DEER CONSUMER PRODUCTS, INC.
Area 2, 1/F, Building M-6
Central High-Tech Industrial Park
Nanshan, Shenzhen, China 518057
(86) 755-8602-8285
July 12, 2011
VIA EDGAR
Larry Spirgel
Assistant Director
Division of Corporation Finance
Mail Stop 4631
U.S. Securities and Exchange Commission
100 F. Street, N.E.
Washington, DC 20549
Re: | Deer Consumer Products, Inc. |
Form 10-K for Fiscal Year Ended December 31, 2010 | |
Form 10-Q for Fiscal Quarter Ended March 31, 2011 | |
File No. 1-34407 |
Dear Mr. Spirgel:
This letter is in response to the comment letter of the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”), dated June 7, 2011, to Deer Consumer Products, Inc. (the “Company”) regarding the above-mentioned filings of the Company. Please note that the Staff’s comments are restated below along with the Company’s responses.
Form 10-K for Fiscal Year Ended December 31, 2010
Item 1. Business
General
1. Please advise us supplementally whether you continue to anticipate that the new factory to be constructed in the Wuhu area of the AnHui Province will be completed in 2011.
Response:
On page 20 of the Company’s quarterly report on Form 10Q for the period ended March 31, 2011, the Company disclosed that, “[w]e have received official land use right certificates issued by the PRC government for these land parcels and broke ground in 2011 for the initial phase of construction of our new production and distribution facilities. The Company anticipates that the new facilities will allow us to target the neighboring population of more than 400 million as we continue to grow our business in the China domestic market. We anticipate that the new facilities will be constructed in several phases, on pace with our growing China domestic product distribution footprint.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 2
The Company plans to construct the foundation of the new facilities which will include factories and warehouses. The Company plans to complete the construction of fencing, sewage system, water pipes, gas and utilities, the factory’s main entrance and leveling the land during the remainder of 2011. The Company plans to complete the construction of certain workshops and the warehouse in 2012, which are estimated to be about 1 million square feet. The pace of construction will be determined by the pace of the Company’s China domestic market expansion.
2. We note that the new factory to be constructed in the AnHui Province will increase your production capacity by 40%. Please advise us, with a view towards disclosure, whether your current factory operates at capacity. Likewise, advise us when management anticipates needing the additional capacity the new factory can provide, and whether the additional capacity will be brought on line incrementally or all at once.
Response:
The Company previously disclosed in its Current Report on Form 8-K filed on March 14, 2011: “Once completed, the new facilities (in Wuhu) are planned to serve primarily as a hub for our China domestic markets, while our current facilities in Yangjiang, GuangDong Province will serve primarily as a hub for our export markets . . . We also anticipate realizing significant savings on shipping and logistics costs compared to our current Yangjiang location, which is located at the southern tip of China's southern GuangDong province, several days shipping time away from central China by land transportation. Until we complete the planned new location in east central China, we will continue to supply out of our current facilities in Yangjiang, where we have sufficient existing production capacity to support our growth plan in 2011.”
The Company’s current factory located in Yangjiang, Guangdong province in south China does not operate at full capacity. The Yangjiang facilities have been primarily used for fulfilling export orders. The Company’s anticipated new facilities in AnHui are located in central China and will be primarily used to fulfill China domestic orders. The two facilities are about 1,000 miles apart. Management anticipates needing the new capacity at the new facilities in AnHui over the next few years. This additional capacity will be brought on line incrementally in accordance with the Company’s China domestic expansion strategy.
Products. page 2
3. Please revise the first sentence to clarify that Deer Consumer Products, Inc. is a holding company with no material assets other than the stock of its wholly-owned subsidiaries, that, through its operating subsidiary Winder, manufactures small home and kitchen appliances.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 3
Response:
The Company proposes to revise the first sentence in accordance with the Staff’s comment as set forth below.
“We are a U.S. holding company with no material assets other than the stock of our wholly owned subsidiaries, including our operating subsidiary Winder, which manufactures our small home and kitchen electric appliances for the consumer market in China and for export markets.”
Industry Overview. page 2
4. We note references to third party information, such as the 2009 CCID Consulting and China Market Monitor Co., Ltd., on page 2. Please provide us with marked copies of any materials that support third party statements, clearly cross-referencing a statement with the underlying factual support.
Response:
We enclose as Exhibit A a copy of the 2009 CCID Consulting and China Market Monitor Co., Ltd. Report (the “Report”), marked to clearly cross-reference statements made in the Company’s annual report with the underlying factual support. For the convenience of the Staff, the marked portions of the Report have been translated into English.
Sales and Marketing, page 3
5. Please revise here, and within your annual report, to provide more fulsome disclosure concerning how Deer increased sales of its Deer brand within the China domestic market by “establishing a direct channel presence” at retail locations.
Response:
The Company proposes to add the disclosure set forth below to its Sales and Marketing section and its annual report in accordance with the Staff’s comment.
“The increase in sales and distribution of our Deer brand (德尔) products to the China domestic market in 2010 was attributable to our establishing a direct sales channel presence at domestic retail stores across China, such as Gome, SuNing and Rainbow Department Stores. The presence of our products on the shelves of these large and well-known nationwide retailers provided our products with a high degree of visibility throughout China. In addition, we hire in-store promoters to directly introduce our products to in-store customer traffic.”
6. Please revise here, and within your annual report, likewise to more fully expand upon how Deer “continued its marketing program” to increase sales and product distribution to markets outside of China.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 4
Response:
The Company proposes to add the disclosure set forth below to its Sales and Marketing section and its annual report in accordance with the Staff’s comment.
“After the global financial crisis in 2010 the Company experienced a decrease in customer orders from North America. As a result, the Company continued its marketing program to increase sales and distribution of products in emerging markets, such as South America, Asia, Africa and the Middle East. The Company’s sales personnel marketed the Company’s products through various channels including participating in exhibitions such as at the Canton Fair, the largest import and export trade fair in China and a leading venue for Chinese exporters to exhibit and sell their goods to the international markets. The Canton Fair is one of the significant sources of export oriented new business for the Company each year. The Company also maintains regular contacts with current and new international customers to solicit repeat orders and obtain new orders.”
7. We note you disclose that the company’s Sales and Marketing department consisted of 150 employees at December 31, 2010. In light of your significant year over year increase in revenue, please disclose and tell us what this number was at December 31, 2009 and December 31, 2008 for comparative purposes.
Response:
The Company proposes to add the disclosure set forth below to its Sales and Marketing section in accordance with the Staff’s comment.
“The Company’s Sales and Marketing department consisted of 98 full-time employees at both December 31, 2009, and December 31, 2008. From time to time, the Company has also hired part-time marketing personnel to help market the Company’s products at trade shows and third-party sales agents who introduce new customers to the Company.”
8. Also, please quantify the expansion of your sales channels to the extent that this is support for increases in revenue.
Response:
The Company proposes to add the disclosure set forth below to its Sales and Marketing section in accordance with the Staff’s comment.
“We have been actively expanding our traditional and non-traditional sales channels in the China domestic market to increase our revenues. Our sales through traditional channels, including retail stores such as Gome and SuNing, expanded to $58,734,807 in 2010 from $11,450,788 in 2009. In addition, our sales through non-traditional channels, such as hospitality, restaurant and commercial channels, increased to $18,162,298 in 2010 from $2,928,336 in 2009.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 5
Customers, page 4
9. We note that Song Qiao is identified as a 13% customer, yet is discussed nowhere else in your Form 10-K, including within Management's Discussion and Analysis. Please advise. We note the discussion of Gome and SuNing within that section of your Form 10-K.
Response:
The Company proposes to add the underlined disclosure below regarding Song Qiao to the revenues section of its Management’s Discussion and Analysis in accordance with the Staff’s comment. The Company notes that Song Qiao is a wholly-owned subsidiary of SuNing. As sales to such related parties is aggregated for disclosure purposes, the Company considers Song Qiao and SuNing one customer.
“Our products currently are available in approximately 3,000 retail distribution points as of March 2011. Beginning in the latter half of 2009, we increased sales of our products under a private label arrangement to SuNing, who together with its wholly-owned subsidiary Song Qiao, is a prominent national electric appliance retail chain in China with roughly 900 stores and with more locations added each year.”
The Company proposes to add the underlined disclosure below regarding Song Qiao to its customers section on page 4 in accordance with the Staff’s comment.
“Our two largest customers, Song Qiao, a wholly-owned subsidiary of SuNing, and Gome, accounted for 14% and 10% of our revenues in 2010. Our other top customers in 2010 included: SuNing, Focus Electric, Lidehaisi, Sattar, Rainbow Department Store (天虹商场), Shen Zhen Chu TianLong, Sanwai and Taggo.”
Export Market, page 4
10. Your statement that sales to customers outside of China accounted for 57%, 82%, and 95% of your revenues over the past three years appears to suggest a trend at variance with your statement in the following paragraph that, “We have experienced significant growth to customers in South America, Asia, Europe and the Middle East over the past three years.” Please revise to address the apparent discrepancy, or advise us why you believe no revision is needed.
Response:
The Company’s overall increase in sales between 2008 and 2010, from $43,784,935 to $175,845,887, was driven by both an increase in sales outside of China, from $41,595,688 to $100,232,155, and an increase in sales in the China domestic market, from $2,189,246 to $75,613,731. The Company posted larger percentage increases in year over year sales in the China domestic market, with an average yearly growth rate between 2008 and 2010 of approximately 493%, than in sales outside of China, with an average yearly growth rate between 2008 and 2010 of approximately 55%. We believe the 55% growth rate between 2008 and 2010 and $58,636,467 increase in sales to customers outside of China represents “significant growth” as described in the Company’s current disclosure.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 6
Intellectual Property, page 5
11. We note your statement that in December, 2008 you entered into transfer agreements that intended to transfer the ownership of patents and trademarks from Messrs. He and He, Shenzhen De Mei Long Electric Appliances Co., Ltd, and Shenzhen Kafu Industrial Company Ltd., to Winder. Please advise us why there is uncertainty that such a transfer was, or has been, effected. Please advise us further what steps, if any, you have taken to effect the transfer of the referenced patents and trademarks. We note related risk factor disclosure at page 9, “[w]e may only have a perpetual, exclusive, worldwide and royalty-free license to use the patents and trademarks used in its business.”
