January 16, 2009
2840 Highway 95 Alt. S, Suite 7
Silver Springs, NV 89429
519-872-2539
John Reynolds
Assistant Director
Office of Beverages, Apparel and
Health Care Services
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Re: China Du Kang Co., Ltd.
Form 10 filed November 10, 2009
Form 10, Amendment 1 filed November 13, 2009
Form 10, Amendment 2 filed December 4, 2009
File No.: 0-53833
Gentlemen:
Thank you for your letter of comment dated December 11, 2009. For the
convenience of the staff, we have sent under separate cover copies of the
Amended Form 10 "marked to show changes." We have followed the numbering
system of the Examiner's comment letter unless noted otherwise.
1. We have added disclosures to this section setting out that our
distribution is through two distributors at present. We distribute our
major products, including Baishui Dukang, Jiu Zu gong, and Thirteen
Dynasties, through two exclusive distributors. We also sell other
products via our subsidiary, Brand Management, to franchise stores and
end-consumers.
2. We have deleted the references to the market share increase.
3. We have removed the ambiguous statements on page 5.
4. We may need clarification from the Staff as to this comment.
5. We have removed the statement that we expect to eliminate our deficit
with "anticipated profits in the foreseeable future."
6. We have provided a new section entitled "Management's Discussion and
Analysis"
7. We have added a discussion of our financial condition, changes in
financial condition, and results of operations for the periods included
in the filing.
8. In addition, we hired independent appraiser which is certificated by
local government to value its inventory balance as of December 31, 2008.
The appraisal fair value was $3,914,243 (RMB 26,831,935), which is larger
than the amount on our financial report, see the detail schedule below.
December 31, 2008
Appraisal Report Balance Financial
{yen}1.00 = $0.14588 @ 12/31/2008 Report
(RMB{yen}) (USD$) Balance
(USD$)
Finished goods 11,124,785 1,622,884 1,131,381
Work-in-progress 13,045,205 1,903,034 1,564,281
Raw materials and supplies 2,661,945 388,325 63,933
26,831,935 3,914,243 2,959,595
9. We have added a disclosure at the end of the Assets section as following:
"All banks with which we hold deposits in PRC are majority-owned by the state
and no bank has ever bankrupted since PRC was established in 1949.
Generally, there is no insurance provided on bank deposits in PRC. However,
all deposits may be redeemed upon demand and therefore bear minimal risk."
10.We have added a disclosure to explain and clarify the pension and
unemployment insurance expenses of Sanjiu's original employees as
following:
"Pursuant to the lease agreement, Baishui Dukang is required to absorb the
pension and unemployment insurance expenses of Sanjiu's original employees
until they all reach their retirement age. Pursuant to the applicable laws
in PRC, male employees retire when they reach 60 years old, while female
employees retire when they reach 55 years old. Accordingly, Sanjiu's
original employees will gradually retire until Year 2032. The pension and
unemployment insurance expenses are based on a certain percentage of the
employees' gross payroll. The percentage may be changed as the applicable
law is amended. In practice, the expenses can be based on the local
average salary published by the local government. Over the life of the
lease, the Management anticipates the percentage will remain the same while
the local average salary will increase 8% annually. The number of
employees that we need to absorb their pension and unemployment insurance
expenses will gradually decrease as they reach their retirement ages. To
the best of our estimation, we anticipate the future payment for pension
and unemployment insurance expenses as following:
Estimated Pension and Unemployment Insurance Expenses
Pension Insurance Expense Unemployment Insurance Expense Total
------------------------- ------------------------------ -----
Year Province Annual Per- No of Estimated pension City Annual Per- No. of Estimated USD$1.00=RMB 6.83720
average increase cent- employ- insurance expense average increase cent- employees pension @12/31/2009
