CHINA DU KANG CO. LTD. - FORM 10-Q

CHINA DU KANG CO. LTD. - FORM 10-Q - August 22, 2011

CHINA DU KANG CO. LTD. Reports

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

[ ] 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.

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)

Check whether the issuer (1) filed all reports required to be filed by Section 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.

[X] YES [ ] NO

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

[X ] YES [ ] NO

APPLICABLE TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.

[x ] YES [ ] NO

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: June 30, 2011: 100,113,791

Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]

Table of Contents

10-Q – China Du Kang Co., Ltd.

FORM 10-Q

PART I

FINANCIAL STATEMENTS	4

MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION	26

QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK	28

CONTROLS AND PROCEDURES	29



PART II

LEGAL PROCEEDINGS	31

RISK FACTORS	32

UNREGISTERED SALES OF EQUITY	38

SECURITIES AND USE OF PROCEEDS	38


DEFAULTS UPON SENIOR SECURITIES	38


EXHIBITS	38


SIGNATURES	39

PART I.

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.


FINANCIAL REPORT

At June 30, 2011 and December 31, 2010 and
For the Three and Six Months Ended June 30, 2011 and 2010

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.



INDEX



		PAGE


	CONSOLIDATED BALANCE SHEETS	2

	CONSOLIDATED STATEMENTS OF OPERATIONS	3

	CONSOLIDATED STATEMENTS OF CASH FLOWS	4

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	5-28

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2011			2010
ASSETS	(unaudited)
Current Assets:
Cash and cash equivalents	$	1,336,289		$	1,994,126
Accounts receivable, net (Note 6)		61,080			-
Others receivable		3,041			74,210
Prepaid expenses (Note 7)		1,057,445			625,696
Inventories (Note 8)		4,405,660			3,273,993
Total current assets		6,863,515			5,968,025

Property, Plant and Equipment, net (Note 9)		4,428,194			4,424,062
Intangible assets, net (Note 10)		2,024,794			2,003,122
Long-term investment		1,856,436			1,814,937

Total Assets	$	15,172,939		$	14,210,146

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank loans (Note 15)	$	773,515		$	756,224
Accounts payable		1,040,356			891,409
Accrued expenses (Note 12)		294,014			160,512
Others payable		75,926			64,136
Land use right purchase payable		-			1,946,792
Taxes payable		563,262			491,137
Deferred revenue		2,254,843			1,587,115
Due to related parties (Note 13)		16,440,385			17,018,272
Employee security deposit		44,863			43,860
Lease liability-current		125,199			126,314
Total Current Liabilities		21,612,363			23,085,771

Long-term Liabilities:
Lease liability-long-term		895,000			934,237
Total Long-term Liabilities		895,000			934,237
Total Liabilities		22,507,363			24,020,008

Commitments and Contingencies (Note 18)		-			-

Shareholders' Equity:
China Du Kang Co., Ltd. Shareholders' Equity
Preferred stock, par value $0.001, 5,000,000 shares authorized;
no shares issued and outstanding as of March 31, 2011 and December 31, 2010		-			-
Common stock, par value $0.001, 250,000,000 shares authorized;
100,113,791 shares issues and outstanding as of March 31, 2011 and December 31, 2010		100,114			100,114
Additional paid-in capital		15,223,238			14,699,903
Accumulated deficit		(21,954,058	)		(21,449,649	)
Accumulated other comprehensive income		(852,542	)		(685,094	)
Due from related parties (Note 10)		-			(2,577,187	)
Total China Du Kang Co., Ltd. Shareholders' equity (deficit)		(7,483,248	)		(9,911,913	)
Noncontrolling Interest		148,824			102,051
Total Shareholders' Equity (Deficit)		(7,334,424	)		(9,809,862	)
Total Liabilities and Shareholders' Equity (Deficit)	$	15,172,939		$	14,210,146

See Notes to Consolidated Financial Statements

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended							For the Six Months Ended
	June 30,							June 30,
		2011			2010			2011			2010
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues
Sales of Liquor		$	258,941		$	248,528		$	686,620		$	538,932
License Fees			242,636			192,447			526,453			392,285
Gross Revenue			501,577			440,975			1,213,073			931,217

Costs of Revenues
Costs of Liquor Sold			215,384			282,852			529,835			560,301
Costs of License Fees			-			-			-			-
Total Costs of Sales			215,384			282,852			529,835			560,301

Gross Profit			286,193			158,123			683,238			370,916

Operating Expenses

Selling Expenses
Advertising expenses			15,296			70,458			19,267			78,211
Promotion expenses			51,184			23,343			53,120			50,550
Travel and entertainment			3,312			1,751			5,046			2,235
Total Selling Expenses			69,792			95,552			77,433			130,996

General and administrative expenses
Payroll			72,667			44,038			150,955			95,293
Employee benefit and pension			21,646			425			40,726			597
Depreciation and amortization expenses			38,279			34,495			83,928			69,084
Professional fees and consultancy fees			31,122			49,810			56,226			84,844
Office expenses			13,047			13,575			28,889			22,259
Vehicle expenses			9,702			4,198			18,978			11,281
Loss on physical inventory count			162			-			25,849			-
Travel and entertainment			7,053			43,940			18,082			89,788
Other general and administrative expenses			(31,615	)		16,736			2,257			18,459
Total General and Administrative Expenses			162,063			207,217			425,890			391,605

Total Operating Expenses			231,855			302,769			503,323			522,601

Income (Loss) from Operation			54,338			(144,646	)		179,915			(151,685	)

Other Income (Expenses)
Interest income			1,483			83			3,003			248
Interest expenses			(19,930	)		(2,597	)		(38,473	)		(6,594	)
Imputed interest			(260,838	)		(237,578	)		(523,335	)		(474,152	)
Other income (expense)			(1,444	)		888			(1,344	)		993
Total other income (expenses)			(280,729	)		(239,204	)		(560,149	)		(479,505	)