Response:
The intended transfer of ownership of patents and trademarks from Messrs. He and He, Shenzhen De Mei Long Electric Appliances Co., Ltd., and Shenzen Kafu Industrial Company Ltd. to Winder has not been completed since such transfers have not been registered with the State Intellectual Property Office of the PRC and the China Trademark Office under the State Administration of Industry and Commerce of the PRC. Because the Company has been relying on a perpetual, exclusive, world-wide and royalty-free license which may not be cancelled by the licensors, the Company has not registered the transfer as noted in the risk factor on page 9. This license is sufficient to grant all rights necessary for the Company to conduct its operations and is set forth in a supplemental agreement entered into between the Company and the aforementioned licensors on November 19, 2009, and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 20, 2009.
The Company proposes to add the disclosure underlined below to the risk factor in accordance with the Staff’s comment and to be consistent with this discussion.
“Winder may only have a perpetual, exclusive, worldwide and royalty-free license to use the patents and trademarks used in its business.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 7
We and our subsidiaries have historically licensed the right to use patents and trademarks from various parties, including from our Chairman and Chief Executive Officer, Ying He, his brother, Famin He, Shenzhen De Mei Long Electric Appliances Co., Ltd. and Shenzhen Kafu Industrial Co., Ltd. In December 2008, we entered into transfer agreements that intended to transfer patents and trademarks used by us from Messrs. He and He, Shenzhen De Mei Long Electric Appliances Co., Ltd. and Shenzhen Kafu Industrial Co., Ltd., to Winder. Any transfer of the ownership of such patents and trademarks requires that the transfer agreements be registered with the State Intellectual Property Office of the PRC and the China Trademark Office under the State Administration of Industry and Commerce of the PRC, respectively. In the absence of such registration, the transfers would be ineffective under PRC law. To clarify the transfer and safeguard our right to use these patents and trademarks, Winder has entered into a supplemental agreement to such transfer agreements whereby the original intellectual property holders clarify that a transfer of ownership was intended and their license of the use of the patents and trademarks to Winder has and will continue on a perpetual, exclusive, world-wide and royalty-free basis, which may not be cancelled by the licensor or grantor until such time as the ownership of such patents and trademarks are effectively transferred to Winder. This license is set forth in a supplemental agreement entered into between the Company and the aforementioned licensors on November 19, 2009, and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 20, 2009. Because the Company has been relying on such license, which is sufficient to grant all rights necessary for the Company to conduct its operations, the Company has not registered the transfer. However, if any of the licensors unilaterally terminates or repudiates the supplemental agreements, our business may be adversely affected as Winder may have to litigate or arbitrate to retain such license rights.”
Governmental and Environmental Regulation, page 5
12. Please revise to specify by name all governmental and environmental rules, regulations, laws, circulars, notices any other guidance, apply to the company’s business and whether GuangDong Province or PRC national level authorities, naming all such authorities, necessitate compliance by the company.
Response:
The Company proposes to add the disclosure set forth below to its Governmental and Environmental Regulation section in accordance with the Staff’s comment.
“Business License
A company that conducts business in the PRC must have a business license that prescribes a scope of business to be conducted. Our business license covers our present business to manufacture small home and kitchen electric appliances for sales overseas and domestically. If we were to expand our business beyond the scope of our business license, we would be required to apply for and receive approval from the PRC government.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 8
Consumer Product Regulations
In order to produce small home and kitchen electric appliances, we must obtain China Compulsory Product Certification, or CCC authentication, for all our products. CCC authentication is a product conformity assessment system that is executed by the Chinese government based on the WTO agreement and the international prevailing rules, with the purpose to protect consumers, personal and animal life safety, protect the environment and national security. The CCC products must be tested and can be exported, imported and sold only after they pass the tests. All of our products have CCC authentications.
Export Laws and Regulations
We are subject to various governmental regulations related to exportation. The major export regulations applicable to us include the Customs Law of the PRC and the Regulation of the PRC on the Administration of The Import and Export of Goods.
These laws and regulations set out standards and requirements for various aspects of export and import of goods, custom registration, sanitary registration and inspection. Failure to comply with these laws and regulations may result in confiscation of our products and proceeds from the sales of non-compliant products, order for correction, fines, revocation of licenses, and, in extreme cases, criminal liability. We believe we are in material compliance with all applicable laws and regulations related to the export of our products.
Environmental Regulations
We are subject to the national environmental regulations of the PRC as well as local laws regarding pollutant discharge, air, water and noise pollution, including the Environmental Protection Law of the PRC, the Environmental Impact Appraisal Law of the PRC, the Law of the PRC on the Prevention and Control of Water Pollution, the Law of the PRC on Prevention and Control of Environmental Pollution Caused by Solid Waste, the Law of the PRC on Prevention and Control of Air Pollution and the Law of the PRC on Prevention and Control of Environmental Noise Pollution. The Environmental Protection Law of the PRC sets out the legal framework for environmental protection in the PRC. The Ministry of Environmental Protection of the PRC, or the MEP, is primarily responsible for the supervision and administration of environmental protection work nationwide and formulating national waste discharge limits and standards. Local environmental protection authorities at the county level and above are responsible for environmental protection in their jurisdictions. Companies that discharge contaminants must report and register with the MEP or the relevant local environmental protection authorities. Companies discharging contaminants in excess of the discharge limits prescribed by the central or local authorities must pay discharge fees for the excess in accordance with applicable regulations and are also responsible for the treatment of the excessive discharge. Companies that directly or indirectly discharge industrial wastewater into the water or are required by law to obtain the pollutant discharge permit before discharging wastewater or sewage shall also obtain the pollutant discharge permit.
We currently do not incur any material costs in connection with our compliance with the applicable PRC environmental laws as our manufacturing processes generate minimal discharge and we recycle and reuse much of our manufacturing waste materials. Furthermore, the cost of maintaining compliance has not, and we believe, in the future, will not, have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 9
Labor Regulations
In June 2007, the National People’s Congress of the PRC enacted the Labor Contract Law (“LCL”), which became effective on January 1, 2008. To clarify certain details in connection with the implementation of the LCL, the State Council promulgated the Implementing Rules for the LCL, or the Implementing Rules, on September 18, 2008 which came into effect immediately. The LCL provides various rules regarding employment contracts that will likely have a substantial impact on employment practices in China. The LCL imposes severe penalties on employers that fail to timely enter into employment contracts with employees. The employer is required to pay a double salary to the employee if it does not enter into a written contract with the employee within one month of the employment, and a non-fixed-term contract is assumed if a written contract is not executed after one year of the employment. Additionally, the LCL sets a limit of two fixed-term contracts regardless of the length of each term, after which the contract must be renewed on a non-fixed-term basis should the parties agree to a further renewal unless otherwise required by the respective employee. This requirement curtails the common practice of continuously renewing short-term employment contracts. The Implementing Rules appear to further tighten this rule by suggesting that an employee has the right to demand a non-fixed-term contract upon the completion of the second fixed term regardless of whether the employer agrees to a contract renewal. A non-fixed-term contract does not have a termination date and it is generally difficult to terminate such a contract because termination must be based on limited statutory grounds. The employer can no longer supplement such statutory grounds through an agreement with the employee. In addition, the LCL requires the payment of statutory severance upon the termination of an employment contract in most circumstances, including the expiration of a fixed-term employment contract.
Under the LCL, employers can only impose a post-termination non-competition provision on employees who have access to their confidential information for a maximum period of two years. If an employer intends to maintain the enforceability of a post-termination non-competition provision, the employer has to pay the employee compensation on a monthly basis post-termination of the employment. Under the LCL, a “mass layoff” is defined as termination of more than 20 employees or more than 10% of the workforce. The LCL expands the circumstances under which a mass layoff can be conducted, such as when a company undertakes a restructuring pursuant to the PRC Enterprise Bankruptcy Law, suffers serious difficulties in business operations, changes its line of business, performs significant technology improvements, changes operating methods, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract impractical. The employer must follow specific procedures in conducting a mass layoff. There is little guidance on what penalties an employer will suffer if it fails to follow the procedural requirements in conducting the mass layoff. Finally, the LCL requires that the employer discuss the company’s internal rules and regulations that directly affect the employees’ material interests (such as employees’ salary, work hours, leave, benefits, and training, etc.) with all employees or employee representative assemblies and consult with the trade union or employee representatives on such matters before making a final decision.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 10
All of our employees based exclusively within the PRC are covered by the new laws. As there has been little guidance and precedents as to how the LCL and its Implementing Rules shall be enforced by the relevant PRC authorities, there remains uncertainty as to their potential impact on our business and results of operations. The implementation of the LCL and its Implementing Rules may increase our operating expenses, in particular our personnel expenses and labor service expenses. The compensation and procedures required under the LCL may add substantial costs and cause logistical burdens to us. Prior to the new law such compensation was often structured as part of the employee’s salary during employment, and was not an additional compensation cost. In the event that we decide to terminate employees or otherwise change our employment or labor practices, the LCL and its Implementing Rules may also limit our ability to effect these changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations. In particular, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns such as the recent financial turmoil may be affected. In addition, during periods of economic decline when mass layoffs become more common, local regulations may tighten the procedures by, among other things, requiring the employer to obtain approval from the relevant local authority before conducting any mass layoff. Such regulations can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition. We believe we are in material compliance with all applicable laws and regulations related to our employees.