salary rate age ees (RMB) salary rate age insurance
(RMB) (RMB) expense
(RMB) (USD)
2009 13,764 8% 20% 325 894,629 10,964 8% 2.50% 325 89,084 983,713 143,877
2010 14,865 8% 20% 316 939,443 11,841 8% 2.50% 316 93,546 1,032,989 151,084
2011 16,054 8% 20% 309 992,123 12,789 8% 2.50% 309 98,792 1,090,915 159,556
2012 17,338 8% 20% 301 1,043,752 13,812 8% 2.50% 301 103,933 1,147,685 167,859
2013 18,725 8% 20% 282 1,056,097 14,917 8% 2.50% 282 105,162 1,161,259 169,844
2014 20,223 8% 20% 268 1,083,960 16,110 8% 2.50% 268 107,937 1,191,896 174,325
2015 21,841 8% 20% 258 1,126,994 17,399 8% 2.50% 258 112,222 1,239,216 181,246
2016 23,588 8% 20% 244 1,151,107 18,791 8% 2.50% 244 114,623 1,265,730 185,124
2017 25,475 8% 20% 228 1,161,674 20,294 8% 2.50% 228 115,675 1,277,350 186,823
2018 27,513 8% 20% 215 1,183,074 21,917 8% 2.50% 215 117,806 1,300,880 190,265
2019 29,714 8% 20% 199 1,182,633 23,671 8% 2.50% 199 117,762 1,300,396 190,194
2020 32,092 8% 20% 173 1,110,368 25,564 8% 2.50% 173 110,566 1,220,934 178,572
2021 34,659 8% 20% 148 1,025,903 27,610 8% 2.50% 148 102,156 1,128,059 164,988
2022 37,432 8% 20% 135 1,010,653 29,818 8% 2.50% 135 100,637 1,111,290 162,536
2023 40,426 8% 20% 113 913,630 32,204 8% 2.50% 113 90,976 1,004,606 146,932
2024 43,660 8% 20% 102 890,668 34,780 8% 2.50% 102 88,689 979,358 143,240
2025 47,153 8% 20% 77 726,157 37,563 8% 2.50% 77 72,308 798,465 116,782
2026 50,925 8% 20% 52 529,623 40,568 8% 2.50% 52 52,738 582,361 85,175
2027 54,999 8% 20% 41 450,994 43,813 8% 2.50% 41 44,908 495,903 72,530
2028 59,399 8% 20% 25 296,996 47,318 8% 2.50% 25 29,574 326,570 47,764
2029 64,151 8% 20% 18 230,944 51,103 8% 2.50% 18 22,997 253,941 37,141
2030 69,283 8% 20% 12 166,280 55,192 8% 2.50% 12 16,558 182,837 26,742
2031 74,826 8% 20% 6 89,791 59,607 8% 2.50% 6 8,941 98,732 14,440
2032 80,812 8% 20% 1 16,162 64,376 8% 2.50% 1 1,609 17,772 2,599
Total 19,273,656 1,919,199 21,192,854 3,099,639
11.We have added disclosure to this item to clarify.
12.We have added a table of principle shareholders including the number and
percentage of shares owned.
13.We have added the date of appointment and the percent of time devoted to
the company by each director and executive officer, as well as an
additional paragraph about the election process and the former CEO.
14.Following the discussion with the EXAMINER, we believe that this comment
references the inconsistency between the preamble paragraph and the
figures contained in the chart. We have removed the preamble paragraph to
eliminate the inconsistency.
15.We have added disclosures to clarify.
16.We have added an explanatory paragraph regarding the pink sheets tier
system and the skull and crossbones insignia.
17.We have now correctly labeled the prior columns and have added updates
for each quarter through the third quarter of 2009.
18.We have added a disclosure setting forth the holders of common equity.
19.We have removed the chart and have addressed each transaction in a
separate paragraph.
20. We have substantially revised the disclosures setting forth the Item 701
disclosures for each transaction in a separate paragraph.
21. We have added a paragraph of explanation regarding the exchange of all
of the issued and outstanding shares.
22.We include the audited consolidated financial statements as of December
31, 2008 and for the years ended December 31, 2008 and 2007 in this
amendment.
23.We have reviewed this comment with Keith Zhen, our independent registered
public accountant. Mr. Zhen has advised us that he personally conducted
all of the audit field work while present in our office in Xi'an City,
PRC. No foreign audit firm played a role in the preparation or
furnishing of the audit reports. Although Mr. Zhen was trained as an
accountant in the U.S. and maintains his principal office in Brooklyn,
New York, Mr. Zhen has concluded that it is appropriate for him to render
the audit report on our financial statements because Chinese is his
native language, he specializes in providing accounting services to SEC
filers whose operations are located in China, and he spends a
considerable portion of each year within the PRC.
