10-K/A 1 cdkg_10ka.htm FORM 10-K/A cdkg_10ka.htm


U.S. Securities and Exchange Commission
Washington, D.C. 20549
_________________________
 
FORM 10-K
AMENDMENT #1
_________________________
 
x
Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2010

o
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from _______ to _______
 
Commission File Number: __________

_________________________
 
CHINA DU KANG CO., LTD
(Exact name of small business issuer as specified in its charter)
_________________________
 
Nevada
 
90-0531621
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
   
 
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)
_________________________
 
Securities registered under Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange
on which registered
     
None
 
Not Applicable
 
Securities registered under Section 12(g) of the Exchange Act:
 
Common Stock, $.001 par value
(Title of Class)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 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 if disclosure of delinquent filers pursuant to Item 405 if Regulation S-K (229.405 of this Chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.
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.
 
Large accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Accelerated filer
o
Smaller reporting company
x

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
 
The Registrant’s revenues for its fiscal year ended December 31, 2010 and 2009 were $2,487,454 and $1,987,659, respectively.

The aggregate market value of the voting stock on April 1, 2009 (consisting of Common Stock, $0.001 par value per share) held by non-affiliates was approximately $10,450,054 based upon the most recent sales price for such Common Stock on said date ($0.12) April 1, 2009, there were 100,113,791 shares of our Common Stock issued and outstanding, of which approximately 87,083,791 shares were held by non-affiliates.

Number of shares of common stock, par value $.001, outstanding as of April 1, 2011: 100,113,791
 


 
 

 
 
DOCUMENTS INCORPORATED BY REFERENCE

None

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

The discussion contained in this 10-K under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," " the Company believes," "management believes" and similar language, including those set forth in the discussions under "Notes to Financial Statements" and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-K. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them.
 
TABLE OF CONTENTS
 
PART I:
       
         
Item 1.
Business
    1  
Item 1A.
Risk Factors
    8  
Item 1B.
Unresolved Staff Comments
    13  
Item 2.
Properties
    13  
Item 3
Legal Proceedings
    15  
Item 4.
Submission of Matters to a Vote of Security Holders
    15  
           
PART II:
         
           
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    16  
Item 6.
Selected Financial Data
    18  
Item 7.
Management’s Discussion and Analysis or Plan of Operation
    18  
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
    30  
Item 8.
Financial Statements and Supplementary Data
    30  
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    30  
Item 9A.
Controls and Procedures
    31  
Item 9A(T).
Controls and Procedures
    31  
Item 9B.
Other Information
    32  
           
PART III:
         
           
Item 10.
Directors, Executive Officers and Corporate Governance
    32  
Item 11.
Executive Compensation
    34  
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    36  
Item 13.
Certain Relationships and Related Transactions, and Director Independence
    36  
Item 14.
Principal Accounting Fees and Services
    39  
           
PART IV:
         
           
Item 15.
Exhibits, Financial Statement Schedules
    40  
           
SIGNATURES:
         
 
 
 

 
 
ITEM 1.
BUSINESS

China Du Kang Co., Ltd (“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.

Overview

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

“We previously were a shell company; therefore the exemption offered pursuant to Rule 144 is not available. Anyone who purchased securities directly or indirectly from us or any of our affiliates in a transaction or chain of transactions not involving a public offering cannot sell such securities in an open market transaction.”
 
On January 10, 2008, the Company entered into a Plan of Exchange Agreement (the “Agreement”) with Hong Kong Merit Enterprise Limited (“Merit”), a holding company incorporated in Hong Kong.  Pursuant to the terms of the Agreement, the Company agreed to issue post split 88,000,000 shares of its common stock to the shareholder(s) 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 .  Merit also agreed to pay $260,000 to the Company at closing.  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.

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,  the Merit agreed to purchase 100% of the equity ownership in  Huitong for a cash consideration of $136,722 (RMB 1,000,000). Subsequent to the completion of the Agreement, 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 a share exchange agreement (the "Exchange Agreement") with the owners of Shaanxi Xidenghui Technology Stock Co., Ltd. ("Xidenghui"), whereby Huitong exchanged 100% of its issued and outstanding capital for 98.24% of the equity ownership in Xidenghui.  Subsequent to completion of the Share Exchange, Xidenghui became a majority-owned subsidiary of Huitong.
 
 
1

 

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”).

Baishui Dukang was incorporated in Baishui County, Shaanxi Province, PRC on March 1, 2002 under the Company Law of PRC.  Baishui Dukang was principally engaged in the business of production and distribution of distilled spirit with a brand name of “Baishui Dukang”. 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 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 $769,200 (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.  Xidenghui is principally engaged in the business of distribution of Baishui Dukang’s liquor and management of the “Baishui Dukang” brand name.

Baishui Dukang and Brand Management are the two of these affiliated companies that are engaged in business operations. Du Kang, Merit, Huitong, and Xidenghui 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 productors.   The Company 's structure is summarized in the flow chart found in Item 14. Supplementary Data.
 
Previous to this, on or about October 25, 2006 a Definitive Agreement was entered into by Premier Organic Farms Group, Inc. and Amstar International, Inc.  On or about December 19, 2006, the merger defined in this agreement was closed.  In the definitive agreement Amstar International, Inc. was to merge with Premier Organic Farms Group, Inc. (PFOG).  Prior to the merger PFOG was to change its name to Amstar Financial Holdings, inc., dilute their shares down to approximately 608,771 shares with 96.12% of the ownership passing to Amstar International Stockholders.  In addition, as part of the terms of this agreement a favorable hearing before a judge of competent jurisdiction, regarding a petition of fairness subject to section 3(a)(10) of the Securities Act of 1933 was to be approved.  An order granting this petition of fairness was signed on December 18, 2006 by a judge in State of Nevada, County of Elko, Case number CV-C-06-1016.  This transaction closed on December 19, 2006, in Phoenix, Arizona.

Baishui Dukang Liquor Factory was built as a State owned enterprise in the middle of 1970s with about 400 employees. By the early 1990’s it was no longer profitable and Baishui stopped manufacturing in the early 90’s. The Sanjiu Group acquired the facility in 1995, restarted and attempted to operate for one year. Unable to attain profitability, the Sanjiu Group closed the facility in 1998 and it remained closed until Baishui Dukang leased the facility on March 4, 2002.

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.
 
 
2

 

From that time until the present, the Baishui facility has been the Company ’s exclusive manufacturing facility and the Company has continued to market the lines that were originally proffered by the Baishui Dukang Liquor Factory. The Company has made significant improvements to the facility and expects to continue to improve the facility.
 
Current Operations

Shaanxi Xi Deng Hui Technology Stock Co. Ltd. is a holding company which established on March 29, 2001 after being restructured enterprise with added capital. The registered capital is 129,000,000 RMB ($17,793,103 USD).  On or about January 31, 2008 Shaanxi Xi Deng Hui Technology Stock Co. Ltd purchased a majority interest in Amstar Financial Holdings, Inc. (formerly AFLH) in a reverse merger.   The Company ’s new name is China Du Kang Company Limited now listed as CDKG.

Shaanxi Xi Deng Hui Stock Co. Ltd., Holds

 
90.51% and controls Shaanxi Bai Shui Du Kang Liquor Co., Ltd., and holds
 
70% Shaanxi Bai Shui Du Kang Brand  Management Co., Ltd.;

Principal Products

The Company manufactures, sells, licenses and distributes a proprietary line of white wines that are generally known in China under the heading Du Kang. The largest sellers are currently collections called the “Baishui Dukang” series, the Thirteen Dynasties series and Jiu Zu Gong.

Du Kang is a generic description, like “vodka” or “merlot” and is one of the most famous Chinese white wine brands. The Company ’s subsidiaries Shaanxi Bai Shui Du Kang Liquor Co. Ltd and Shaanxi Bai Shui Du Kang own the “Bai Shui Du Kang” brand, while another subsidiary, owns three 3 brands:

 
·
Bai Shui Du Kang
 
·
Thirteen Dynasties and
 
·
Jiu Zu Gong.
 
At present, Du Kang has 6000 ton production capacity per year including (brewing and packaging).  Liquor products unit price ranges from $2.00 USD to $150.00 USD. Our Du Kang Liquor products are sold in most cities in China.  In northeast, north,south coastal region and middle areas of China we sell liquor through long-term liquor distributors. In Shaanxi province we sell liquor to agent stores in Xi’an, Bai Shui, Hua yin, Han Cheng, Fu Ping Pu Cheng, Da Li, Wei Nan city.  Throughout China the Du Kang market sales, awareness and brand image is broadening.

Through its subsidiaries in China, the Company sells and develops new and additional liquors, liquor raw materials, deep processing of agricultural and sideline products and research and develop of high-tech products and brewing methods. We were the first company, in cooperation with the Chinese Academy of Sciences, to ship Du Kang yeast and grain aboard #3 and #7 Shenzou spaceflights for a series of scientific experiments designed to improve yield and flavors. No newly developed products have entered the market since 2008. We are currently focusing on expanding distribution of existing brands so we have devoted only minimal resources to research and development activities in the past two years.

Major products include the Baishui Dukang series, Thirteen Dynasties series, Shen Zhou Nectar, Guo Bin Special, and Jiu Zu Gong.
 
 
3

 
 
Distribution methods of the products or services

The Company set a new sales strategy, including sales territory that covers many counties in China and since July 2007. Du Kang Liquor products previously have been sold mostly in the larger cities in China. In 2008 and 2009, we put in place distributorship agreements in the form of agenciess or licensing that now includes the northeast, north, south coastal region and middle areas of China.

We derive our revenue from following three ways:

 
·
Sales of liquor within China generally through long-term liquor distributors (“distributor”).
 
·
Fees from agent liquor stores/retailers (“agent”)
 
·
Our subsidiary, Shaanxi Bai Shui Du Kang Brand Management Co., Ltd. grants permission to use “Baishui Dukang” trademark to white spirits manufactures (“licensee”) who comply with the liquor (or white spirits) production standard of PRC.

Accordingly, the Company enters into three different types of agreements: Distributorship Agreements, Agency Agreements, and Licensing Agreements. All are designed to expand the distribution of the Company ’s products. The material terms and differences among the agreements are as follows:
 
 
1.
The Company ’s distribution agreements grant the distributor the exclusive right to distribute the Company ’s products within a defined territory. Each distributor agreement provides an area within the PRC that is exclusive to the distributor for a 5-year exclusive period.  Each Distributor Agreement specifies the Du Kang products that are to be sold, with the Thirteen Dynasties series being the most prevalent. Pricing of the products is according to the China Du Kang pricing policies. Terms include account settlement procedures; duties pertaining to licenses, packaging and sales conduct. The distributors are required to provide reports, protect the trademarks and copyrights and dispute resolution procedures. The
 
 
2.
The Company ’s agency agreements grant the agent the exclusive right to sell the Company ’s products within a defined territory. The agency agreements grant an agent to exclusively sell particular products of the Company in exchange for a pre-determined royalty. The Royalty payments for agency agreements range from $44,610 to $160,317. The Company will produce specific liquors for sale stated under the terms of the agency agreement, and the agent has the exclusive right to sell certain products as designated by the agreement. The agreement does not private label the specific products, but we agree that we will not sell those products through our distributors or other arrangements. The agency agreement does not entitle the agent to sell any other China Du Kang products other than the specific products that are subject to the Agency agreement.  For agency agreements last for one year and may be renewed annually. The agent must pay an upfront fee that varies from product to product and the agent must minimum sales requirements during the term of the agreement.

