China Du Kang (CDKG) 10-Q 2013 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, 2013

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 x   No o

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: May 17, 2013: 100,113,791 shares of common stock

China Du Kang Co. Ltd.

FORM 10-Q

TABLE OF CONTENTS

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012 (audited)		3
	Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)		4
	Consolidated Statements of Comprehensive Loss for the three months ended March 31,2013 and 2012 (unaudited)		5
	Consolidated Statements of Cash Flows f or the three months ended March 31,2013 and 2012 (unaudited)		6
	Notes to Consolidated Financial Statements		7 - 33
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.	Controls and Procedures		38
PART II.	OTHER INFORMATION
Item 6.	Exhibits		39
	Signatures		40

2

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2013			2012
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	406,174		$	681,702
Accounts receivable (Note 5)		603,820			541,246
Others receivable		28,385			26,517
Prepaid expenses (Note 6)		1,326,384			1,244,199
Inventories (Note 7)		7,398,363			6,962,485
Total current assets		9,763,126			9,456,149
Property, Plant and Equipment, net (Note 8)		4,317,060			4,245,296
Intangible assets, net (Note 9)		2,007,447			2,006,989
Long-term investment		1,910,341			1,899,907
Total Assets	$	17,997,974		$	17,608,341
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	1,257,332		$	1,068,104
Accrued expenses (Note 10)		405,764			336,130
Others payable		84,685			64,541
Taxes payable (Note 11)		750,653			661,838
Deferred revenue (Note 12)		3,793,004			4,174,197
Security deposit		82,147			81,695
Lease liability-current		82,000			83,926
Total Current Liabilities		6,455,585			6,470,431
Long-term Liabilities:
Lease liability-long-term		748,502			770,016
Total Long-term Liabilities		748,502			770,016
Total Liabilities		7,204,087			7,240,447
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;
none issued and outstanding as of March 31, 2013 and December 31, 2012		-			-
Common stock, par value $0.001, 250,000,000 shares authorized;
100,113,791 shares issued and outstanding as of March 31, 2013 and December 31, 2012		100,114			100,114
Additional paid-in capital		27,385,386			27,385,386
Accumulated deficit		(21,022,139	)		(21,345,293	)
Accumulated other comprehensive income		(709,988	)		(767,180	)
Total China Du Kang Co. Ltd.  Shareholders' equity		5,753,373			5,373,027
Noncontrolling Interest		5,040,514			4,994,867
Total Shareholders' Equity		10,793,887			10,367,894
Total Liabilities and Shareholders' Equity	$	17,997,974		$	17,608,341

See Notes to Consolidated Financial Statements

3

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended
	March 31,
	2013			2012
	(unaudited)			(unaudited)
Revenues
Sales of Liquor	$	1,818,199		$	614,377
License Fees		156,603			212,322
Gross Revenues		1,974,802			826,699
Costs of Revenues
Costs of Liquor Sold		950,892			459,435
Costs of License Fees		-			-
Total Costs of Sales		950,892			459,435
Gross Profit		1,023,910			367,264
Operating Expenses
Selling Expenses
Sales commission		54,570			-
Advertising expenses		49,356			12,609
Promotion expenses		153,441			-
Travel and entertainment		18,965			7,652
Total Selling Expenses		276,332			20,261
General and Administrative Expenses
Payroll		103,397			71,353
Employee benefit and pension		14,054			21,617
Depreciation and amortization expenses		30,944			31,370
Professional fees and consultancy fees		43,936			52,530
Office expenses		15,674			20,982
Vehicle expenses		6,993			7,782
Bad debt expenses		25,039			-
Travel and entertainment		20,358			7,908
Other general and administrative expenses		1,169			-
Total General and Administrative Expenses		261,564			213,542
Total Operating Expenses		537,896			233,803
Income from Operations		486,014			133,461
Other Income (Expenses)
Interest income		455			1,223
Interest Expenses-capital lease		(10,133	)		(8,048	)
Governmental subsidy		-			261,071
Other income (expense)		(94,096	)		32
Total Other Income (Expenses)		(103,774	)		254,278
Income before Provision for Income Tax		382,240			387,739
Provision for Income Tax (Note 16)		(13,451	)		(22,353	)
Net Income		368,789			365,386
Less: Net income attributable to noncontrolling interest		45,635			40,583
Net Income attributable to
China Du Kang Co. Ltd.	$	323,154		$	324,803
Basic and Fully Diluted Income per Share	$	0.003		$	0.003
Weighted average shares outstanding		100,113,791			100,113,791

