PINX:CDKG China Du Kang Co Ltd Quarterly Report 10-Q/A Filing - 6/30/2012

Effective Date 6/30/2012

PINX:CDKG Fair Value Estimate
Premium
PINX:CDKG Consider Buying
Premium
PINX:CDKG Consider Selling
Premium
PINX:CDKG Fair Value Uncertainty
Premium
PINX:CDKG Economic Moat
Premium
PINX:CDKG Stewardship
Premium
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q/A
Amendment No. 1

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from____to____
 
Commission File No.  333-157281
 
CHINA DU KANG CO., LTD.
(Exact name of Registrant as specified in its charter)
 
NEVADA
 
90-0531621
(State or other jurisdiction of   incorporation or organization)
 
(IRS Employer Identification No.)
 
Town of Dukang, Baishui County,
A-28, Van Metropolis, #35 Tangyan Road,
Xi'an, Shaanxi, PRC, 710065
(Address of principal executive offices) 
            
8629-88830106-822
(Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x     No  o
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x      No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large Accelerated Filer   o Accelerated Filer      o Non-accelerated Filer         x Smaller Reporting Company
 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.   Yes o    No x
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: August 16, 2012:  100,113,774 shares of common stock
 


 
 

 
 
EXPLANATORY NOTE

The purpose of this Amendment No. 1 to our Quarterly Report on Form 10-Q for the period ended June 30, 2012 is to provide a complete Form 10-Q with all required items in Parts I and II and, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, the certifications of our Chief Executive Office and Chief Financial Officer.

An incomplete 10-Q containing only draft our financial statements and notes was inadvertently filed by our EDGAR agent on August 14, 2012 instead of an NT 10-Q that was to be submitted.

Accordingly, this amendment amends and restates Part I, Items 1 through 4, particularly to include our final financial statements and notes, and Part II, Item 6 (Exhibits) to reflect all disclosure required in Form 10-Q for smaller reporting companies. This Amendment No. 1 to Form 10-Q does not reflect subsequent events occurring after the original filing date of the Form 10-Q.

 
2

 
 
China Du Kang Co., Ltd.
FORM 10-Q/A

TABLE OF CONTENTS
 
     
Page No.
 
PART I.
FINANCIAL INFORMATION
     
         
Item 1.
Financial Statements.
    4  
           
 
Consolidated Balance Sheets as of June 30,2012 (unaudited) and December 31, 2011 (audited)
    4  
           
 
Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited)
    5  
           
 
Consolidated Statement of Comprehensive Income for the three and six months ended June 30,2012 and 2011 (unaudited)
    6  
           
 
Consolidated Statements of Cash Flows f or the three and six months ended June 30, 2012 and 2011 (unaudited)
    7  
           
 
Notes to Consolidated Financial Statements
    8 - 33  
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    34  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    39  
           
Item 4.
Controls and Procedures
    39  
           
PART II.
OTHER INFORMATION
       
           
Item 6.
Exhibits
    40  
           
 
Signatures
    41  
 
 
3

 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1 - FINANCIAL INFORMATION
 
 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 570,026     $ 968,370  
Accounts receivable, net (Note 4)
    554,692       270,276  
Others receivable
    77,587       2,427  
Prepaid expenses (Note 5)
    2,038,069       678,528  
Inventories (Note 6)
    5,947,393       5,335,136  
Total current assets
    9,187,767       7,254,737  
                 
Property, Plant and Equipment, net (Note 7)
    4,320,146       4,451,669  
Intangible assets, net (Note 8)
    2,026,907       2,034,235  
Long-term investment
    1,898,880       1,885,399  
                 
Total Assets
  $ 17,443,700     $ 15,626,040  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Current Liabilities:
               
Accounts payable
  $ 1,498,511     $ 1,215,285  
Accrued expenses (Note 9)
    439,274       352,964  
Others payable
    132,198       125,599  
Taxes payable (Note 10)
    689,521       661,296  
Deferred revenue
    3,730,645       2,785,391  
Employee security deposit
    45,889       45,564  
Lease liability-current (Note 15)
    117,904       123,087  
Total Current Liabilities
    6,653,942       5,309,186  
                 
Long-term Liabilities:
               
Lease liability-long-term (Note 15)
    797,560       847,420  
Total Long-term Liabilities
    797,560       847,420  
Total Liabilities
    7,451,502       6,156,606  
                 
Commitments and Contingencies (Note 15)
    -       -  
                 
Shareholders' Equity:
               
China Du Kang Co., Ltd. Shareholders' Equity
               
Preferred stock, par value $0.001, 5,000,000 shares authorized;
               
no shares issued and outstanding as of
               
June 30, 2012 and December 31, 2011     -       -  
Common stock, par value $0.001, 250,000,000 shares authorized;
               
100,113,774 shares issued and outstanding as of                
June 30, 2012 and December 31, 2011     100,114       100,114  
Additional paid-in capital
    27,385,386       27,385,386  
Accumulated deficit
    (21,880,083 )     (22,292,346 )
Accumulated other comprehensive income
    (753,614 )     (821,700 )
Total China Du Kang Co., Ltd.  Shareholders' equity (deficit)     4,851,803       4,371,454  
Noncontrolling Interest
    5,130,395       5,097,980  
Total Shareholders' Equity (Deficit)
    9,982,198       9,469,434  
Total Liabilities and Shareholders' Equity (Deficit)   $ 17,433,700     $ 15,626,040  
 