 
3.
The Company ’s licensing agreements grant the licensee a non-exclusive right to use the Company ’s trademarks, logos, and brand names in connection with the development, marketing, and sale of the licensee’s independently manufactured products. The licensing agreements grant a license to use the Company ’s trademarks in exchange for a pre-determined royalty. The Royalty payments for licensing agreements ranged from $6,134 to $355,254. Licensing agreements typically date back to a period before the current Company acquired the assets and essentially continues the rights of certain third parties to market products using the China Du Kang name, patterns, logos, trademarks and other proprietary assets for sub-branding of products. Licensing agreements are for specific zones with the PRC and may overlap territories that are included in other agreements. Each agreement specifies the products covered, types of uses permitted, and the method and scope of sub-branding. The Agreements cover sales literature, pricing, quality controls and standards for packaging.
 
 
4

 
 
We derive revenue from distributors, licensees, and agents as following:
 
   
For the Year Ended
 
   
2010
   
2009
 
         
Percentage
         
Percentage
 
         
of Total
         
of Total
 
Type of Customer
 
Revenue
   
Revenue
   
Revenue
   
Revenue
 
Distributor
 
$
1,270,136
     
51.06
%
 
$
1,059,694
     
53.31
%
Licensee
   
806,535
     
32.42
%
   
731,711
     
36.81
%
Agent
   
410,784
     
16.51
%
   
196,254
     
9.87
%
   
$
2,487,454
     
100.00
%
 
$
1,987,659
     
100.00
%
 
We derive revenue from PRC region as further disclosed in the following:
 
   
For the Year Ended
 
   
2010
   
2009
 
         
Percentage
         
Percentage
 
         
of Total
         
of Total
 
Name of Province
 
Revenue
   
Revenue
   
Revenue
   
Revenue
 
Shaanxi Province
 
$
1,732,035
     
69.63
%
 
$
1,587,641
     
79.87
%
Henan Province
   
535,064
     
21.51
%
   
147,707
     
7.43
%
Shandong Province
   
89,452
     
3.60
%
   
105,612
     
5.31
%
Hebei Province
   
6,970
     
0.28
%
   
-
     
-
 
Anhui Province
   
27,184
     
1.09
%
   
71,147
     
3.58
%
Hubei Province
   
83,644
     
3.36
%
   
-
     
-
 
Gansu Province
   
-
     
-
     
23,034
     
1.16
%
Zhejiang Province
   
6,134
     
0.25
%
   
35,242
     
1.77
%
Heilongjiang Province
   
6,970
     
0.28
%
   
17,276
     
0.87
%
   
$
2,487,454
     
100.00
%
 
$
1,987,659
     
100.00
%
 
 
5

 
 
Competitive Business Conditions

While management is pleased at the progress of the distribution of its Du Kang liquors, it remains a relatively insignificant participant in the liquor and beverage industry. Many of our competitors are larger and have significantly more financial resources. We were recently awarded inclusion in China’s top 500 large and medium sized beverage manufacturers. An article in the April 15, 2009 edition of “The Atlantic magazine (Risen,The Atlantic, April 15, 2009) reported that “Maotai”, a “baijiu” type of white liquor that is competitive, was the largest selling liquor in the world. The article notes that Maotai is somewhat expensive – the bottle tested cost $115 USD, smells of ammonia, and has a bitter taste.

Both a February, 2010 issue of the newspaper China Daily (Qingfen and Yue,China Daily,February 2, 2010) also noted that "Moutai and Wuliangye”, two higher end liquors were selling briskly, Both Moutai and Wuliangy are products that compete with the Company ’s liquors. The article contained a quote a report from a China investment firm that said,

“In 2010, China's high-end liquor (wine and spirit) consumption will grow by more than "30 percent" from a year earlier, higher than the liquor market as a whole, which will see a "20 to 25" percent rise.”

The Company believes that its Du Kang series is positioned well against the larger sellers and should enjoy increased sales if the liquor market overall improves as expected.

Sources and Availability of Raw Materials
 
The raw material needed in our production is mainly grain. The Company purchases sorghum from farmers in the northeast and other wholesalers. While its price fluctuates in response to market conditions, availability has never been an issue. In addition, the Company expects to enter into a contract of quota system for the production by local farmers to purchase some of the other required raw materials such as wheat and corn
 
Dependence of Major Customers

The Company has long-term marketing contract with the following three companies: Shaanxi Dukang Liquor Group Co., Ltd., Henan Jiuquan Liquor Co., Ltd., and Shanxi Baishui Xingjijiu Marketing Co., Ltd. These three companies sell our products in China.
 
Shaanxi Dukang Group Co., Ltd., accounted for approximately 41% and Henan Jiuquan Liquor Co., Ltd.. accounted for more than 14% of our sales of our products for the year ended December 31, 2010.  Shaanxi Dukang Group Co., Ltd., accounted for approximately 30% and Shanxi Baishui Xingjijiu Marketing Co., Ltd. accounted for more than 15% of our sales of our products for the year ended December 31, 2010.    

We have begun to expand our distributorship and licensing programs and expect to reduce the dependence on these three distributors over the course of 2010.

Patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts, including duration
 
The Company has received all the certificates required to be issued by the Chinese government pertaining to production and sales of liquor, such as the Production License, Trade Mark Registration Certificate, etc. All these certificates are in force.
 
We believe we have full rights to the intellectual property required for sales in China. We have been contacted by a U.S. group that indicates that they have a prior right to the name “Du Kang” within the United States.
 
 
6

 
 
Dependence of Major Suppliers
 
We rely on a limited number of suppliers for our component parts and raw materials. Although there are many suppliers for each of our component parts and raw materials, we are dependent on a limited number of suppliers for many of the significant components and raw materials. This reliance involves a number of significant potential risks, including:

 
lack of availability of materials and interruptions in delivery of components and raw materials from our suppliers;
 
manufacturing delays caused by such lack of availability or interruptions in delivery;
 
fluctuations in the quality and the price of components and raw materials, in particular due to the petroleum price impact on such materials; and
 
risks related to foreign operations.

We generally do not have any long-term or exclusive purchase commitments with any of our suppliers. Hunan Xinshiji Taochi Co., Ltd., Hunan Fengling Liangyou China Co., Ltd., Shanxi Wenxiyingfa Glass Co., Ltd., and Chongqing World Guohua Technology Co., Ltd. each accounted for more than 10% of our purchases of components for our products for the year ended December 31, 2010.  Shanxi Wenxiyingfa Glass Co., Ltd., Shanxi Wenxiyingfa Glass Co., Ltd., and Yuncheng Aofeng Glass Co., Ltd. each of which accounted for more than 10% of our purchases of components for our products for the fiscal year ended December 31, 2009.    

Our failure to maintain existing relationships with our suppliers or to establish new relationships in the future could also negatively affect our ability to obtain our components and raw materials used in our products in a timely manner. If we are unable to obtain ample supply of products from our existing suppliers or alternative sources of supply, we may be unable to satisfy our customers’ orders which could materially and adversely affect our revenues and our relationship with our customers.

Regulation
 
We are currently regulated People’s Government of Shaanxi Province approved Business License, Organization Code of PRC. We have obtained and maintain China Manufacture Certificate, Sanitation License and Food Security permits to Shaanxi Bai Shui Du Kang Liquor Co., Ltd. On March 1, 2008 which is valid until December 31, 2011 in China, which we believe are all of the necessary legal government approvals if a manufacturer in PRC starts its business and continue its operation.

The greatest impact of government regulation for company’s business is the change of tax policy. In China, white spirit production belongs to a traditionally high tax industry. However, the Company ’s location, Bai Shui county, is rated as a national level poor county. The Company is considered to be a pillar enterprise and major client of taxation in Bai Shui county.

Historically, the Company has enjoyed preferential tax treatment on a national and local level. The Company entered into a Tax Abatement Agreement in 2004. Taxes were exempted for the first 2 years of existence of the Agreement and reduced by half for the following 3 years. The Agreement expired as of August, 2009. Management is optimistic that they can work with taxing authorities to continue some level of preferential tax treatment for income of the Company .

Employees

The Company currently has 144 full time employees. During peak seasons the Company hires temporary workers and typically has approximately 250 part time employees during these periods. The Company currently has no part time employees.

All officers and directors except Director Liu Su Ying are employed on a full time basis and devote their full time energies to the Company . Each officer and director except Ms. Liu devotes at least 40 hours per week during each work week.
 
 
7

 
 
Costs and effects of compliance with environmental laws

Company’s main product is liquor, and the raw material for liquor production is grain and water. The water is taken from Dukang spring, a fresh water aquifer that has a history of thousands of years. The Company ’s manufacturing process meets the national standard for environmental protection. Moreover, the Company was commended as a “Manufacturing Enterprise to Recycle Energy” by the government of the Shaanxi province.

In recent years, company has spent over $4,400 to refurbish the Company ’s production equipment, factory, building, boiler, water line, electricity as well as air, to improve its efficiency. In addition, the Company has invested in recovery processing of the distiller’s grains produced in liquor-making, in order to produce the fodder.

ITEM 1A.
RISK FACTORS
 
RISK FACTORS
 
RISKS RELATED TO OUR BUSINESS
 
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 $21,449,649 at December 31, 2010 that includes losses of $(1,007,604) and $(1,321,056) for the years ended December 31, 2010 and 2009, respectively. In addition, The Company has a working capital deficiency of $17,117,746 and a shareholders' deficiency of $8,809,864 at December 31, 2010. These factors raise certain 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.
 
WE HAVE HAD LOSSES FROM OPERATIONS AND ANTICIPATE LOSSES FOR THE FORESEEABLE FUTURE.
 
Since inception we have had limited revenues from operation. Revenues for the year ended December 31, 2009 totaled $ 1,987,659 as compared to $2,487,454 for the year ended 2010. For the year ended December 31, 2010 we experienced net income from operations of $207,901 for the year ended December 31, 2010 as compared to net loss of $(489,413) for the year ended December 31, 2009. We expect to incur significant operating expenses and, as a result, will need to generate significant revenues to achieve profitability, which may not occur. Even if we do achieve profitability, we may be unable to sustain or increase profitability on an ongoing basis.
 