See Notes to Consolidated Financial Statements

4

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	For the Three Months Ended
	March 31,
	2013			2012
	(unaudited)			(unaudited)
Net Income	$	368,789		$	365,386
Other comprehensive income, net of tax:
Effects of foreign currency conversion		57,204			59,623
Total other comprehensive income, net of tax		57,204			59,623
Comprehensive loss		425,993			425,009
Less: Comprehensive income attributable to
the noncontrolling interest		(45,647	)		(40,553	)
Comprehensive income attributable to
China Du Kang Co. Ltd.	$	380,346		$	384,456

See Notes to Consolidated Financial Statements

5

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months Ended
	March 31,
	2013			2012
	(unaudited)			(unaudited)
Cash Flows from Operating Activities
Net income including noncontrolling interest	$	368,789		$	365,386
Adjustments to reconcile net income
including noncontrolling interest to net cash
provided (used) by operating activities:
Depreciation		90,547			119,545
Amortization		10,558			11,153
Bad debt expenses		25,039			-
Obsolete inventory write-down		33,735			9,842
Changes in operating assets and liabilities:
(Increase)/Decrease in accounts receivable		(84,600	)		(56,813	)
(Increase)/Decrease in others receivable		(1,721	)		(3,589	)
(Increase)/Decrease in prepaid expenses		(75,301	)		(244,494	)
(Increase)/Decrease in inventories		(431,106	)		30,506
Increase/(Decrease) in accounts payable		183,239			32,630
Increase/(Decrease) in accrued expenses		67,742			(33,270	)
Increase/(Decrease) in other payable		19,776			19,730
Increase/(Decrease) in taxes payable		85,123			10,596
Increase/(Decrease) in deferred revenue		(403,845	)		(244,825	)
Increase/(Decrease) in lease liabilities		(28,111	)		(30,989	)
Net cash used in operating activities		(140,136	)		(14,592	)
Cash Flows from Investing Activities
Purchase of fixed assets		(138,918	)		(13,870	)
Net cash used in investing activities		(138,918	)		(13,870	)
Cash Flows from Financing Activities
Net cash provided by financing activities		-			-
Decrease in cash		(279,054	)		(28,462	)
Effects of exchange rates on cash		3,526			6,164
Cash at beginning of period		681,702			968,370
Cash at end of period	$	406,174		$	946,072
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest	$	10,133		$	8,048
Income tax	$	55,088		$	-

See Notes to Consolidated Financial Statements

6

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, 2012.
	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, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
Note 2-	ORGANIZATION AND BUSINESS BACKGROUND
	China Du Kang Co., Ltd (“China Du Kang” or the “Company”) was incorporated in the State of Nevada on January 16, 1987. Currently, throught its wholely owned subsidiary, Hong Kong Merit Enterprise Limited (“Merit”),the Company is engaged in the business of production and distribution of distilled spirits with the brand name of “Baishui Dukang”in the People's Republic of China ("PRC"). The Company also licenses the brand name to other liquor manufactures and liquor stores in PRC.  The Company's structure is summarized in the following chart.

7

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 Xidenghui, 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 83.75% 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

8

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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-	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.

9

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	SIGNIFICANT ACCOUNTING POLICIES (continued)
	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 high-quality institutions. Deposits held with banks in PRC may not be insured or exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore bear minimal risk.
	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.
	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.

10

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	SIGNIFICANT ACCOUNTING POLICIES (continued)
	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 Rates	Average Rates
Three months ended March 31, 2013	6.28160	6.28582
Three months ended March 31, 2012	6.32470	6.32012
Year ended December 31, 2012	6.31610	6.31984
Year ended December 31, 2011	6.36470	6.47351

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.

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.

11

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	SIGNIFICANT ACCOUNTING POLICIES (continued)
	(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 a 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 its 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.

12

CHINA DUKANG CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	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 that are unrestricted as to withdrawal or use, and which have original maturities of three months or less.
	Accounts receivable
	The Company carries accounts receivable at the invoiced amount without bearing interest, less an allowance for doubtful accounts. Allowances for doubtful accounts are recorded as a general and administrative expense. Management regularly reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the collectability of accounts receivable and the adequacy of the allowance. Management also performs a subjective review of specific large accounts to determine if an additional reserve is necessary. In circumstances in which we receive payment for accounts receivable that have previously been written off, we reverse the allowance and bad debt expenses.
	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.

13

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	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	3-5 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

14

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	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 acres, 2.4 acres, and 7.8 acres, 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 $49,356, and $12,609 for the three months ended March 31, 2013 and 2012, respectively.

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CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	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 ended March 31, 2013 and 2012, 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.
	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.
	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.

16

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	SIGNIFICANT ACCOUNTING POLICIES (continued)
	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 provisions for such employee benefits were $14,054 and $18,491 for the three months ended March 31, 2013 and 2012, respectively.
	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. The Company recognized government subsidy of $0 and $261,071 for the three months ended March 31, 2013 and 2012, respectively.
	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 longer 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 the statutory surplus reserve fund and statutory public welfare reserve fund to date. The company will be required to make contributions 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.

