China Du Kang (CDKG) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from____to____

Commission File No.  333-157281

CHINA DU KANG CO., LTD.

(Exact name of Registrant as specified in its charter)

NEVADA	90-0531621
(State or other jurisdiction of   incorporation or organization)	(IRS Employer Identification No.)

Town of Dukang, Baishui County,

A-28, Van Metropolis, #35 Tangyan Road,

Xi'an, Shaanxi, PRC, 710065

(Address of principal executive offices) 

8629-88830106-822

(Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o    No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large Accelerated Filer   o Accelerated Filer     o Non-accelerated Filer         x Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.   Yes o   No x

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: March 31, 2012:  100,113,791 shares of common stock

Table of Contents

10-Q China Du Kang Co., Ltd.

FORM 10-Q

	PAGE
PART I
FINANCIAL STATEMENTS		3
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION		37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		40
CONTROLS AND PROCEDURES		40
PART II
LEGAL PROCEEDINGS		41
RISK FACTORS		41
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		44
DEFAULTS UPON SENIOR SECURITIES		44
EXHIBITS		45
SIGNATURES		46

2

PART I.

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

FINANCIAL REPORT

At March 31, 2012 and December 31, 2011 and

For the Three Months Ended March 31, 2012 and 2011

3

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

INDEX

	PAGE
CONSOLIDATED BALANCE SHEETS		5
CONSOLIDATED STATEMENTS OF OPERATIONS		6
CONSOLIDATED STATEMENT OF COMPRESENTATIVE INCOME		7
CONSOLIDATED STATEMENTS OF CASH FLOWS		8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		9-36

4

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2012			2011
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	946,072		$	968,370
Accounts receivable, net (Note 6)		328,757			270,276
Others receivable		6,029			2,427
Prepaid expenses (Note 7)		927,136			678,528
Inventories (Note 8)		5,328,559			5,335,136
Total current assets		7,536,553			7,254,737
Property, Plant and Equipment, net (Note 9)		4,374,206			4,451,669
Intangible assets, net (Note 10)		2,035,956			2,034,235
Long-term investment		1,897,323			1,885,399
Total Assets	$	15,844,038		$	15,626,040
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	1,255,577		$	1,215,285
Accrued expenses (Note 11)		321,950			352,964
Others payable		146,109			125,599
Taxes payable (Note 12)		676,067			661,296
Deferred revenue		2,558,359			2,785,391
Employee security deposit		45,854			45,564
Lease liability-current (Note 17)		120,836			123,087
Total Current Liabilities		5,124,752			5,309,186
Long-term Liabilities:
Lease liability-long-term (Note 17)		824,843			847,420
Total Long-term Liabilities		824,843			847,420
Total Liabilities		5,949,595			6,156,606
Commitments and Contingencies (Note 17)		-			-
Shareholders' Equity:
China Du Kang Co., Ltd. Shareholders' Equity
Preferred stock, par value $0.001, 5,000,000 shares authorized;
no shares issued and outstanding as of
March 31, 2012 and December 31, 2011		-			-
Common stock, par value $0.001, 250,000,000 shares authorized;
100,113,791 shares issued and outstanding as of
March 31, 2012 and December 31, 2011		100,114			100,114
Additional paid-in capital		27,385,386			27,385,386
Accumulated deficit		(21,967,543	)		(22,292,346	)
Accumulated other comprehensive income		(762,047	)		(821,700	)
Total China Du Kang Co., Ltd.  Shareholders' equity (deficit)		4,755,910			4,371,454
Noncontrolling Interest		5,138,533			5,097,980
Total Shareholders' Equity (Deficit)		9,894,443			9,469,434
Total Liabilities and Shareholders' Equity (Deficit)	$	15,844,038		$	15,626,040

See Notes to Consolidated Financial Statements

5

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended
	March 31,
	2012			2011
	(unaudited)			(unaudited)
Revenues
Sales of Liquor	$	614,377		$	427,679
License Fees		212,322			283,817
Gross Profit		826,699			711,496
Costs of Revenues
Costs of Liquor Sold		459,435			340,138
Costs of License Fees		-			-
Total Costs of Sales		459,435			340,138
Gross Profit		367,264			371,358
Operating Expenses
Selling Expenses
Advertising expenses		12,609			5,907
Travel and entertainment		7,652			1,734
Total Selling Expenses		20,261			7,641
General and administrative expenses
Payroll		71,353			78,288
Employee benefit and pension		21,617			19,080
Depreciation and amortization expenses		31,370			45,649
Professional fees and consultancy fees		52,530			25,104
Office expenses		20,982			15,842
Vehicle expenses		7,782			9,276
Travel and entertainment		7,908			11,029
Other general and administrative expenses		-			33,872
Total General and Administrative Expenses		213,542			238,140
Total Operating Expenses		233,803			271,468
Income (Loss) from Operation		133,461			125,577
Other Income (Expenses)
Interest income		1,223			1,520
Interest expenses		(8,048	)		(18,543	)
Imputed interest		-			(262,497	)
Governmental subsidy		261,071			-
Other income (expense)		32			100
Total other income (expenses)		254,278			(279,420	)
Income (Loss) before Provision for Income Tax		387,739			(153,843	)
Provision for Income Tax		(22,353	)		(46,585	)
Net Income (Loss)		365,386			(200,428	)
Less: Net income attributable to noncontrolling interest		40,583			31,831
Net Income (Loss) attributable to
China Du Kang Co., Ltd.	$	324,803		$	(232,259	)
Basic and Fully Diluted Earnings per Share	$	0.00		$	(0.00	)
Weighted average shares outstanding		100,113,791			100,113,791

See Notes to Consolidated Financial Statements

6

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPRESENTATIVE INCOME

	For the Three Months Ended
	March 31,
	2012		2011
	(unaudited)		(unaudited)
Net income	$	365,386	$	(200,428	)
Other comprehensive income, net of tax:
Effects of foreign currency conversion		59,623		(45,704	)
Total other comprehensive, not of tax		59,623		(45,704	)
Comprehensive income		425,009		(246,132	)
Comprehensive income attributable to
the noncontrolling interest		40,553		32,572
Comprehensive income attributable to
China Du Kang Co., Ltd.	$	384,456	$	(278,704	)

See Notes to Consolidated Financial Statements

7

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months Ended
	March 31,
	2012			2011
	(unaudited)			(unaudited)
Cash Flows from Operating Activities
Net income (loss) including noncontrolling interest	$	365,386		$	(200,428	)
Adjustments to reconcile net income (loss)
including noncontrolling interest to net cash
provided (used) by operating activities:
Imputed interest		-			262,497
Depreciation		119,545			89,608
Amortization		11,153			12,404
Changes in operating assets and liabilities:
Increase in accounts receivable		(56,813	)		(539,729	)
(Increase)/Decrease in others receivable		(3,589	)		73,096
(Increase)/Decrease in prepaid expenses		(244,494	)		200,075
(Increase)/Decrease in inventories		40,348			(290,375	)
Increase in accounts payable		32,630			84,634
Increase/(Decrease) in accrued expenses		(33,270	)		61,268
Increase in other payable		19,730			1,421
Decrease in taxes payable		10,596			33,017
Decrease in deferred revenue		(244,825	)		(72,754	)
Decrease in lease liabilities		(30,989	)		(31,685	)
Net cash used by operating activities		(14,592	)		(316,951	)
Cash Flows from Investing Activities
Purchase of fixed assets		(13,870	)		(77,067	)
Purchase of land use right		-			(1,953,410	)
Net cash used by investing activities		(13,870	)		(2,030,477	)
Cash Flows from Financing Activities
Proceeds from related parties		-			1,625,993
Repayments to related parties		-			(1,518	)
Net cash provided by financing activities		-			1,624,475
Increase (decrease) in cash		(28,462	)		(722,978	)
Effects of exchange rates on cash		6,164			43,111
Cash at beginning of period		968,370			1,994,126
Cash at end of period	$	946,072		$	1,314,259
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during year for:
Interest	$	8,048		$	13,270
Income taxes	$	-		$	-

See Notes to Consolidated Financial Statements

8

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1- BASIS OF PRESENTATION

The accompanying unaudited financial statements of China Du Kang Co., Ltd. and subsidiaries, (the “Company” or "Du Kang") were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Management of the Company (“Management”) believes that the following disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and the notes for the year ended December 31, 2011.

These unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of Management, are necessary to present fairly the financial position and results of operations of the Company for the periods presented. Operating results for the three months ended March 31, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Note 2- ORGANIZATION AND BUSINESS BACKGROUND

China Du Kang Co., Ltd (“China Du Kang” or the “Company”) was incorporated as U. S. Power Systems, Inc., in the State of Nevada on January 16, 1987.  On or about June 8, 2006 the Company’s name was changed to Premier Organic Farms Group, Inc. On or about November 30, 2006 the name was changed to Amstar Financial Holdings, Inc. (“AFLH”). On or about March 18, 2008 the name was changed to its current name of China Du Kang Co., Ltd. with its corporate charter still residing in Nevada.  The Company changed its fiscal year ending from September 30 to December 31 in February 2008.