 
8

 
 
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 $60,000 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.
 
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.
 
 
9

 
 
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.
 
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.
 
 
10

 
 
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.
 
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.
 
 
11

 
 
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.
 
CHINA CONTROLS THE CURRENCY CONVERSION AND EXCHANGE RATE OF ITS CURRENCY, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
 
The Chinese government imposes control over the conversion of the Chinese currency, the Renminbi, into foreign currencies, although recent pronouncements indicate that this policy may be relaxed. Under the current system, the People's Bank of China publishes a daily exchange rate based on the prior day's activity which controls the inter-bank foreign exchange market. Financial institutions are permitted a narrow range above or below the exchange rate based on then current market conditions. Since 1997, the State Council has prohibited restrictions on certain international payments or transfers for current account items. The regulations also permit conversion for distributions of dividends to foreign investors. Investment in securities, direct investment, and loans, and security investment, are still subject to certain restrictions.
 
 For more than a decade the exchange rate for the Renminbi (“RMB”) was pegged against the United States dollar leaving the exchange rates relatively stable at roughly 8 RMB for 1 US Dollar. The Chinese government announced in 2005 that it would begin pegging the Renminbi exchange rate against a basket of currencies, instead of relying solely on the U.S. dollar. This has recently caused the dollar to depreciate as against the RMB. As of December 31, 2009, the rate was 6.837 RMB for 1 US Dollar. Since all of our expected operations are in China, significant fluctuations in the exchange rate may materially and adversely affect our revenues, cash flow and overall financial condition.
 
CHINESE LAW REQUIRES APPROVAL BY CHINESE GOVERNMENT AGENCIES AND COULD LIMIT OR PROHIBIT THE PAYMENT OF DIVIDENDS FROM ANY PROCEEDS OBTAINED FROM LIQUIDATION OF OUR ASSETS.
 
All of our assets are located inside the Peoples Republic of China. Chinese law governs the distributions that can be made in the event of liquidation of assets of foreign invested enterprises. While dividend distribution is allowed it is subject to governmental approval. Liquidation proceeds would also be subject to foreign exchange control. We are unable to predict the outcome in the event of liquidation insofar as it affects dividend payment to non- Chinese nationals.
 
CHINA HAS BEEN THE LOCALE FOR THE OUTBREAK OF VARIOUS DISEASES AND A PANDEMIC CAUSED BY DISEASES SUCH AS SARS, THE AVIAN FLU, OR SIMILAR DISEASES COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR WORKERS AND EVEN THE CHINESE ECONOMY IN GENERAL, WHICH MAY ADVERSELY AFFECT BUSINESS.
 
The World Health Organization reported in 2004 that large scale outbreaks of avian flu throughout most of Asia, including China, had nearly caused a pandemic that would have resulted in high mortality rates and which could cause wholesale civil and societal disruption. There have also been several potential outbreaks of similar pathogens in China with the potential to cause large scale disruptions, such as SARS, pneumonia and influenza. Any future outbreak which infiltrates the areas of our operations would likely have an adverse effect on our ability to conduct normal business operations.
 
 
12

 
 
ITEM I B.
UNRESOLVED STAFF COMMENTS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
ITEM 2.
PROPERTIES.
 
Depreciation expense charged to operations was $366,490 and $368,554 for the year ended December 31, 2010 and 2009, respectively. The property, plant and equipment shown in the following chart are those held directly by the Company and the remaining properties are owned per a capital lease.
 
   
December 31,
   
December 31,
 
   
2010
   
2009
 
             
Building and warehouses
 
$
3,171,057
   
$
2,963,873
 
Machinery and equipment
   
2,015,433
     
1,857,877
 
Office equipment and furniture
   
182,278
     
194,394
 
Motor vehicles
   
341,059
     
329,815
 
Leased assets*
   
2,300,810
     
2,159,053
 
     
8,010,637
     
7,505,012
 
                 
Less: Accumulated depreciation
   
(3,849,240
)
   
(3,262,315
)
     
4,161,397
     
4,242,697
 
                 
Add: Construction in progress
   
262,665
     
41,153
 
                 
     Total
 
$
4,424,062
   
$
4,283,850
 
 
Leased Assets*
 
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.
 
 
13

 
 
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 follow:

Year
Pension Insurance Expense
   
Unemployment Insurance Expense
 
Total
 
 
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¥6.83720
@12/31/2009
Present Value as of December 31, 2009
(the incremental interest rate is 8%)
                     
(RMB)
(USD)
(RMB)
(USD)
2009
    13,254
4%
20%
325
       861,494
 10,558
4%
2.50%
325
      85,784
      947,279
    138,548
   
2010
    13,784
4%
20%
316
       871,143
 10,980
4%
2.50%
316
      86,745
      957,888
    140,100
    886,934
    129,722
2011
    14,335
4%
20%
309
       885,919
 11,420
4%
2.50%
309
      88,217
      974,136
    142,476
    835,165
    122,150
2012
    14,909
4%
20%
301
       897,502
 11,876
4%
2.50%
301
      89,370
      986,872
    144,339
    783,411
    114,581
2013
    15,505
4%
20%
282
       874,483
 12,351
4%
2.50%
282
      87,078
      961,561
    140,637
    706,776
    103,372
2014
    16,125
4%
20%
268
       864,312
 12,846
4%
2.50%
268
      86,065
      950,377
    139,001
    646,811
      94,602
2015
    16,770
4%
20%
258
       865,344
 13,359
4%
2.50%
258
      86,168
      951,512
    139,167
    599,614
      87,699
2016
    17,441
4%
20%
244
       851,123
 13,894
4%
2.50%
244
      84,752
      935,875
    136,880
    546,074
      79,868
2017
    18,139
4%
20%
228
       827,124
 14,449
4%
2.50%
228
      82,362
      909,486
    133,020
    491,367
      71,867
2018
    18,864
4%
20%
215
       811,162
 15,027
4%
2.50%
215
      80,772
      891,935
    130,453
    446,189
      65,259
2019
    19,619
4%
20%
199
       780,828
 15,629
4%
2.50%
199
      77,752
      858,580
    125,575
    397,689
      58,165
2020
    20,404
4%
20%
173
       705,963
 16,254
4%
2.50%
173
      70,297
      776,260
    113,535
    332,925
      48,693
2021
    21,220
4%
20%
148
       628,103
 16,904
4%
2.50%
148
      62,544
      690,647
    101,013
    274,265
      40,114
2022
    22,068
4%
20%
135
       595,849
 17,580
4%
2.50%
135
      59,332
      655,182
      95,826
    240,909
      35,235
2023
    22,951
4%
20%
113
       518,698
 18,283
4%
2.50%
113
      51,650
      570,348
      83,418
    194,181
      28,401
2024
    23,869
4%
20%
102
       486,933
 19,015
4%
2.50%
102
      48,487
      535,420
      78,310
    168,787
      24,687
2025
    24,824
4%
20%
77
       382,290
 19,775
4%
2.50%
77
      38,067
      420,357
      61,481
    122,698
      17,946
2026
    25,817
4%
20%
52
       268,497
 20,566
4%
2.50%
52
      26,736
      295,233
      43,180
      79,792
      11,670
2027
    26,850
4%
20%
41
       220,167
 21,389
4%
2.50%
41
      21,923
      242,091
      35,408
      60,583
        8,861
2028
    27,924
4%
20%
25
       139,618
 22,244
4%
2.50%
25
      13,903
      153,521
      22,454
      35,573
        5,203
2029
    29,041
4%
20%
18
       104,546
 23,134
4%
2.50%
18
      10,410
      114,957
      16,813
      24,664
        3,607
2030
    30,202
4%
20%
12
         72,485
 24,059
4%
2.50%
12
        7,218
        79,703
      11,657
      15,834
        2,316
2031
    31,410
4%
20%
6
         37,692
 25,022
4%
2.50%
6
        3,753
        41,446
        6,062
        7,624
        1,115
2032
    32,667
4%
20%
1
           6,533
 26,023
4%
2.50%
1
           651
          7,184
        1,051
        1,224
           179
Total
       
  11,825,175  
       
 1,177,507
   13,002,682
 1,966,587
 7,012,153
 1,060,551
 
The manufacturing facility of the Company is Shaanxi Bai Shui Du Kang Liquor Co., Ltd. The plant is located in South of Dukang Street, Town of Dukang, Baishui County, the city of Weinan, Shaanxi Province, 715600.
 
 
14

 

All of the equipment is used in our manufacturing process. The main equipments are as follows:
-  
Fermenter: grain fermentation
-  
Crasher: before the fermentation of the grain, it is better to have it crashed and then it can fullly access to the distiller's yeast
-  
Brewing equipment: which is also called Liquor distillation equipment.  The well fermented semifinished products can be poured into it. After heating, the Ethanol, water and various organic compounds can be fractioned by distillation.
-  
Cellar: for the storage of the liquor after it is brewed
-  
Liquid filling machine: filling the liquor into the containers, such as the bottles
-  
Capping machine: cover the bottle shutters
-  
Labeling machine: affix  labels on the products
-  
Packaging machine: put the bottles into the boxes.
-  
Carton sealing machine seal the boxes
-  
Progressive assembly line: it can help to make the liquid filling, capping, labeling and packaging, etc be completed in an assembly line so it can speed up the production efficiency.

ITEM 3.
LEGAL PROCEEDINGS.
 
The Company ’s prior CEO, Howard Wayland, Jr., filed for protection from creditors under Chapter 7 of the United States Bankruptcy Code in Houston, TX. Mr. Wayland resigned as CEO in 2008 and resigned as a director prior to filing the petition. Mr. Wayland discharged, among other things, various guarantees he had made in connection with the prior operations of the Company .

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,
· 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.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
 
We did not submit any matters to a vote of security holders during the fiscal year of 2010 and 2009.
 
 
15

 
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Trading Market for Common Equity
 
There is currently an extremely limited market for the Company 's Common Stock, which is traded over-the-counter and quoted from time to time under the trading symbol "CDKG.PK". Prior to the reverse merger in January 2008, the company traded under the symbol “AFLH.” Consequently, there is currently no established public trading market for the Company 's 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. =
 
The Company 's Common Stock is traded over-the-counter and quoted from time to time in the Pink Sheets Electronic OTC Markets under the trading symbol "CDKG.PK".
 
The following table sets forth the range of high and low bid prices as reported by the Pink Sheets Electronic OTC Markets for the periods indicated. Such quotations represent inter-dealer prices without retail markup, markdown, or commission, and may not necessarily represent actual transactions. As of December 31, 2010, the opening bid was $.0012 and the closing bid was $.90 with 5000 shares traded.
 