17

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	SIGNIFICANT ACCOUNTING POLICIES (continued)
	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.
	The Company has net operating losses carried forward from prior years. Although the PRC Income Tax Law allows the enterprises to offset their future taxable income with operating losses carried forward in a 5-year period, enterprises need approval from the local tax authority before they 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 as a result of these losses.
	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 effective 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.

18

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	SIGNIFICANT ACCOUNTING POLICIES (continued)
	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.
	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, 2013 and 2012, 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.

19

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4-	SIGNIFICANT ACCOUNTING POLICIES (continued)
	Recent Accounting Pronouncements
	In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters. This standard provides additional guidance with respect to the reclassification into income of the cumulative translation adjustment (CTA) recorded in accumulated other comprehensive income associated with a foreign entity of a parent company. The ASU differentiates between transactions occurring within a foreign entity and transactions/events affecting an investment in a foreign entity. For transactions within a foreign entity, the full CTA associated with the foreign entity would be reclassified into income only when the sale of a subsidiary or group of net assets within the foreign entity represents the substantially complete liquidation of that foreign entity. For transactions/events affecting an investment in a foreign entity (for example, control or ownership of shares in a foreign entity), the full CTA associated with the foreign entity would be reclassified into income only if the parent no longer has a controlling interest in that foreign entity as a result of the transaction/event. In addition, acquisitions of a foreign entity completed in stages will trigger release of the CTA associated with an equity method investment in that entity at the point a controlling interest in the foreign entity is obtained. This ASU is effective prospectively beginning January 1, 2014, with early adoption permitted. This ASU would impact the Company’s consolidated results of operations and financial condition only in the instance of an event/transaction as described above.
	In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. Under this standard, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. For the Company, this ASU is effective beginning January 1, 2013, and interim periods within those annual periods. The adoption of this standard is not expected to have an impact on the Company’s financial results or disclosures.
	In July 2012, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2012-02 (“ASU 2011-12”), Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. This ASU is effective beginning January 1, 2013, with early adoption permitted under certain conditions. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations, and cash flows.

20

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5-	ACCOUNTS RECEIVABLE
	Accounts receivable consists of the following:

	March 31,			December 31,
	2013			2012
	(unaudited)
Accounts receivable	$	689,455		$	602,688
Accounts receivable-related party		154,898			154,052
Less: Allowance for doubtful accounts		(240,533	)		(215,494	)
Accounts  receivable, net	$	603,820		$	541,246

Bad debt expense charged to operations was $25,039 and $0 for the three months ended March 31, 2013 and 2012, respectively.

Refer to Note 14 - Sales of Liquor to Related Party for accounts receivable of related party.

Note 6-	PREPAID EXPENSES
	Prepaid expenses consist of the following:

	March 31,		December 31,
	2013		2012
	(unaudited)
Machinery and parts	$	150,774	$	135,222
Raw materials and supplies		34,216		49,477
Packing and supply materials		150,889		74,343
Advance to contraction project		990,505		985,157
Total	$	1,326,384	$	1,244,199

Note 7-	INVENTORIES
	Inventories consist of following:

	March 31,			December 31,
	2013			2012
	(unaudited)
Finished goods	$	3,054,228		$	2,982,436
Work-in-progress		3,204,999			3,001,300
Raw materials and supplies		184,712			65,565
Supplies and packing materials		1,121,599			1,046,624
Less: Allowance for obsolete inventory		(167,175	)		(133,440	)
Total	$	7,398,363		$	6,962,485

Obsolete/Slow moving inventory was $33,735 and $9,842 for the three months ended March 31, 2013 and 2012, respectively, and these amounts were included in costs of goods sold.

21

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8-	PROPERTY, PLANT AND EQUIPMENT
	The following is a summary of property, plant and equipment:

	March 31,			December 31,
	2013			2012
	(unaudited)
Building and warehouses	$	3,258,918		$	3,185,704
Machinery and equipment		2,343,071			2,278,147
Office equipment and furniture		285,437			281,718
Motor vehicles		375,784			373,732
Leased assets		2,597,211			2,561,674
Total		8,860,421			8,680,975
Less: Accumulated depreciation		(4,938,481	)		(4,821,423	)
		3,921,940			3,859,552
Add: Construction in progress		395,120			385,744
Total property, plant and equipment, net	$	4,317,060		$	4,245,296

Depreciation expense charged to operations was $90,547 and $119,545 for the three months ended March 31, 2013 and 2012, respectively. Depreciation expense with respect to production equipment that was charged to cost of sales was $70,161 and $99,328 for the three months ended March 31, 2013 and 2012, respectively.  The remainder, depreciation expense attributable to equipment used in administration, was $20,386 and $20,217 for the three months ended March 31, 2013 and 2012, respectively, and was included in general and administration expenses.