24."Registered capital to-be received" principally represents the difference
between the historical cost and the appraised value of the property,
which the owners contributed to Xidenghui.
In PRC, when a company is formed, its articles of incorporation filed with
local government indicate the amount of capital that the owners will
contribute to the company, which is called registered capital. The
owners can contribute the registered capital within certain period of
time after the company is formed.
On March 31, 2005, Xidenghui revalued the value of the use right of a
piece of land based on an appraisal report issued by an independent
appraiser certificated by the local government. The appraisal value is
$10,619,791 (RMB 87,900,00) higher that its history cost, of which
$8,660,144 (RMB 71,680,000) is deemed to be a new registered capital
contribution and accordingly, amended its articles of incorporation to
increase its registered capital from $10,825,176 (RMB 89,600,000) to
$19,485,320 (RMB 161,280,000) as indicated on its new business license
issued by the local government. The balance of $1,959,647 (RMB
16,220,000) was deemed to be an additional paid-in capital contribution.
To record this transaction, Xidenghui made following journal entry:
Dr. Intangible asset - land use right $10,619,791
Cr. Registered capital $8,660,144
Cr. Additional paid-in capital $1,959,647
When Xidenghui prepared its financials pursuant to U.S. GAAP, it resorted
the value of the land use right to its historical cost via following
adjusting journal entry:
Dr. Capital registered capital to-be-received $8,660,144
Dr. Additional paid-in capital $1,959,647
Cr. Intangible asset - Land use right $10,619,791
Therefore, leaving $8,660,144 in the account "Registered capital to-be-
received". Latterly in preparing the consolidated financial statements,
$152,420 (RMB 1,261,568) was allocated to non-controlling interest,
resulting in a final balance of $8,507,724, as indicated in the
consolidated financial statements. See the summarized schedule below:
Variance
-----------------------------------------------------------------------------------
Property Variance allocated to Variance allocated to additional Total Variance
registered capital paid-in capital
------------------------ -------------------------------- ---------------------
Appraisal Value Historical Costs a b c=a+b
--------------- ---------------- ------------------------ -------------------------------- ---------------------
USD RMB USD RMB USD RMB USD RMB USD RMB
---------- ---------- ------ ------- --------- ---------- --------- ---------- ---------- ----------
Land Use
Right 10,672,949 88,340,000 53,158 440,000 8,660,144 71,680,000 1,959,647 16,220,000 10,619,791 87,900,000
Less: portion allocated to non-controlling
interest (152,420) (1,261,568)
Registered capital to-be received 8,507,724 70,418,432
25.We classify fixed assets into two categories, fixed assets using in
manufacturing and fixed assets using in office management. We include the
depreciation of fixed assets using in manufacturing into overhead and
then to costs of goods sold, while we include the depreciation of fixed
assets using in office management in G&A expenses.
26.This is a clerical mistake. Merit purchased Huitong for RMB 1,000,000,
which was translated to $136,722, not $128,200, at the date of
acquisition. We will revise the relevant disclosure in Note 2 as
following:
"On January 22, 2008, Merit entered into a Share Purchase Agreement
(the "Purchase Agreement") with the owners of Shaanxi Huitong Food
Co., Inc. ("Huitong"), a limited liability company incorporated in the
People's Republic of China ("PRC") on August 9, 2007 with a
registered capital of $128,200
(RMB1,000,000). Pursuant to the Purchase Agreement, Merit agreed to
purchase 100% of the equity ownership in Huitong for a cash consideration
of $136,722 (RMB 1,000,000). The local government approved the
transaction on February 1, 2008. Subsequent to the completion of the
acquisition, Huitong became a wholly-owned subsidiary of Merit."