The Company had been engaged in the business to provide various financial services since it's incorporated. The Company was not successful and discontinued the majority of its operation by December 31, 2007.

On January 10, 2008, the Company entered into a Plan of Exchange Agreement (the “Exchange Agreement”) with Hong Kong Merit Enterprise Limited (“Merit”), a holding company incorporated in Hong Kong.  Pursuant to the terms of the Exchange Agreement, the Company agreed to issue post split 88,000,000 shares of its common stock to the shareholders of Merit in exchange for Merit to transfer all of its issued and outstanding shares of common stock to the Company, thereby causing Merit to become a wholly-owned subsidiary of the Company.  The parties closed the transaction contemplated by the Agreement on February 11, 2008.

This transaction is being accounted for as a reverse merger, since the shareholders of Merit owns a majority of the outstanding shares of the Company’s common stock immediately following the share exchange.  Merit is deemed to be the acquirer in the reverse merger.  Consequently, the assets and liabilities and the historical operations that will reflected in the consolidated financial statements for periods prior to the share exchange will be those of Merit and its subsidiaries and will be recorded at the historical cost basis.  After completion of the share exchange, the Company‘s consolidated financial statements will include the assets and liabilities of both Du Kang and Merit, the historical operations of Merit and the operations of the Company and its subsidiaries from the closing date of the share exchange.

9

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2- ORGANIZATION AND BUSINESS BACKGROUND (continued)

Merit was incorporated on September 8, 2006 in Hong Kong under the Companies Ordinances as a Limited Liability company.  Merit was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship.

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.

Huitong was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship.  On December  26, 2007, Huitong executed an acquisition agreement with shareholders of Shaanxi Xidenghui Technology Stock Co., Ltd. ("Xidenghui"), whereby Huitong agreed to acquire 98.24% of the equity ownership of Xidenghui from the shareholders.  Subsequent to completion of the acquisition agreement,  Xidenghui became a majority-owned subsidiary of Huitong. On October 1, 2011, Xidenghui amended its Bylaws to increase its registered capital to $23,964,642 (RMB 189,803,210). Huitong's equity ownership interest in Xidenghui decreased from 98.24% to 83.47%, as some related-parties contributed their loans to Xidenghui to paid-in capital.

Xidenghui was incorporated  in Weinan City, Shaanxi Province, PRC on March 29, 2001 under the Company Law of PRC.  Xidenghui was engaged in the business of production and distribution of distilled spirit with a brand name of “Xidenghui”.  Currently, its principal business is to hold an equity ownership interest in Shannxi Baishui Dukang Liquor Co., Ltd. (“Baishui Dukang”) and Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd. (“Brand Management”), and to distribute liquor manufactured by Baishui Dukang.

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 (liquor) with a brand name of “Baishui Du Kang”. On May 15, 2002, Xidenghui invested inventory and fixed assets with a total fair value 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. On July 29, 2003, Baishui Dukang amended its Bylaws to increase its registered capital to $5,603,479 (RMB 46,380,000). Xidenghui remains its 90.51% equity ownership interest in Baishui Dukang.

On October 30, 2007, Xidenghui executed an agreement with Mr. Zhang Hongjun, a PRC citizen, to establish a joint venture, Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd. ("Brand Management").  Pursuant to the agreement, Xidenghui contributed cash of $95,704 (RMB 700,000), and owns 70% equity interest ownership therein.  Brand Management was subsequently incorporated on November 12, 2007.  Upon the completion of incorporation, Brand Management became a majority-owned subsidiary of the Xidenghui.  Brand Management is principally engaged in the business of distribution of Baishui Dukang’s liquor and manage the franchise of the “Baishui Du Kang” brand name.

10

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2- ORGANIZATION AND OPERATIONS (continued)

Xidenghui, Baishui Dukang, and Brand Management are the three of these affiliated companies that are engaged in business operations.  Du Kang, Merit, and Huitong are holding companies, whose business is to hold an equity ownership interest in Baishui Dukang and Brand Management.   All these affiliated companies are hereafter referred to as the "Company".  Currently, the Company is principally engaged in the business of production and distribution of distilled spirit with the brand name of “Baishui Dukang”. The Company also licenses the brand name to other liquor manufactures and liquor stores.  The Company's structure is summarized in the following chart.

		China Du Kang Co., Ltd. ("China Du Kang") F/K/A Amstar Financial Holdings, Inc. ("AFLH") Incorporated in the State of Nevada on January 16, 1987
				Acquiring 100% equity interest on 2/11/2008
		Hong Kong Merit Enterprise Limited “Merit" Incorporated in Hong Kong on September 8, 2006
				Acquiring 100% equity interest on 1/22/2008
		Shaanxi Huitong Food Development Co., Inc. “Huitong” Incorporated in Shaanxi Province, PRC on August 9, 2007
				Acquiring 98.24% equity interest on 12/26/2007 The equity interest changed to 83.47% on October 1, 2011
		Shaanxi Xidenghui Technology Stock Co., Ltd. “Xidenghui” Incorporated in Shaanxi Province, PRC on March 29, 2001
Acquiring 90.51% equity interest on 5/15/2002					Acquiring 70% equity interest on 11/12/2007
	Shaanxi Baishui Dukang Liquor Co., Ltd. “Baishui Dukang” Incorporated in Shaanxi Province, PRC on March 1, 2002			Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd.        “Brand Management” Incorporated in Shaanxi Province, PRC on November 12, 2007

11

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2- ORGANIZATION AND OPERATIONS (continued)

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 is established as a WOFE corporation for the purpose of effecting an acquisition transaction with Huitong, a WOFE corporation incorporated in PRC. Huitong in turn majority owns Xidenghui, which is a Chinese holding company. Xidenghui has 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.

Note 3- CONTROL BY PRINCIPAL OWNERS

The directors, executive officers, their affiliates, and related parties own, directly or indirectly, beneficially and in the aggregate, the majority of the voting power of the outstanding capital of the Company. Accordingly, directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including approving significant expenses, increasing the authorized capital and the dissolution, merger or sale of the Company's assets.

Note 4- GOING CONCERN

As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $21,967,543 at March 31, 2012 that includes losses of $823,812 and $1,007,604 for the year ended December 31, 2011 and 2010, respectively.  These factors raise substantial doubt about its ability to continue as a going concern.

Management has taken steps to revise the Company's operating and financial requirements.  The Company is actively pursuing additional funding and a potential merger or acquisition candidate and strategic partners, which would enhance owners' investment.  However, there can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.

The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

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CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").  This basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the "Accounting Principles of China " ("PRC GAAP").  Certain accounting principles, which are stipulated by US GAAP, are not applicable in the PRC GAAP.  The difference between PRC GAAP accounts of the Company and its US GAAP consolidated financial statements is immaterial.

The consolidated financial statements include the accounts of the Company and all its majority-owned subsidiaries which require consolidation.  Inter-company transactions have been eliminated in consolidation.

Certain amounts in the prior year's consolidated financial statements and notes have been revised to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual results when ultimately realized could differ from those estimates.

Subsequent Events

The Company evaluated subsequent events through the date of issuance of these financial statements. We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our consolidated financial statements.

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CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign Currencies Translation

The Company maintains its books and accounting records in PRC currency "Renminbi" ("RMB"), which is determined as the functional currency.  Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of the transactions. Monetary assets and liabilities denominated in currencies other than RMB are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. Exchange differences are included in the statements of changes in owners' equity.  Gain and losses resulting from foreign currency transactions are included in operations.

The Company’s financial statements are translated into the reporting currency, the United States Dollar (“US$”).  Assets and liabilities of the Company are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period.  Translation adjustments resulting from translation of these consolidated financial statements are reflected as accumulated other comprehensive income (loss) in the consolidated statements of changes in shareholders’ equity.

The exchange rates used for foreign currency translation were as follows (USD$1 = RMB):

Period Covered	Balance Sheet Date		Average Rates
Three months ended March 31, 2012		6.32470		6.32012
Three months ended March 31, 2011		6.57010		6.5894
Year ended December 31, 2011	��	6.36470		6.47351
Year ended December 31, 2010		6.61180		6.77875

Statement of Cash Flows

In accordance with FASB ASC 830-230, “Statement of Cash Flows”, cash flows from the Company’s operations is calculated based upon the functional currency.  As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

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CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition

The Company recognizes revenue when the earnings process is complete, both title and the risks and rewards of ownership are transferred or services have been rendered and accepted, the selling price is fixed or determinable, and collectability is reasonably assured.