Note 9-	INTANGIBLE ASSETS
	The following is a summary of intangible assets, less amortization:

	March 31,			December 31,
	2013			2012
	(unaudited)
Land use right	$	2,112,929		$	2,101,388
Trade Mark of "Xidenghui"		71,638			71,246
Trade Mark of "Baishui Du Kang"		26,267			26,124
Total intangible assets		2,210,834			2,198,758
Less: Accumulated amortization		(203,387	)		(191,769	)
Total intangible assets, net	$	2,007,447		$	2,006,989

Amortization expense charged to operations was $10,558 and $11,153 for the three months ended March 31, 2013 and 2012, respectively.

Note 10-	ACCRUED EXPENSES
	Accrued expenses consist of the following:

	March 31,		December 31,
	2013		2012
	(unaudited)
Accrued payroll	$	86,549	$	98,532
Accrued employee benefits		59,749		59,422
Accrued pension and employee benefit		198,460		140,892
Accrued office expenses		61,006		37,284
Total	$	405,764	$	336,130

22

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11-	TAXES PAYABLE
	Taxes payable consists of the following:

	March 31,		December 31,
	2013		2012
	(unaudited)
Income tax	$	478,434	$	469,513
Sales tax and sales tax affixation		149,074		142,687
Excise taxes		47,010		42,797
Value-added Tax ("VAT")		73,286		3,715
Other taxes		2,849		3,126
Total taxes payable	$	750,653	$	661,838

Note 12-	DEFERRED REVENUE
	Deferred revenue consist of the following:

	March 31,		December 31,
	2013		2012
	(unaudited)
Deferred revenue	$	2,102,633	$	2,498,357
Deferred revenue-related party		1,690,371		1,675,840
Total	$	4,174,197	$	2,785,391

	Refer to Note 14 - Sales of Liquor to Related Party for deferred revenues of related party.
Note 13-	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 is as follows:

	For the Three Months Ended
	March 31,
	2013		2012
	(unaudited)		(unaudited)
REVENUE
Sales of Liquor	$	1,818,199	$	614,377
Franchise Fees	$	156,603	$	212,322
COST OF SALES
Sales of Liquor	$	950,892	$	459,435
Franchise Fees	$	-	$	-
GROSS PROFITS
Sales of Liquor	$	867,307	$	154,942
Franchise Fees	$	156,603	$	212,322

	March 31,		December 31,
	2013		2012
	(unaudited)
TOTAL ASSETS OF LIQUOR PRODUCTION AND DISTRIBUTION	$	30,010,823	$	29,157,214
TOTAL ASSETS OF BRAND NAME FRANCHISE	$	4,323,259	$	4,361,566

23

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14-	SALES OF LIQUOR TO RELATED PARTIES
	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 to third parties. The amount sold to these affiliates are as follows:

		For the Three Months Ended March 31,
Name of Related Party	Description	2013		2012
		(unaudited)		(unaudited)
Shaanxi Dukang Group Co., Ltd.	Affiliate 2	$	498,109	$	400,151
Shaanxi Baishui Shiye Co., Ltd.
(F/K/A Shaanxi Baishui Dukang Trade Co., Ltd.)	Affiliate 3		-		45,801
Total		$	498,109	$	445,952

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

Due from related parties

Due from related parties consists of the following:

		March 31,		December 31,
Name of Related Party	Description	2013		2012
		(unaudited)
Shaanxi Yellow-river Bay Wenquan Lake Park Co., Ltd.,	Non-consolidated,
F/K/A Shaanxi Yellow-river Wetlands Park Co., Ltd.	7.9% owned subsidiary	$	34,300	$	34,113
Shaanxi Zhongke Spaceflight Agriculture
Development Stock Co., Ltd.	Affiliate 1		120,598		119,939
Total		$	154,898	$	154,052

Due to related parties

Due to related parties consists of the following:

		March 31,		December 31,
Name of Related Party	Description	2013		2012
		(unaudited)
Shaanxi Dukang Group Co., Ltd.	Affiliate 2	$	1,270,031	$	1,258,241
Shaanxi Baishui Shiye Co., Ltd.
(F/K/A Shaanxi Baishui Dukang Trade Co., Ltd.)	Affiliate 3		328,007		325,770
Shaanix Mining New Energy Co., Ltd.	Affiliate 4		92,333		91,829
Total		$	1,690,371	$	1,675,840

The nature of the affiliation of each related party is as follows:

Affiliate 1--This company is indirectly, majority owned, and controlled by the Company's sole director's siblings.

Affiliate 2--The CEO of the Company is a director of Shaanxi Dukang Group Co., Ltd. and has significant influence on the operations therein.