CALENDAR YEARS
BY QUARTER
 
BID PRICE
 
     
LOW
   
HIGH
 
2010
First
  $ 0.02     $ 0.09  
 
Second
    0.08       0.15  
 
Third
    0.137       0.002  
 
Fourth
    0.002       0.13  
                   
2009
First
  $ 0.01     $ 0.13  
 
Second
    0.015       0.025  
 
Third
    0.017       0.025  
 
Fourth
    0.01       0.02  
 
Trading in the common stock in the over-the-counter market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions. Further, these prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions.
 
Dividends
 
We have never paid a cash dividend on our common stock. The payment of dividends may be made at the discretion of our Board of Directors, and will depend upon, among other things, our operations, capital requirements, and overall financial condition. There are no contractual restrictions on our ability to declare and pay dividends.
 
Number of Holders
 
As of March 31, 2010, we had 9,146 common shareholders of record.
 
 
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Securities Authorized for Issuance under Equity Compensation Plans
 
As of the date of this Report, we have not authorized any equity compensation plan, nor has our Board of Directors authorized the reservation or issuance of any securities under any equity compensation plan.

Recent Sales of Unregistered Securities
 
On or about January 28, 2008 the company issued 88,000,000 shares to Deng Guo Gang, the sole shareholder of HONGKONG MERIT ENTERPRISE LIMITED ("MERIT"). Mr. Deng Guo Gang was a “non-US person,” being a citizen and resident of the People’s Republic of China. Mr. Deng Guo Gang thereafter distributed the 88,000,000 shares to the shareholders of China Du Kang, all of which were “non-US persons,” being citizens and residents of the People’s Republic of China. We believe that the securities exchanged to the non-US persons were private placements under Section 4(2) under the Securities Act of 1933, as amended and exempt from registration under Regulation S as promulgated under the Act.
 
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.
 
AFLH also issued 362,200 shares of newly issued common voting shares to Sedgefield Capital Corporation for consulting services rendered by Sedgefield prior to the reverse acquisition by Hongkong Merit Enterprise Limited. The shares were issued in exchange for services valued at $25,000. The Company then changed its name to China Du Kang Co., Ltd..
 
In June, 2008, the Company issued 850,000 shares of common stock, valued at $17,000 to two Chinese consultants and their Chinese attorney. Also, in June 2008, 150,000 shares of common stock, valued at $3,000, to its securities counsel, Charles Barkley.
 
We believe the securities offered in the exchange, including the common stock, were issued and sold in reliance upon exemptions from registration contained in Regulation S promulgated there under, which exempt transactions by an issuer not involving any public offering and issuances to non-US persons. The issuance of the shares was undertaken without general solicitation or advertising. Each recipient of the shares was a non- US person as defined in Regulation S, was acquiring the shares of for investment purposes and not with a view to any public resale or other distribution and otherwise met the requirements of Regulation S. In addition, the stock certificate representing these shares contained a legend that they are restricted securities under the Securities Act of 1933 pursuant to Regulation S.
 
Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
 
None
 
Transfer Agent
 
Our transfer agent is Island Stock Transfer, Inc. located at 100 Second Avenue South, Suite 705S St. Petersburg, Florida 33701
 
 
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ITEM 6.
SELECTED FINANCIAL DATA

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
For
 
CHINA DU KANG CO., LTD.,
 
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
 
The discussion contained in this prospectus contains "forward-looking statements" that involve risk and uncertainties. These statements may be identified by the use of terminology such as "believes", "expects", "may", or "should", or "anticipates", or expressing this terminology negatively or similar expressions or by discussions of strategy. The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this prospectus. Our actual results could differ materially from those discussed in this prospectus. Important factors that could cause or contribute to such differences include those discussed under the caption entitled "risk factors," as well as those discussed elsewhere in this prospectus.
 
Cautionary statement identifying important factors that could cause actual results to differ from those projected in forward looking statements.
 
This document contains both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual result to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to, (i) projection of revenues, income or loss, earnings per share, capital expenditures, dividends, capital structure, and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of shareholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects. This document also identifies important factors that could cause actual results to differ materially from those indicated by the forward looking statement. These risks and uncertainties include the factors discussed under the heading "Risk Factors" beginning at page 6 of this Prospectus.
 
The section "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with our audited consolidated or un-audited condensed consolidated financial statements and the notes thereto appearing elsewhere in this prospectus.
 
OVERVIEW
 
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.
 
 
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The Company ’ operations currently consist of sales of a line of proprietary liquors known generally in China as the Baishui Dukang series. These are clear liquors sold under a variety of trade names including Thirteen Dynasty, Jiu Zu Gong and Baishui. The Company ’s products are sold mostly in larger urban areas in China through three long term marketing agreements.
 
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. Merit was a “wholly owned foreign enterprise, generally known as a “WOFE” company, established for the purpose of facilitating an acquisition of a Chinese enterprise. While a Chinese entity may not be owned or controlled by foreign investors or shareholders, the Company ’s Chinese counsel opined that a Chinese entity may be acquired in a two step transaction with a WOFE company. The purpose of the Company was simply to facilitate the acquisition and Merit engages in no operations. All operations are carried out through the Chinese entities. The Chart below shows all of the entities but all operations are conducted by entities incorporated in China. The Hong Kong and US corporations conduct no operations and all of the business of the Company is conducted by the entities incorporated in the PRC..
 
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.
 
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 Merithui 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.
 
 
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Xidenghui was incorporated in Weinan City, Shannxi 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”).
 
Baishui Dukang was incorporated in Baishui County, Shanxi Province, PRC on March 1, 2002 under the Company Law of PRC. Baishui Dukang was principally engaged in the business of production and distribution of distilled spirit with a brand name of “Baishui Du Kang”. On May 15, 2002, Xidenghui invested inventory and fixed assets, with a total fair 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.
 
Baishui Dukang Liquor Factory (“Dukang Liquor Factory”) was built as a State owned enterprise in the middle of 1970s with about 400 employees. By the early 1990’s it was no longer profitable and Dukang Liquor Factory stopped manufacturing in the early 90’s. Sanjiu Dukang Liquor Production Co., Ltd ("Sanjiu") acquired Dukang Liquor Factory in 1995, restarted and attempted to operate for one year. Unable to attain profitability, the Sanjiu closed the facility in 1998 and it remained closed until Baishui Dukang leased the facility on March 4, 2002.
 
On March 4, 2002, Baishui Dukang signed a lease agreement with 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.
 
We manufacture product for distribution under certain labels that are proprietary to the Company and which are also distributed through agencies. We also permit third parties to manufacture under similar products under distinguishable names.
 
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 licensing fee varies based on the sales territory and the number of sub brand names. We generally collect the entire licensing fee when the licensing contract is executed, and then recognize licensing fee revenue over the beneficial period described by the contract, as the revenue is realized or realizable and earned. 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 agency fee varies based on the sales territory and the number of sub brand names. We generally collect the entire agency fee when the agency contract is executed, and then recognize agency fee revenue over the beneficial period described by the contract, as the revenue is realized or realizable and earned

The company ’s annual income increased from $1,987,659 in 2009 to $2,487,454 in 2010,which included $210,441, or 19.86% increase in sales of liquor, and $289,354, or 31.18% increase in license fees.
 
 
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The company adjusts its sales policy from 2008 and increases the strategic partner. Moreover, the expansion of “Bai Shui Du Kang” brand influence and the collection of royalties bring the good benefit for the company .
 
China has a vast territory and a large population. Every enterprise will seek for the total occupation of their products in all Chinese market. As a liquor enterprise with small production scale and not longer period of operation, it is difficult for the company to occupy the national market in a short period of time. Therefore, according to company’s actual situation, under the precondition of meeting current production capacity and ensuring the sales of products, the company ’s management want to look for the enterprise (in the region our products have not reached yet) which meet the PRC liquor production standard as our strategic partner to expand the sales territory, promote the brand influence, and increase company’s income. Practice has proved that it is a very effective strategy. Some well-known company also adopt this strategic and have many successful cases. Firstly, it can make up company’s deficiency that production capacity cannot meet the actual need. Secondly, it can save a large amount of funds for expansion of reproduction scale. Thirdly, it can expand the influence of company and market share, raise the brand value. Fourthly, it can accelerate the speed of products into market, and reduce the production and transportation cost. Fifthly, it can maximize the profit, and increase company’s income along with the improvement of brand influence and royalties. All of above will lay a good foundation for next step of company’s development.

The current situation is an opportunity as well as a challenge for company’s development.

IHigh requirements for inner management and market management have been put forward along with the company ’s development. The company will further deepen the internal reform, strengthen the implementation of target responsibility system, implement the tasks, ascertain the responsibility, reduce the energy consumption, improve the efficiency, guarantee the quality, improve management’s ability of scientific and programmed decision-making, and decrease operation cost.

II The company will increase scientific research input, intensify the development of new product. Based on retaining the sales of matured product in existing market, the company will strive for annually putting two or three new product on the market, in order to suit varying customer needs. As income increases, china began to form a middle class. Therefore, company’s goal is to satisfy the high-end products needed by middle class consumer groups.
 
IIIAs the expansion of sales territory and participation of strategic partner, it becomes more and more difficult to regulate the market. Further, company will increase the number of lawyer and market regulators, strengthen the supervision, send more officers to resident in strategic partner enterprise, implement rigid control on quality and sales territory, and strictly crack down on violations.

The Company operates in two reportable business segments: Sales of Liquor and License Fees. We currently have three major customers who constitute approximately 10% or more of the Company ’s total sales. These customers are identified in the notes to our consolidated financial statements. As a group, they represent over 50% of our total revenues. Because we depend on a small number of major customers, our revenues are dependent on those customers, rendering the Company vulnerable to a reduction in liquidity or income from operations. To the extent that any of these three customers fail or refuse to continue to do business with the Company , the Company ’s revenues would be adversely impacted. Further, while our distribution is expanding throughout China, our sales are concentrated in the Shaanxi province of China, where the Company ’s headquarters are located.
 
IVThe company will expand the market method, gradually reduce our reliance on three agents, purchase or set up our own marketing team in due course, and instruct the relevant department to conduct the marketing research and feasibility analysis.
 
 
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VThe Liquor industry is a high tax industry in China, which affects profitability.. The company located in Bai Shui County, Shaanxi Province. Prior to 2009 we had a preferential tax treatment agreement but that agreement has expired and we do not currently have any tax amelioration in place.

VIThe principal raw materials for liquor-making are grain. Because the price of grain will be fluctuated with the influence of climate, it will increase the cost of production and further affect the corporate profit.
 
(i ) The company will sign the Contract of Ordering Needed Grain with local farmers, that is to say, purchasing from designated person. In this way, the interest of farmers will be protected and also price risk of grain will be minimized.
 
(ii) There are almost 2000 tons of stocks of wine base, which absolutely can guarantee the demand for one-year regular production. Therefore, the company will purchase when the food prices is low, and will not purchase when the food prices is high.
 