Regulation of Work Safety
On June 29, 2002, the Work Safety Law of the PRC was adopted by the Standing Committee of the 9th National People’s Congress and came into effect on November 1, 2002, as amended on August 27, 2009. The Work Safety Law provides general work safety requirements for entities engaging in manufacturing and business activities within the PRC. We believe we are in material compliance with all applicable laws and regulations related to work safety.
Foreign Currency Exchange
The principal regulation governing foreign exchange in the PRC is the Foreign Currency Administration Rules (IPPS), as amended. Under these rules, the Renminbi, the PRC’s currency, is freely convertible for trade and service related foreign exchange transactions (such as normal purchases and sales of goods and services from providers in foreign countries), but not for direct investment, loan or investment in securities outside of China unless the prior approval of the SAFE is obtained. Foreign Invested Enterprises (FIEs) are required to apply to the SAFE for “Foreign Exchange Registration Certificates for FIEs.” With such registration certificates, FIEs are allowed to open foreign currency accounts including a “current account” and “capital account.” Further, the currency conversion is classified as “current item” and “capital item” according to its nature. Currency conversion within the scope of the “current items,” such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE, but such transactions are subject to the consent of banks which are authorized by the SAFE to review “current items” currency transactions, and it is possible that such banks would not consent to our making such payments. However, conversion of currency under the “capital items,” including capital items such as direct investment, loans and securities, still require approval of the SAFE.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 11
On October 21, 2005, SAFE issued a public notice named Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Return Investments via Overseas Special Purpose Vehicles, or the Circular 75, requiring PRC residents, including both legal persons and natural persons, to register with an appropriate local SAFE branch before establishing or controlling any company outside of China, referred to as an “offshore special purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies and raising funds from overseas. When a PRC resident contributes the assets or equity interests it holds in a PRC company into the offshore special purpose company, or engages in overseas financing after contributing such assets or equity interests into the offshore special purpose company, such PRC resident shall modify its SAFE registration in light of its interest in the offshore special purpose company and any change thereof. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch, with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, long-term equity investment or creation of any security interest. To further clarify the implementation of Circular 75, SAFE issued Circular 106 on May 29, 2007. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing in a timely manner of SAFE registrations by the offshore holding company’s shareholders who are PRC residents. If these shareholders fail to comply, the PRC subsidiaries can report to the local SAFE authorities to be exempted from liabilities. In the event of a failure to comply with the above SAFE registration requirements, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. We believe we are in material compliance with Circular 75 as the Company was permitted to distribute the profits of its PRC subsidiaries to its offshore parent company, and convert the same into USD, in connection with the payment of the Company’s first quarter dividend in 2010. We believe we are in compliance with Circular 106.
On August 29, 2008, SAFE promulgated a notice, or Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency into Renminbi by restricting how the converted Renminbi may be used. Circular 142 requires that the registered capital of a foreign-invested enterprise settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested enterprise settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used for purposes within the foreign-invested enterprise’s approved business scope. Violations of Circular 142 will result in severe penalties, including substantial fines as set forth in the PRC Foreign Exchange Administration Regulations. We believe we are in compliance with Circular 142.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 12
Taxation
On March 16, 2007, the National People’s Congress approved and promulgated the Enterprise Income Tax (EIT) Law. The EIT Law took effect on January 1, 2008. Under the EIT Law, FIEs and domestic companies are subject to a uniform tax rate of 25%. The EIT Law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the EIT Law and which were entitled to a preferential lower tax rate under the then-effective tax laws or regulations. For the enterprises whose applicable tax rate was 24%, the tax rate was changed to 25% from January 1, 2008. For those enterprises which are enjoying tax holidays, such tax holidays may continue until their expiration, but where the tax holiday has not yet started because of losses, such tax holiday shall be deemed to commence from the first effective year of the EIT Law. While the EIT Law equalizes the tax rates for FIEs and domestic companies, preferential tax treatment would continue to be given to companies in certain encouraged sectors and to entities classified as high-technology companies supported by the PRC government, whether FIEs or domestic companies. According to the EIT Law, entities, such as the Company, that qualify as high-technology especially supported by the PRC government are expected to benefit from a tax rate of 15% as compared to the uniform tax rate of 25%. Nevertheless, there can be no assurances that the Company will continue to qualify as a high technology company supported by the PRC government in the future, and benefit from such preferential tax rate.”
Risk Factors, page 6
Loss or failure to renew any or all of its licenses and permits, page 7
13. Please revise to specify by name which licenses and permits the company must maintain in order to operate its business, and whether all such permits and licenses are currently up to date.
Response:
The Company proposes to add to the risk factor the disclosure underlined below in accordance with the Staff’s comment.
“Loss of or failure to renew any or all of its licenses and permits.
In accordance with the laws and regulations of the PRC, we are required to maintain various licenses and permits in order to operate our electrical appliance products manufacturing business.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 13
We must maintain a Business License, Certificate of Approval for Establishment for Enterprises with Foreign Investment in the PRC and Organization Code Certificates for each of our PRC operating subsidiaries, Winder, Anlin Technology and Deer Technology. The Business License permits the Company to operate its electric appliance products manufacturing business and to sell its products domestically and internationally. The Company’s PRC operating subsidiaries maintain up to date Business Licenses, Organizational Codes and Certificates of Approval for Establishment for Enterprises with Foreign Investment. In addition, all of the Company’s products have up to date China Compulsory Product Certifications, or CCC Authentications, which certifications are required before the Company’s products may be sold. We are also required to comply with applicable hygiene and safety standards in relation to our production processes. Our production processes are subject to periodic inspections by the regulatory authorities for compliance with applicable regulations. While the Company intends to renew all licenses before expiration, the loss of or failure to renew any of the aformentioned licenses could result in the temporary or permanent suspension of some or all of our production or distribution operations and could adversely affect our revenues and profitability.”
We are a holding company that depends on cash flow from our wholly-owned subsidiaries to meet our obligations
14. Please revise to indicate how much the company has set aside for purposes of the statutory reserve, and how much additional will be required for the company to meet the requirement of 50% of registered capital.
Response:
The Company proposes to add to the risk factor the disclosure underlined below in accordance with the Staff’s comment.
“We are a holding company that depends on cash flow from our wholly owned subsidiaries to meet our obligations.
After the Share Exchange, we became a holding company with no material assets other than the stock of our wholly owned subsidiaries. Accordingly, all our operations are conducted by our wholly owned subsidiaries in China: Winder, which is responsible for research, production and delivery of goods; Delta, which transferred its material former operations to Winder; and Deer Technology and Anlin Technology, which have yet to commence operations. Although we currently expect that the earnings and cash flow of our subsidiaries will primarily be retained and used by us in their operations, we rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. China has currency and capital transfer regulations that require us to comply with complex regulations for the movement of capital. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. We also are required to set aside at least 10% of our net income after taxes based on China’s accounting standards each year to statutory surplus reserves until the cumulative amount of such reserves reaches 50% of registered capital. At December 31, 2010, the Company had set aside $6,127,639 for statutory reserve and $3,063,819 as development fund reserve. Statutory reserve is a mandatory reserve, after making up cumulative prior years’ losses, and to be reserved at least 10% of income after tax, until the reserve amounts to 50% of the Company’s registered capital. Development fund is a discretionary surplus reserve; the Company allocates 5% of income after tax as development fund. The development fund is for enlarging its business and increasing capital. At December 31, 2010, an additional $31,929,734 will be required for the Company’s Chinese subsidiaries to meet the requirement of 50% of registered capital. These reserves are not distributable as cash dividends. Our subsidiaries also may be required to allocate a portion of their after-tax profits to their staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. In addition, if our subsidiaries incur debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Accordingly, if our subsidiaries are unable to pay us dividends and make other payments to us when needed because of regulatory restrictions or otherwise, we may be materially and adversely limited in our ability to make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund and conduct our business.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 14
Tax laws and regulations in China …, page 12
15. Identify the privileged economic zone in which you operate and disclose the basis, if any, you will have to apply for renewed treatment prior to the expiration of December 31, 2011 and the basis for same. Further, disclose all steps you must take to make any such application and the anticipated schedule for same.
Response:
The Company proposes to add to the risk factor the disclosure underlined below in accordance with the Staff’s comment.
“Certain tax treatment that we presently enjoy in China is scheduled to expire this year.
As a substantial portion of our operations are located in a privileged economic zone, we are entitled to certain tax benefits. The Company’s operating subsidiary Winder, operates in the Yangjiang Hi-Tech Industry Development Zone, while Deer Technology and Anlin Technology operate in the Wuhu Hi-Tech Industry Development Zone. Since 2009, we have been granted a special tax rate of 15% for our efforts to automate production at our factory. When these exemptions expire, our income tax expenses will increase, reducing our net income below what it would be if we continued to enjoy these exemptions. The tax authority and government entities examine productivity per employee and other operating metrics to determine our eligibility for special tax treatment. Our current tax treatment lasts for three years, expiring on December 31, 2011, and can be renewed prior to expiration following a re-assessment of our efforts in automating production and determination of future eligibilities for special tax treatment. We would pay the common 25% corporate income tax rate instead of the special 15% corporate income tax rate if the special tax treatment is not renewed. Our current special tax may be renewed by filing an application for a renewal with the Tax Bureau of the Hi-Tech Industry Development Zone. Whether or not renewal is granted depends upon the Tax Bureau’s assessment of our efforts in automating production at our factory and our productivity per employee. The Company has filed with the requisite application for renewal and expects to receive a response prior to the expiration of its current special tax rate.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 15
The acquisition by Deer International of Winder in 2008 may require further approval, page 13
16. Please revise to indicate what further approvals and by whom and which regulatory authorities, all by name, may be required with respect to the April, 2008 acquisition by Deer International of the 100% equity interest in Winder from 50HZ Electric Limited. Indicate why there is uncertainty in this regard, and what steps, if any, you have taken to obtain such approvals.