(1) Sales of Liquor

The Company generally sells liquor to liquor distributors with which the Company executed an exclusive distributor contract, pursuant to which the distributor cannot act as a distributor for any other products of the third party.  The Company recognizes liquor sales revenue when the significant risks and rewards of ownership have been transferred pursuant to PRC law, including such factors as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value-added tax laws have been complied with, and collectability is reasonably assured. The Company generally recognizes revenue from sales of liquor when its products are shipped.

The Company does not provide an unconditional right of return, price protection or any other concessions to our customers.  Sales returns and other allowances have been immaterial in our operation.

(2) License Fees

(a) License fees from liquor manufactures

We authorize liquor manufacturers who comply with our requirements 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 of time. The amount of license fee varies based on the sales territory and the number of sub brand names. We generally collect the entire license fee when the license agreement is executed, and then recognize license fee revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned.

(b) License fees from liquor stores

We also authorize liquor stores who comply with our requirements to exclusively sell certain sub brand names of “Baishui Dukang” products within the designated area in a certain period of time. The amount of license fee varies based on the sales territory and the number of sub brand names. We generally collect the entire license fee when the agency agreement is executed, and then recognize license fee revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned.

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CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Deferred Revenue

Deferred revenue consists of prepayments to the Company for products that have not yet been delivered to the customers and franchise fees received upfront for services have not yet been rendered and accepted.  Payments received prior to satisfying the Company’s revenue recognition criteria are recorded as deferred revenue.

Cost of License Fees

Costs of franchise fees principally include the costs to prepare the franchise contracts and the payroll to employees who are responsible for inspection and monitoring the franchisees. These expenses are immaterial and therefore included in the general and administrative expenses.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less.

Others Receivable

Others receivable principally includes advance to employees who are working on projects on behalf of the Company.  After the work is finished, they will submit expense reports with supporting documents to the accounting department. Upon being properly approved, the expenses are debited into the relevant accounts and the advances are credited out. Cash flows from these activities are classified as cash flows from operating activities.

Concentrations of Credit Risk

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with various financial institutions in the PRC which do not provide insurance for the amounts on deposit.  The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.

Fair Value of Financial Instruments

The carrying value of financial instruments including cash and cash equivalents, receivables, prepaid expenses, accounts payable, and accrued expenses, approximates their fair value due to the relatively short-term nature of these instruments.

16

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

Inventories are stated at the lower of cost or market value. Actual cost is used to value raw materials and supplies. Finished goods and work-in-progress are valued on the weighted-average-cost method. Elements of costs in finished good and work-in-progress include raw materials, direct labor, and manufacturing overhead.

Baishui Dukang, one of our subsidiaries, is engaged in the distillery business.  Pursuant to the production requirement, all spirits that are newly distilled from sorghum, so call “liquor base”, must be barrel-aged for several years, so we bottle and sell only a portion of our liquor base inventory each year.  We classify barreled liquor base as work-in-progress. Following industry practice, we classify all barreled liquor base as a current asset.

Property, Plant and Equipment

Property, plant and equipment are carried at cost.  The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets without residual value.  The percentages or depreciable life applied are:

Building and warehouses	20 years
Machinery and equipment	7-10 years
Office equipment and furniture	5 years
Motor vehicles	5 years
Leased assets	Lease duration

Intangible Assets

Intangible assets are carried at cost.  Amortization is calculated on a straight-line basis over the estimated useful life of the assets without residual value.  The percentages or amortizable life applied are:

Land use right	50 years
Trade Mark	10 years

17

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Land Use Right

All land belongs to the State in PRC.  Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively.  The land use right can be sold, purchased, and exchanged in the market.  The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner.

The Company owns the right to use three pieces of land, approximately 657 acre, 2.4 acre, and 7.8 acre, located in Weinan City, Shaanxi Province for through February, 2051, March 2055, and May 2059.   The costs of these land use rights are amortized over their prospective beneficial period, using the straight-line method with no residual value.

Valuation of Long-Lived assets

Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Long-term Investment

On March 1, 2006, Xidenghui executed an investment agreement with Shaanxi Yichuan Nature Park Co., Inc., pursuant to which, Xidenghui agreed to invest cash of $1,596,254 (RMB 12,000,000) to establish a joint-venture named Shaanxi Yellow-river Bay Wenquan Lake Park Co., Ltd., F/K/A Shaanxi Yellow-river Wetlands Park Co., Ltd., and owns 7.9% equity ownership interest therein. Shaanxi Yellow-river Wetlands Park Co., Ltd. is engaged in the business of recreation and entertainment.

Xidenghui finished the investment contribution in September 2007.  As the project is currently ongoing, the Management believes the amount invested approximates the fair value and uses the cost method to record the investment.

Advertising Costs

The Company expenses advertising costs as incurred or the first time the advertising takes place, whichever is earlier, in accordance with the FASB ASC 720-35, “Advertising Costs”.  The advertising costs were $12,609, and $5,907 for the three months ended March 31, 2012 and 2011, respectively.

18

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Research and Development Costs

Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred in accordance with the FASB ASC 730, "Research and Development". Research and development costs were immaterial for the three months March 31, 2012 and 2011, respectively.

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 and Sales Tax Affixation

Brand Management derives license fees revenue, which is subject to sales tax and sales tax affixation in PRC. Sales tax rate is 5% of the gross sales, and sales tax affixation is approximately 10% of the sales tax, or 0.05% of the gross sales. The Company presents sales tax and sales tax affixation on a net basis. License fee revenue represents the invoiced amount, net of sales tax and sales tax affixation.

Excise Tax

Baishui Dukang produces and distributes distilled liquor, which is subject to excise tax in PRC. Excise tax rate is $0.14 (RMB1.00) per kilogram and 10%-20% of gross sales revenue. The Company presents excise tax on a net basis. Sales revenue from sales of liquor represents the invoiced value of liquor sold, net of excise tax.

Related Parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

19

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Due from/to Affiliates

Due from/to affiliates represent temporally short-term loans to/from affiliates, which are directly or indirectly, beneficially and in the aggregate, majority-owned and controlled by directors and principal shareholders of the Company.  These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.  Cash flows from due from related parties are classified as cash flows from investing activities.  Cash flows from due to related parties are classified as cash flows from financing activities.

Loans from Directors and Officers

Loans from directors and officers are temporally short-term loans from our directors and officers to finance the Company’s operation due to lack of cash resources.  These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.  Cash flows from these activities are classified as cash flows from financing activates.

Imputed Interest

The Company has financed it business operation through short-term borrowings from various related parties. These short-term borrowings are non-secured, non-interest bearing with no fixed repayment date. The imputed interests are assessed as an expense to the business operation and an addition to the paid-in capital. The calculation is performed quarterly  based on the average outstanding balance and the market interest rate. The interest rate used in the calculation of imputed interest for the three months ended March 31, 2011 was 6.375%. The imputed interest expense was $0 and $262,497 for the three months ended March 31, 2012 and 2011.

Pension and Employee Benefits

Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Company to accrue for these benefits based on certain percentages of the employees' salaries. The Management believes full time employees who have passed the probation period are entitled to such benefits.  The total provision for such employee benefits was $18,491 and $17,515 for the three months ended March 31, 2012 and 2011, respectively.

20

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Government Subsidies

The Company records government grants as current liabilities upon reception.   A government subsidy revenue is recognized only when there is reasonable assurance that the Company has complied with all conditions attached to the grant.  Government subsidies are generally exempt from income tax. The Company recognized government subsidy of $261,071 and$0 for the three months ended March 31, 2012 and 2011, respectively.

Income Taxes

The Company accounts for income tax in accordance with FASB ASC 740-10-25, which requires the asset and liability approach for financial accounting and reporting for income taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Although the PRC Income Tax Law allows the enterprises to offset their future net income with operating losses carried forward, an enterprise need approval from the local tax authority before it can claim such tax benefit, and the outcome of the application is generally uncertain.  Therefore, the Management established a 100% valuation allowance for the operation losses carried forward and no deferred tax assets have been recorded.

Effective January 1, 2007, the Company adopted a new FASB guidance, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The new FASB guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The new FASB guidance also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.  In accordance with the new FASB guidance, the Company performed a self-assessment and concluded that there were no significant uncertain tax positions requiring recognition in its consolidated financial statements.

The Company accounts for income taxes in interim periods in accordance with FASB ASC 740-270, "Interim Reporting".  The Company has determined an estimated annual effect tax rate.  The rate will be revised, if necessary, as of the end of each successive interim period during the Company's fiscal year to its best current estimate. The estimated annual effective tax rate is applied to the year-to-date ordinary income (or loss) at the end of the interim period.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions. In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.

21

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Statutory Reserves

Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the Company's registered capital.  Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings.  The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.  Beginning from January 1, 2006, enterprise is no more required to make appropriation to the statutory public welfare fund.  The Company does not make appropriations to the discretionary surplus reserve fund.