Affiliate 3--The CEO of the Company is the sole director of Shaanxi Baishui Shiye Co., Ltd. and has significant influence on the operations therein.

Affiliate 4--The Company's sole director's spouse is a director of Shaanxi Mining New Energy  Co., Ltd., and has significant influence on the operation therein.

24

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,
			2013					2012
			(unaudited)					(unaudited)
	Major	Type of			Percentage of					Percentage of
	Customers	Customer	Revenue		Total Revenue			Revenue		Total Revenue
*	Shaanxi Dukang Group Co., Ltd.	Distributor	$	498,109		25.22	%	$	400,151		48.40	%
*	Shaanxi Baishui Dukang Shiye Co., Ltd.	Distributor		-		-			45,801		5.54	%
	Xinhui Shanghang Co., Ltd.	Distributor		644,233		32.62	%		-
	Mr. Weidong Peng	Distributor		104,769		5.31	%		-
	Mr. Anxian Xie	Agent		-		-			44,858		5.43	%
	Mr. Changzhong Ji	Agent		-		-			44,857		5.43	%
	Ms. Jie Cao	Agent		-		-			44,857		5.43	%
	Total		$	1,247,111		63.15	%	$	580,524		70.22	%

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,
			2013					2012
			(unaudited)					(unaudited)
	Major	Type of			Percentage of					Percentage of
	Suppliers	Goods	Purchase		Total Purchase			Purchase		Total Purchase
	Hunan Dexing  China Co., Ltd.	Packing materials	$	-		-		$	12,718		10.92	%
	Hunan Hualian Taochi Co., Ltd.	Packing materials		97,076		9.90	%		-		-
	Hunan Liling Liangyou Geramacs Co., Ltd.	Packing materials		-		-			19,155		16.45	%
	Hunan Fengling Liangyou China Co., Ltd.	Packing materials		82,413		8.41	%		-		-
	Wenzhou Zhixin Wujin Glass Co., Ltd.	Packing materials		-		-			30,910		26.55	%
	Yuncheng Aofeng Glass Co., Ltd.	Packing materials		-		-			47,893		41.14	%
*	Shaanxi Dukang Group Co., Ltd.	Packing materials		157,111		16.03	%		-		-
	Shangluo Danquan Distribution Co., Ltd.	Raw materials		122,711		12.52	%		-		-
	Mr. Xiaorong Yang	Raw materials		110,185		11.24	%		-		-
	Mr. Deli Xu	Raw materials		64,232		6.55	%		-		-
	Total		$	633,727		64.65	%	$	110,676		95.06	%

*      Shaanxi Dukang Group Co., Ltd. and Shaanxi Baishui Duking Shiye Co., Ltd are related parties of the Company, see the nature of the affiliation relationship in Note 12.

The Company purchases packing materials from 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 purchase from third parties.

25

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
	Brand Management			Baishui Dukang			Xidenghui			Total Noncontrolling
		30.00	%		9.49%	%		16.25%	(4)	Interest
Balance @ December 31, 2007	$	40,057		$	85,189		$	-	(1)	$	125,246
Noncontrolling Interest income (Loss)		(42,081	)		(45,176	)		-			(87,258	)
Other Comprehensive Income (Loss)-
effects of Foreign Currency Conversion		2,024			5,003			-			7,028
Balance @ December 31, 2008	$	-		$	45,016		$	-		$	45,016
Noncontrolling Interest income (Loss)		28,071			(60,287	)		(23,661	)(2)		(55,878	)
Other Comprehensive Income (Loss)-
effects of Foreign Currency Conversion		15			79			(13	)		82
Balance @ December 31, 2009	$	28,086		$	(15,192	)	$	(23,674	)	$	(10,780	)
Noncontrolling Interest income (Loss)		173,253			(44,796	)		(18,047	)		110,410
Other Comprehensive Income (Loss)-
effects of Foreign Currency Conversion		5,332			(1,648	)		(1,263	)		2,421
Balance @ December 31, 2010	$	206,671		$	(61,636	)	$	(42,984	)	$	102,051
Debt Conversion		-			218,865			4,644,728			4,863,593
Noncontrolling Interest income (Loss)		130,183			(29,866	)		27,494			127,810
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
Reverse of Debt Conversion		-			-			(99,603	)		(99,603	)
Noncontrolling Interest income (Loss)		29,308			(32,815	)		(0	)		(3,507	)
Other Comprehensive Income (Loss)-
effects of Foreign Currency Conversion		17			(20	)		-			(3	)
Balance @ December 31, 2012	$	368,404		$	94,019		$	4,532,444		$	4,994,867
Noncontrolling Interest income (Loss)		12,106			(9,205	)		42,734			45,635
Other Comprehensive Income (Loss)-
effects of Foreign Currency Conversion		169			(186	)		29			12
Balance @ March 31, 2013	$	380,679		$	84,628		$	4,575,207		$	5,040,514