See Notes to Consolidated Financial Statements
 
 
4

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Revenues
                       
Sales of Liquor
  $ 722,681     $ 258,941     $ 1,337,058     $ 686,620  
License Fees
    212,209       242,636       424,531       526,453  
Total Revenues
    934,890       501,577       1,761,589       1,213,073  
                                 
Costs of Revenues
                               
Costs of Liquor Sold
    446,413       215,546       905,848       555,684  
Costs of License Fees
    -       -       -       -  
Total Costs of Sales
    446,413       215,546       905,848       555,684  
                                 
Gross Profit
    488,477       286,031       855,741       657,389  
                                 
Operating Expenses
                               
                                 
Selling Expenses
                               
Advertising expenses
    -       15,296       4,268       19,267  
Promotion expenses      13,474       51,184       21,815       53,120  
Travel and entertainment
    10,141       3,312       17,793       5,046  
 Total Selling Expenses
    23,615       69,792       43,876       77,433  
                                 
General and administrative expenses
                               
Payroll
    106,477       72,667       177,830       150,955  
Employee benefit and pension
    27,763       21,646       49,380       40,726  
Depreciation and amortization expenses
    30,772       38,279       62,142       83,928  
Professional fees and consultancy fees
    44,871       31,122       97,401       56,226  
Office expenses
    83,710       13,047       104,692       28,889  
Vehicle expenses
    11,227       9,702       19,009       18,978  
Travel and entertainment
    55,559       7,053       63,467       18,082  
Other general and administrative expenses
    9,164       (31,615 )     9,164       2,257  
Total General and Administrative Expenses
    369,543       161,901       583,085       400,041  
                                 
Total Operating Expenses
    393,158       231,693       626,961       477,474  
                                 
Income (Loss) from Operation
    95,319       54,338       228,780       179,915  
                                 
Other Income (Expenses)
                               
Interest income
    1,588       1,483       2,811       3,003  
Interest expenses
    (8,035 )     (19,930 )     (16,083 )     (38,473 )
Imputed interest
    -       (260,838 )     -       (523,335 )
Governmental subsidy
    -       -       260,849       -  
Other income (expense)
    (143 )     (1,444 )     111       (1,344 )
Total other income (expenses)
    (6,590 )     (280,729 )     247,688       (560,149 )
                                 
Income (Loss) before Provision for Income Tax
    88,729       (226,391 )     476,468       (380,234 )
                                 
Provision for Income Tax
    (9,467 )     (33,721 )     (31,820 )     (80,306 )
                                 
Net Income (Loss)
    79,262       (260,112 )     444,648       (460,540 )
                                 
Less: Net income attributable to noncontrolling interest
    (8,198 )     12,038       32,385       43,869  
                                 
Net Income (Loss) attributable to China Du Kang Co., Ltd.
  $ 87,460     $ (272,150 )   $ 412,263     $ (504,409 )
                                 
Basic and Fully Diluted Earnings per Share
  $ 0.00     $ (0.00 )   $ 0.00     $ (0.01 )
                                 
Weighted average shares outstanding
    100,113,774       100,113,774       100,113,774       100,113,774  
 
See Notes to Consolidated Financial Statements
 
 
5

 

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPRESENTATIVE INCOME
(Unaudited)
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
                         
Net income
  $ 79,262     $ (260,112 )   $ 444,648     $ (460,540 )
Other comprehensive income, net of tax:
                               
      Effects of foreign currency conversion
    8,493       (118,840 )     68,116       (164,544 )
Total other comprehensive, not of tax
    8,493       (118,840 )     68,116       (164,544 )
Comprehensive income
    87,755       (378,952 )     512,764       (625,084 )
     Comprehensive income attributable to the noncontrolling interest
    (8,138 )     14,201       32,415       46,773  
Comprehensive income attributable to China Du Kang Co., Ltd.
  $ 95,893     $ (393,153 )   $ 480,349     $ (671,857 )

See Notes to Consolidated Financial Statements
 
 
6

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
For the Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
Cash Flows from Operating Activities
           
             
Net income (loss) including noncontrolling interest
  $ 444,648     $ (460,540 )
Adjustments to reconcile net income (loss)
               
   including noncontrolling interest to net cash
               
   provided (used) by operating activities:
               
        Imputed interest
    -       523,335  
        Depreciation
    267,137       182,075  
        Amortization
    21,852       23,820  
Changes in operating assets and liabilities:
               
   (Increase) in accounts receivable
    (282,232 )     (60,295 )
   (Increase)/Decrease in others receivable
    (75,074 )     71,929  
   (Increase)/Decrease in prepaid expenses
    (1,353,467 )     (412,076 )
   (Increase)/Decrease in inventories
    (573,741 )     (1,043,221 )
    Increase in accounts payable
    274,321       126,912  
    Increase/(Decrease) in accrued expenses
    83,720       128,163  
    Increase in other payable
    5,699       10,191  
    Increase in taxes payable
    23,495       60,112  
    (Decrease) in deferred revenue
    924,572       623,321  
    (Decrease) in lease liabilities
    (61,897 )     (63,771 )
Net cash (used) by operating activities
    (300,967 )     (290,045 )
                 