Response:
While the Company believes that the April 2008 acquisition of Winder by Deer International did not require approval from the PRC Ministry of Commerce, or MOFCOM, the application and implementation of the Regulation on Mergers and Acquisition of Domestic Companies by Foreign Investors, or M&A Regulations, is unclear and subject to differing interpretations. The Company proposes to add to the risk factor the disclosure underlined below in accordance with the Staff’s comment and to be consistent with this discussion.
“The acquisition by Deer International of Winder in 2008 may require further approval.
On April 1, 2008, Deer International acquired 100% of the equity interest in Winder from 50HZ Electric Limited. While the Company believes that the April 2008 acquisition of Winder by Deer International did not require approval from the PRC Ministry of Commerce, or MOFCOM, the application and implementation of the Regulation on Mergers and Acquisition of Domestic Companies by Foreign Investors, or M&A Regulations, is unclear and subject to differing interpretations. The M&A Regulations have a particular provision which requires MOFCOM’s approval if a PRC domestic non-foreign-invested enterprise or natural person acquires an affiliated PRC company in the name of an offshore enterprise established or controlled by such enterprise or person. Ying He, our Chairman and Chief Executive Officer, his brother FaMin He and Bao Zhi Li, shareholders of the Company, simultaneously controlled Deer International and 50HZ Electric Limited at the time of Deer International’s acquisition of Winder from 50HZ Electric Limited.
The Company has obtained a legal opinion from its PRC counsel, GuangDong Tuo Jin Law Firm, stating that MOFCOM approval of the April 2008 acquisition of Winder by Deer International was not required. In addition, the transaction was approved by the Economic Development Bureau of Yangjiang High-tech Industry Development Zone. If it is subsequently determined that that approval of MOFCOM is required, the approval that 50HZ Electric Limited obtained from the Yangjiang Hi-Tech Zone may be deemed incomplete and the transferee, namely Deer International, may need to obtain further approval from MOFCOM.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 16
17. Please revise to indicate which PRC shareholders simultaneously controlled Deer International and 50HZ Electric Limited, such as to make Winder an affiliated PRC company.
Response:
The Company notes that in October of 2008, the shareholders of 50HZ Electric Limited, Ying He, Famin He and Bhao Zhi Li, transferred their ownership interests in 50HZ Electric Limited to an unrelated third party and that 50HZ did not retain any material assets. The certificate evidencing the transfer of ownership is enclosed with this response letter as Exhibit D. The Company proposes to add to the risk factor the disclosure underlined below in accordance with the Staff’s comment.
“The acquisition by Deer International of Winder in 2008 may require further approval.
On April 1, 2008, Deer International acquired 100% of the equity interest in Winder from 50HZ Electric Limited. While the Company believes that the April 2008 acquisition of Winder by Deer International did not require approval from the PRC Ministry of Commerce, or MOFCOM, the application and implementation of the Regulation on Mergers and Acquisition of Domestic Companies by Foreign Investors, or M&A Regulations, is unclear and subject to differing interpretations. The M&A Regulations have a particular provision which requires MOFCOM’s approval if a PRC domestic non-foreign-invested enterprise or natural person acquires an affiliated PRC company in the name of an offshore enterprise established or controlled by such enterprise or person. Ying He, our Chairman and Chief Executive Officer, his brother FaMin He and Bao Zhi Li, shareholders of the Company, simultaneously controlled Deer International and 50HZ Electric Limited at the time of Deer International’s acquisition of Winder from 50HZ Electric Limited.
The Company has obtained a legal opinion from its PRC counsel, GuangDong Tuo Jin Law Firm, stating that MOFCOM approval of the April 2008 acquisition of Winder by Deer International was not required. In addition, the transaction was approved by the Economic Development Bureau of Yangjiang High-tech Industry Development Zone. If it is subsequently determined that that approval of MOFCOM is required, the approval that 50HZ Electric Limited obtained from the Yangjiang Hi-Tech Zone may be deemed incomplete and the transferee, namely Deer International, may need to obtain further approval from MOFCOM.”
18. Likewise, please revise to indicate what steps you have taken to determine whether or not you needed to obtain further approval from MOFCOM insofar as Winder was an affiliated PRC company of the shareholders of 50HZ Electric Limited.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 17
Response:
The Company has obtained a legal opinion from its PRC counsel, GuangDong Tuo Jin Law Firm, stating that MOFCOM approval of the April 2008 acquisition of Winder by Deer International was not required. The Company proposes to add to the risk factor the disclosure underlined below in accordance with the Staff’s comment.
“The acquisition by Deer International of Winder in 2008 may require further approval.
On April 1, 2008, Deer International acquired 100% of the equity interest in Winder from 50HZ Electric Limited. While the Company believes that the April 2008 acquisition of Winder by Deer International did not require approval from the PRC Ministry of Commerce, or MOFCOM, the application and implementation of the Regulation on Mergers and Acquisition of Domestic Companies by Foreign Investors, or M&A Regulations, is unclear and subject to differing interpretations. The M&A Regulations have a particular provision which requires MOFCOM’s approval if a PRC domestic non-foreign-invested enterprise or natural person acquires an affiliated PRC company in the name of an offshore enterprise established or controlled by such enterprise or person. Ying He, our Chairman and Chief Executive Officer, his brother FaMin He and Bao Zhi Li, shareholders of the Company, simultaneously controlled Deer International and 50HZ Electric Limited at the time of Deer International’s acquisition of Winder from 50HZ Electric Limited.
The Company has obtained a legal opinion from its PRC counsel, GuangDong Tuo Jin Law Firm, stating that MOFCOM approval of the April 2008 acquisition of Winder by Deer International was not required. In addition, the transaction was approved by the Economic Development Bureau of Yangjiang High-tech Industry Development Zone. If it is subsequently determined that that approval of MOFCOM is required, the approval that 50HZ Electric Limited obtained from the Yangjiang Hi-Tech Zone may be deemed incomplete and the transferee, namely Deer International, may need to obtain further approval from MOFCOM.”
If the CSRC or another PRC regulatory agency determines that its approval is required in connection with public offerings, we may become subject to penalties., page 14
19. Expand your disclosure to identify all laws, rules, regulations, circulars, notices, and authorities, both provincial and national, by name. Further, please provide us with your analysis as to the application of Circular 10. Provide us with the legal opinion upon which you rely.
Response:
The Company proposes to add to the risk factor the disclosure underlined below in accordance with the Staff’s comment. In addition, the Company has enclosed herewith as Exhibit B, a copy of the legal opinion upon which it relies from GuangDong Tuo Jin Law Firm, the Company’s PRC counsel.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 18
“If the CSRC or another PRC regulatory agency determines that its approval is required in connection with our public offerings, we may become subject to penalties.
On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or “CSRC,” MOFCOM the State-Owned Assets Supervision and Administration Commission, or “SASAC”, the State Administration of Taxation, or “SAT”, the State Administration for Industry and Commerce, or “SAIC” and SAFE jointly promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Regulations, which became effective on September 8, 2006, and was amended on June 22, 2009. The M&A Regulations, among other things, have certain provisions that require offshore special purpose vehicles, or SPVs, formed or controlled for the purpose of overseas listing of interests of PRC domestic non-foreign-invested companies controlled by PRC domestic non-foreign invested companies or individuals, to obtain the approval of the CSRC prior to listing their securities on an overseas stock exchange. We believe, based on the opinion of our PRC legal counsel, the GuangDong Tuo Jin Law Firm, that while the CSRC generally has jurisdiction over overseas listings of companies like us, CSRC’s approval is not required for the offerings of our securities because our current corporate structure was established before the new regulations became effective. However, there remains some uncertainty as to how these regulations will be interpreted or implemented in the context of an overseas offering. If the CSRC or another PRC regulatory agency subsequently determines that its approval is required for our public offerings, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our offerings into the PRC, restrict or prohibit payment or remittance of dividends by our PRC subsidiaries to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock.
In addition, Under Circular 10, captioned as “Regulation on Mergers and Acquisition of Domestic Enterprises by Foreign Investors,” which became effective on September 6, 2006, an offshore special purpose vehicle, or SPV, formed for purposes of overseas listing of equity interests in China-based companies and controlled directly or indirectly by Chinese companies or individuals must obtain the approval of the CSRC prior to the listing of such SPV’s securities on an overseas stock exchange. Circular 10 also requires approval from MOFCOM for “round-trip” investment transactions in which a China-based company or a PRC resident, or Acquirer, using an offshore entity controlled by the Acquirer, acquires any PRC local company that is an affiliate of the Acquirer. Because Winder was a wholly foreign owned enterprise at the time of the acquisition by Deer International and prior to the effective date of Circular 10, the Company believes that it does need to initiate an application for retroactive recognition by the CSRC for its shares to be listed and traded on the NASDAQ Global Select Market.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 19
20. Please include a separate risk factor, as applicable, to address the SAFE Circular 142 requirement that the capital of a foreign-invested company settled in RMB converted from foreign currencies be only used for purposes “within the business scope approved by the applicable governmental authority” and “may not be used for equity investments within the PRC.” Please address how this limitation may affect your ability to transfer the net proceeds from future offerings to your PRC subsidiaries. Here and throughout your document, please amend to identify all laws, rules, regulations, circulars, notices, and authorities, both provincial and national, by name.