26

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, 2013
	(unaudited)
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			Noncontrolling Interest
		100%			30%		100%			9.49%			100%			16.25%		(4)	Income			Income
Net Income (Loss)		$	40,352		$	12,106	$	(96,992	)	$	(9,205	)	$	468,428		$	76,120		$	(42,996	)	$	-
Income (Loss) from subsidiary
(equity method)			-			-		-			-			(59,541	)		(9,675	)		366,153			45,635
Total Income (Loss)			40,352			12,106		(96,992	)		(9,205	)		408,887			66,444			323,157			45,635
Adjustments to noncontrolling interest
to absorb prior accumulated deficit			-			-		-			-			-			(23,710	)		-			-
Less: Income (Loss) attributable to
noncontrolling interest			(12,106	)		-		9,205			-			(66,444	)		-			-			-
Income (Loss) attributable to Majority		$	28,246				$	(87,788	)				$	342,443					$	323,157	(3)
Income (Loss) attributable to
noncontrolling interest					$	12,106				$	(9,205	)				$	42,734					$	45,635

	For the Three Months Ended March 31, 2012
	(unaudited)
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			Noncontrolling Interest
		100%			30%		100%			9.49%		100%		16.25%		(4)	Income			Income
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 prior 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

27

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, 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			Noncontrolling Interest
		100%			30%		100%			9.49%			100%			16.25%		(4)	Income			Income
Net Income (Loss)		$	97,693		$	29,308	$	(345,788	)	$	(32,815	)	$	1,173,569		$	190,705		$	(814	)	$	-
Income (Loss) from subsidiary
(equity method)			-			-		-			-			(244,587	)		(39,745	)		778,022			(3,507	)
Total Income (Loss)			97,693			29,308		(345,788	)		(32,815	)		928,982			150,960			777,208			(3,507	)
Adjustments to noncontrolling interest
to absorb prior accumulated deficit			-			-		-			-			-			(150,960	)		-			-
Less: Income (Loss) attributable to
noncontrolling interest			(29,308	)		-		32,815			-			(150,960	)		-			-			-
Income (Loss) attributable to Majority		$	68,385				$	(312,972	)				$	778,022					$	777,208	(3)
Income (Loss) attributable to
noncontrolling interest					$	29,308				$	(32,815	)				$	(0	)				$	(3,507	)

	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			Noncontrolling Interest
		100%			30%		100%			9.49%			100%			16.25%		(4)	Income			Income
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

(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 16.25% on October 1, 2011, as some minority shareholders contributed their loans to Shaanxi Xidenghui Technology Stock Co., Ltd. to paid-in capital.

28

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17-	COMMITMENTS AND CONTINGENCIES
	Contingent Liability from Prior Operation
	Prior to the merger with Hong Kong Merit Enterprise Limited on February 11, 2008, the Company had 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:

29

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, 2012 (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¥6.31610 @12/31/2012
											(RMB)	(USD)	(RMB)	(USD)
2013	15,505	4%	20%	282	874,483	12,351	4%	2.50%	282	87,078	961,561	152,240	706,776	130,521
2014	16,125	4%	20%	268	864,312	12,846	4%	2.50%	268	86,065	950,377	150,469	646,811	119,447
2015	16,770	4%	20%	258	865,344	13,359	4%	2.50%	258	86,168	951,512	150,649	599,614	110,731
2016	17,441	4%	20%	244	851,123	13,894	4%	2.50%	244	84,752	935,875	148,173	546,074	100,844
2017	18,139	4%	20%	228	827,124	14,449	4%	2.50%	228	82,362	909,486	143,995	491,367	90,741
2018	18,864	4%	20%	215	811,162	15,027	4%	2.50%	215	80,772	891,935	141,216	446,189	82,398
2019	19,619	4%	20%	199	780,828	15,629	4%	2.50%	199	77,752	858,580	135,935	397,689	73,442
2020	20,404	4%	20%	173	705,963	16,254	4%	2.50%	173	70,297	776,260	122,902	332,925	61,482
2021	21,220	4%	20%	148	628,103	16,904	4%	2.50%	148	62,544	690,647	109,347	274,265	50,649
2022	22,068	4%	20%	135	595,849	17,580	4%	2.50%	135	59,332	655,182	103,732	240,909	44,489
2023	22,951	4%	20%	113	518,698	18,283	4%	2.50%	113	51,650	570,348	90,301	194,181	35,860
2024	23,869	4%	20%	102	486,933	19,015	4%	2.50%	102	48,487	535,420	84,771	168,787	31,170
2025	24,824	4%	20%	77	382,290	19,775	4%	2.50%	77	38,067	420,357	66,553	122,698	22,659
2026	25,817	4%	20%	52	268,497	20,566	4%	2.50%	52	26,736	295,233	46,743	79,792	14,735
2027	26,850	4%	20%	41	220,167	21,389	4%	2.50%	41	21,923	242,091	38,329	60,583	11,188
2028	27,924	4%	20%	25	139,618	22,244	4%	2.50%	25	13,903	153,521	24,306	35,573	6,569
2029	29,041	4%	20%	18	104,546	23,134	4%	2.50%	18	10,410	114,957	18,201	24,664	4,555
2030	30,202	4%	20%	12	72,485	24,059	4%	2.50%	12	7,218	79,703	12,619	15,834	2,924
2031	31,410	4%	20%	6	37,692	25,022	4%	2.50%	6	3,753	41,446	6,562	7,624	1,408
2032	32,667	4%	20%	1	6,533	26,023	4%	2.50%	1	651	7,184	1,137	1,224	226
Total					10,939,256					1,089,290	12,028,546	1,903,233	6,176,988	1,119,124