Since the Company has been accumulating deficiency, no contribution has been made to statutory surplus reserve fund and statutory public welfare reserve fund to date. The company will be required to make contribution to the statutory surplus reserve fund and statutory public welfare reserve fund upon the achievement of positive retained earnings, which means elimination of accumulated deficit and making further positive net income.

Comprehensive Income

FASB ASC 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances.  Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statements of changes in owners' equity consists of changes in unrealized gains and losses on foreign currency translation.  This comprehensive income is not included in the computation of income tax expense or benefit.

Segment Reporting

FASB ASC 820, “Segments Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company currently operates in two principal business segments.

22

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) Per Share

The Company reports earnings per share in accordance with FASB ASC 260, “Earnings Per Share” , which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.  Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  There are no potentially dilutive securities outstanding (options and warrants) for the three months ended March 31, 2012 and 2011, respectively.

Fair Value of Measurements

Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1:	Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2:	Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available.  Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Level 3:	Unobservable inputs.  Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Availability of observable inputs can vary and is affected by a variety of factors.  The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.

23

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2011-12 (“ASU 2011-12”), Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The provisions of ASU 2011-12 became effective in fiscal years beginning after December 15, 2011. The adoption of ASU 2011-12 did not materially impact our financial statements.

In September 2011, the Financial Accounting Standards Board (FASB) issued a revised standard on testing for goodwill impairment. The revised standard allows an entity to first assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a likelihood of more than 50 percent. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform the qualitative assessment in any subsequent period. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The adoption of this new guidance did not have a material effect on the Company’s financial position, results of operations, and cash flows.

In June 2011, the FASB issued amended disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective January 1, 2012. Early application is permitted.  The adoption of this new guidance did not have a material effect on the Company’s financial position, results of operations, and cash flows.

In January 2011, the FASB temporarily deferred the disclosures regarding troubled debt restructurings which were included in the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses which was issued in July 2010.  In April 2011, the FASB issued additional guidance and clarifications to help creditors in determining whether a creditor has granted a concession, and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The new guidance and the previously deferred disclosures are effective July 1, 2011 applied retrospectively to January 1, 2011. Prospective application is required for any new impairments identified as a result of this guidance. The adoption of this new guidance did not have a material effect on the Company’s financial position, results of operations, and cash flows.

In December 2010, FASB issued an amendment to the disclosure of supplementary pro forma information for business combinations. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this new guidance did not have a material effect on the Company’s financial position, results of operations, and cash flows.

24

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6- ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

	March 31,		December 31,
	2012		2011
	(unaudited)
Accounts receivable	$	328,757	$	270,276
Less: Allowance for doubtful accounts		-		-
Accounts  receivable, net	$	328,757	$	270,276

Bad debt expense charged to operations was $0 and $0 for the three months ended March 31, 2012 and 2011, respectively.

Note 7- PREPAID EXPENSES

Prepaid expenses consist of the following:

	March 31,		December 31,
	2012		2011
	(unaudited)
Machinery and parts	$	116,165	$	20,520
Raw materials and supplies		577,980		519,629
Packing and supply materials		216,307		138,379
Office expenses		16,684		-
Total	$	927,136	$	678,528

Note 8- INVENTORIES

Inventories consist of following:

	March 31,		December 31,
	2012		2011
	(unaudited)
Finished goods	$	1,762,610	$	1,799,934
Work-in-progress		2,895,610		2,700,921
Raw materials		153,718		154,603
Supplies and packing materials		516,621		679,678
Total	$	5,328,559	$	5,335,136

25

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9- PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment:

	March 31,			December 31,
	2012			2011
	(unaudited)
Building and warehouses	$	3,295,293		$	3,274,587
Machinery and equipment		2,320,785			2,306,197
Office equipment and furniture		196,943			191,972
Motor vehicles		373,224			370,878
Leased assets		2,471,664			2,457,187
Total		8,657,909			8,600,821
Less: Accumulated depreciation		(4,608,634	)		(4,460,944	)
		4,049,275			4,139,877
Add: Construction in progress		324,931			311,792
Total property, plant and equipment, net	$	4,374,206		$	4,451,669

Depreciation expense charged to operations was $119,545 and $89,608 for the three months ended March 31, 2012 and 2011, respectively. Depreciation expense with respect to production equipment that was charged to cost of sales was $99,328 and $56,363 for the three months ended March 31, 2012 and 2011, respectively.  The remainder, depreciation expense attributable to equipment used in administration, was $20,217 and $33,245 for the three months ended March 31, 2012 and 2011, respectively, and was included in general and administration expenses.

Note 10- INTANGIBLE ASSETS

The following is a summary of intangible assets, less amortization:

	March 31,			December 31,
	2012			2011
	(unaudited)
Land use right	$	2,098,531		$	2,085,341
Trade Mark of "Xidenghui"		71,150			70,702
Trade Mark of "Baishui Du Kang"		26,088			25,924
Total intangible assets		2,195,769			2,181,967
Less: Accumulated amortization		(159,813	)		(147,732	)
Total intangible assets, net	$	2,035,956		$	2,034,235

Amortization expense charged to operations was $11,153 and $12,404 for the three months ended March 31, 2012 and 2011, respectively.

26

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11- ACCRUED EXPENSES

Accrued expenses consist of the following:

	March 31,		December 31,
	2012		2011
	(unaudited)
Accrued payroll	$	52,550	$	84,933
Accrued employee benefits		59,342		59,000
Accrued pension and employee benefit		157,002		138,643
Accrued office expenses		53,056		70,388
Total	$	321,950	$	352,964

Note 12- TAXES PAYABLE

Taxes payable consists of the following:

	March 31,		December 31,
	2012		2011
	(unaudited)
Income tax	$	494,933	$	469,626
Sales tax and sales tax affixation		141,736		142,148
Excise taxes		17,013		44,694
Value-added Tax ("VAT")		19,724		2,429
Other taxes		2,661		2,399
Total taxes payable	$	676,067	$	661,296

27

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13- SALES OF LIQUOR TO RELATED PARTY

The Company generally sells liquor to liquor distributors. Some of these liquor distributors are our affiliates, which are directly or indirectly, beneficially and in the aggregate, majority-owned and controlled by directors and principal shareholders of the Company.  The price will be different if we sell liquor to third parties. The amount sold to these affiliates follows:

		For the Three Months Ended
		June 30,
Name of Related Party	Description	2012		2011
		(unaudited)		(unaudited)
Shaanxi Dukang Group Co., Ltd.	Affiliate 1	$	441,562	$	358,244
Shaanxi Baishui Shiye Co., Ltd.(F/K/A
Shaanxi Baishui Dukang Trade Co., Ltd.)	Affiliate 2		26,369		67,803
		$	467,931	$	426,047

In related to sales to related-parties, our subsidiaries have accounts receivable and deferred revenue from related-parties, as disclosed in the following:

Accounts receivable from related parties consists of the following:

		March 31,		December 31,
	Description	2012		2011
Name of Related Party		(unaudited)
Shaanxi Dukang Group Co., Ltd.	Affiliate 1	$	19,367	$	-
Shaanxi Baishui Shiye Co., Ltd.(F/K/A
Shaanxi Baishui Dukang Trade Co., Ltd.)	Affiliate 2		67,405		66,981
Less: Allowance for doubtful accounts			-		-
Accounts Receivable from Related-parties, net		$	86,772	$	66,981

Bad debt expense charged to operations was $0 and $0 for the three months ended March 31, 2012 and 2011, respectively.

Deferred revenue from related parties consists of the following:

		March 31,		December 31,
Name of Related Party	Description	2012		2011
		(unaudited)
Shaanxi Dukang Group Co., Ltd.	Affiliate 1	$	351,487	$	427,732
Shaanxi Baishui Shiye Co., Ltd.(F/K/A
Shaanxi Baishui Dukang Trade Co., Ltd.)	Affiliate 2		200,527		217,021
Total Deferred Revenue from Related-parties		$	552,014	$	644,753

The nature of the affiliation of each related party follows:

Affiliate 1--The CEO of the Company is a director of Shaanxi Dukang Group Co., Ltd. and has significant influence on the operations therein.

Affiliate 2--The CEO of the Company is the sole director of Shaanxi Baishui Shiye Co., Ltd. and has significant influence on the operations therein.

28

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14- SEGMENT REPORTING

The Company operates in two reportable business segments that are determined based upon differences in products and services. Summarized information by business segment for the three months ended March 31, 2012 and 2011 is as follows:

	For the Three Months Ended
	March 31,
	2012		2011
	(unaudited)		(unaudited)
REVENUE
Sales of Liquor	$	614,377	$	427,679
Franchise Fees		212,322		283,817
COST OF SALES
Sales of Liquor	$	459,435	$	340,138
Franchise Fees		-		-
GROSS PROFITS
Sales of Liquor	$	154,942	$	87,541
Franchise Fees		212,322		283,817

	March 31,		December 31,
	2012		2011
	(unaudited)
TOTAL ASSETS OF LIQUOR PRODUCTION AND DISTRIBUTION	$	12,428,618	$	12,139,862
TOTAL ASSETS OF BRAND NAME LICENSE	$	4,213,996	$	4,201,880

29

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15- CONCENTRATIONS AND CREDIT RISKS

The Company operates in the PRC and grants credit to its customers in this geographic region based on an evaluation of the customer's financial condition. Although the PRC is economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Company’s operations.