Response:
The Company proposes to add the risk factor set forth below to its annual report in accordance with the Staff’s comment to address SAFE Circular 142.
“PRC regulation of direct investment by offshore holding companies to PRC entities may delay or prevent us from transferring the net proceeds from future offerings to our PRC subsidiaries.
On August 29, 2008, State Administration of Foreign Exchange, or SAFE, promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC, unless specifically provided for otherwise in its business scope. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. If we raise any funds in the United States in the future, we expect that if we convert the net proceeds into Renminbi pursuant to SAFE Circular 142, our use of Renminbi funds will be for purposes within the approved business scope of our PRC subsidiaries. Such business scope permits our PRC subsidiaries to operate our electrical appliance products manufacturing business. However, if it is subsequently determined that our use of Renminbi funds are not within our approved business scope, or the applicable rules change, we may experience delays in transferring the proceeds from any future offerings to our PRC subsidiaries, which would adversely and materially affect our liquidity and ability to expand our business.”
Our PRC subsidiaries may be exposed to penalties by the PRC government due to noncompliance with taxation, land use and construction administration, environmental and employment rules., page 15
21. To the extent that letters indicating compliance in the areas indicated within your risk factor heading are legally required, please advise why you have not obtained letters from the competent PRC governmental authorities confirming such compliance, except for the letter regarding discharge of wastes. Specifically list all required letters by name, if such letters are commonly known as a certain type of letter, name the PRC authorities responsible for issuing same, and which letters you have received versus which letters you have yet to receive and why. Indicate whether the absence of such letters extends to the construction and use of your new facility at Wuhu.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 20
Response:
The Company believes it is in compliance with PRC government regulations related to taxation, land use and construction administration, environmental and employment rules. While we have not received letters from the competent PRC governmental authorities confirming such compliance, we would not expect to receive such letters in the ordinary course of our business, with the exception of the letter confirming Winder’s compliance in discharge of wastes in the last two years. In addition, these letters are not legally required in the PRC. As a result, the Company proposes removing this risk factor from its annual report as it believes it is a general risk.
22. Separately, provide us with an explanation as to the use of letters by PRC authorities to confirm compliance with various rules in China.
Response:
Please refer to the Company’s response to Staff comment 21.
We operate in the PRC through our WFOE status initially approved by the local office of the PRC Ministry of Commerce, page 15
23. Please revise to specifically identify all the ways in which you may not be in compliance with the “MOFCOM’s local counterpart,” naming the local authority and what parts of the approval procedures or interpretations may have changed or be different from your understanding. Separately, detail the effects on your business, financial condition, and results of operations should there be a loss of WFOE status for any of the reasons you have identified.
Response:
The Company proposes to replace this risk factor with the one set forth below in accordance with the Staff’s comment.
“We operate in the PRC through our WFOE status initially approved by the local office of the PRC Ministry of Commerce (“MOFCOM’s Local Counterpart”). However, we cannot warrant that such approval procedures will continue to be considered completely satisfied should there be changes in laws or government interpretations. If we lose our WFOE status for any reason, our business in China may be negatively impacted.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 21
Our operating entities in the PRC have received initial approval for WFOE status from the Yangjian Administration for Industry & Commerce, or MOFCOM’s Local Counterpart. The Company believes it is currently in compliance with the MOFCOM’s requirements to maintain its PRC subsidiaries’ WFOE status and is not aware of any change in interpretations or differences in understandings with respect to WFOE approval procedures that would jeopardize the approval. However, we cannot assure you that such approval procedures or understanding will not change in the future.”
24. Please provide us with the WFOE’s business certificate and an English translation of same.
Response:
Enclosed please find an original copy of the business certificates for the Company’s PRC subsidiaries, Winder, Deer Technology and Anlin Technology, all WFOEs of the Company, and English translations of the same, attached hereto as Exhibit C.
Dividends, page 17
25. Please advise us of the basis for your belief that your subsidiaries are in compliance with the requirements of Circular 75.
Response:
The Company has advised its PRC investors, including its senior management that holds the Company’s common stock, to register with the local SAFE Authority in accordance with Circular 75. While the Company cannot provide any assurances that such registrations have occurred, the Company’s PRC subsidiaries were permitted to distribute their profits to their offshore parent company and convert the same into USD in connection with the payment of the Company’s first quarter 2010 dividend. If the Company’s PRC subsidiaries were not in compliance with Circular 75 such a distribution and currency exchange would not have been permitted by SAFE.
Management’s Discussion and Analysis, page 20
Overview, page 20
26. Please revise this section to include an organizational chart that serves as a meaningful reference to your narrative disclosure. Distinguish between entities operating outside of China, and those operating within the PRC. Identify and explain the relationships between and among the holding company, the operating company, and your subsidiaries, Winder and Delta, be they contractual in nature, or otherwise. Likewise, please revise to indicate where Deer Technology and Anlin Technology, incorporated on April 30, 2010, fall within your corporate structure. Include significant percentage ownership of all entities.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 22
Response:
The Company proposes to add the organizational chart and disclosure set forth below to the overview section of its Management’s Discussion and Analysis in accordance with the Staff’s comment.
“We operate through our wholly owned subsidiaries in China. Our U.S. holding company, Deer Consumer Products, Inc., owns a 100% of Deer International Group Ltd., a BVI entity, which owns our three wholly foreign owned enterprises, Winder, Deer Technology (AnHui) Co., Ltd. and Anlin Technology (Anhui) Co., Ltd. Delta, which transferred its material former operations to Winder in 2009, is 100% owned by Winder. Winder is located in Guangdong Province and is engaged in the research, production and delivery of our goods. Deer Technology and Anlin Technology were both incorporated in the AnHui Province on April 30, 2010. Deer Technology and Anlin Technology will also be engaged in the manufacture and sale of household electric appliances and were formed for the purpose of establishing production and distribution facilities located in the Wuhu area of AnHui Province.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 23
![](https://capedge.com/proxy/CORRESP/0001185185-11-000992/deer-corresp_img1.jpg)
27. Please advise us whether subsidiaries in addition to Winder are wholly-owned foreign enterprises. Please advise us whether each such WOFE has obtained a business license. Revise to indicate each such wholly-owned foreign enterprise’s business scope. Supplementally, please provide us with a copy of each such business license along with an English translation.
Response:
In addition to Winder, Deer Technology and Anlin Technology are each wholly owned foreign enterprises owned by the Company. Winder, Deer Technology and Anlin Technology all have obtained business licenses; original copies and English translations of which are attached hereto as Exhibit C.
The Company proposes to add each wholly owned foreign enterprise’s business scope in the overview section of its Management Discussion and Analysis as set forth below in accordance with the Staff’s comment.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 24
“Each of our wholly owned foreign enterprises, Winder, Deer Technology and Anlin Technology, are authorized by their respective business licenses to operate our electrical appliance manufacturing business.”
28. Please revise to indicate what operations your Delta subsidiary performs. We note your statement that you “operate through [y]our two wholly owned subsidiaries,” but that Delta “transferred all its material former operations to Winder.” Please also revise to indicate when the transfer to Winder of the Delta operations occurred.
Response:
The Company proposes to add the disclosure set forth below to the the overview section of its Management’s Discussion and Analysis in accordance with the Staff’s comment.
“Delta transferred all of its material former operations to Winder in 2009 to improve the Company’s operating efficiency. Currently, Delta only conducts marketing operations for the Company.”
29. Please advise us, with a view towards disclosure, how the amounts of consideration Deer Technology and Anlin Technology paid for the land use rights in AnHui Province, $27 million and approximately $10 million, were agreed upon, and how they compare with other recent land valuations in the area.
Response:
The purchase price paid by the Company for the land use rights in Anhui Province was determined through a public bidding process with the PRC government, as is the case with all acquisitions of land use rights in the PRC. Typically, once a bidder wins a land auction a public notification stating the bidder’s name, the size of the land and the price paid are available to the public on the PRC government’s Ministry of Land and Resources website. After the bidder makes the full payment on the land an official land use rights certificate is granted. On the Company’s Current Reports on Form 8-K, filed March 14, 2011, and April 26, 2011, the Company disclosed the acquisition of the land use rights for two parcels of land
As was disclosed in the Company’s quarterly report on Form 10Q for period ended March 31, 2011, the Company paid approximately $35 million for the land use rights for two parcels of land, reflecting a price of RMB 4.95 ($752,000) million per hectacre and including a 4% PRC government land transfer tax and other government charges. The PRC government bases the price of the land use rights on a number of factors including the land’s location, size, condition, proposed use, need for improvement, degree of surface leveling, close proximity to utilities and logistics, availability of other land in the local market, the financial position of the bidder, the competitive bidding positions of other bidders, general market conditions and local government policies at the time of the land auction. The prices for land use rights can vary significantly based on these factors.
Results of Operations
Year ended December 31, 2010 Compared to the Year ended December 31, 2009, page 23
Revenues, page 23
30. We note that the underlying drivers for increases in revenues for the fiscal year ended December 31, 2010 (116% over the previous year) are largely the same as for the year ended December 31, 2009 (85.8% over the previous year), except that in the first quarter of 2010 you began “ramping up sales of our brand name products to Gome, another prominent national electronic appliance chain in China with over 1,100 stores.” Please advise us, with a view towards disclosure, whether the Gome agreement is the underlying reason for the significant increase in revenues in the fiscal year just completed even as compared to the prior fiscal year’s significant revenue increase. Amend to include material drivers and all other basis for line item increases and decreases.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 25
Response:
The Gome agreement is one of the underlying reasons for the significant increase in revenues in 2010. Additionally, the increase in revenues was attributable to an expansion of international sales, with exception of North America, as a result of a successful sales and marketing effort by the Company. The expansion of international sales is quantified in the chart set forth below, which is included on page F-17 of the Company’s annual report.