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.

30

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17-	COMMITMENTS AND CONTINGENCIES (continued)
	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.

31

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18-	CONDENSED PARENT COMPANY FINANCIAL INFORMATION
	Basis of Presentation
	The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of China Du Kang Co. Ltd. exceed 25% of the consolidated net assets of China Du Kang Co. Ltd. The ability of the Company’s Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because substantially all of the Company’s operations are conducted in China and a substantial majority of its revenues are generated in China, a majority of the Company’s revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into US Dollars.
	The condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.
	CHINA DU KANG CO. LTD.
	CONDENSED PARENT COMPANY BALANCE SHEETS
	(Dollars in Thousands)

	March 31,			December 31,
	2013			2012
	(unaudited)
ASSETS
Investment in subsidiaries, at equity in net assets		5,753			5,373
Total Assets	$	5,753		$	5,373
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities		-			-
Commitments and Contingencies		-			-
Shareholders' Equity:
Preferred stock, par value $0.001, 5,000,000 shares authorized;
no shares issued and outstanding as of
March 31, 2013 and December 31, 2012		-			-
Common stock, par value $0.001, 250,000,000 shares authorized;
100,113,791 shares issued and outstanding as of
December 31, 2012 and 2011		100			100
Additional paid-in capital		27,385			27,385
Accumulated deficit		(21,022	)		(21,345	)
Accumulated other comprehensive income		(710	)		(767	)
Total Shareholders' equity (deficit)	$	5,753		$	5,373

32

CHINA DU KANG CO. LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18-	CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)
	CHINA DU KANG CO. LTD.
	CONDENSED PARENT COMPANY STATEMENT OF OPERATIONS
	(Dollars in Thousands)

	For the Three Months Ended
	March 31,
	2013		2012
	(unaudited)		(unaudited)
Operating Expenses	$	-	$	-
Equity in undistributed income of subsidiaries		369		365
Net Income	$	369	$	365

CHINA DU KANG CO. LTD.

CONDENSED PARENT COMPANY STATEMENT OF CASH FLOWS

(Dollars in Thousands)

	For the Three Months Ended
	March 31,
	2013			2012
	(unaudited)			(unaudited)
Cash Flows from Operating Activities
Net income	$	369		$	365
Adjustments to reconcile net income (loss) provided by cash flows from operations
Equity in undistributed income of subsidiaries		(369	)		(365	)
Net cash provided by operating activities		-			-
Increase (decrease) in cash		-			-
Cash at beginning of period		-			-
Cash at end of period	$	-		$	-

33

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 spirits (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.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

Revenue

Total revenues for the three months ended March 31, 2013 were $1,974,802 as compared to $826,322 for the same period of 2012. These include sales of liquor, which were $1,818,199 for the three months ended March 31, 2013 and $614,377 for the same period of 2012. The license fees revenue for the three months ended March 31, 2013 were $156,603 and $212,322 for the same period of 2012, representing a decrease of 26.2%.

Sales of liquor to related parties distributors were $489,189 or approximately 24.8% of total liquor sales for the three months ended March 31, 2013; and $467,931 or 76.16% of total liquor sales for the three months ended March 31, 2012, respectively. Corresponding related parties accounts receivables to the sales revenues were $154,898 and $154,052 at March 31, 2013 and December 31, 2012, 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, 2013 increased approximately 195.9% as compared to the same period in 2012. The increase in sales revenues resulted from a sales and marketing strategy implemented by the Company to increase its third party customer base instead of relying on related party distributors for sale of its products.

34

Cost of Goods and Gross Margin

The overall gross margin for the three month ended March 31, 2013 was 51.8% as compared to 44.4% for the comparable period of 2012. Gross margin on sales of liquor was 47.7% in the three months ended March 31, 2013, representing an increase of 22.5% when compared to 25.2% for the comparable period in 2012.