Cash Flows from Investing Activities
               
                 
Purchase of fixed assets
    (105,207 )     (124,427 )
Purchase of land use right
    -       (1,965,706 )
Net cash (used) by investing activities
    (105,207 )     (2,090,133 )
                 
Cash Flows from Financing Activities
               
                 
Proceeds from related parties
    -       1,657,609  
Repayments to related parties
    -       (9,939 )
Net cash provided by financing activities
    -       1,647,670  
                 
Increase (decrease) in cash
    (406,174 )     (732,508 )
Effects of exchange rates on cash
    7,830       74,671  
Cash at beginning of period
    968,370       1,994,126  
Cash at end of period
  $ 570,026     $ 1,336,289  
                 
Supplemental Disclosures of Cash Flow Information:
               
   Cash paid (received) during year for:
               
       Interest
  $ 16,083     $ 27,862  
       Income taxes
  $ 19,958     $ -  
 
See Notes to Consolidated Financial Statements
 
 
7

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1-
BASIS OF PRESENTATION
 
The accompanying unaudited financial statements of China Du Kang Co., Ltd. and subsidiaries, (the “Company” or "China Du Kang") were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Management of the Company (“Management”) believes that the following disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and the notes for the year ended December 31, 2011.
 
These unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of Management, are necessary to present fairly the financial position and results of operations of the Company for the periods presented. Operating results for the three and six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
 
Note 2-
ORGANIZATION AND BUSINESS BACKGROUND
 
China Du Kang Co., Ltd (“China Du Kang” or the “Company”) was incorporated in the State of Nevada on January 16, 1987. Currently, through its wholly owned subsidiary, Hong Kong Merit Enterprise Limited (“Merit”),the Company is engaged in the business of production and distribution of distilled spirits with the brand name of “Baishui Dukang”in the People's Republic of China ("PRC"). The Company also licenses the brand name to other liquor manufactures and liquor stores in PRC.  The Company's structure is summarized in the following chart.
 
 
8

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2-
ORGANIZATION AND OPERATIONS (continued)
 
   
 
China Du Kang Co., Ltd. ("China Du Kang")
Incorporated in the State of Nevada
on January 16, 1987
 
   
       
 
       
        Acquiring 100% equity interest on 2/11/2008
               
               
   
 
Hong Kong Merit Enterprise Limited
“Merit"
Incorporated in Hong Kong
on September 8, 2006
 
   
       
 
       
        Acquiring 100% equity interest on 1/22/2008
               
               
   
 
Shaanxi Huitong Food Development Co., Inc.
“Huitong”
Incorporated in Shaanxi Province, PRC
on August 9, 2007
 
   
       
 
       
       
Acquiring 98.24% equity interest on 12/26/2007
The equity interest changed to 83.47% on October 1, 2011
               
               
   
 
Shaanxi Xidenghui Technology Stock Co., Ltd.
“Xidenghui”
Incorporated in Shaanxi Province, PRC
on March 29, 2001
 
   
Acquiring 90.51% equity interest on 5/15/2002   Acquiring 70% equity interest on 11/12/2007
 
 
Shaanxi Baishui Dukang Liquor Co., Ltd.
       “Baishui Dukang”
Incorporated in Shaanxi Province, PRC
on March 1, 2002
 
  Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd.
       “Brand Management”
Incorporated in Shaanxi Province, PRC
on November 12, 2007
 
 
 
9

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").  This basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the "Accounting Principles of China" ("PRC GAAP").  Certain accounting principles, which are stipulated by US GAAP, are not applicable in the PRC GAAP.  The difference between PRC GAAP accounts of the Company and its US GAAP consolidated financial statements is immaterial.
 
The consolidated financial statements include the accounts of the Company and all its majority-owned subsidiaries which require consolidation.  Inter-company transactions have been eliminated in consolidation.
 
Certain amounts in the prior year's consolidated financial statements and notes have been revised to conform to the current year presentation.
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual results when ultimately realized could differ from those estimates.
 
Subsequent Events
 
The Company evaluated subsequent events through the date of issuance of these financial statements. We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our consolidated financial statements.
 
 
10

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Foreign Currencies Translation
 
The Company maintains its books and accounting records in PRC currency "Renminbi" ("RMB"), which is determined as the functional currency.  Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of the transactions. Monetary assets and liabilities denominated in currencies other than RMB are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. Exchange differences are included in the statements of changes in owners' equity.  Gains and losses resulting from foreign currency transactions are included in operations.
 
The Company’s financial statements are translated into the reporting currency, the United States Dollar (“US$”).  Assets and liabilities of the Company are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period.  Translation adjustments resulting from translation of these consolidated financial statements are reflected as accumulated other comprehensive income (loss) in the consolidated statements of changes in shareholders’ equity.
 