(iii) Partial profit of the company is from strategic partner. Accordingly, the fluctuation of food price will have no effect on this part of revenue.

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 management of the “Baishui Du Kang” brand name.
 
Baishui Dukang and Brand Management are the two of these affiliated companies that are engaged in business operations. Du Kang, Merit, Huitong, and Xidenghui 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. The Company 's structure is summarized in the following chart.
 
Regarding material challenges, risks and material trends affecting the Company , Management believes the primary risk is the potential for raw material prices to fluctuate, affecting the Company ’s profitability. The Company requires approximately 2,000 tons of grain each year. Thus far the Company has not faced shortages from suppliers but has little control over pricing. The Company expects to enter into supply contracts in 2011 with designated suppliers to streamline the ups and downs of pricing.
 
Secondly, the Company expects the continued expansion of distributors to require additional supervisory and marketing personnel. The Company hopes to expand its marketing staff to provide close supervision and support to the network of resellers.
 
Finally, management believes that our current manufacturing capacity is sufficient for the next year or so, we may begin to examine expansion of our facility and our manufacturing capacity as we continue to expand our network of resellers.
 
 
22

 
 
 
 
 
 
23

 
 
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 2010 AND DECEMBER 31, 2009

REVENUES

Gross revenues improved from $1,987,659 and $2,487,454for the years ended December 31, 2009 and 2010 respectively due primarily to the sales of liquor and the license fees. We recognize revenue when the earning process is complete which generally occurs when products are shipped, 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.. We do not provide unconditional rights of return and other concessions to our customers. Sales returns and other allowances have been immaterial in our operation.

Revenues increased $499,795 or 25% from $1,987,659 to $2,487,454 for the years ended December 31, 2009 and 2010 respectively. The increase was fairly evenly attributable to an increase in license fees and sales of liquor. Sales of liquor improved $210,441,or 19.86% from $1,059,694 for the year ended December 31, 2009 to $1,217,319 for the year ended December 31, 2010.
 
License fees increased from $927,965 for the year ended December 31, 2009 to $1,217,319 for the year ended December 31, 20010, representing an increase of $289,354,or 31.18%.License fees includes fees payable by our licensees and agents. We added 5 licensees in 2010. The Company expects to continue to expand its network of third party licensees and agents throughout 2010. Increase in license fees resulted from additions to our licensing agreements with third parties who wish to use the Du Kang name. These agreements are for renewable one year terms. We expected our agency fees will increase in 2011 aswe implement our sales strategy toincrease license feesand to increase sales generated by distributorsof liquor.
 
Management believes these increases confirm the validity in the changes to their distribution model and believes that improvements in license fees and sales of liquor should continue in 2011.
 
GROSS MARGIN
 
The overall gross margin for the year ended December 31, 2010 was 49.98% as compared to 43.65% for the comparable period of 2009.  Gross margin on sales of liquor was 2.03% for the year ended December 31, 2010, representing an increase of 7.75%, compared to (5.67%) for the comparable period in 2010. The gross margin has been comparable and consistent over the years.

OPERATING EXPENSES

Total operating expenses decreased from $1,357,076 for the year ended December 31, 2009 to $1,035,243 for the year ended December 31, 2010, representing an improvement of $321,833 or approximately 30%.

Selling expenses decreased $321,343 or 69%from $465,749 in the year ended December 31, 2009 to $142,212 for the year ended December 31, 2010. The decrease is due to a decrease of $ 112,708 in advertising expenses from $135,966 in the year ended December 31, 2009 to $23,258 for the same period in 2010, as we reduce our ads in media as we focus on our main distributors to sell our liquor. We have now finished most of our package design, so as our expenses for package design decrease from $17,039 in 2009 to $5,266 in 2010. We also decreased our travel and entertainment expenses from $56,327 to $14,979 and promotion expenses from 256,417 to 98,709 as we attended less promotion conference in 2010 than in 2009.
 
 
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The decrease in operating expenses was largely due to the decrease in selling expenses ,which was offset by a slight increase in general and administrative expenses of $12,171, from $891,327 for the year ended December 31, 2009 to $893,031 for the year ended December 31, 2010.The increase was largely attributed to the increase of $62,349 in the professional fees and consultant fees from $60,565 for the year ended 2009 to $122,914 for the same period in 2010.Another large increase was in employee benefit and pension from $19,846 for the year ended 2009 to $76,654 for the same period of 2010,which was partially offset by our office expenses decreased from $83,332 for the year ended 2009 to $57,610 for the same period in 2010,and loss on inventory from $121,595 for the year ended December 31, 2009 to $32,849 for the year ended December 31, 2010.
 
Our travel and entertainment expense increased $30,068 from $145,908 in the year ended December 31, 2009 to $175,976 in the same period in 2010. The increase in travel expenses was due to Relocation of some of offices; including the main offices of Xidenghui and Brand Management.
 
Payroll decreased from $266,278 at December 31, 2009 to $214,338 as we adjusted our full time staff and made effective use of temporary help. For those same periods, employee benefits and pension increased from $19,846 to $76,654 as we paid more benefit, such as food and housing, to keep our skillful employees; depreciation and amortization decreased from $151,244 to $140,703 as we disposed one vehicle; vehicle expenses increased from $30,168 to $38,469 as the gasoline price increase in PRC.

OTHER INCOME AND EXPENSES
 
The Company has incurred total interest expense and imputed interest expense of $980,523 and $852,691 for the years ended December 31, 2009 and 2010, respectively. The increased in interest expense was due to increased in bank loans and related parties loans for working capital purposes.

INCOME/LOSS FROM OPERATIONS

The C ompany had experienced a loss from operations of $(489,413) in the year ended December 31, 2009, but shows income from operations of $207,901 which reflects an improvement of $697,314 in the year ended December 31, 2010, The improvement was attributable to an increase in gross profit from $867,663 to $1,243,144 from year ended December 31, 2009 to 2010 and a decrease in operating expenses from $1,357,076 to $1,035,243 for the same periods. The increase in profit is mainly attributed to the performance of new marketing polices and a reduction of selling expenses from $465,749 to $142,212 from the year ended December 31, 2009 to the year ended December 31, 2010. The number of the licensees has increased; the marketing network is expanding and covers more than thirty provinces, cities and districts throughout the country. Revenue has increased by more than 25% compared with the revenue in the year ended Dec 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 2010 AND 2009 AND FOR THE YEARS THEN ENDED

Net cash provided by operating activities in 2010 was $1,210,013, as cash used by operating activities was 320, 119 for year ended December 31, 2009.The Changes were primarily due to increase in deferred revenue from (67,281) to $1,216,097 from year ended December 31, 2009 to 2010,as we collected more advance from licensees and agents, which was partially offset by the increase in inventories from 272,211 in 2009 to (475,529) in 2010. The prepaid expenses improved from (368,052) to (98,923),as well as the increase in other payable from (63,597) to ($4,669) for the same periods.
 
 
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Cash flows used in investment activities increase from $(912,202) to $(1,850,875) for the years ended December 31, 2009 and December 2010, respectively.The increase was due primarily to the loans that we made to our non-consolidated subsidiary, Shaanxi Yellow-river Wetlands Park Co., Ltd.,and Shaanxi Mining New Energy Co., Ltd. a related party. We also used more cash in purchasing fixed assets in 2010, including equipment and building facility, as we are expanding our production capacity.
 
Net cash provided by financing activities for the years ended December 31, 2009 and 2010 were $1,033,872 and $1,815,626 respectively. The majority of the change was attributed to from the increase in the proceeds from related parties from $3,145,366 in 2009 to $5,388,390 in 2010, which was partially offset by increase in the amount of repayment to such loans from (2,403,854) in 2009 to (4,015,324) in 2010..Bank loans increased from 292,360 to 442,560 for the same periods as we take out more bank loan to expending our production capacity.

GENERAL

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.

Total assets for the periods ending 2010 and 2009 were $14,210,146 and $9,993,604 respectively.  Total current assets increased for the same periods from $3,888,194 to $5,968,025, which was primarily attributable to the increase of cash and cash equivalents, which increased from $619,472 at December 31, 2009 to $1,994,126 at December 31, 2010; and the increase in inventories that increased from $2,694,596 to $3,273,993 for the same respective periods.

Property, plant and equipment declined from $4,283,850 at December 31, 2009 to $4,424,062 at December 31, 2010.  For the same respective periods long term investment increased slightly from $1,755,104 to $1,814,937 due to the changes in currency exchange rate. Liabilities increased from December 31, 2009 to December 31, 2010 from $18,151,683 to $24,020,008   We had bank loans of $292,517 at December 31, 2009 as compared to $756,224 at December 31, 2010.  Accounts payable were $856,270 at December 31, 2009 as compared to $891,409 at December 31, 2010. Amounts due to related parties were the most significant change of current liabilities increasing from $15,095,908 at December 31, 2009 to $17,018,272 at December 31, 2010, as we obtained more loans from related-parties. Taxes payables increased from $196,104 to $491,137 during the same periods..

We have cash of $1,994,126 and $619,472 as of December 31, 2010 and 2009, respectively. We believe that we have sufficient cash to fund operations for approximately 12 months assuming that sales and margins remain constant.

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.
 
 
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RELATED PARTY LOANS

We have historically funded our cash needs through a series of debt transactions, primarily with related parties. These related party loans have operated as informal lines of credit since the inception of the Company , and related parties have extended credit as needed which the Company has repaid at its convenience. Our officers and directors and related parties have assured us that they will continue to provide capital infusions sufficient to fund operations over the next 12 months as needed, but they are under no legal obligation to do so. If our related parties are unable or unwilling to provide additional capital infusions we would likely require additional financing which would likely be on more unfavorable terms. If we are unable to attain additional capital there would likely be a material adverse affect on our operations and financial condition.

We currently have sixteen (16) outstanding loans from related parties in an aggregate amount of $17,018,272 and $15,095,908 as of December 31, 2010 and 2009, respectively.
 
 
Theaffiliates are directly or indirectly, beneficially and in the aggregate, majority-owned and controlled by directors and principal shareholders of the Company , as more fully disclosed in the Note 10 and Note 12 to our consolidated financial statements.The remaining eight related party loans are shareholders, and current or former officers and directors which are unsecured, demand notes, which are non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. We have not paid any interest on these loans. Imputed interest expense charged to operations was $949,932 and $833,911 for the years ended December 31, 2010 and 2009, respectively.

Cash flows from due from related parties are classified as cash flows from investing activities.  Cash flows due to related parties are classified as cash flows from financing activities. 

Refer to Item 7- Certain Relationships and Related Transactions, and Director Independence of this filing for additional information.

INVENTORY
 
Our inventory is aged to improve the taste and smoothness of the finished product. Total storage time is approximately three (3) years, so our inventory turnover rate typically exceeds 1,000 days. We believe our practices are standard in the liquor industry in China. The base wine of our liquors goes through a production process that includes weighing, measuring, sampling and tasting, and chromatographic analysis of the production micro-components before the finished goods come off the production line. When the base wine comes off the production line, the product is extremely bitter and is generally not smooth enough for sale.
 