Years Ended December 31 | ||||||||||||
Geographical Areas | 2010 | 2009 | 2008 | |||||||||
China | $ | 76,897,106 | $ | 14,313,485 | $ | 2,048,297 | ||||||
South America | 24,663,627 | 12,305,666 | 6,294,899 | |||||||||
Asia | 24,454,857 | 9,319,581 | 5,532,985 | |||||||||
Europe | 17,837,267 | 11,488,707 | 7,842,437 | |||||||||
Middle East | 21,439,859 | 11,064,745 | 6,921,928 | |||||||||
North America | 8,516,523 | 22,217,528 | 14,899,350 | |||||||||
Africa | 2,037,648 | 632,968 | 245,039 | |||||||||
$ | 175,846,887 | $ | 81,342,680 | $ | 43,784,935 |
The Company proposes to add its agreement with Gome as a material driver of its revenue growth in the results of operations section of its Management’s Discussion and Analysis as underlined below in accordance with the Staff’s comment.
“Our revenue for 2010 was $175.8 million, an increase of $94.5 million or 116.2% from $81.3 million for 2009. The increase in revenues was a result of our expansion of sales in the China domestic market and increasing our market share in the Asian, South American, Middle East and European markets. The average selling prices of our products increased 5.87% compared to the average selling prices in 2009. We increased our China domestic market sales to $76.9 million in 2010 from $14.3 million in 2009, a 437.2% increase. Our products currently are available in approximately 3,000 stores as of March 2011. Beginning in the latter half of 2009, we increased sales of our products to SuNing, a prominent national electric appliance retail chain in China with roughly 900 stores, under a private label arrangement. In the first quarter of 2010, we began ramping up sales of our brand name products to Gome, another prominent national electronic appliance retail chain in China with over 1,100 stores, in addition to many other retail locations across China. Our agreement with Gome is one of the underlying reasons for our significant revenue growth in 2010.We also added retail locations in other channels such as regional electric appliance retailers and department stores. We increased our product sales over internet portals, into hotels and restaurants, and via reward programs with large banks, telecommunication firms and postal offices in China. In addition, we introduced new product lines in 2010, such as humidifiers and dehumidifiers, bringing our current product offerings up to approximately 250 different product varieties from 189 in 2009. These results are on pace with management’s plan to capture the fast growth experienced in the China domestic small appliance market.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 26
31. Please expand upon your disclosure in paragraph one to more fully discuss how you began ramping up sales of your brand name products in Gome during the first quarter of 2010. We note that but for brief disclosure in your “Business” section at pages 3 and 4, you do not appear to discuss the sales and marketing methods you employ to, for example, “establish a direct channel presence at a retail location,” or how you “actively expand your sales channels into the hospitality, restaurant, and commercial channels.” Please revise to more fully address the sales and marketing methods you employ at the Gome, SuNing, and other locations, including, for example, indicating how many personnel you employ in this area of your business. Likewise, please explain in more detail what comprises your “marketing program to increase sales and distribution of products in emerging markets, such as South America, Asia, Africa, and the Middle East.”
Response:
The Company proposes to add the disclosure underlined below in the results of operations section of its Management’s Discussion and Analysis in accordance with the Staff’s comment.
“Beginning in the latter half of 2009, we increased sales of our products to SuNing, a prominent national electric appliance retail chain in China with roughly 900 stores, under a private label arrangement. In the first quarter of 2010, we began ramping up sales of our brand name products to Gome, another prominent national electronic appliance retail chain in China with over 1,100 stores, in addition to many other retail locations across China. We also added retail locations in other channels such as regional electric appliance retailers and department stores.
The increase in sales to these retail locations in 2010 was attributable to our establishing a direct sales channel presence at domestic retail stores across China, such as Gome, SuNing and Rainbow Department Stores. The presence of our products on the shelves of these large and well-know nationwide retailers provided our products with a high degree of visibility throughout China. In addition, we hire in-store promoters to directly introduce our products to in-store customer traffic.
We also increased our product sales over internet portals, into hotels and restaurants, and via reward programs with large banks, telecommunication firms and postal offices in China. In addition, we introduced new product lines in 2010, such as humidifiers and dehumidifiers, bringing our current product offerings up to approximately 250 different product varieties from 189 in 2009. Our sales team increased from 98 people in 2009 to 150 people in 2010. These results are on pace with management’s plan to capture the fast growth experienced in the China domestic small appliance market.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 27
After the global financial crisis in 2010 the Company experienced a decrease in customer orders from North America. As a result, the Company continued its marketing program to increase sales and distribution of products in emerging markets, such as South America, Asia, Africa and the Middle East. The Company’s sales personnel marketed the Company’s products through various channels including participating in exhibitions such as at the Canton Fair, the largest import and export trade fair in China and a leading venue for Chinese exporters to exhibit and sell their goods to the international markets. The Canton Fair is one of the significant sources of export oriented new business for the Company each year. The Company also maintains regular contacts with current and new international customers to solicit repeat orders and obtain new orders.”
Gross Profit, page 23
32. We note you attribute the increase in gross margin in 2010 to the increased sales in the China domestic market, which has higher margins. Please quantify in this discussion the total amount of gross profit earned from China domestic market sales in 2010 and 2009.
Response:
The Company proposes to add the disclosure set forth below to the gross profit section of its Management’s Discussion and Analysis in accordance with the Staff’s comment.
“Domestic sales as a percentage of total sales rose from 18% in 2009 to 43% in 2010. Gross margins for domestic sales are higher than international sales; 30% in 2010 and 29% in 2009. As a result, we experienced 4% increase in our overall gross margin from 24.8% in 2009 to 28.8% in 2010. Gross profit for domestic sales increased to $23,069,132 in 2010, from $4,150,911 in 2009.”
Operating Expenses. page 23
33. Please revise to explain more fully why your selling expenses increased 157.7% “due to [y]our significant increase in revenues.” For example, please quantify the specific expenses incurred, for example, in the hiring and retaining of additional staff, as part of total selling expenses that contributed to your 116% increase in revenues.
Response:
The Company proposes to add the disclosure underlined below to the operating expenses section of its Management’s Discussion and Analysis in accordance with the Staff’s comment.
“Selling, general and administrative expenses for 2010 were $13.7 million, an increase of $7.8 million or 131.2% from $5.9 million for 2009. Selling expenses for 2010 increased by 157.7% or $5.6 million in comparison to 2009 due to our significant increase in revenue. These selling expenses included advertising, freight, designing, exhibition and promotion efforts to expand our market presence and increase brand awareness. Advertising expenses increased $0.18 million or 405%. Freight expenses increased $2.81 million or 133%. Designing expenses increased $9.08 million or 513%. Exhibition expenses increased $0.08 million or 86%. The compensation paid to employees in our sales department also increased by $1.09 million, or 231%, due to the payment of increased sales commissions.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 28
Sales, General and Administrative Expenses, page 25
34. Please revise to explain how you “contracted out [y]our Delta subsidiary beginning in 2009.”
Response:
The Company proposes to add the disclosure underlined below to the sales, general and administrative expenses section of its Management’s Discussion and Analysis in accordance with the Staff’s comment.
“Selling, general and administrative expenses for 2009 were $5.9 million, an increase of $0.5 million or 9.5% from $5.4 million for 2008. Selling expenses for 2009 increased by 24.5% or $0.8 million in comparison to 2008 due to the associated selling costs incurred to generate the significant increase in revenue. General and administrative expenses for 2009 decreased by 7.2% or $185,773 in comparison to 2008. Operating expenses include overhead expenses such as rent, management and staff salaries, general insurance, marketing, accounting, legal and offices expenses. We have scaled back and consolidated our operations, thus reducing selling, general and administrative expenses to withstand the effect of the global financial crisis. In addition, to improve the efficiency of our operations, beginning in 2009, all of Delta’s former operations were transferred and are now run through our Winder subsidiary. As a result of these cost-cutting efforts, we have been able to reduce our operating expenses while at the same time increasing our growth in revenue.”
Financial Statements, page F-3
35. Your VAT receivable and taxes payable balances at December 31, 2009 do not appear to reconcile to previous financial reports filed. Please label your December 31, 2009 Balance Sheet column restated and provide a restatement footnote explaining the restatements.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 29
Response:
The VAT receivable and taxes payable were reclassified at December 31, 2009, to be consistent with 2010.
2009 as reported | 2009 as reclassified | ||||||||
VAT tax | (2,516,618 | ) | VAT receivable | 2,516,618 | |||||
Income tax and other taxes | 3,371,986 | Taxes payable | 3,371,986 | ||||||
Welfare | 6,964 | ||||||||
Taxes & welfare payable at December 31, 2009 | 862,332 |
The Company proposes to add the reclassification disclosure under Summary of Significant Accounting Policies as set forth below.
“Reclassifications
Certain prior year amounts were reclassified to conform to the manner of presentation in the current period including the reclassification of VAT tax from taxes and welfare payable to VAT receivable at December 31, 2009.”
Note 2 - Summary of Significant Accounting Policies
Accounts Receivable, page F-8
36. In light of your significant accounts receivable balance, please disclose your payment terms and if applicable, granting of extended terms to any party, and advise us.
Response:
The Company proposes to add the disclosure set forth below to the accounts receivable section of Note 2 in accordance with the Staff’s comment, which was included on page 25 of the Company’s quarterly report on Form 10Q for the period ended March 31, 2011.