The exchange rates used for foreign currency translation were as follows (USD$1 = RMB):
 
Period Covered
 
Balance Sheet Date
 
Average Rates
         
Six months ended June 30, 2012
 
6.31970
 
6.32550
Six months ended June 30, 2011
 
6.46400
 
6.54818
Year ended December 31, 2011
 
6.36470
 
6.47351
 
 
Statement of Cash Flows
 
In accordance with FASB ASC 230, “Statement of Cash Flows," cash flows from the Company’s operations is calculated based upon the functional currency.  As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
 
 
11

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Revenue Recognition
 
The Company recognizes revenue when the earnings process is complete, both title and the risks and rewards of ownership are transferred or services have been rendered and accepted, the selling price is fixed or determinable, and collectability is reasonably assured.
 
(1) Sales of Liquor
 
The Company generally sells liquor to liquor distributors with which the Company executed an exclusive distributor contract, pursuant to which the distributor cannot act as a distributor for any other products of a third party.  The Company recognizes liquor sales revenue when the significant risks and rewards of ownership have been transferred pursuant to PRC law, including such factors as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value-added tax laws have been complied with, and collectability is reasonably assured. The Company generally recognizes revenue from sales of liquor when its products are shipped.
 
The Company does not provide an unconditional right of return, price protection or any other concessions to our customers.  Sales returns and other allowances have been immaterial in our operation.
 
(2) License Fees
 
(a) License fees from liquor manufactures
 
We authorize liquor manufacturers who comply with our requirements to use certain sub brand names of “Baishui Dukang” to process the production of liquor and to sell to customers within the designated area in a certain period of time. The amount of license fee varies based on the sales territory and the number of sub brand names. We generally collect the entire license fee when the license agreement is executed, and then recognize license fee revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned.
 
(b) License fees from liquor stores
 
We also authorize liquor stores who comply with our requirements to exclusively sell certain sub brand names of “Baishui Dukang” products within the designated area in a certain period of time. The amount of license fee varies based on the sales territory and the number of sub brand names. We generally collect the entire license fee when the agency agreement is executed, and then recognize license fee revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned.
 
 
12

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Deferred Revenue
 
Deferred revenue consists of prepayments to the Company for products that have not yet been delivered to the customers and franchise fees received upfront for services that have not yet been rendered and accepted.  Payments received prior to satisfying the Company’s revenue recognition criteria are recorded as deferred revenue.
 
Cost of License Fees
 
Costs of franchise fees principally include the costs to prepare the franchise contracts and the payroll to employees who are responsible for inspection and monitoring the franchisees. These expenses are immaterial and therefore included in the general and administrative expenses.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less.
 
Others Receivable
 
Others receivable principally includes advances to employees who are working on projects on behalf of the Company.  After the work is finished, they will submit expense reports with supporting documents to the accounting department. Upon being properly approved, the expenses are debited into the relevant accounts and the advances are credited out. Cash flows from these activities are classified as cash flows from operating activities.
 
Concentrations of Credit Risk
 
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with various financial institutions in the PRC which do not provide insurance for the amounts on deposit.  The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.
 
Fair Value of Financial Instruments
 
The carrying value of financial instruments including cash and cash equivalents, receivables, prepaid expenses, accounts payable, and accrued expenses, approximates their fair value due to the relatively short-term nature of these instruments.
 
 
13

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Inventories
 
Inventories are stated at the lower of cost or market value. Actual cost is used to value raw materials and supplies. Finished goods and work-in-progress are valued on the weighted-average-cost method. Elements of costs in finished good and work-in-progress include raw materials, direct labor, and manufacturing overhead.
 
Baishui Dukang, one of our subsidiaries, is engaged in the distillery business.  Pursuant to the production requirement, all spirits that are newly distilled from sorghum, so call “liquor base”, must be barrel-aged for several years, so we bottle and sell only a portion of our liquor base inventory each year.  We classify barreled liquor base as work-in-progress. Following industry practice, we classify all barreled liquor base as a current asset.
 
Property, Plant and Equipment
 
Property, plant and equipment are carried at cost.  The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.
 
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
 
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets without residual value.  The percentages or depreciable life applied are:
 
 
Building and warehouses
20 years
Machinery and equipment
7-10 years
Office equipment and furniture
5 years
Motor vehicles
5 years
Leased assets
Lease duration
 
 
Intangible Assets
 
Intangible assets are carried at cost.  Amortization is calculated on a straight-line basis over the estimated useful life of the assets without residual value.  The percentages or amortizable life applied are:
 
Land use right
50 years
Trade Mark
10 years
 
 
14

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Land Use Right
 
All land belongs to the State in PRC.  Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively.  The land use right can be sold, purchased, and exchanged in the market.  The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner.
 
The Company owns the right to use three pieces of land, approximately 657 acres, 2.4 acres, and 7.8 acres, located in Weinan City, Shaanxi Province through February, 2051, March 2055, and May 2059.   The costs of these land use rights are amortized over their prospective beneficial period, using the straight-line method with no residual value.
 
Valuation of Long-Lived assets
 
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
 
Long-term Investment
 
On March 1, 2006, Xidenghui executed an investment agreement with Shaanxi Yichuan Nature Park Co., Inc., pursuant to which, Xidenghui agreed to invest cash of $1,596,254 (RMB 12,000,000) to establish a joint-venture named Shaanxi Yellow-river Bay Wenquan Lake Park Co., Ltd., F/K/A Shaanxi Yellow-river Wetlands Park Co., Ltd., and owns 7.9% equity ownership interest therein. Shaanxi Yellow-river Wetlands Park Co., Ltd. is engaged in the business of recreation and entertainment.
 