Major Customers

The following major customers accounted for approximately 5% or more of the Company’s total sales, as summarized in the following:

		For the Three Months Ended March 31,
		2012					2011
		(unaudited)					(unaudited)
Major	Type of			Percentage of					Percentage of
Customer	Customer	Revenue		Total Revenue			Revenue		Total Revenue
Shaanxi Dukang Group Co., Ltd.	Distributor	$	400,151		48.40	%	$	358,244		50.35	%
Shaanxi Baishui Dukang Shiye Co., Ltd.	Distributor		45,801		5.54	%		67,803		9.53	%
Mr. Jincai Bai'	Licensee		-		-			43,203		6.07	%
Ms. Xiaoyan Shi	Agent		-		-			50,403		7.08	%
Mr. Anxian Xie	Agent		44,857		5.43	%		43,203		6.07	%
Mr. Changzhong Ji	Agent		44,857		5.43	%		-		-
Ms. Jie Cao	Agent		44,857		5.43	%		-		-
Ms. Xiaoli Du	Agent		-		-			36,002		5.06	%
Ms. Sue Dong	Agent		-		-			36,002		5.06	%
Total		$	580,523		70.22	%	$	634,860		89.23	%

Major Suppliers

The following major suppliers accounted for approximately 5% or more of the Company’s total purchase, as summarized in the following:

	For the Three Months Ended March 31,
	2012					2011
	(unaudited)					(unaudited)
Major			Percentage of					Percentage of
Suppliers	Purchase		Total Purchase			Purchase		Total Purchase
Hunan Dexing Taochi Co., Ltd.	$	12,718		10.92	%	$	-		-
Hunan Liling Liangyou Taochi Co., Ltd.		19,155		16.45	%		27,426		11.27	%
Hunan Fengling Liangyou China Co., Ltd.		-		-			-		-
Hunan Xinshiji Taochi Co., Ltd.		-		-			61,871		25.42	%
Shanxi Wenxiyingfa Glass Co., Ltd.		-		-			68,097		27.98	%
Sichuan Guangan Defeng Glass Co., Ltd.		-		-			13,879		5.70	%
Wenzhou Zhixin Wujin Glass Co., Ltd.		30,910		26.55	%		-		-
Yuncheng Aofeng Glass Co., Ltd.		47,893		41.14	%		50,799		20.87	%
Total	$	110,675		95.07	%	$	222,071		91.25	%

30

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16- NONCONTROLLING INTEREST

Balance of Noncontrolling Interest consists of the following:

	Subsidiary and Noncontrolling Interest percentage									Total Noncontrolling Interest
	Brand Management			Baishui Dukang			Xidenghui
		30.00%			9.49%			16.53% (4)
Balance @ December 31, 2010	$	206,671		$	(61,636	)	$	(42,984	)	$	102,051
Noncontrolling Interest income (Loss)		130,183			(29,866	)		27,494			127,810
Debt Conversion		-			218,865			4,644,728			4,863,593
Other Comprehensive Income (Loss)-
effects of Foreign Currency Conversion		2,225			(509	)		2,809			4,526
Balance @ December 31, 2011	$	339,079		$	126,854		$	4,632,047		$	5,097,980
Noncontrolling Interest income (Loss)		20,118			20,465			-			40,583
Other Comprehensive Income (Loss)-
effects of Foreign Currency Conversion		(15	)		(15	)		-			(30	)
Balance @ March 31, 2012	$	359,182		$	147,304		$	4,632,047		$	5,138,533

31

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16- NONCONTROLLING INTEREST (continued)

Noncontrolling interest income consists of the following:

	For the three months Ended March 31, 2012
Name of Subsidiary	Brand Management						Baishui Dukang					Xidenghui					Parent/Holding Company
		Total Income			Noncontrolling Interest Income		Total Income			Noncontrolling Interest Income		Total Income		Noncontrolling Interest Income			Total Income			Noncontrolling Interest Income
			100%			30%		100%			9.49%		100%		16.53% (4)
Net Income (Loss)		$	67,060		$	20,118	$	215,645		$	20,465	$	82,823	$	13,691		$	(144	)	$	-
Income (Loss) from subsidiary
(equity method)			-			-		-			-		242,122		40,023			324,945			40,583
Total Income (Loss)			67,060			20,118		215,645			20,465		324,945		53,713			324,801			40,583
Adjustments to noncontrolling interest
to absorb accumulated deficit			-			-		-			-		-		(53,713	)		-			-
Less: Income (Loss) attributable to
noncontrolling interest			(20,118	)		-		(20,465	)		-		-		-			-			-
Income (Loss) attributable to Majority		$	46,942				$	195,180				$	324,945				$	324,801	(3)
Income (Loss) attributable to
noncontrolling interest					$	20,118				$	20,465			$	-					$	40,583

	For the three months Ended March 31, 2011
Name of Subsidiary	Brand Management						Baishui Dukang						Xidenghui						Parent/Holding Company
		Total Income			Noncontrolling Interest Income		Total Income			Noncontrolling Interest Income			Total Income			Noncontrolling Interest Income			Total Income			Noncontrolling Interest Income
			100%			30%		100%			9.49%			100%			1.76%
Net Income (Loss)		$	139,755		$	41,926	$	(62,529	)	$	(5,934	)	$	(277,648	)	$	(4,887	)	$	(6	)	$	-
Income (Loss) from subsidiary
(equity method)			-			-		-			-			41,234			726			(232,253	)		31,832
Total Income (Loss)			139,755			41,926		(62,529	)		(5,934	)		(236,414	)		(4,161	)		(232,259	)		31,832
Less: Income (Loss) attributable to
noncontrolling interest			(41,926	)		-		5,934			-			4,161			-			-			-
Income (Loss) attributable to Majority		$	97,828				$	(56,595	)				$	(232,253	)				$	(232,259	)
Income (Loss) attributable to
noncontrolling interest					$	41,926				$	(5,934	)				$	(4,161	)				$	31,832	(3)

32

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16- NONCONTROLLING INTEREST (continued)

Noncontrolling interest income consists of the following:

	For the Year Ended December 31, 2011
Name of Subsidiary	Brand Management						Baishui Dukang						Xidenghui					Parent/Holding Company
		Total Income			Noncontrolling Interest Income		Total Income			Noncontrolling Interest Income			Total Income			Noncontrolling Interest Income		Total Income			Noncontrolling Interest Income
			100%			30%		100%			9.49%			100%			16.53% (4)
Net Income (Loss)		$	433,942		$	130,183	$	(314,709	)	$	(29,866	)	$	(814,314	)	$	2,943	$	(917	)	$	-
Income (Loss) from subsidiary
(equity method)			-			-		-			-			18,917			24,550		(822,891	)		127,810
Total Income (Loss)			433,942			130,183		(314,709	)		(29,866	)		(795,397	)		27,494		(823,808	)		127,810
Less: Income (Loss) attributable to
noncontrolling interest			(130,183	)		-		29,866			-			(27,494	)		-		-			-
Income (Loss) attributable to Majority		$	303,760				$	(284,843	)				$	(822,891	)			$	(823,808	)(3)
Income (Loss) attributable to
noncontrolling interest					$	130,183				$	(29,866	)				$	27,494				$	127,810	(3)

33

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16- NONCONTROLLING INTEREST (continued)

(1)	Prior to January 1, 2009, before we adopted ASC 810 (or FAS 160), if the current period loss attributed to the noncontrolling interest resulted in a deficit noncotrolling interest balance, the majority absorbed the current period loss up to the extent that  brought the minority interest back to zero. Any subsequent period income attributed to such noncontrolling interest will first absorb the amount that was absorbed by the majority in the prior period, the balance, if any, will attribute to the noncontrolling interest.
(2)	After we adopted ASC 810 on January 1, ASC 810-10-45-21 requires that the noncontrolling interest continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance.
(3)	The minor variance between the amount on the table and the amount on the consolidated statements of operations was due to the rounding of foreign currency translation.
(4)	The non-controlling interest percentage increased from 1.76% to 16.53% on October 1, 2011, as some minority shareholders contributed their loans to Shaanxi Xidenghui Technology Stock Co., Ltd. to paid-in capital.

Note 17- COMMITMENTS AND CONTINGENCIES

Lack of Insurance

The Company does not carry any business interruption insurance, products liability insurance or any other insurance policy except for a limited property insurance policy. As a result, the Company may incur uninsured losses, increasing the possibility that the investors would lose their entire investment in the Company.