Some finished goods will be stored for 3 years in total, initially through a 2-year storage in wooden containers and then a 1-year jar storage. This storage process creates a chemical process for the stored wine that goes into flavor blending before packaging. After packaging, the products will also be stored for 3 months. We then conduct random inspection and testing before releasing the production run for the market.
 
We experience an extended time for inventory turnover, as good quality base wine are stored for several decades for flavor blending. At present, national liquor industry performance is subject to PRC National Standard GB/T14867-2007 Feng-flavor Chinese Spirit, GB/T10781.1-2006 Strong Aromatic Chinese Spirits, and business standards Q/SBDJ01-2002 Mixed-Flavor (Feng, Strong Aromatic and Jiang) Chinese Spirits and Q/SBDJ03-2002 Feng and Strong Aromatic Flavor Chinese Spirits. These requirements set forth the minimum storage requirements for truthful labeling and sale. In short, the more years base wine stored for, the higher its market price will be.
 
Further, the storage of a certain quantity of base wine also assists in smoothing the fluctuations in grain price which can keep the productions cost competitive and dealing with peak and off peak seasonality.
 
 
27

 
 
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.

Inventories consist of following:
           
   
December 31,
   
December 31,
 
   
2010
   
2009
 
Finished goods
 
$
948,300
   
$
769,619
 
Work-in-progress
   
1,985,260
     
1,789,276
 
Raw materials
   
102,934
     
51,910
 
Supplies and packing materials
   
237,499
     
83,791
 
 Total
 
$
3,273,993
   
$
2,694,596
 
  
SHAREHOLDERS’ EQUITY
 
Shareholders’ deficit as of December 31, 2010 were $(9,809,862), as compared to $(8,158,076) as of December 31, 2009..The increase in shareholders’ deficit was due to loss in the year ended December 31, 2010. The accumulated deficit was $(20,442,045) at December 31, 2009 as compared to $(21,449,649) at December 31, 2010. The shareholders’ deficit for China Du Kang was $(8,147,299) and $(9,911,913) for those same periods.
 
 Off-Balance Sheet Arrangements
 
None
 
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").
 
Each subsidiary has an accounting manager that records the transactions for that subsidiary in accordance with PRC GAAP. These transactions and bookkeeping are reviewed by the Company ’s CFO and adjustments were made as needed to conform to US GAAP at the end of every reporting period. The CFO prepares a consolidated trial balance for the Company and its subsidiaries based on the consolidated trial balance, she prepares a consolidated financial statement in accordance with the US GAAP and then submitted to the Company ’s external auditor. The Company does not use external consultants or financial advisers in connection with the preparation of its reports.
 
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").
 
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.
 
 
28

 
 
The preparation and supervision of the Company ’s financial reports is the responsibility of the Company ’s CFO. Each subsidiary has at least one accounting manager who compiles the financials transactions of the subsidiary in accordance with PRC GAAP. The CFO supervises this process and all accounting managers’ report to the CFO for accounting matters. While the accounting managers are versed in PRC GAAP principles, they have limited or no experience in US GAAP. The conversion to US GAAP is the responsibility of the CFO.
 
The Company ’s current CFO is a certified public account in the PRC, having passed her examination in 1990. Since that time she has been continuously engaged in various accounting positions. She became familiar with US GAAP while preparing reports for those companies, leading up to her selection as the Company ’s CFO in 2008.  There is no outside firm involved in the preparation of the financial reports or the analysis of the internal controls.
 
The Company does not have a separate audit committee. The only member of the Board with experience in US GAAP is the Company ’s CFO, who has exclusive and plenary control over the policies governing financial reporting and internal controls. The Board relies on the expertise of the CFO for both issues regarding reporting and issues regarding internal control.
 
The subsidiary manager approves transactions and invoices for payments. The accounting manager for the subsidiary serves as a cross checks and pays the invoices and records the transactions. These transactions are recorded and sent to the CFO in PRC GAAP format. The CFO then reviews the reports, converts them to US GAAP, and investigates as needed any issues presented regarding internal controls.
 
The Company ’s current CFO is a certified public accountant in the PRC, having passed her examination in 1990. Since that time she has been continuously engaged in various accounting positions. She became familiar with US GAAP while preparing reports for those companies, leading up to her selection as the Company ’s CFO in 2008.
 
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 statement of shareholders’ equity.
 
 Critical Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use if estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
 
 
29

 

Our significant accounting policies are summarized in Note 4 of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

Related Party

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.
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements of China Du Kang Co., Ltd. are included in Part II, Item 15 of this Report

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet at December 31, 2010 and 2009 (Restated)
Consolidate d Statements of Operations - for the years ended December 31, 2010 and 2009 (Restated)
Consolidated Statements of Cash Flows - for the years ended December 31, 2010 and 2009 (Restated)
Consolidated Statements of Stockholders’ Equity - for the years ended December 31, 2010 and 2009 (Restated)
Notes to Consolidated  Financial Statements (Restated)
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None 
 
 
30

 
 
ITEM 9A.
CONTROLS AND PROCEDURES
 
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and our Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures. The controls and procedures established by us are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

We kept our books in China GAAP and converted China GAAP to US GAAP under the auspices of our Chief Financial Officer. Although our Chief Financial Officer has some experience with US GAAP, her experience is not extensive. Based on this assessment, we believe that our internal controls and procedures to date is not effective based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework and due to the deficiencies described.

The deficiencies consisted of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews over financial reporting in US GAAP. In addition, there are deficiencies in the recording and classification of accounting transactions and a lack of personnel with expertise in US generally accepted accounting principles and US Securities and Exchange Commission rules and regulations.
 
The Company discovered that our financial statements for the years ended December 31, 2010, 2009, 2008 and the periods ended March 31, 2011, 2010, 2009; June 30, 2010, 2009, and September 30, 2010, 2009 should not be relied upon due to errors in the accounting record, accounting treatment and insufficient recognition of related party transactions disclosures. We did not account for the addition of imputed interest in our financial statements at the time of issuance.  We reviewed the accounting for the imputed interest and, based on the review, we concluded that we misapplied accounting principles generally accepted in the United States of America and we restated our financial statements for the periods indicated above.  We concluded that the imputed interest on loans due to our principal shareholders should have been accounted for as an expense to business operation and an addition to paid-in capital.  We accounted for the imputed interest as an expense to business operations and an addition to paid-in capital. We reviewed the accounting for related parties’ transactions and, based on the review, we concluded that we misapplied accounting principles generally accepted in the United States of America and we restated our financial statements for the periods indicated above. We concluded that the related parties transactions should have been accounted for by recording related party receivables as a deduction from stockholders’ equity and provided additional disclosures.
 
We are taking steps to improve the process designed to prevent such deficiencies by engaging a financial consultant to assist us with our process of financial reporting. We are seeking to improve our controls and procedures in an effort to remediate these deficiencies through improving supervision, education, and training of our accounting staff. We have engaged third-party financial consultants to review and analyze our financial statements and assist us in improving our reporting of financial information.  Management plans to enlist additional qualified in-house accounting personnel and third-party accounting personnel as required to ensure that management will have adequate resources in order to attain complete reporting of financial information disclosures in a timely matter. We believe that the remedial steps that we have taken and plan to take will address the conditions identified by our CEO and CFO in our disclosure controls and procedures. We will continue to monitor the effectiveness of these improvements. We also plan to work with the outside consultants we have engaged in assessing and improving our internal controls and procedures when necessary.
 
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements under all potential conditions. Therefore, effective internal control over financial reporting provides only reasonable, and not absolute, assurance that a restatement of our financial statements would be prevented or detected.
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
 
 
31

 
 
Changes in Internal Control over Financial Reporting
 
There were no changes in the our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.
OTHER INFORMATION
 
None
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
NAME
 
AGE
 
TITLE
 
DATE OF APPOINTMENT
 
PERCENT OF TIME DEVOTED
 
Wang Yongsheng
  36  
CEO
 
January 5, 2008
    100 %
Liu Su Ying
  58  
Chief Financial Officer
 
January 5, 2008
    100 %
Nie fen Ying
  43  
Director
 
January 5, 2008
    100 %
 
Wang Yongsheng, 36, CEO
Mr. Wang studied EMBA in Xi’an Jiao Tong University, and obtained his certificate. He served as the purchasing and supplying manager and the vice producing director of Xi Deng Hui Alcohol Co. Ltd. in 1996. He left the prior position and held the post of the vice general manager of Du Kang Liquor Limited Liability Company in 2002. In 2004, he was promoted to be the Chairman of  Du Kang Liquor Limited Liability Company and he is still the chairman till now. Since Feb. 18th, 2008 till now, he stared to be the Chief Executive Officer of China Dukang Co., Ltd.

Mr. Wang has nearly fifteen years experience as a director of alcoholic beverage sales companies in the People’s Republic of China. He has been associated with Dukang Liquor since 2002, and has been associated with the Company since its acquisition of the liquor producing facilities. He has served as CEO since 2008, and has directed our efforts to expand our distribution methods and increase the revenues of the Company .

Liu Su Ying, 58, CFO
Ms. Liu passed the Adult SelfStudy Examination in Shaanxi from 1987 to 1990 major in Accounting.

Ms. Liu is a certified public account in the PRC, having passed her examination in 1990. Since that time she has been continuously engaged in various accounting positions. She became familiar with US GAAP while preparing reports for those companies, leading up to her selection as the Company ’s CFO in 2008.

From 1990 to 1998 she was deputy section chief of accounting department of Shaanxi Wei Nan Textile Factory. From1999 to 2001 she worked in Shaanxi Hui Huang Construction and Building Material Company as manager of accounting department. In 2001, she was appointed as the CFO of Shannxi Xidenghui Technology Co., Ltd and she is still the chairman till now. Since Feb. 18th, 2008 till now, she stared to be the CFO of China Dukang Co., Ltd.
 
 
32

 
 
Nie Fen Ying, 42, Director
Ms. Nie Fen Ying graduated from Xian Yang Normal University majoring in physical distribution management. After 3 years of studying, she served as sales manager in Shaanxi Bai Shui Dukang Liquor Co., Ltd. from 2001 to 2003 which is a liquor production and sales company. Since 2003 till now she has been sales manager of Shaanxi Xi Deng Hui Stock Co., Ltd. which is holding company of the Company she first served in after acquisition. Since Feb. 18th, 2008 till now, she is appointed as the Director of China Dukang Co., LTD.

Ms. Nie has nearly a decade of experience in production and sales of liquor in the People’s Republic of China. She was familiar with the Company ’s predecessor and has served as a director since 2008. She has been instrumental in guiding the dedicated liquor sales segment of the business.