27.We have disclosed the issuance of common stock in Note 14-Owners' Equity
to the consolidated financial statements as of December 31, 2008 and
2007, and for the years ended December 31, 2008 and 2007, as we outline
in the following:
Number of shares
of common stock
Immediately after the 1:10
reverse stock split in Feb. 2008 1,951,574
Issuance to Mr. Guogang Dong 8,800,000
Issuance to Sedgefield Capital Corporation 362,217
Issuance to a consultant 1,000,000
Issuance to Merit's prior owners (to acquire Merit) 88,000,000
Total 100,113,791
28.We added the following to Note 2-Organization and Business Background to
disclose the business reasons for the multiple mergers and layers of
shell companies between the ultimate holding company, China Du Kang, and
the operating company, Xidenghui.
"Under the PRC regulations on acquisition of businesses, commonly referred
to as "SAFE" regulations (State Administration of Foreign Exchange),
which were jointly adopted on August 8, 2006 by six PRC regulatory
agencies with jurisdictional Authority, a Chinese entity may not be owned
or controlled directly by foreign investors or shareholders but may be
acquired in a two-step transaction with a wholly owned foreign enterprise
("WOFE").
China Du Kang is the US holding company for Merit, a Hong Kong entity
organized under the Companies Ordinance as a limited liability company.
Merit was established as a WOFE corporation for the purpose of effecting
an acquisition transaction with Huitong, a WOFE corporation incorporated
in PRC. Huitong in turn contracted with Xidenghui, which was a Chinese
holding company. Xidenghui had two subsidiaries, Baishui Dukang and Brand
Management.
This arrangement provides separate holding companies for the United States,
Hong Kong, and PRC. This allows the Company to lawfully conduct
operations in China while ownership is represented in shares of the U. S.
holding company."
29.
The Management valued the investment at fair value based on an appraisal
report issued by an independent appraiser certificated by local
government. We will revise the relevant disclosure as following:
"Baishui Dukang was incorporated in Baishui County, Shanxi Province, PRC
on March 1, 2002 under the Company Law of PRC. Baishui Dukang was
principally engaged in the business of production and distribution of
distilled spirit with a brand name of "Baishui Du Kang". On May 15,
2002, Xidenghui invested inventory and fixed assets with a total fair
valued of $ 4,470,219 (RMB 37,000,000) to Baishui Dukang and owns 90.51%
of Baishui Dukang's equity interest ownership, thereby causing
Baishui Dukang to become a majority-owned subsidiary of Xidenghui."
30.Our customers include distributors, end-customers, and franchise stores.
The sales terms for all the customers are the same. When goods are
shipped to customers, the title and risk of loss have been transferred to
customers, collectability is reasonably assured and pricing is fixed or
determinable. Therefore, we recognize revenue when goods are shipped to
customers.
31."Joined in fee" and "brand using fee" are franchise fees from franchising
the sub-brand names of "Baishui Duking" to liquor manufactures and liquor
stores. Our subsidiary, Brand Management, is engaged in this franchise
business.
We authorize the liquor manufacturers who comply with the liquor production
standards of People's Republic of China to use certain sub brand names of
"Baishui Dukang" to process the production of liquor and to sell to
customers within the designated area in a certain period. The company
collects franchise fees from these liquor manufactures and the amount of
franchise fee varies based on the sales territory and the number of sub
brand names. We also authorize liquor stores to sell certain sub brand
names of "Baishui Dukang" products within the designated area in a
certain period. While we collect annual franchise fees from these
franchise stores, we manufacture and sell these products exclusive to
these franchise stores.
For franchise liquor manufactures, we report franchise fees "as revenue as
fees are earned and become receivable from the franchised" as described
in ASC 952-605-25-12. Generally, we recognize franchise fees over the
contract period as time passes by.
For franchise stores, we report annual franchise fees "as revenue as fees
are earned and become receivable from the franchised" as described in ASC
952-605-25-12. Generally, we recognize franchise fees over the contract
period as time passes by. We also recognize revenue from sales of
products exclusive to franchise stores when goods are shipped to these
stores, because, pursuant to the sales contracts, the title and risk of
loss have been transferred to customers, collectability is reasonably
assured and pricing is fixed or determinable when goods are shipped.
32.We present the value-add tax and sales tax on a net basis as described in
ASB 605-45-50-3. We revised the relevant disclosure as following:
"Value-added Tax ("VAT")
Sales revenue represents the invoiced value of goods, net of a value-added
tax ("VAT"). All of the Company's products that are sold in PRC are
subject to a Chinese value-added tax at a rate of 17% of the gross
sales price or at a rate approved by the Chinese local government.