The Company could be exposed to liabilities or other claims for which the Company would have no insurance protection. The Company does not currently maintain any business interruption insurance, products liability insurance, or any other comprehensive insurance policy except for property insurance policies with limited coverage. As a result, the Company may incur uninsured liabilities and losses as a result of the conduct of its business. There can be no guarantee that the Company will be able to obtain additional insurance coverage in the future, and even if it can obtain additional coverage, the Company may not carry sufficient insurance coverage to satisfy potential claims. If an uninsured loss should occur, any purchasers of the Company’s common stock could lose their entire investment.

Because the Company does not carry products liability insurance, a failure of any of the products marketed by the Company may subject the Company to the risk of product liability claims and litigation arising from injuries allegedly caused by the improper functioning or design of its products. The Company cannot assure that it will have enough funds to defend or pay for liabilities arising out of a products liability claim. To the extent the Company incurs any product liability or other litigation losses, its expenses could materially increase substantially. There can be no assurance that the Company will have sufficient funds to pay for such expenses, which could end its operations and the investors would lose their entire investment.

34

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17- COMMITMENTS AND CONTINGENCIES (continued)

Contingent Liability from Prior Operation

Prior to the merger with Hong Kong Merit Enterprise Limited on February 11, 2008, the Company has not been active since discontinuing its financial service operations by December 31,2007.  Management believes that there are no valid outstanding liabilities from prior operations. If a creditor were to come forward and claim a liability, the Company has committed to contest such claim to the fullest extent of the law.  No amount has been accrued in the financial statements for this contingent liability.

The Company’s assets are located in PRC and revenues are derived from operations in PRC.

In terms of industry regulations and policies, the economy of PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in PRC are still owned by the Chinese government. For example, all lands are state owned and are leased to business entities or individuals through governmental granting of Land Use Rights. The Chinese government also exercises significant control over PRC’s economic growth through the allocation of resources and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures.

The Company faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state.  Its political and economic systems are very different from the more developed countries and are in a state of change.  The PRC also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States.  Such shocks, instabilities and crises may in turn significantly and negatively affect the Company's performance.

Lease

On March 4, 2002, Baishui Dukang signed a lease agreement with Shaanxi Sanjiu Dukang Liquor Production Co., Ltd ("Sanjiu"), pursuant to which Baishui Dukang agreed to lease the liquor production facility of Sanjiu, including all the fixed assets and the piece of land that the fixed assets attached, for a period of 20 years, which was latterly extended to 30 year. On February 3, 2005, Sanjiu was acquired by Shannxi Baishui Dukang Liquor Development Co., Ltd, an affiliate of the Company. On April 30, 2005, Baishui Dukang signed a complementary lease agreement with Shannxi Baishui Dukang Liquor Development Co., Ltd, pursuant to which Baishui Dukang agreed to continue to lease the liquor production facility for the rest of the original 30-year period. Baishui Dukang also agreed to pay $362,450 (RMB 3,000,000) to the local government to continue the lease and to absorb the pension and unemployment insurance expenses of Sanjiu's original employees. All the pension and unemployment insurance payments were to be made directly to the local China Social Security Administration to satisfy all of the pension and unemployment insurance expenses that were required in connection with the original Sanjiu employees.

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 4% annually.  The number of employees that we need to absorb their pension and unemployment insurance expenses will gradually decrease as Sanjiu’s original employees reach their retirement ages.  To the best of our estimation, we anticipate the future payment for pension and unemployment insurance expenses for Sanjiu’s original employees as rental payment follows:

35

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17- COMMITMENTS AND CONTINGENCIES  (continued)

Lease (continued)

Estimated Pension and Unemployment Insurance Expenses

Year	Pension Insurance Expense					Unemployment Insurance Expense					Total		Present Value as of December 31, 2011 (the incremental interest rate is 8%)
	Province average salary (RMB)	Annual increase rate	Percentage	No. of employees	Estimated pension insurance expense (RMB)	City average salary (RMB)	Annual increase rate	Percentage	No. of employees	Estimated pension insurance expense	USD$1.00=RMB¥6.36470 @12/31/2011
											(RMB)	(USD)	(RMB)	(USD)
2012	14,909	4%	20%	301	897,502	11,876	4%	2.50%	301	89,370	986,872	155,054	783,411	123,087
2013	15,505	4%	20%	282	874,483	12,351	4%	2.50%	282	87,078	961,561	151,077	706,776	129,524
2014	16,125	4%	20%	268	864,312	12,846	4%	2.50%	268	86,065	950,377	149,320	646,811	118,535
2015	16,770	4%	20%	258	865,344	13,359	4%	2.50%	258	86,168	951,512	149,498	599,614	109,886
2016	17,441	4%	20%	244	851,123	13,894	4%	2.50%	244	84,752	935,875	147,041	546,074	100,074
2017	18,139	4%	20%	228	827,124	14,449	4%	2.50%	228	82,362	909,486	142,895	491,367	90,048
2018	18,864	4%	20%	215	811,162	15,027	4%	2.50%	215	80,772	891,935	140,138	446,189	81,769
2019	19,619	4%	20%	199	780,828	15,629	4%	2.50%	199	77,752	858,580	134,897	397,689	72,881
2020	20,404	4%	20%	173	705,963	16,254	4%	2.50%	173	70,297	776,260	121,963	332,925	61,012
2021	21,220	4%	20%	148	628,103	16,904	4%	2.50%	148	62,544	690,647	108,512	274,265	50,262
2022	22,068	4%	20%	135	595,849	17,580	4%	2.50%	135	59,332	655,182	102,940	240,909	44,149
2023	22,951	4%	20%	113	518,698	18,283	4%	2.50%	113	51,650	570,348	89,611	194,181	35,586
2024	23,869	4%	20%	102	486,933	19,015	4%	2.50%	102	48,487	535,420	84,123	168,787	30,932
2025	24,824	4%	20%	77	382,290	19,775	4%	2.50%	77	38,067	420,357	66,045	122,698	22,486
2026	25,817	4%	20%	52	268,497	20,566	4%	2.50%	52	26,736	295,233	46,386	79,792	14,623
2027	26,850	4%	20%	41	220,167	21,389	4%	2.50%	41	21,923	242,091	38,036	60,583	11,102
2028	27,924	4%	20%	25	139,618	22,244	4%	2.50%	25	13,903	153,521	24,121	35,573	6,519
2029	29,041	4%	20%	18	104,546	23,134	4%	2.50%	18	10,410	114,957	18,062	24,664	4,520
2030	30,202	4%	20%	12	72,485	24,059	4%	2.50%	12	7,218	79,703	12,523	15,834	2,902
2031	31,410	4%	20%	6	37,692	25,022	4%	2.50%	6	3,753	41,446	6,512	7,624	1,397
2032	32,667	4%	20%	1	6,533	26,023	4%	2.50%	1	651	7,184	1,129	1,224	224
Total					10,939,256					1,089,290	12,028,546	1,889,884	6,176,988	1,111,518

We consolidate Sanjiu into our consolidated financial statement based on FASB ASC 810-10-25 (FIN 46R). Since Sanjiu had ceased operation when we executed the lease agreement, we will consolidate the leased assets and the lease payment obligation, including the $362,450 (RMB 3,000,000) paid directly to the local government and the payments that were to be made directly to the local China Social Security Administration to satisfy all of the pension and unemployment insurance payments that were required in connection with the original Sanjiu employees in our consolidated financial statements.

36

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The statements contained herein that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information.  Forward-looking statements include the information concerning our current and future operations, business strategies, need for financing, competitive position, ability to retain and recruit personnel, and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,” “expects,” “could,” “plans,” or comparable terminology or by discussions of strategy or trends.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct.  Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.

The following discussion should be read in conjunction with our financial statements and related notes thereto as included with this report.

GENERAL BUSINESS

The Company and its subsidiaries principally engage in the business of production and distribution of distilled spirit (liquor) with a brand name of “Baishui Du Kang” as well as to manage the license of the “Baishui Du Kang” brand name in China, PRC.

OUR AUDITORS HAVE NOTED THERE IS CERTAIN DOUBT ABOUT OUR ABILITY TO OPERATE AS A GOING CONCERN

As reflected in the accompanying consolidated financial statements, the Company has an accumulated deficit of $21,967,543 at March 31, 2012 that includes a profit of $365,386 for the three months ended March 31, 2012 and a loss of $200,428 for three months ended March 31, 2011. The Company has working capital 2,411,801 at March 31, 2012.  These factors raise substantial doubt about the Company's ability to continue as a going concern.

Management has taken steps to revise the Company's operating and financial requirements.  The Company is actively pursuing additional funding and a potential merger or acquisition candidate and strategic partners, which would enhance owners' investment.  However, there can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.