“We sell our products in the China domestic market through a broad range of distribution outlets including regional and national wholesalers and third party distributors. Our standard terms for account receivables from several large and established China domestic retailers is 180 days from the close of the billing cycle, which is 30 – 45 days after products are delivered. The term for account receivables from other domestic customers is 30 – 90 days from the close of the billing cycle. These terms are customary for large and established retailers in China. Historically, we have not experienced late payments or bad debts under such terms from these select retailers. We sell our products to overseas customers in the export markets under letters of credit, prepaid arrangements, certain short credit terms or direct customer purchase orders. Our export sales-related account receivables typically are less than three months, depending on customer shipment schedules. Historically, we have not experienced significant bad debts from export sales. As we continue to focus on our expansion in the China domestic markets, our sales in the China domestic market may represent a larger percentage of our total revenue. We anticipate that our account receivables will remain in line with standard industry practice relating to account receivable schedules in China, which could be up to seven months. We provide our major customers with payment terms based on their payment history, amount they have purchased from us in the past, and upon on any strategic agreement we may have with them.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 30
37. If true, disclose your belief that the accounts receivable will be collected in the ordinary course of business within a year or advise us.
Response:
The Company proposes to add the disclosure set forth below to the accounts receivable section of Note 2 in accordance with the Staff’s comment.
“We believe that our accounts receivable will be collected in the ordinary course of business within a year as we have established relationships with many of our significant customers. In addition, our domestic customers typically pay according to our payment terms and we maintain insurance for our accounts receivables with respect to our international customers.”
38. Disclose in a separate footnote your policy for the timely recognition of credit losses and doubtful accounts. In light of the significant balance of accounts receivable as of December 31, 2010, please disclose any significant concentrations of receivables with a single party. Also, provide a roll-forward schedule to disclose the activities in this account beginning with the previous year’s balance, collections, additions, write-offs, and the ending balance.
Response:
The Company proposes to add a separate footnote in accordance with the Staff’s comment as set forth below.
“The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
We have not incurred any bad debts to date. If we find there is a possibility that we may incur a bad debt, we will accrue the appropriate allowance based on the aging of our account receivables. Our policy is to accrue the full amount of account receivables when their aging exceeds one year.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 31
Major customer AR list:
2010 AR AGING REPORT | In USD | |||||||||||||||||||
CUSTOMER | BALANCE | CURRENT | >30 | >90 | Total | |||||||||||||||
GOME | $ | 17,152,336 | $ | 5,179,540 | $ | 9,584,269 | $ | 2,388,527 | $ | 17,152,336 | ||||||||||
SONG QIAO (subsidiary of SuNing) | $ | 15,146,560 | $ | 4,045,459 | $ | 8,641,884 | $ | 2,459,217 | $ | 15,146,560 | ||||||||||
FOCUS | $ | 2,473,182 | $ | 580,613 | $ | 773,421 | $ | 1,119,148 | $ | 2,473,182 | ||||||||||
LIDE HAISI | $ | 2,320,365 | $ | 704,506 | $ | 1,469,160 | $ | 146,699 | $ | 2,320,365 | ||||||||||
TIANHONG | $ | 702,065 | $ | 313,625 | $ | 388,440 | 0.00 | $ | 702,065 | |||||||||||
SATTAR | $ | 637,063 | $ | 233,594 | $ | 202,268 | $ | 201,202 | $ | 637,063 |
The table below provides account receivable roll forward schedules for our two largest clients----SuNing and Gome. Song Qiao is a wholly-owned subsidiary of SuNing.
Client Name | 2009 Receivable | 2010 Sales | 2010 collection | Bad debt allowance | 2010 Receivable | |||||||||||||||
SuNing | $ | 2,908,241 | $ | 2,989,491 | $ | 5,897,732 | - | - | ||||||||||||
Gome | - | $ | 21,938,060 | $ | 4,949,887 | - | $ | 16,988,173 | ||||||||||||
Song Qiao | $ | 1,175,076 | $ | 27,986,007 | $ | 14,166,156 | - | $ | 14,994,927 |
Intangible Assets, page F-9
39. In light of the significance of the intangible asset identified as “Right to use land,” please expand the table provided in this footnote to separately identify and quantify the cost of each acquired right by parcel. Also, please provide within this footnote additional details of what was actually acquired, including the size of each parcel, the location, the period of the land use right, and an explanation of how the company intends to use it. Disclose any regulatory deadlines or commitments to develop the land or state that there are none.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 32
Response:
The Company proposes to revise the footnote in accordance with the Staff’s comment to include the table set forth below.
“
No. | Name | Size In Square Meters | Location | Owner | Useful life in months | Purpose | Purchase date | Price in RMB | As of 3/31/2011 | Pay off date for the remaining balance |
1 | Site use right Phase I | 33,728 | Yangjiang | Winder | 600 | Manufacturing | November 2002 | 1,447,920 | Paid | |
2 | Site use right Phase II | 52,597 | Yangjiang | Winder | 600 | Manufacturing | June 2005 & March 2010 | 3,681,390 | Paid | |
3 | Site use right Phase III | 60,900 | Yangjiang | Winder | 600 | Manufacturing | November 2010 | 5,305,324 | Not paid in full | 2012 |
4 | Land use right | 289,416 | Wuhu | Deer Technology | 600 | Manufacturing | September 2010 | 149,080,438 | Paid | |
5 | Land use right | 150,224 | Wuhu | Deer Technology | 600 | Manufacturing | December 2010 | 77,372,295 | Paid |
There are no regulatory deadlines or commitments to develop the land.”
VAT Receivable
40. Disclose in a separate footnote the nature of the VAT receivable, your collection experience, the anticipated timing of collection, and your policies for the timely recognition of credit losses, and advise us. Explain to us in detail your collection experience and why this is appropriately classified as a current asset.
Response:
The Company proposes to add a separate footnote in accordance with the Staff’s comment as set forth below.
“VAT receivables are VAT rebates which arise from our purchase of raw materials. VAT receivables are returned to the Company or offset against VAT payable. We anticipate collecting our VAT receivable within one year. We do not experience credit losses with respect to our VAT receivables because they are owed to us by the government. We classify our VAT receivable as a current asset because it is an asset that is reasonably expected to be realized (or sold or consumed) within one-year or within our normal operating cycle.”
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 33
Revenue Recognition, page F-11
41. We note your disclosure that revenue is recognized at the date of shipment to customers when no other significant obligations of the Company exist and collectability is reasonably assured. Please explain your revenue recognition policy in the context of the Memorandum of Understanding provided as an exhibit to your 8-K/A filed April 30, 2010. The agreement appears to describe a commission-based arrangement. Please tell us when and how you recognize revenue for this arrangement and similar consignment/commission-based arrangements. Also tell us what percentage of your revenue comes from these types of arrangements.
Response:
The Company’s revenue is recognized at the date of shipment to customers, when no other significant obligations of the Company exist and collectability is reasonably assured. The agreement provided as an exhibit to the Company’s 8-K/A filed April 30, 2010, was a general Memorandum of Understanding (“MOU”) with Gome, one of several customers of the Company in China and the largest electronic retailer in China. As is a standard practice for Gome in dealing with its many vendors, the MOU provides a general outline of Gome’s working relationship with a particular vendor. The MOU indicated that “Both parties use the one-step pricing model.” Gome’s one-step pricing model means that sales will occur directly to Gome and Gome will be responsible for the payment of the vendor’s products. The “commissions” referenced in the MOU refer to the commissions that the Company may be required to pay to in-store promotional staff that focus on enhancing sales of the Company’s products at each Gome outlet. It is standard practice in retail sales in China for vendors to hire in-store promotional staff at Gome to enhance sales to in-store customer traffic.
The Company does not sell its products to Gome on a consignment basis. As a standard practice for Gome, the MOU is always followed by definitive agreements which are entered between a vendor and a Gome subsidiary that actually handles the product receiving, delivery to the stores and payment to vendor. The Company has entered into definitive agreements with Gome subsidiaries and has been operating under those agreements. These definitive agreements reflect the Company’s direct supplier relationship with Gome, where Gome settles payment with the Company within 180 days from the close of the billing cycle, which is 30 days after the products are delivered.
On page 25 of the Company’s quarterly report on Form 10-Q for the period ended March 31, 2011, the Company disclosed such accounts receivable policies with large customers such as Gome.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 34
Related Party Transactions
42. We note on page 9 that the company licenses the right to use patents and trademarks from various related parties. Fully disclose in a separate footnote all related party transactions, balances, commitments, and arrangements. In addition, provide separate Risk Factor disclosure of any possible conflicts of interest with the company and any its executives or principal shareholders, and advise us.
Response:
The right to use patents and trademarks received from various related parties was obtained free of any charges. As such, there are no balances, commitments or arrangements which would require disclosure in a footnote. In addition, we do not believe there are any potential conflicts of interest between the Company and any of its executives or principal shareholders which would require a separate risk factor.
Form 10-Q for Fiscal Quarter Ended March 31, 2011
Intangible Assets, page 9
43. Please reconcile the $6,071,063 increase in cash flows from investing activities attributed to a refund of deposit on land use rights in your statement of cash flows, to your prepayment of land use rights balance at December 31, 2010 of $3,367,207.
Response:
The Company did not receive land use rights because it failed to win the public auction for the land. The deposit of $10,314,346 (RMB 67,788,231) that was previously paid in 2010 was returned to the Company in the first quarter of 2011. The Company paid an additional $4,243,283 (RMB 27,934,381) in first quarter of 2011 to make payment in full for the land use rights they acquired in December 2010. Therefore, there was a net cash inflow of $6,071,063, as stated in the consolidated cash flow statement. In addition, as of December 31, 2010, The Company prepaid $3,367,207 for land use rights they acquired in December 2010; the prepayment was transferred into intangible assets in the first quarter of 2011 when the Company received the land use right certificate.