Xidenghui finished the investment contribution in September 2007.  As the project is currently ongoing, management believes the amount invested approximates the fair value and uses the cost method to record the investment.
 
Advertising Costs
 
The Company expenses advertising costs as incurred or the first time the advertising takes place, whichever is earlier, in accordance with the FASB ASC 720-35, “Advertising Costs."  The advertising costs were $4,268, and $19,267 for the six months ended June 30, 2012 and 2011, respectively.
 
 
15

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Research and Development Costs
 
Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred in accordance with the FASB ASC 730, "Research and Development." Research and development costs were immaterial for the six months ended June 30, 2012 and 2011, respectively.
 
Value-added Tax ("VAT")
 
Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT).  All of the Company’s products that are sold in PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government.  This VAT may be offset by VAT paid on purchase of raw materials included in the cost of producing the finished goods. The Company presents VAT on a net basis.
 
Sales Tax and Sales Tax Affixation
 
Brand Management derives license fees revenue, which is subject to sales tax and sales tax affixation in PRC. Sales tax rate is 5% of the gross sales, and sales tax affixation is approximately 10% of the sales tax, or 0.05% of the gross sales. The Company presents sales tax and sales tax affixation on a net basis. License fee revenue represents the invoiced amount, net of sales tax and sales tax affixation.
 
Excise Tax
 
Baishui Dukang produces and distributes distilled liquor, which is subject to excise tax in PRC. The excise tax rate is $0.14 (RMB1.00) per kilogram and 10%-20% of gross sales revenue. The Company presents excise tax on a net basis. Sales revenue from sales of liquor represents the invoiced value of liquor sold, net of excise tax.
 
Related Parties
 
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
 
 
16

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Due from/to Affiliates
 
Due from/to affiliates represent temporally short-term loans to/from affiliates, which are directly or indirectly, beneficially and in the aggregate, majority-owned and controlled by directors and principal shareholders of the Company.  These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.  Cash flows from due from related parties are classified as cash flows from investing activities.  Cash flows from due to related parties are classified as cash flows from financing activities.
 
Loans from Directors and Officers
 
Loans from directors and officers are temporally short-term loans from our directors and officers to finance the Company’s operation due to lack of cash resources.  These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.  Cash flows from these activities are classified as cash flows from financing activates.
 
Imputed Interest
 
The Company has financed it business operation through short-term borrowings from various related parties. These short-term borrowings are non-secured, non-interest bearing with no fixed repayment date. The imputed interests are assessed as an expense to the business operation and an addition to the paid-in capital. The calculation is performed quarterly based on the average outstanding balance and the market interest rate. The interest rate used in the calculation of imputed interest for the six months ended June 30, 2011 was 6.375%. The imputed interest expense was $0 and $523,335 for the six months ended June 30, 2012 and 2011.
 
Pension and Employee Benefits
 
Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Company to accrue for these benefits based on certain percentages of the employees' salaries. Management believes full time employees who have passed the probation period are entitled to such benefits.  The total provision for such employee benefits was $38,495 and $36,305 for the six months ended June 30, 2012 and 2011, respectively.
 
 
17

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Government Subsidies
 
The Company records government grants as current liabilities upon reception.   Government subsidy revenue is recognized only when there is reasonable assurance that the Company has complied with all conditions attached to the grant.  Government subsidies are generally exempt from income tax. The Company recognized government subsidy of $260,849 and $0 for the six months ended June 30, 2012 and 2011, respectively.
 
Income Taxes
 
The Company accounts for income tax in accordance with FASB ASC 740-10-25, which requires the asset and liability approach for financial accounting and reporting for income taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
Although the PRC Income Tax Law allows an enterprises to offset their future net income with operating losses carried forward, an enterprise needs approval from the local tax authority before it can claim such tax benefit, and the outcome of the application is generally uncertain.  Therefore, management established a 100% valuation allowance for the operation losses carried forward and no deferred tax assets have been recorded.
 
Effective January 1, 2007, the Company adopted a new FASB guidance, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The new FASB guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The new FASB guidance also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.  In accordance with the new FASB guidance, the Company performed a self-assessment and concluded that there were no significant uncertain tax positions requiring recognition in its consolidated financial statements.
 
The Company accounts for income taxes in interim periods in accordance with FASB ASC 740-270, "Interim Reporting."  The Company has determined an estimated annual effect tax rate.  The rate will be revised, if necessary, as of the end of each successive interim period during the Company's fiscal year to its best current estimate. The estimated annual effective tax rate is applied to the year-to-date ordinary income (or loss) at the end of the interim period.
 
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.
 
 
18

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Statutory Reserves
 
Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the Company's registered capital.  Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings.  The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.  Beginning from January 1, 2006, enterprise is no longer required to make appropriation to the statutory public welfare fund.  The Company does not make appropriations to the discretionary surplus reserve fund.
 
Since the Company has been accumulating deficit, no contribution has been made to statutory surplus reserve fund and statutory public welfare reserve fund to date. The company will be required to make contribution to the statutory surplus reserve fund and statutory public welfare reserve fund upon the achievement of positive retained earnings, which means elimination of accumulated deficit and making further positive net income.
 
