin care product sales), the Company also receives
Point of Sale (POS) data that details sales of the Company's products. This
factor does not adversely impact the Company's ability to estimate returns.
"(3) expected introductions of new products that may result in the
technological obsolescence of and larger than expected returns of current
products, "
Please see a discussion of this factor above in regard to paragraph 8 of
SFAS 48. This factor does not adversely impact the Company's ability to
estimate returns.
"(4) the significance of a particular distributor to the registrant's (or a
reporting segment's) business, sales and marketing, "
As discussed above, no distributor (which buys and resells products)
is significant to the Company's sales. The Company's largest customer is
Wal-Mart, accounting for 25.1% of its sales of skin care products in 2006.
Wal-Mart does not return products to the Company. This factor does not
adversely impact the Company's ability to estimate returns.
"(5) the newness of a product,"
The Company's premium products have been on the market for 15 years.
The Company's value priced products have been on the market for 5 years. The
Company introduces new variances of these products from time to time, but,
based on historical experience, these variances do not affect the factors that
the Company uses in arriving at estimates of products that may be returned.
This factor does not adversely impact the Company's ability to estimate returns.
"(6) the introduction of competitor's products with superior technology or
greater expected market acceptance, and"
Product introductions by the Company's competitors have only a gradual,
if any, impact on the Company's products. In addition, as further detailed
elsewhere in this letter, the Company's procedures and processes for estimating
reserves take into account the constant introduction of new products by
competitors. This factor does not adversely impact the Company's ability to
estimate returns.
"(7) other factors that affect market demand and changing trends in that
demand for the registrant's products."
The Company has some seasonality in its revenues due to increases in
holiday season purchases. This increase is predictable and does not impact
the Company's ability to estimate returns. This factor does not adversely
impact the Company's ability to estimate returns.
.. Please tell us more about your methodology used to determine the
appropriate reserves on a quarterly basis, including whether this reserve is
determined on a product by product basis and what factors you consider.
Please also provide us with a schedule summarizing the changes in your skin
Ms. Nudrat Salik
June 29, 2007
Page 9
care products return reserves account for each of the past three years and
current interim period. This schedule should show the balance of the reserve
at the beginning of each period, any additions to the reserve recorded as a
reduction of sales during the period, any reserves used during the period,
and the ending balance. Please provide this separately for your manufactured
line of premium products from your value priced skin care products.
Response:
The Company's methodology for quarterly and annual estimates of future
product returns related to previous sales include the following for each
product line:
Review of return activity of products for the last three years
and the current year;
. Review of any reasons for any significant returns in past periods;
. Review of reorders or lack of reorders, which are indicative of
sales to consumers;
. Review of all information for trends, positive and negative; and
. Discuss with the Company's sales personnel and management the
relationship with the customers, the competitive environment and
their knowledge of any specific issues that could result in a
return.
Ms. Nudrat Salik
June 29, 2007
Page 10
The Company's estimated reserves have historically been adequate. For
detail regarding actual accruals and utilization of return reserves, see the
table below.
Premium Priced Skin Care Products
- --------------------------------------------------------------------------
Quarter end Year ended December 31,
March 31, 2007 2006 2005 2004
------------- ----------- ----------- -----------
Gross Sales $ 1,585,000 $ 5,503,000 $ 7,071,000 $ 4,023,000
Reserve:
Begin of period $ 72,000 $ 42,000 $ 73,000 $ 283,000
Additions 47,000 452,000 190,000 137,000
Utilized (24,000) (422,000) (221,000) (347,000)
---------- ----------- ----------- -----------
End of period $ 95,000 $ 72,000 $ 42,000 $ 73,000
========== =========== =========== ===========
Premium Priced Skin Care Products
- --------------------------------------------------------------------------
Quarter end Year ended December 31,
March 31, 2007 2006 2005 2004
------------- ----------- ----------- -----------
Gross Sales $ 1,188,000 $ 5,413,000 $11,307,000 $11,488,000
Reserve:
Begin of period $ 51,000 $ 121,000 $ 86,000 $ 58,000
Additions 5,000 128,000 442,000 272,000
Utilized (26,000) (198,000) (407,000) (244,000)
---------- ----------- ----------- -----------
End of period $ 30,000 $ 51,000 $ 121,000 $ 86,000
=========== =========== =========== ===========
Note 2. Inventories, page 32
2. We note your response to prior comment 2. Please tell us the amount of
finished goods written off by each product line for each of the three prior
years and current interim period. Please tell us more about your sales
through close-out channels. Please help us understand at what point you
determine it is appropriate to sell through these channels. For example, is
it based on when unit sales of a particular product hit a certain level?
Please also tell us how these products are typically priced when selling
through these channels and whether you are typically able to sell these
products for prices in excess of the original cost.
Ms. Nudrat Salik
June 29, 2007
Page 11
Response:
The Company's finished goods written off in the last three years and
current interim period are as follows:
Year Write-off
- ---- ---------
2004 ....... None
2005 ....... None
2006 ....... $165,000*
Q1 2007 .... None
* Reduction in Montagne Jeunesse Sachets finished goods described below.
The Company's sales through close-out channels include sales to such
retailers as dollar stores, (i.e., Dollar General, Family Dollar, Big Lots)
and similar outlets. We contact this type of retailer when we believe that
it is not likely that our items will sell to consumers through our regular
retail customers or to consumers through our website. Sales of close-out
items to these types of retailers occur from time to time but not on a
regular basis.
The write-off of $165,000 mentioned above concerns a variant of the
Montagne Jeunesse sachets where the Company determined that the sales of the
sachets were becoming minimal and realizing the inventory cost, even at
close-out prices, was not likely to be recovered. In that case the Company
reserved a significant portion of the cost of that inventory.
The Company sets close-out pricing by estimating the retail price at
which the Company believes a close-out store could sell an item and then
determining the highest price that the Company may obtain, taking into
account the margins which close-out stores desire. Because the Company's
inventory value of finished goods ranges, in relation to normal selling
prices, from 25% to 30% for our premium skin care, and 48% for our value
priced skin care products, the Company is, in the vast majority of cases,
able to achieve a selling price at or above its original inventory carrying
value plus direct selling costs.
If you have any questions or comments regarding the foregoing, please
contact Mark R. Levy (303-290-1083) or Lucy Schlauch (303-295-8493) at
Holland & Hart LLP, our attorneys. Thank you.
Very truly yours,
SCOTT'S LIQUID GOLD-INC.
By: /s/ Jeffry B. Johnson
Treasurer and Chief Financial Officer