The increase in gross margin on sales of liquor resulted from increase of sales to unrelated third parties. 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. The Company also had obsolete inventory of $33,735 for the three months ended March 31, 2013.

Operating Expenses

Expenses from operations totaled $537,896 and $233,803 for the three months ended March 31, 2013 and 2012, respectively.

Selling expenses increased $256,071 from $20,261 for the three months ended March 31, 2012 to $276,332 for the same period in 2013. The Company increased its sales to unrelated third parties by increasing its promotions to customers, providing sales commissions to its sales employees and agents, as well as increasing its advertising campaign spending.

General and administrative expenses were $261,654 and $213,542 for the three months ended March 31, 2013 and 2012, respectively. The increase in general and administrative expenses was $48,022 or 22.5%, represented by an increase in payroll expenses, bad debt expenses, and travel and entertainment expenses. The Company expects bad debt expense to increase as a result of increase of sales to third party customers.

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 other expenses of $103,774 for the three months ended March 31, 2013 and other income of $254,278 for the three months ended March 31, 2012. The Company spent $94,096 in application fees for its manufacturing plant to be a historical site in China Baishui province. The Company received a government subsidy of $261,071 for the three months ended March 31, 2012. The Company incurred interest expense net of $9,678 and $6,825 for the three months ended March 31, 2013 and 2012, respectively, attributable to capital lease.

35

LIQUIDITY AND CAPITAL RESOURCES

Working capital

	March 31,		December 31,
	2013		2012
Current assets	$	9,763,126	$	9,456,149
Current liabilities		6,455,585		6,470,431
Working capital	$	3,307,541	$	2,985,718

Cash and cash equivalents at March 31, 2013 and December 31, 2012 was $406,174 and $681,702, respectively. The Company has working capital of $3,307,541 at March 31, 2013 as compared to $2,985,718 at December 31, 2012.

As of March 31, 2013, our total assets were $17,997,974, total liabilities were $7,204,087, and shareholders’ equity was $10,793,887, compared to $17,608,341, $7,240,447 and $10,367,894, respectively, as of December 31, 2012. The increase was attributable to an increase in inventories and accounts payable along with a decrease in deferred revenues.

Operating Activities

We experienced a net income of $368,789 for the three months ended March 31, 2013 as compared to a net income of $365,386 for the same period of 2012.

Changes in operating assets and liabilities included an increase in accounts receivable from $541,246 at December 31, 2012 to $603,820 at March 31, 2013. Accounts receivable increased $84,600 from $541,246 to $603,820, prepaid expenses increased $82,185 from $1,244,199 to $1,326,384, and inventory increased $431,106 from $6,962,485 to $7,398,363 for the three months period ended March 31, 2013 as a result of higher prices in raw materials used for liquor production.

Changes in operating liabilities such as accounts payable and accrued expenses for the three months periods were $189,228. Deferred revenues decreased $403,845 from $4,174,197 to $3,793,004. The increase in inventories purchase resulted in the increase in accounts payables to vendors, and the decrease in deferred revenues resulted from fulfillment sales backlog by the Company.

As a result, net cash used in operating activities was $140,136 for the three months ended March 31, 2013, as compared to $14,592 for the same period in 20121.

Investing Activities

Net cash used in investing activities were $138,918 and $13,870 for the three months ended March 31, 2013 and 2012 respectively, the increase was primarily attributable to payments for the second stage of construction in progress .

Financing Activities

The Company did not have any cash provided by or used in financing activities for the three months ended March 31, 2013 and 2012, respectively.

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.

36

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 increasing sales through to third party customers will improve throughout 2013 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 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 $489,109 and $445,952 for the three months ended March 31, 2013 and 2012, respectively.

The Company has outstanding accounts receivables from related parties in the amount of $154,898 and $154,052 at March 31, 2013 and December 31, 2012, respectively.

The Company has outstanding deferred revenues related to related parties in the amount of $1,690,371 and $1,675,840 at March 31, 2013 and December 31, 2012, respectively.

Critical Accounting Policies

Information regarding significant accounting standards is included in Note 4 to the accompanying Consolidated Financial Statements.

Off-Balance Sheet Arrangements

As of March 31, 2013, 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.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for Smaller Reporting Companies. 

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, 2013.

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 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 requirements of the Securities Exchange Act of 1934, the registrant 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 20, 2013	By:	/s/ Wang Yong Sheng, President
		Wang Yong Sheng,
		President
		(Chief Executive Officer)

Date: May 20, 2013	By:	/s/ Liu Su Ying, CFO
		Liu Su Ying,
		Chief Financial Officer
		(Principal Accounting Officer)

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