Comprehensive Income
 
FASB ASC 220, “Comprehensive Income," establishes standards for reporting and display of comprehensive income, its components and accumulated balances.  Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statements of changes in owners' equity consists of changes in unrealized gains and losses on foreign currency translation.  This comprehensive income is not included in the computation of income tax expense or benefit.
 
Segment Reporting
 
FASB ASC 820, “Segments Reporting," establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company currently operates in two principal business segments.
 
 
19

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Earnings (Loss) Per Share
 
The Company reports earnings per share in accordance with FASB ASC 260, “Earnings Per Share," which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.  Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  There are no potentially dilutive securities outstanding (options and warrants) for the six months ended June 30, 2012 and 2011, respectively.
 
Fair Value of Measurements
 
Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
 
Level 1:
 
Unadjusted quoted prices in active markets for identical assets or liabilities.
     
Level 2:
 
Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available.  Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
     
Level 3:
 
Unobservable inputs.  Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
 
 
An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Availability of observable inputs can vary and is affected by a variety of factors.  The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.
 
 
20

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3-
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Recent Accounting Pronouncements
 
In December 2011, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2011-12 (“ASU 2011-12”), Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The provisions of ASU 2011-12 became effective in fiscal years beginning after December 15, 2011. The adoption of ASU 2011-12 did not materially impact our financial statements.
 
In September 2011, the Financial Accounting Standards Board (FASB) issued a revised standard on testing for goodwill impairment. The revised standard allows an entity to first assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a likelihood of more than 50 percent. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform the qualitative assessment in any subsequent period. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The adoption of this new guidance did not have a material effect on the Company’s financial position, results of operations, and cash flows.
 
In June 2011, the FASB issued amended disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective January 1, 2012. Early application is permitted.  The adoption of this new guidance did not have a material effect on the Company’s financial position, results of operations, and cash flows.
 
In January 2011, the FASB temporarily deferred the disclosures regarding troubled debt restructurings which were included in the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses which was issued in July 2010.  In April 2011, the FASB issued additional guidance and clarifications to help creditors in determining whether a creditor has granted a concession, and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The new guidance and the previously deferred disclosures are effective July 1, 2011 applied retrospectively to January 1, 2011. Prospective application is required for any new impairments identified as a result of this guidance. The adoption of this new guidance did not have a material effect on the Company’s financial position, results of operations, and cash flows.
 
 
21

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 4-
ACCOUNTS RECEIVABLE
 
Accounts receivable consists of the following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
Accounts receivable
  $ 554,692     $ 270,276  
Less: Allowance for doubtful accounts
    -       -  
    Accounts  receivable, net
  $ 554,692     $ 270,276  
 
 
Bad debt expense charged to operations was $0 and $0 for the six months ended June 30, 2012 and 2011, respectively.
 
Note 5-
PREPAID EXPENSES
 
Prepaid expenses consist of the following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
Machinery and parts
  $ 12,026     $ 20,520  
Construction projects
    996,400       -  
Raw materials and supplies
    692,608       519,629  
Packing and supply materials
    304,090       138,379  
Office expenses
    32,945       -  
       Total
  $ 2,038,069     $ 678,528  
 
Note 6-
INVENTORIES
 
Inventories consist of following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
Finished goods
  $ 2,409,002     $ 1,799,934  
Work-in-progress
    2,680,932       2,700,921  
Raw materials
    219,276       154,603  
Supplies and packing materials
    638,183       679,678  
       Total
  $ 5,947,393     $ 5,335,136  
 
 
22

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 7-
PROPERTY, PLANT AND EQUIPMENT
 
The following is a summary of property, plant and equipment:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
Building and warehouses
  $ 3,177,085     $ 3,274,587  
Machinery and equipment
    2,330,805       2,306,197  
Office equipment and furniture
    198,032       191,972  
Motor vehicles
    373,531       370,878  
Leased assets
    2,499,643       2,457,187  
      Total
    8,579,096       8,600,821  
Less: Accumulated depreciation
    (4,636,273 )     (4,460,944 )
      3,942,823       4,139,877  
Add: Construction in progress
    377,323       311,792  
     Total property, plant and equipment, net
  $ 4,320,146     $ 4,451,669  
 
 
Depreciation expense charged to operations was $267,137 and $182,075 for the six months ended June 30, 2012 and 2011, respectively. Depreciation expense with respect to production equipment that was charged to cost of sales was $226,847 and $121,967 for the six months ended June 30, 2012 and 2011, respectively.  The remainder, depreciation expense attributable to equipment used in administration, was $40,290 and $60,108 for the six months ended June 30, 2012 and 2011, respectively, and was included in general and administration expenses.
 
Note 8-
INTANGIBLE ASSETS
 
The following is a summary of intangible assets, less amortization:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
Land use right
  $ 2,100,252     $ 2,085,341  
Trade Mark of "Xidenghui"
    71,208       70,702  
Trade Mark of "Baishui Du Kang"
    26,110       25,924  
      Total intangible assets
    2,197,570       2,181,967  
                 
Less: Accumulated amortization
    (170,663 )     (147,732 )
                 
   Total intangible assets, net
  $ 2,026,907     $ 2,034,235  
 
 
Amortization expense charged to operations was $21,852 and $23,820 for the three months ended June 30, 2012 and 2011, respectively.
 