The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

RESULTS OF OPERATIONS

FOR THE THREE MONTHS THEN ENDED MARCH 31, 2012 AND 2011

Revenue

Total revenues for the three months ended March 31, 2012 were $826,699 as compared to $711,496 for the same period of 2011. These include sales of liquor, which were $614,377 for the three months ended March 31, 2012 and $427,679 for the same period of 2011. The license fees revenue for the three months ended March 31, 2012 were $212,322 and $283,817 for the same period of 2011, representing a decrease of 25.2%.

Sales of liquor to related parties distributors were $467,931 or approximately 76.2% of total liquor sales for the three months ended March 31, 2012; and $426,047 or 99.62% of total liquor sales for the three months ended March 31, 2012, respectively. Corresponding related parties accounts receivables to the sales revenues were $86,772 and $66,981 at March 31, 2012 and December 31, 2011, respectively.

There are no related parties’ revenues generated from License fees or agent sales.

The Company’s revenues from sales of liquor for the three months ended March 31, 2012 increased approximately 44% as compared to the same period in 2011. The Company expects its revenue to increase gradually over the next periods as new and old customer demand increases.

37

Cost of Goods and Gross Margin

The overall gross margin for the three month ended March 31, 2012 was 44.4% as compared to 52.2% for the comparable period of 2011 which is due to the decrease on license fees revenues for the three months ended March 31, 2012 compared with gross margin for the comparable period of 2011. Gross margin on sales of liquor was 25.2% in the three months ended March 31, 2012, representing an increase of 23.2% when compared to 20.5% for the comparable period in 2011.

The increase in gross margin on sales of liquor resulted from increase of sales to unrelated third party. Historically, the Company primarily sold its liquor products to the related parties’ distributors at deep discount prices. As the Company increases its customers’ base, the gross margin increased as well.

Operating Expenses

Expenses from operations totaled $233,803 and $271,468 for the three months ended March 31, 2012 and 2011, respectively. Selling expenses increased $12,620 from $7,641 for the three months ended March 31, 2011 to $20,261 for the same period in 2012 since the Company increased its sales to unrelated third party. General and administrative expenses are comparable for the periods with an exception to significant increase in professional and consultant fees and decrease of other miscellaneous general and administrative expenses.

The changes in operating expenses, both selling expenses and general and administrative expenses arose from the Company's decision to change its distribution practices. The Company has begun its effort to move away from its emphasis on affiliates to a much broader network of third party resellers.

Other Income and Expenses

The Company has incurred total interest expense and imputed interest expense net of $6,825 and $279,520 for the three months ended March 31, 2012 and 2011, respectively. The decreased in imputed interest expense was due to the conversion of related parties’ loans to additional paid-in capital of the Company.

LIQUIDITY AND CAPITAL RESOURCES

AS OF MARCH 31, 2012 AND DECEMBER 31, 2011

Operating Activities

We experienced a net income of $365,386 for the three months ended March 31, 2012 as compared to a loss of $200,428 for the same period of 2011. Adjustments to reconcile the net loss to cash provided by operating activities included zero dollars for imputed interest for the three months ended March 31, 2012 as compared to $262,497 for the same period of 2011. Depreciation and amortization remained relatively stable at $130,689 and $102,012 for the same respective periods.

Changes in operating assets and liabilities included an increase in accounts receivable from $270,276 at December 31, 2011 to $328,757 at March 31, 2012.  Prepaid expenses increased $248,608 from $678,528 to $927,136 for the three months period of 2012, as we increased our advance to purchase new packing materials for products selling to third party customers.  Changes in operating liabilities such as accounts payable and accrued expenses for the three months periods were minimal, as did other payables, taxes payables, other current liabilities with the exception to deferred revenues which decreased $244,825 .

38

As a result, net cash used by operating activities declined to $14,592 for the three months ended March 31, 2012,  as compared to $316,951 for the same period of 2011.

Investing Activities

Net cash used by investing activities were $13,870 and $2,030,477 for the three months ended March 31, 2012 and 2011 respectively, the decrease was primarily attributed to the payments for purchase of land use right in 2011.  

Financing Activities

Net cash provided by financing activities changed were $0 and $1,624,475 for the three months ended March 31, 2012 and 2011 respectively. For the three months ended March 31, 2011, the Company has obtained financing from its related parties as working capital. The Company has reduced its dependence on related party financing as it increased its revenues to cover the expenses.

Cash at March 31, 2012 and December 31, 2011 was $946,072 and $968,370, respectively. The Company has working capital 2,411,801 at March 31, 2012 as compared to $1,945,551 at March 31, 2011.

We have historically funded our cash needs through a series of debt transactions, primarily with related parties. On October 1, 2011, the related parties contributed their outstanding debt to paid-in capital and the contribution.

The related-parties include affiliates and individuals. Affiliates are companies which are directly or indirectly, beneficially and in the aggregate, majority-owned and controlled by directors, officers, and principal shareholders of the Company. Individuals include our officers, shareholders, and prior directors of subsidiaries.

Loans from related-parties are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. The Company has imputed interest on these loans. Cash flows from due to related parties are classified as cash flows from financing activities, and cash flows from due from related parties are classified as cash flows from investing activities.

Our liquidity is dependent upon the continuation of and expansion of our operations, receipt of revenues and additional infusions of capital provided by equity and debt financing. Management believes that the current program of sales through distributorship agreements will improve throughout 2011 and that margins overall will continue to improve thereby.  Demand for our products is dependent on market acceptance of our liquor and conditions in the liquor and general beverage markets, and general economic conditions. All of our products are currently sold in the Peoples Republic of China and are heavily dependent on the economy, exchange rates, and consumption habits within the Peoples Republic of China.  Many of these factors are cyclical and beyond the control of management.

Access to short and long term sources of cash is important to the continuation of our research and development and commencement of our operations. Our ability to operate is limited by our financial capacity to obtain cash and additional lines of credit in the future.

Related Parties Transactions

The Company has generated sales revenues from related parties in the amount of $467,931 and $426,047 for the three months ended March 31, 2012 and 2011, respectively.

The Company has outstanding accounts receivables from related parties in the amount of $86,772 and $66,981 at March 31, 2012 and December 31, 2011, respectively.

The Company has outstanding deferred revenues related to related parties in the amount of $552,014 and $644,753 at March 31, 2012 and December 31, 2011, respectively.

39

Critical Accounting Policies

Information regarding significant accounting standards is included in Note 5 to the accompanying Consolidated Financial Statements.

Off-Balance Sheet Arrangements

As of March 31, 2012, the Company did not have any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for Smaller Reporting Company. 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.

Based on an evaluation carried out as of the end of the period covered by this quarterly report, under the supervision and with the participation of our management, including our CEO and CFO, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of March 31, 2012.

Changes in Internal Control Over Financial Reporting

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, there were no changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

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PART II

ITEM 1. LEGAL PROCEEDINGS

We are not presently involved in any litigation that is material to our business. We are not aware of any pending or threatened legal proceedings. In addition, none of our officers, directors, promoters or control persons has filed or been involved for the past five years:

● in any bankruptcy petition

● in any conviction of a criminal proceeding or involved in a pending criminal proceeding (excluding traffic violations and minor offenses)

● is subject to any order, judgment or decree enjoining, barring suspending or otherwise limiting their involvement in any type of business, securities, or banking activities,

● or has been found to have violated a federal or state securities or commodities law.

There have been no securities trading suspensions by any regulator, and there is no pending or threatened litigation for which the adverse effect, assuming an unfavorable outcome, would exceed $25,000.

We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition or future results. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deems to be immaterial also may materially adversely affect our business, financial condition or results of operations.

WE MAY INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH CORPORATE GOVERNANCE AND ACCOUNTING REQUIREMENTS.

We expect to incur significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. While we have no experience as a public company, we estimate that these additional costs will total approximately $100,000 per year. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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RISKS RELATING TO OUR SECURITIES

WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND YOU MAY NEVER RECEIVE DIVIDENDS. THERE IS A RISK THAT AN INVESTOR IN OUR COMPANY WILL NEVER SEE A RETURN ON INVESTMENT AND THE STOCK MAY BECOME WORTHLESS.

We have never paid dividends on our common stock. We intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy will be at the discretion of the Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions and other factors. Future dividends may also be affected by covenants contained in loan or other financing documents, which may be executed by us in the future. Therefore, there can be no assurance that cash dividends of any kind will ever be paid. If you are counting on a return on your investment in the common stock, the shares are a risky investment.

THERE IS CURRENTLY NO SUBSTANTIAL MARKET FOR OUR COMMON STOCK AND NO ASSURANCE THAT ONE WILL DEVELOP.