Family Relationships

Mr. Wang is the nephew of Ms. Nie.

Director Independence
 
The Company does not have a separately designated Audit, Nominating, or Compensation committee, and those functions are currently being provided by the members of the Board of Directors.
 
The Company ’s board of director currently composed of one board member, Ms Nie Fen Ying. The OTC Bulletin Board does not have rules regarding director independence.  Ms Nie is considered “independent” as defined under the rules of the NASDAQ Stock Market.  Accordingly, only one member of the board is an independent director under the NASDAQ definition.

Under the bylaws of the Company , directors are elected at each annual meeting of the stockholders and serve until a successor has been duly elected and qualified except upon death, resignation, or removal. Vacancies on the Board of Directors may be filled by appointment by the remaining directors until the next shareholder meeting.

The prior CEO and Chairman of the Board of Directors, Howard Wayland, Jr., remained as a member of the Board of Directors until August 26, 2008. Mr. Wayland filed for protection from creditors under Chapter 7 of the United States Bankruptcy Code shortly after his resignation as a director of the Company .

Legal Proceedings

No officer, director, or persons nominated for such positions and no promoter or significant employee has been involved in legal proceedings that would be material to an evaluation of our management.
 
Audit Committee and Other Committees

We do not have a separately designated standing audit committee. Pursuant to Section 3(a)(58)(B) of the Exchange Act, the entire Board of Directors acts as an audit committee for the purpose of overseeing the accounting and financial reporting processes, and audits of our financial statements. The Commission recently adopted new regulations relating to audit committee composition and functions, including disclosure requirements relating to the presence of an "audit committee financial expert" serving on its audit committee. In connection with these new requirements, our Board of Directors examined the Commission's definition of "audit committee financial expert" and concluded that we do not currently have a person that qualifies as such an expert. We have had minimal operations for the past two (2) years. Presently, there are only one (1) director serving on our Board, and we are not in a position at this time to attract, retain and compensate additional directors in order to acquire a director who qualifies as an "audit committee financial expert", but we intend to retain an additional director who will qualify as such an expert, as soon as reasonably practicable. While neither of our current directors meets the qualifications of an "audit committee financial expert", each of our directors, by virtue of his past employment experience, has considerable knowledge of financial statements, finance, and accounting, and has significant employment experience involving financial oversight responsibilities. Accordingly, we believe that our current director capably fulfill the duties and responsibilities of an audit committee in the absence of such an expert.
 
 
33

 

Code of Ethics

We have adopted a code of ethic (the "Code of Ethics") that applies to our principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is being designed with the intent to deter wrongdoing, and to promote the following:

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships
Full, fair, accurate, timely and understandable disclosure in reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by the small business issuer
Compliance with applicable governmental laws, rules and regulations
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code
Accountability for adherence to the code

Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission. Specific due dates for these reports have been established, and we are required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 2009. We believe that all of these filing requirements were satisfied by our executive officers, directors and by the beneficial owners of more than 10% of our common stock. In making this statement, hawse have relied solely on copies of any reporting forms received by it, and upon any written representations received from reporting persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) was required to be filed under applicable rules of the Commission.

ITEM 11.
EXECUTIVE COMPENSATION
 
No compensation was awarded to or paid to any executive officer or director of the Company during the years 2009, 2008, and 2007 other than as shown in the table below.
 
The following table and the accompanyingnotes provide summary information for each of the last three fiscal years concerning cash and non-cash compensationpaid or accrued.
 
 
34

 
 
Summary Compensation Table

SUMMARY COMPENSATION TABLE
 
Name and principal position
(a)
Year
(b)
 
Salary
($)
(c)
   
Bonus
($)
(d)
   
Stock Awards
($)
(e)
   
Option Awards
($)
(f)
   
Non-Equity Incentive Plan Compensation
($)
(g)
   
Nonqualified Deferred Compensation Earnings ($)
(h)
   
All Other Compensation ($)
(i)
   
Total
($)
(j)
 
Wang
2008
 
$
3,026
     
0
     
0
     
0
     
0
     
0
     
0
   
$
3,026
 
Yongsheng
2009
 
$
3,026
     
0
     
0
     
0
     
0
     
0
     
0
   
$
3,026
 
CEO
2010
 
$
9,707
     
0
     
0
     
0
     
0
     
0
     
0
   
$
9,707
 
                                                                   
Liu Su Ying
2008
 
$
3,550
     
0
     
0
     
0
     
0
     
0
     
0
   
$
3,550
 
CFO
2009
 
$
3,550
     
0
     
0
     
0
     
0
     
0
     
0
   
$
3,550
 
 
2010
   
2,964
     
0
     
0
     
0
     
0
     
0
     
0
   
$
2,946
 
                                                                   
Ni Fen Ying
2008
 
$
3,447
     
0
     
0
     
0
     
0
     
0
     
0
   
$
3,447
 
Director
2009
 
$
3,447
     
0
     
0
     
0
     
0
     
0
     
0
   
$
3,447
 
 
2010
   
0
     
0
     
0
     
0
     
0
     
0
     
0
   
$
0
 

(1) Unless stated otherwise, the business address for each person named is c/o China Du Kang Co., Ltd.
 
(2) Calculated pursuant to Rule 13d-3(d) (1) of the Securities Exchange Act of 1934
 
(3) We believe that each individual or entity named has sole investment and voting power with respect to the shares of common stock indicated as beneficially owned by them (subject to community property laws where applicable) and except where otherwise noted.
 
We have not entered into any other employment agreements with our employees, Officers or Directors. We have no standard arrangements to compensate our directors for their services to us.
 
Stock Option Plan
 
We have not implemented a stock option plan at this time and since inception, have issued no stock options, SARs or other compensation. We may decide, at a later date, and reserve the right to, initiate such a plan as deemed necessary by the Board.
 
Changes in Control
 
None.
 
 
35

 
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS
 
The following table contains certain information as of December 31, 2010 as to the number of shares of Common Stock beneficially owned by (i) each person known by the Company to own beneficially more than 5% of the Company ’s Common Stock, (ii) each person who is a Director of the Company , (iii) all persons as a group who are Directors and Officers of the Company , and as to the percentage of the outstanding shares held by them on such dates and as adjusted to give effect to this Offering.

Principal Shareholders
 
The following table contains certain information as of December 21, 2010 as to the number of shares of Common Stock beneficially owned by (i) each person known by the Company to own beneficially more than 5% of the Company ’s Common Stock, (ii) each person who is a Director of the Company , (iii) all persons as a group who are Directors and Officers of the Company , and as to the percentage of the outstanding shares held by them on such dates and as adjusted to give effect to this Offering.
  
Name and Position
 
Common Shares
   
Percentage
 
Wang Yongsheng
Chief Executive Officer
    9,030,000       9.052 %
   Liu Su Ying
Chief Financial Officer
    -       - %
Deng Guo Gang
    8,800,000       8.28 %
Totals
    17,830,000       17.33 %
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
NAME
 
AGE
 
TITLE
 
DATE OF APPOINTMENT
 
PERCENT OF TIME DEVOTED
 
Wang Yongsheng
  36  
CEO
 
January 5, 2008
    100 %
Liu Su Ying
  58  
Chief Financial Officer
 
January 5, 2008
    100 %
Nie fen Ying
  43  
Director
 
January 5, 2008
    100 %

Family Relationships and Director Independence

See the section entitled “Item 10 - Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of the Exchange Act” above.
 
 
36

 

Related Parties Transactions

Due to lack of capital resources, our related-parties have been making loans to our company to finance its operation.  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 our subsidiaries. Loans from these related-parties are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. Accordingly, we have not paid any interest for these loans.

Related party loans payables transactions are as follows:
 
For the Year Ended December 31, 2009
                                   
No.
 
 Name of Related-party
 Description
 
Balance @ 12/31/08
   
Effects of foreign currency translation
   
Payback in 2009
   
Additional borrowing in 2009
   
Balance @ 12/31/09
   
Highest Balance during 2009
 
1  
Shaanxi Dukang Group Co., Ltd.
Affiliate
    471,244       1,172       1,274,734       1,391,175       588,857       881,375  
2  
Shaanxi Zhongke Spaceflight Agriculture Development Stock Co., Ltd
Affiliate
    33,512       31       -       -       33,543       33,543  
3  
Shaanxi Baishui Dukang Marketing Management  Co.Ltd
Affiliate
    1,179       3       104,868       116,553       12,867       27,508  
4  
Shaanxi Baishui Dukang Commercial and Trade Co.Ltd
Affiliate
    72,853       180       2,290       1,463       72,206       74,496  
5  
Shaanxi Baishui Dukang Spirits Industry  Development Co.Ltd
Affiliate
    876,721       2,179       349,644       739,200       1,268,456       1,353,844  
6  
Shaanxi Changjiang Electric Power and Energy Sources Co.Ltd
Affiliate
    291,792       725       292,517       -       -       292,517  
7  
Shaanxi Baishui Dukang Trade Co.ltd
Affiliate
    -       -       193,849       355,923       162,074       328,935  
8  
Shaanxi Lantian Fuping Investment Co., Ltd.
Affiliate
    -       -       -       292,517       292,517       292,517  
9  
Shaanxi Baishui Shiye Co., Ltd.
Affiliate
    -       -       -       -       -       -  
10  
Shaanxi Changjiang Petrol Co., Ltd.
Affiliate
    -       -       -       -       -       -  
11  
Mr. Hongjun Zhang
Shareholder
    3,058,821       7,605       95,272       218,647       3,189,801       3,189,801  
12  
Mr. Guoqi Diao
Prior director of Xidenghui
    392,107       975       -       -       393,082       393,082  
13  
Ms. Ping Li
Secretary of the Board
    581,438       1,446       -       -       582,884       582,884  
14  
Mr. Pingjun Nie
Shareholder
    4,380,268       10,891       -       -       4,391,159       4,391,159  
15  
Ms. Hong Ge
Prior director of Xidenghui
    263,991       657       -       -       264,648       264,648  
16  
Mr.Hailong Tian
Prior director of Xidenghui
    2,760,680       6,864       -       -       2,767,544       2,767,544  
17  
Ms. Ming Chen
Shareholder
    355,761       884       90,680       30,342       296,307       296,307  
18  
Mr. Shengli Wang
Prior director of Xidenghui
    778,029       1,934       -       -       779,963       779,963  
Total
          14,318,396       35,546       2,403,854       3,145,820       15,095,908       15,950,123  
 
 
37

 
 
For the Year ended December 31, 2010
                                   
No.
 