 
23

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 9-
ACCRUED EXPENSES
 
Accrued expenses consist of the following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
Accrued payroll
  $ 60,977     $ 84,933  
Accrued employee benefits
    59,390       59,000  
Accrued pension and employee benefit
    171,874       138,643  
Accrued office expenses
    147,033       70,388  
       Total
  $ 439,274     $ 352,964  
 
Note 10-
TAXES PAYABLE
 
Taxes payable consists of the following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
Income tax
  $ 484,857     $ 469,626  
Sales tax and sales tax affixation
    144,285       142,148  
Excise taxes
    19,458       44,694  
Value-added Tax ("VAT")
    40,365       2,429  
Other taxes
    556       2,399  
      Total taxes payable
  $ 689,521     $ 661,296  
 
The Company’s subsidiary, Xidenghui, have certain tax deferred assets such as net operating loss to apply against current period’s taxable income.

The Company’s subsidiary, Brand Management, is subject to income tax. The income tax rate is 25%.
 
 
24

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 11-
SALES OF LIQUOR TO RELATED PARTY
 
The Company generally sells liquor to liquor distributors. Some of these liquor distributors are our affiliates, which are directly or indirectly, beneficially and in the aggregate, majority-owned and controlled by directors and principal shareholders of the Company.  The price we sell liquor to third parties. The amount sold to these affiliates follows:
 
     
For the Three Months Ended
   
For the Six Months Ended
 
     
June 30,
         
June 30,
       
Name of Related Party
Description
 
2012
   
2011
   
2012
   
2011
 
                           
Shaanxi Dukang Group Co., Ltd.
Affiliate 1
  $ 385,587     $ 207,750     $ 827,149     $ 565,994  
Shaanxi Baishui Dukang Commercial and Trade Co., Ltd.
Affiliate 2
    4,557       -       4,557       -  
Shaanxi Baishui Shiye Co., Ltd.(F/K/A Shaanxi Baishui Dukang Trade Co., Ltd.)
Affiliate 3
    19,432       38,423       45,801       106,226  
      $ 409,576     $ 246,173     $ 877,507     $ 672,220  
 
Accounts receivable from related parties consists of the following:
 
     
June 30,
   
December 31,
 
Name of Related Party Description  
2012
   
2011
 
               
Shaanxi Baishui Dukang Commercial and Trade Co., Ltd.
Affiliate 2
  $ 4,557     $ -  
Shaanxi Baishui Shiye Co., Ltd.(F/K/A Shaanxi Baishui Dukang Trade Co., Ltd.)
Affiliate 3
    -       66,981  
Less: Allowance for doubtful accounts
      -       -  
    Accounts Receivable from Related-parties, net
    $ 4,557     $ 66,981  

Bad debt expense charged to operations was $0 and $0 for the six months ended June 30, 2012 and 2011, respectively.

Deferred revenue from related parties consists of the following:
 
     
June 30,
   
December 31,
 
Name of Related Party Description  
2012
   
2011
 
               
               
Shaanxi Dukang Group Co., Ltd.
Affiliate 1
  $ 1,513,822     $ 427,732  
Shaanxi Baishui Shiye Co., Ltd.(F/K/A Shaanxi Baishui Dukang Trade Co., Ltd.)
Affiliate 2
    211,821       217,021  
Total Deferred Revenue from Related-parties     $ 1,725,643     $ 644,753  
 
The nature of the affiliation of each related party follows:
 
Affiliate 1--The CEO of the Company is a director of Shaanxi Dukang Group Co., Ltd. and has significant influence on the operations therein.
 
Affiliate 2--The CEO of the Company is the sole director of Shaanxi Baishui Dukang Commercial and Trade Co., Ltd. and has significant influence on the operations therein.
 
Affiliate 3--The CEO of the Company is the sole director of Shaanxi Baishui Shiye Co., Ltd. and has significant influence on the operations therein.
 
 
25

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 12-
SEGMENT REPORTING
 
The Company operates in two reportable business segments that are determined based upon differences in products and services. Summarized information by business segment for the three and six months ended June 30, 2012 and 2011 is as follows:
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
REVENUE
                       
      Sales of Liquor
  $ 722,681     $ 258,941     $ 1,337,058     $ 686,620  
      License Fees
    212,209       242,636       424,531       526,453  
                                 
COST OF SALES
                               
      Sales of Liquor
  $ 446,413     $ 215,546     $ 905,848     $ 555,684  
      License Fees
    -       -       -       -  
                                 
GROSS PROFITS
                               
      Sales of Liquor
  $ 276,268     $ 43,395     $ 431,210     $ 130,936  
      License Fees
    212,209       242,636       424,531       526,453  
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
             
TOTAL ASSETS OF LIQUOR PRODUCTION AND DISTRIBUTION
  $ 13,912,410     $ 12,139,862  
                 
TOTAL ASSETS OF BRAND NAME LICENSE
  $ 4,213,860     $ 4,201,880  

 
26

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 13-
CONCENTRATIONS AND CREDIT RISKS
 
The Company operates in the PRC and grants credit to its customers in this geographic region based on an evaluation of the customer's financial condition. Although the PRC is economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Company’s operations.
 