44. Further, please explain the $5,672,314 ($38,519,101+$3,367,207-$36,213,994) decrease in your gross right to use land to use land asset balance between December 31, 2010 and March 31, 2011.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 35
Response:
The below table provides the explanation and reconciliation of $5,672,314 decrease in gross right to use land right. The cash inflow from net of payment and refund on land use right was $6,071,063 as explained in question 43. $5,672,314-6,071,063=$398,749, was due to the effect of exchange rate change.
Land use right in RMB | Prepayment in RMB | EX rate at B/S date | Land use right in USD | Prepayment in USD | Total | Change in RMB | Change in USD | |
12/31/2010 | ¥ 255,100,450 | ¥ 22,300,000 | 6.6227 | $ 38,519,101 | $ 3,367,207 | $ 41,886,308 | ||
3/31/2011 | ¥ 237,433,430 | 6.5564 | $ 36,213,994 | $ 36,213,994 | ¥ -39,967,019 | $ (6,071,063) | ||
Change: | $ 5,672,314 |
Subsidy Income, page 10
45. Please expand your disclosure with regard to your subsidy income to discuss how the company obtained the grant (e.g., did you apply for it, or was it awarded on some other basis), what is the total amount of the award and how was the amount determined/calculated, and what local government agency did you receive the grant from.
Response:
The Company proposes to add the disclosure set forth below to the subsidy income section of notes to the financials in accordance with the Staff’s comment.
“We were awarded grants from the local government bureaus to encourage the development of our business. As a general policy across municipal governments in the PRC, local government bureaus commonly provide grants or subsidies to leading local companies to encourage greater economic development and greater employment based on certain standards which are reviewed periodically. The grants set forth below were awarded to us on the basis of our progress in technological innovation and building a standardized plant and factory. As the exact amount of a grant is uncertain until the local government makes its final determination, the Company records income only when the subsidy is received or approved. Set forth below are the grants that were recorded in the first quarter of 2011.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 36
Item | Amount in ($) |
From Yangjiang Science and Technology Information Bureau | $11,393 |
From Yangjiang Finance Bureau | $15,190 |
Development fund from Yangjiang Hi-tech Industrial Development Zone | $264,839 |
Innovation fund for Technology from local government | $15,190 |
Reward from Yangjiang Finance Bureau for acting as a lead role model of demonstrating the standardize factory construction | $692,620 |
Total | $999,232 |
”
46. We note that you have recorded a significant subsidy receivable. Please confirm that this receivable relates to the $999,232 in subsidy income recognized during the quarter and explain how you determined the appropriate period in which to recognize the income. Also disclose when the receivable is expected to be paid.
Response:
The subsidy receivable of $482,423 represents a grant from a local government bureau to encourage the expansion of our business. This amount was included in subsidy income of $692,620, from a grant from the Yangjiang Finance Bureau, which was recorded in first quarter of 2011. The receivable for the subsidy was approved in first quarter of 2011 and the funds were received in April 2011.
In making our responses, we acknowledge that:
· | the Company is responsible for the adequacy and accuracy of the disclosure in the filings; |
· | staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
· | the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Should you or others have any questions or would like additional information, please contact Robert Newman, Esq. of Newman & Morrison LLP at (212) 227-7422 or by fax at (212) 202-6055.
Mr. Larry Spirgel
Deer Consumer Products, Inc.
July 12, 2011
Page 37
Very truly yours,
/s/ Ying He
Ying He
Chief Executive Officer
Enclosures
cc: Robert Newman, Newman & Morrison LLP
Exhibit A
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Exhibit B
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Exhibit C
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Business License of Legal Entity (Duplicate) Registration No.: 340200400005697(1-1) Name: Deer Technology (An Hui) Co.Ltd Address: COMMITTEE BUILDING OF WUHU ECONOMIC-TECHNICAL DEVELOPMENT ZONE Legal Representative: He Famin Registered Capital: USD 2980,0000 Paid-in Capital: USD 2980.0000 Form of Corporation: Limited Liability Company (Wholly Foreign owned) Scope of Business: Production and distribution of household electrical appliances (such as juicers, food processors, electric kettles, rechargeable emergency lights, electric irons, warmers, vacuum cleaners, telephones, electric radiators, electric fryers, meat grinders, water heaters and kitchen ventilators, etc.), integrated circuits for household electrical appliances, airplane parts, automotive parts, air-conditioner parts, environmental protection electrical appliances, healthcare electrical appliances, personal care electrical appliances, manipulators, computer parts, vehicle-mounted electrical appliances, office electrical appliances and kitchen electrical appliances (the said scope of business excludes items restricted or prohibited by the state, and license is a prerequisite for items requiring special permission); designing, production and distribution of molds, plastic and metal products, motors and electrical and mechanical automation products (the said scope of business excludes items restricted or prohibited by the state, and license is a prerequisite for items requiring special permission); purchasing domestic products for export (the said scope of business excludes items restricted or prohibited by the state, items under special administration shall be operated according to relevant state regulations, and license is a prerequisite for items requiring special permission); recycling of waste plastics and modification of plastics (limited to products of the company, the said scope of business excludes items restricted or prohibited by the state, and license is a prerequisite for items requiring special permission). Shareholder (Sponsor): DEER INTERNATIONAL GROUP LTD.. Business Term: From Apr. 30, 2010 to Apr. 30, 2040 Date of Establishment: Apr. 30, 2010 | Instructions 1. The Business License of Legal Entity is the evidence for qualification of an enterprise as a legal person and its legal operations. 2. The Business License of Legal Entity has two copies: the original and the duplicate which have the equal legal effects. 3. The original of the Business License of Legal Entity shall be placed in an eye-catching place of the company's residence. 4. The Business License of Legal Entity shall not be forged, altered, leased, lent or transferred. 5. If the registered items change, the enterprise shall apply to the original registration authority for registration of this change and renew the License. 6. The yearly verification for enterprise shall be carried out by the registration authority within the period from March 1 to June 30 every year. 7. No business operation other than liquidation is permitted after the Business License of Legal Entity is revoked. 8. Both the original and the duplicate of the Business License of Legal Entity shall be returned to the registration authority for conducting cancellation registration. 9. If the Business License of Legal Entity is lost or damaged, the company shall declare it invalid in the newspaper and periodical designated by the company’s registration authority, and shall apply for a new license. Annual Check Status Wuhu Industrial and Commercial Administration Bureau (Sealed) April, 2010 The materials for annual inspection shall be submitted between March 1 and June 30 each year. Registration authority: Wuhu Industrial and Commercial Administration Bureau (Sealed) Sep 7, 2010 |
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Business License of Legal Entity (Duplicate) Registration No.: 340200400005701(1-1) Name: Anlin Technology (An Hui) Co.Ltd Address: COMMITTEE BUILDING OF WUHU ECONOMIC-TECHNICAL DEVELOPMENT ZONE Legal Representative: He Famin Registered Capital: USD 1020,0000 Paid-in Capital: USD 1020.0000 Form of Corporation: Limited Liability Company (Wholly Foreign owned) Scope of Business: Production and distribution of household electrical appliances (such as juicers, food processors, electric kettles, rechargeable emergency lights, electric irons, warmers, vacuum cleaners, telephones, electric radiators, electric fryers, meat grinders, water heaters and kitchen ventilators, etc.), integrated circuits for household electrical appliances, airplane parts, automotive parts, air-conditioner parts, environmental protection electrical appliances, healthcare electrical appliances, personal care electrical appliances, manipulators, computer parts, vehicle-mounted electrical appliances, office electrical appliances and kitchen electrical appliances (the said scope of business excludes items restricted or prohibited by the state, and license is a prerequisite for items requiring special permission); designing, production and distribution of molds, plastic and metal products, motors and electrical and mechanical automation products (the said scope of business excludes items restricted or prohibited by the state, and license is a prerequisite for items requiring special permission); purchasing domestic products for export (the said scope of business excludes items restricted or prohibited by the state, items under special administration shall be operated according to relevant state regulations, and license is a prerequisite for items requiring special permission); recycling of waste plastics and modification of plastics (limited to products of the company, the said scope of business excludes items restricted or prohibited by the state, and license is a prerequisite for items requiring special permission). Shareholder (Sponsor): DEER INTERNATIONAL GROUP LTD.. Business Term: From Apr. 30, 2010 to Apr. 30, 2040 Date of Establishment: Apr. 30, 2010 | Instructions 1. The Business License of Legal Entity is the evidence for qualification of an enterprise as a legal person and its legal operations. 2. The Business License of Legal Entity has two copies: the original and the duplicate which have the equal legal effects. 3. The original of the Business License of Legal Entity shall be placed in an eye-catching place of the company's residence. 4. The Business License of Legal Entity shall not be forged, altered, leased, lent or transferred. 5. If the registered items change, the enterprise shall apply to the original registration authority for registration of this change and renew the License. 6. The yearly verification for enterprise shall be carried out by the registration authority within the period from March 1 to June 30 every year. 7. No business operation other than liquidation is permitted after the Business License of Legal Entity is revoked. 8. Both the original and the duplicate of the Business License of Legal Entity shall be returned to the registration authority for conducting cancellation registration. 9. If the Business License of Legal Entity is lost or damaged, the company shall declare it invalid in the newspaper and periodical designated by the company’s registration authority, and shall apply for a new license. Annual Check Status Wuhu Industrial and Commercial Administration Bureau (Sealed) April, 2010 The materials for annual inspection shall be submitted between March 1 and June 30 each year. Registration authority: Wuhu Industrial and Commercial Administration Bureau (Sealed) Sep 7, 2010 |
Exhibit D
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