 Name of Related-party
 Description
 
Balance @ 12/31/09
   
Effects of foreign currency translation
   
Payback in 2010
   
Additional borrowing in 2010
   
Balance @ 12/31/10
   
Highest Balance during 2010
 
1  
Shaanxi Dukang Group Co., Ltd.
Affiliate
    588,857       87,695       2,030,787       4,708,783       3,354,548       3,354,548  
2  
Shaanxi Zhongke Spaceflight Agriculture Development Stock Co., Ltd
Affiliate
    33,543       290       33,833       -       -       34,687  
3  
Shaanxi Baishui Dukang Marketing Management  Co.Ltd
Affiliate
    12,867       439       -       -       13,306       13,306  
4  
Shaanxi Baishui Dukang Commercial and Trade Co.Ltd
Affiliate
    72,206       2,462       -       -       74,668       74,668  
5  
Shaanxi Baishui Dukang Spirits Industry  Development Co.Ltd
Affiliate
    1,268,456       32,249       435,402       -       865,303       1,311,699  
6  
Shaanxi Changjiang Electric Power and Energy Sources Co.Ltd
Affiliate
    -       -       -       -       -       -  
7  
Shaanxi Baishui Dukang Trade Co.ltd
Affiliate
    162,074       9,005       89,360       227,183       308,902       315,728  
8  
Shaanxi Lantian Fuping Investment Co., Ltd.
Affiliate
    292,517       9,972       -       -       302,489       302,489  
9  
Shaanxi Baishui Shiye Co., Ltd.
Affiliate
    -       2,235       114,584       203,096       90,747       208,224  
10  
Shaanxi Changjiang Petrol Co., Ltd.
Affiliate
    -       6,221       -       246,358       252,579       252,579  
11  
Mr. Hongjun Zhang
Shareholder
    3,189,801       79,125       1,175,938       2,970       2,095,957       3,298,544  
12  
Mr. Guoqi Diao
Prior director of Xidenghui
    393,082       13,400       -       -       406,482       406,482  
13  
Ms. Ping Li
Secretary of the Board
    582,884       19,871       -       -       602,755       602,755  
14  
Mr. Pingjun Nie
Shareholder
    4,391,159       149,332       14,457       -       4,526,035       4,540,857  
15  
Ms. Hong Ge
Prior director of Xidenghui
    264,648       9,022       -       -       273,670       273,670  
16  
Mr.Hailong Tian
Prior director of Xidenghui
    2,767,544       94,347       -       -       2,861,891       2,861,891  
17  
Ms. Ming Chen
Shareholder
    296,307       7,048       120,966       -       182,389       306,407  
18  
Mr. Shengli Wang
Prior director of Xidenghui
    779,963       26,590       -       -       806,553       806,553  
Total
          15,095,908       549,301       4,015,327       5,388,390       17,018,272       18,965,085  

The nature of the affiliation of each related party is as 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 Shaanxi Zhongke Spaceflight Agriculture Development Stock Co., Ltd. is indirectly, majority owned and controlled by the Company 's sole director's siblings.
Affiliate 3 - Shaanxi Baishui Dukang Marketing Management Co., Ltd. is wholly owned and controlled by the Company 's sole director's siblings.
Affiliate 4 - The CEO of the Company is the sole director of Shaanxi Baishui Dukang Commercial and Trade Co., Ltd. and has significant influence of the operations therein.
Affiliate 5 - Shaanxi Baishui Dukang Spirits Industry Development Co., Ltd. is wholly owned and controlled by the Company 's sole director's siblings.
Affiliate 6 - The Company 's sole director's spouse is a director of Shaanxi Changjiang Petrol Co., Ltd., and has significant influence to the operation therein.
Affiliate 7 and 9 - The CEO of the Company is the sole director of Shaanxi Baishui Shiye Co., Ltd. (f/k/a Shaanxi Baishui Dukang Trade Co., Ltd.) and has significant influence of the operations therein.
Affiliate 8 - Shaanxi Lantian Fuping Investment Co., Ltd. is majority owned and controlled by the Company 's sole director's siblings.

The Company has related party receivables outstanding in the amount of $2,577,187 and $1,111,566 as of December 31, 2010 and 2009, respectively. The loans were issued to related parties to maintain business relationship for potential investment opportunities.  Refer to “Due from Related Parties” Notes to Financial Statements in Item 15 – Exhibits, Financial Statement Schedules included in this Report for additional information.
 
 
38

 

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Fees Billed For Audit and Non-Audit Services

The following table represents the aggregate fees billed for professional audit services rendered to the independent auditor, Keith Zhen CPA (“Zhen”), for our audit of the annual financial statements for the years ended December 31, 2009 and 2008. Audit fees and other fees of auditors are listed as follows:

Year Ended December 31
 
2009(2)
   
2010(2)
 
             
Audit Fees (1)
 
$
50,000
   
$
60,000
 
Audit-Related Fees (4)
   
--
     
--
 
Tax Fees (5)
   
--
     
--
 
All Other Fees (6)
   
--
     
--
 
Total Accounting Fees and Services
 
$
50,000
   
$
60,000
 
 
 
(1)
Audit Fees. These are fees for professional services for the audit of our annual financial statements, , and for services that are normally provided in connection with statutory and regulatory filings or engagements.
 
 
(2)
The amounts shown in 2009 and 20010 relate to (i) the audit of our annual financial statements for the fiscal years ended December 31, 2009 and 210. We did not become a reporting company until January, 2010 so there were no quarterly reports or other reports that required review prior to this filing.

 
(4)
Audit-Related Fees. These are fees for the assurance and related services reasonably related to the performance of the audit or the review of our financial statements.
 
 
(5)
Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning.
 
 
(6)
All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax Fees.
 
Pre-Approval Policy for Audit and Non-Audit Services

We do not have a standing audit committee, and the full Board performs all functions of an audit committee, including the pre-approval of all audit and non-audit services before we engage an accountant. All of the services rendered to us by Keith Zhen CPA were pre-approved by our Board of Directors.

The new policies and procedures will be detailed as to the particular service, will require that the Board or an audit committee thereof be informed of each service, and will prohibit the delegation of pre-approval responsibilities to management. It is currently anticipated that our new policy will provide (i) for an annual pre-approval, by the Board or audit committee, of all audit, audit-related and non-audit services proposed to be rendered by the independent auditor for the fiscal year, as specifically described in the auditor's engagement letter, and (ii) that additional engagements of the auditor, which were not approved in the annual pre-approval process, and engagements that are anticipated to exceed previously approved thresholds, will be presented on a case-by-case basis, by the President or Controller, for pre-approval by the Board or audit committee, before management engages the auditors for any such purposes. The new policy and procedures may authorize the Board or audit committee to delegate, to one or more of its members, the authority to pre-approve certain permitted services,provided thatthe estimated fee for any such service does not exceed a specified dollar amount (to be determined). All pre-approvals shall be contingent on a finding, by the Board, audit committee, or delegate, as the case may be, that the provision of the proposed services is compatible with the maintenance of the auditor's independence in the conduct of its auditing functions. In no event shall any non-audit related service be approved that would result in the independent auditor no longer being considered independent under the applicable rules and regulations of the Securities and Exchange Commission.
 
 
39

 
 
(a) On December 31, 2009, our Chief Executive Officer and Chief Financial Officer made an evaluation of our disclosure controls and procedures. In our opinion, the disclosure controls and procedures are adequate because the systems of controls and procedures are designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows for the respective periods being presented. Moreover, the evaluation did not reveal any significant deficiencies or material weaknesses in our disclosure controls and procedures.
 
(b) There have been no significant changes in our internal controls or in other factors that could significantly affect these controls since the last evaluation.
 
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)
Financial Statements
 
Report of Independent Registered Public Accounting Firm Balance Sheet at December 31, 2010 (Restated)
Statements of Operations - for the years ended December 31, 2010 and 2009 (Restated)
Statements of Cash Flows - for the years ended December 31, 2010 and 2009 (Restated)
Statements of Stockholders’ Equity - for the years ended December 31, 2010 and 2009 (Restated)
Notes to Financial Statements (Restated)
 
 
40

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
 
 
 
 
FINANCIAL REPORT
(restated)
 
At December 31, 2010 and  2009 and
For the Years Ended December 31, 2010 and 2009
 
 
41

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
         
   
         
INDEX
         
 
         
     
PAGE
 
         
         
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
2
 
         
CONSOLIDATED BALANCE SHEETS (RESTATED)
   
3
 
         
CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
   
4
 
         
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (RESTATED)
5
 
         
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (RESTATED)
   
6
 
         
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
   
7
 
         
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   
8-49
 
 
 
1

 

KEITH K. ZHEN, CPA
CERTIFIED PUBLIC ACCOUNTANT
2070 WEST 6TH STREET - BROOKLYN, NY 11223 - TEL (347) 408-0693 - FAX (347) 602-4868 - EMAIL :KEITHZHEN@GMAIL.COM
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
Board of Directors
China Du Kang Co., Ltd.
(f/k/a Amstar Financial Holdings, Inc.)
 
We have audited the accompanying consolidated balance sheets of China Du Kang Co., Ltd. and subsidiaries as of  December 31, 2010 and 2009, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended  December 31, 2010.  China Du Kang Co., Ltd.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company ’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 1 to the consolidated financial statements, the accompanying consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of operations, the consolidated statements of changes in shareholders' equity (deficit) , and the consolidated statements of cash flows for the years ended December 31, 2010 and 2009 have been restated.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Du Kang Co., Ltd. and subsidiaries as of  December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended  December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the company has incurred an operating loss for each of the years in the two-year period ended  December 31, 2010, and as of December 31, 2010, has a working capital deficiency and a shareholders' deficiency.  These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 3. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/Keith K. Zhen, CPA
Keith K. Zhen, CPA
Brooklyn, New York
April 15, 2011 (Except for Note 1, August 9, 2011)
 
 
2

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
 
CONSOLIDATED BALANCE SHEETS
( R estated)
 
   
December 31,
2010
   
December 31,
2009
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 1,994,126     $ 619,472  
Others receivable
    74,210       67,134  
Prepaid expenses (Note 6)
    625,696       506,992  
Inventories (Note 7)
    3,273,993       2,694,596  
Total current assets
    5,968,025       3,888,194  
                 
Property, Plant and Equipment, net (Note 8)
    4,424,062       4,283,850  
Intangible assets, net (Note 9)
    2,003,122       66,456  
Long-term investment
    1,814,937       1,755,104  
                 
Total Assets
  $ 14,210,146     $ 9,993,604  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current Liabilities:
               
Bank loans (Note 14)
  $ 756,224     $ 292,517  
Accounts payable
    891,409       856,270  
Accrued expenses (Note 11)
    160,512       92,546  
Others payable
    64,136       56,711  
Land use right purchase payable
    1,946,792       -  
Taxes payable
    491,137       196,104  
Deferred revenue
    1,587,115       329,092  
Due to related parties (Note 12)
    17,018,272       15,095,908  
Employee security deposit
    43,860       77,225  
Lease liability-current
    126,314       129,722  
Total Current Liabilities
    23,085,771       17,126,095