This VAT may be offset by VAT paid on purchase of raw materials included
in the cost of producing the finished goods. The Company presents VAT
on a net basis."
Sales Tax
Baishui Dukang produces and distributes distilled liquor, which is subject
to sales tax in PRC. Sales tax rate is $0.14 (RMB1.00) per kilogram and
10%-20% of gross sales revenue. The Company presents sales tax on a net
basis."
33.All these projects are like travel advance in the nature. The employees
usually report the expenses when they return to the company office.
34.The cash contribution is RMB 12,000,000, which was translated to
$1,596,254 in September 2007. As of December 31, 2008 and 2007, the
currency exchange rate changed and the RMB 12,000,000 was translated to
different U.S. dollar amount, respectively, as further outline below
(including September 30, 2009):
Date RMB Amount Exchange Rate USD Amount
Sept. 2007 12,000,000 0.13302 1,596,254
12/31/2007 12,000,000 0.13672 1,640,667
12/31/2008 12,000,000 0.14590 1,750,751
9/30/2009 12,000,001 0.14610 1,753,156
35.We account for the lease as an operating lease as it does not meet any of
the four criteria described in ASC 840-10-25-1. Although the lease term
is a 30-year period, the land use right include in the lease has a
beneficial life of 50-year.
36.We add the following to Note 13-Income Tax to disclose the components of
your deferred tax assets and liabilities, the amount of total valuation
allowance recognized, and the amounts and dates of expiration of
operating loss carry forwards:
"The provision for income taxes consisted of the following:
For the Year Ended
December 31,
2008 2007
Current Income Tax $ - $ -
Deferred Income Tax - -
Total provision for income taxes $ - $ -
The components of deferred tax assets and deferred tax liabilities consisted of
the following:
For the Year Ended
December 31,
2008 2007
Deferred Tax Assets
Net Operating Loss Carry-forward $ 3,779,805 $ 3,627,431
Less: valuation allowance (3,779,805) (3,627,431)
Net deferred tax assets $ - $ -
For the Year Ended
December 31,
2008 2007
Deferred Tax Liabilities $ - $ -
As of December 31, 2008 and 2007, the Company had net operating losses of
approximately $15,119,220 and $14,509,725 carried forward from prior years.
Although the PRC Income Tax Law allows the enterprises to offset their future
taxable income with operating losses carried forward in a 5-year period,
enterprises need approval from local tax authority before they can claim such
tax benefit, and the outcome of the application is generally uncertain. In
addition, the Management believes that there is no certainty that the Company
will realize taxable income in the future. Therefore, the Management
established a 100% valuation allowance for the operation losses carried forward
and no deferred tax assets have been recorded as a result of these losses."
37.The company is required to make contribution to the statutory surplus
reserve fund or statutory public welfare reserve fund upon achievement of
positive retained earnings, which means elimination of accumulated
deficit and making further positive net income.
38.We do not operate franchise stores ourselves. We only collect franchise
fees from these franchise stores, as more fully described in our response
to Common 31.
39.A letter from the former auditor has been attached.
40.We removed the pro-forma financial statements and Amstar Financial
Holdings Inc. financial statements in this amendment.
We also reviewed this comment with Keith Zhen, our independent registered
public accountant. Mr. Zhen will remove all reference to the audit of
Amstar Financial Holdings from his audit report. The first paragraph of the
audit report will look like:
"We have audited the accompanying consolidated balance sheets of China Du
Kang Co., Ltd. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2008. China Du Kang Co., Ltd.'s management is
responsible for these financial statements. Our responsibility is to
express an opinion on these financial statements based on our audits.
41.The Agreement has been translated and attached as an Exhibit.
The Company has endeavored to comply and adequately respond to reach of the
Staff's comments. Further, the Company notes that it is aware of its
responsibilities under state and federal securities laws and intends to fully
comply with its obligations thereunder.
Should you require anything further, please let us know.
Thanks in advance,
Yours very truly,
/s/ China Du Kang Co., Ltd.
---------------------------
China Du Kang Co., Ltd.
Wang Youngsheng
GG/js
enclosures