Major Customers
 
The following major customers accounted for approximately 5% or more of the Company’s total sales, as summarized in the following:
 
       
For the Six Months Ended June 30,
       
       
2012
         
2011
       
                             
Major
 
Type of
       
Percentage of
         
Percentage of
 
Customer
 
Customer
 
Revenue
   
Total Revenue
   
Revenue
   
Total Revenue
 
Shaanxi Dukang Group Co., Ltd.
 
Distributor
  $ 827,149       46.95 %   $ 565,994       46.66 %
Shaanxi Baishui Dukang Shiye Co., Ltd.
 
Distributor
    -       -       106,226       8.76 %
Shanghai Yue Long Wine Co., Ltd
 
Distributor
    189,425       10.75 %     -       -  
Mr. Jincai Bai'
 
Licensee
    -       -       -       -  
Ms. Xiaoyan Shi
 
Agent
    -       -       101,356       8.36 %
Mr. Anxian Xie
 
Agent
    -       -       86,878       7.16 %
Mr. Changzhong Ji
 
Agent
    94,854       5.38 %     -       -  
Ms. Jie Cao
 
Agent
    94,854       5.38 %     -       -  
Ms. Xiaoli Du
 
Agent
    -       -       72,398       5.97 %
Ms. Sue Dong
 
Agent
    -       -       72,398       5.97 %
Total
      $ 1,206,282       68.48 %   $ 1,005,250       82.87 %
 
 
Major Suppliers
 
The following major suppliers accounted for approximately 5% or more of the Company’s total purchases, as summarized in the following:
 
   
For the Six Months Ended June 30,
       
   
2012
         
2011
       
                         
Major
       
Percentage of
         
Percentage of
 
Suppliers
 
Purchase
   
Total Purchase
   
Purchase
   
Total Purchase
 
Hunan Liling Liangyou Geramacs Co., Ltd.
  $ 130,143       13.91 %   $ 27,599       6.77 %
Hunan Dexing Taochi Co., Ltd.
    64,765       6.92 %     -       -  
Yuncheng Aofeng Glass Co., Ltd.
    47,852       5.12 %     85,071       20.88 %
Hunan New Century Ceramics Co., Ltd.
    200,267       21.41 %     150,403       36.91 %
Wenzhou Zhixin Wujin Glass Co., Ltd.
    52,953       5.66 %     -       -  
Mr. Jianguo Wang
    96,414       10.31 %     -       -  
Shangluo City Danquan Alcohol Purchase and Sale Co., Ltd.
    57,273       6.12 %     -       -  
Sichuan Guangan Detai Glass Co., Ltd.
    -       -       25,396       6.23 %
Shanxi Wenxifa Glass Co., Ltd.
    -       -       68,526       16.82 %
Total
  $ 649,666       69.46 %   $ 356,994       87.62 %
 
 
27

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Note 14-
NONCONTROLLING INTEREST
 
Balance of Noncontrolling Interest consists of the following:
 
   
Subsidiary and Noncontrolling Interest percentage
   
Total
 
   
Brand Management
   
Baishui Dukang
   
Xidenghui
    Noncontrolling  
      30.00%       9.49%       16.53% (4)   Interest  
                               
Balance @ December 31, 2011
  $ 339,079     $ 126,854     $ 4,632,047     $ 5,097,980  
                                 
Noncontrolling Interest income (Loss)
    28,638       3,747       -       32,385  
                                 
Other Comprehensive Income (Loss) - effects of Foreign Currency Conversion
    27       3       -       30  
                                 
Balance @ June 30, 2012
  $ 367,744     $ 130,604     $ 4,632,047     $ 5,130,395  
 
 
28

 
 
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14-
NONCONTROLLING INTEREST (continued)
 
Noncontrolling interest income consists of the following:
 
   
For the six months Ended June 30, 2012
 
                                                   
Name of Subsidiary
 
Brand Management
   
Baishui Dukang
   
Xidenghui
     
Parent/Holding Company
 
   
Total
Income
   
Noncontrolling Interest Income
   
Total
Income
   
Noncontrolling Interest Income
   
Total
Income
   
Noncontrolling Interest Income
     
Total
Income
   
Noncontrolling Interest Income
 
      100%       30%       100%       9.49%       100%       16.53% (4)              
                                                               
Net Income (Loss)
  $ 95,459     $ 28,638     $ 39,483     $ 3,747     $ 309,841     $ 51,217       $ (138 )   $ -  
                                                                   
Income (Loss) from subsidiary
                                                                 
      (equity method)
    -       -       -       -       102,558       16,953         412,399       32,385  
                                                                   
Total Income (Loss)
    95,459       28,638       39,483       3,747       412,399       68,170         412,261       32,385  
                                                                   
Adjustments to noncontrolling
                                                                 
     interest to absorb accumulated                                                                  
     deficit     -       -       -       -       -       (53,713 )       -       -  
                                                                   
Less: Income (Loss) attributable to
                                                                 
      noncontrolling interest
    (28,638 )     -       (3,747 )     -       -       -         -       -  
                                                                   
Income (Loss) attributable to Majority
  $ 66,822             $ 35,736             $ 412,399               $ 412,261 (3)      
Income (Loss) attributable to