There is currently on an extremely limited trading market for our shares of Common Stock, under the symbol "CDKG". We have provided no public information and our symbol contains a "skull and crossbones" insignia on the pink sheets until this filing. We currently have a "stop sign" insignia. We are filing this information partly to provide such information to the public although there can be no assurance that a more substantial market will ever develop or be maintained.  Any market price for shares of our Common Stock is likely to be very volatile, and numerous factors beyond our control may have a significant adverse effect.  In addition, the stock markets generally have experienced, and continue to experience, extreme price and volume fluctuations which have affected the market price of many small capital companies and which have often been unrelated to the operating performance of these companies.  These broad market fluctuations, as well as general economic and political conditions, may also adversely affect the market price of our Common Stock.  Further, there is no correlation between the present limited market price of our Common Stock and our revenues, book value, assets or other established criteria of value.  The present limited quotations of our Common Stock should not be considered indicative of the actual value of the Company or our Common Stock.

Future sales of our common stock could put downward selling pressure on our shares, and adversely affect the stock price.  There is a risk that this downward pressure may make it impossible for an investor to sell his shares at any reasonable price.

Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could put downward selling pressure on our shares, and adversely affect the market price of our common stock.  Such sales could be made pursuant to Rule 144 under the Securities Act of 1933, as amended, as shares become eligible for sale under the Rule.

BECAUSE OUR SHARES ARE DEEMED HIGH RISK "PENNY STOCKS," YOU MAY HAVE DIFFICULTY SELLING THEM IN THE SECONDARY TRADING MARKET.

The Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price (as therein defined) less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Additionally, if the equity security is not registered or authorized on a national securities exchange, the equity security also constitutes a "penny stock." As our common stock falls within the definition of penny stock, these regulations require the delivery, prior to any transaction involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. These regulations generally require broker-dealers who sell penny stocks to persons other than established customers and accredited investors to deliver a disclosure schedule explaining the penny stock market and the risks associated with that market. Disclosure is also required to be made about compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. These regulations also impose various sales practice requirements on broker-dealers. In addition, monthly statements are required to be sent disclosing recent price information for the penny stocks. The ability of broker/dealers to sell our common stock and the ability of shareholders to sell our common stock in the secondary market is limited. As a result, the market liquidity for our common stock is severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock.

IF A MARKET DEVELOPS FOR OUR SECURITIES THE COULD BE VOLATILE AND MAY NOT APPRECIATE IN VALUE.

If a market should develop for our securities, of which we have no assurance, the market price is likely to fluctuate significantly. Fluctuations could be rapid and severe and may provide investors little opportunity to react. Factors such as changes in results from our operations, and a variety of other factors, many of which are beyond the control of the Company, could cause the market price of our common stock to fluctuate substantially. Also, stock markets in penny stock shares tend to have extreme price and volume volatility. The market prices of shares of many smaller public companies securities are subject to volatility for reasons that frequently unrelated to the actual operating performance, earnings or other recognized measurements of value. This volatility may cause declines including very sudden and sharp declines in the market price of our common stock. We cannot assure investors that the stock price will appreciate in value, that a market will be available to resell your securities or that the shares will retain any value at all.

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RISKS RELATING TO DOING BUSINESS IN THE PEOPLE'S REPUBLIC OF CHINA

WE ARE SUBJECT TO THE POLITICAL AND ECONOMIC POLICIES OF THE PEOPLES REPUBLIC OF CHINA, AND GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR INTENDED BUSINESS.

All of our assets and operations are in the PRC.   As a result our operating results and financial performance as well as the value of our securities could be affected by any changes in economic, political and social conditions in China.

The Chinese government adopted an "open door" policy to transition from a planned economy to a market driven economy in 1978. Since then the economy of the PRC has undergone rapid modernization although the Chinese government still exerts a dominant force in the nation's economy. There has historically been a substantial market in liquor consumption in China.

The Chinese government operates the economy in many industries through various five-year plans and even annual plans. A large degree of uncertainty is associated with potential changes in these plans. Since the economic reforms have no precedent, there can be no assurance that future changes will not create materially adverse conditions on our business.

Due to the limited effectiveness of judicial review, public opinion and popular voting there are few avenues available if the governmental action has a negative effect. Any adverse changes in the economic conditions, in government policies, or in laws and regulations in China could have a material adverse effect on the overall economic growth, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business.

THERE ARE RISKS INHERENT IN DOING BUSINESS IN CHINA OVER WHICH WE HAVE NO CONTROL.

The political and economic systems of the PRC are very different from the United States and more developed countries. China remains volatile in its social, economic and political issues which could lead to revocation or adjustment of reforms.  There are also issues between China and the United States that could result in disputes or instabilities.  Both domestically and internationally the role of China and its government remain in flux and could suffer shocks, or setbacks that may adversely affect our business.

THE CHINESE LEGAL SYSTEM IS MUCH DIFFERENT FROM THAT OF THE UNITED STATES WITH CONSIDERABLY LESS PROTECTION FOR INVESTORS, AND IT MAY BE EXTREMELY DIFFICULT FOR INVESTORS TO SEEK LEGAL REDRESS IN CHINA AGAINST US OR OUR OFFICERS AND DIRECTORS, INCLUDING CLAIMS THAT ARE BASED UPON U.S. SECURITIES LAWS.

All of our current operations are conducted in China.  All of our current directors and officers are nationals or residents of China. It may be difficult for shareholders to serve us with service of process in legal actions.

All of the assets of these persons are located outside the United States in China. The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents.  As a result there is no established body of law that has precedential value as is the case in most western legal systems. Differences in interpretations and rulings can occur with little or no opportunity for redress or appeal.

As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our officers and directors.  Even if service of process was successful, considerable uncertainty exists as to whether Chinese courts would enforce U. S. laws or judgments obtained in the United States. Federal and state securities laws in the U. S. confer substantial rights to investors and shareholders that have no equivalent in China. Therefore a claim against us or our officers and/or directors or even a final judgment in the U. S. based on U. S. may not be heard or enforced by the Chinese courts.

In 1979, the PRC began to adopt a complex and comprehensive system legal system and has approved many laws regulating economic and business practices in the PRC including foreign investment. Currently many of the approvals required for our business can be obtained at a local or provincial level.  We believe that it is generally easier and faster to obtain provincial approval than central government approval. Changes to existing laws that repeal or alter the local regulatory authority and replacements by national laws could negatively affect our business and the value of our securities.

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NEW CHINESE LAWS MAY RESTRICT OUR ABILITY TO CONTINUE TO MAKE ACQUISITIONS OF BUSINESSES IN CHINA.

New regulations on the acquisition of businesses commonly referred to as "SAFE" regulations (State Administration of Foreign Exchange) were jointly adopted on August 8, 2006 by six Chinese regulatory agencies with jurisdictional authority. Known as the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors the new Rule requires creation of offshore Special Purpose Ventures, or SPVs, for overseas listing purposes. Acquisitions of domestic Chinese companies require approval prior to listing securities on foreign exchanges.

We obtained the approvals that we believe are required in making the acquisitions that formed the present company. Nonetheless, our growth has largely been by acquisition and we intend to continue to make acquisitions of Chinese businesses. Since the "SAFE" rules are very recent there are many ambiguities and uncertainties as to interpretation and requirements.  These uncertainties and any changes or revisions to the regulations could limit or eliminate our ability to make new acquisitions of Chinese businesses in the future.

WE MAY BE AFFECTED BY RECENT CHANGES TO CHINA'S FOREIGN INVESTMENT POLICY, WHICH WILL CHANGE THE INCOME TAX RATE FOR FOREIGN ENTERPRISES.

On January 1, 2008 a new Enterprise Income Tax Law will take effect. The new law revises income tax policy and sets a unified income tax rate for domestic and foreign companies at 25 percent. It also abolishes favorable treatment for foreign invested enterprises. When the new law takes effect, foreign invested enterprises will no longer receive favorable tax treatment.  Any earnings we may obtain may be adversely affected by the new law.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers

None.

Transfer Agent

Our transfer agent is Island Stock Transfer, 100 Second Avenue South, Suite 705S, St. Petersburg, FL 33701. The telephone number is (727) 289-0010.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

31.1.	Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2.	Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
32.1.	Section 1350 Certifications of Chief Executive Officer
32.2.	Section 1350 Certifications of Chief Financial Officer

101.INS   **	XBRL Instance Document
101.SCH **	XBRL Taxonomy Extension Schema Document
101.CAL **	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF **	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB **	XBRL Taxonomy Extension Label Linkbase Document
101.PRE **	XBRL Taxonomy Extension Presentation Linkbase Document

__________________

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA DU KANG CO., LTD.
		(Registrant)
Date: May 15, 2012	By:	/s/ Wang Yong Sheng, President
		Wang Yong Sheng,
		President
		(Chief Executive Officer)

Date: May 15, 2012	By:	/s/ Liu Su Ying, CFO
		Liu Su Ying,
		Chief Financial Officer
		(Principal Accounting Officer)

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