Income (Loss) before Provision for Income Tax			(226,391	)		(383,850	)		(380,234	)		(631,190	)

Provision for Income Tax			(33,721	)		(4,625	)		(80,306	)		(26,435	)

Net Income (Loss)			(260,112	)		(388,475	)		(460,540	)		(657,625	)

Less: Net income attributable to noncontrolling interest			12,038			(12,738	)		43,869			(3,818	)

Net Income (Loss) attributable to
China Du Kang Co., Ltd.		$	(272,150	)	$	(375,737	)	$	(504,409	)	$	(653,807	)

Basic and Fully Diluted Earnings per Share		$	(0	)	$	(0	)	$	(0.01	)	$	(0.01	)

Weighted average shares outstanding			100,113,791			100,113,791			100,113,791			100,113,791

See Notes to Consolidated Financial Statements

	For the Six Months Ended
	June 30,
	2011			2010
	(unaudited)			(unaudited)
Cash Flows from Operating Activities

Net income (loss) including noncontrolling interest	$	(460,540	)	$	(657,625	)
Adjustments to reconcile net income (loss)
including noncontrolling interest to net cash
provided (used) by operating activities:
Imputed interest		523,335			474,152
Depreciation		182,075			178,554
Amortization		23,820			4,910
Changes in operating assets and liabilities:
(Increase)/Decrease in accounts receivable		(60,295	)		-
(Increase)/Decrease in others receivable		71,929			48,587
(Increase)/Decrease in prepaid expenses		(412,076	)		207,214
(Increase)/Decrease in inventories		(1,043,221	)		(430,903	)
Increase/(Decrease) in accounts payable		126,912			220,206
Increase/(Decrease) in accrued expenses		128,163			65,224
Increase/(Decrease) in other payable		10,191			(10,845	)
Increase/(Decrease) in taxes payable		60,112			43,694
Increase/(Decrease) in deferred revenue		623,321			448,855
Increase/(Decrease) in lease liabilities		(63,771	)		(64,883	)
Net cash provided (used) by operating activities		(290,045	)		527,140

Cash Flows from Investing Activities

Purchase of fixed assets		(124,427	)		(87,816	)
Purchase of land use right		(1,965,706	)		-
Advances to related parties		(610,900	)		(219,467	)
Collections of advances to related parties		305,450			-
Net cash (used) by investing activities		(2,395,583	)		(307,283	)

Cash Flows from Financing Activities

Repayments of bank loans		-			(292,622	)
Proceeds from related parties		1,963,037			1,649,278
Repayments to related parties		(9,941	)		(1,704,650	)
Net cash provided (used) by financing activities		1,953,096			(347,994	)

Increase (decrease) in cash		(732,532	)		(128,137	)
Effects of exchange rates on cash		74,695			52,417
Cash at beginning of period		1,994,126			619,472
Cash at end of period	$	1,336,289		$	543,752

Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during year for:
Interest	$	27,862		$	1,403
Income taxes	$	-		$	-

See Notes to Consolidated Financial Statements

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 1-	BASIS OF PRESENTATION

		The accompanying unaudited financial statements of China Du Kang Co., Ltd. and subsidiaries, (the “Company” or "Du Kang") were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Management of the Company (“Management”) believes that the following disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and the notes for the year ended December 31, 2010.

		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, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

	Note 2-	ORGANIZATION AND BUSINESS BACKGROUND

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

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

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

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


5

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 2-	ORGANIZATION AND BUSINESS BACKGROUND (continued)

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

		On January 22, 2008, Merit entered into a Share Purchase Agreement (the “Purchase Agreement”) with the owners of Shaanxi Huitong Food Co., Inc. ("Huitong"), a limited liability company incorporated in the People's Republic of China ("PRC") on August 9, 2007 with a registered capital of $128,200 (RMB1,000,000). Pursuant to the Purchase Agreement, Merit agreed to purchase 100% of the equity ownership in Huitong for a cash consideration of $136,722 (RMB 1,000,000). The local government approved the transaction on February 1, 2008. Subsequent to the completion of the acquisition, Huitong became a wholly-owned subsidiary of Merit.

		Huitong was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship. On December 26, 2007, Huitong executed an acquisition agreement with shareholders of Shaanxi Xidenghui Technology Stock Co., Ltd. ("Xidenghui"), whereby Huitong agreed to acquire 98.24% of the equity ownership of Xidenghui from the shareholders. Subsequent to completion of the acquisition agreement, Xidenghui became a majority-owned subsidiary of Huitong.

		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, Shanxi Province, PRC on March 1, 2002 under the Company Law of PRC. Baishui Dukang was principally engaged in the business of production and distribution of distilled spirit (liquor) with a brand name of “Baishui Du Kang”. On May 15, 2002, Xidenghui invested inventory and fixed assets with a total fair value of $ 4,470,219 (RMB 37,000,000) to Baishui Dukang and owns 90.51% of Baishui Dukang’s equity interest ownership, thereby causing Baishui Dukang to become a majority-owned subsidiary of Xidenghui.

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


6

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 2-	ORGANIZATION AND OPERATIONS (continued)

		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 and liquor stores. The Company's structure is summarized in the following chart.



		Under the PRC regulations on acquisition of businesses, commonly referred to as "SAFE" regulations (State Administration of Foreign Exchange), which were jointly adopted on August 8, 2006 by six PRC regulatory agencies with jurisdictional Authority, a Chinese entity may not be owned or controlled directly by foreign investors or shareholders but may be acquired in a two-step transaction with a wholly owned foreign enterprise (“WOFE”).


7

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 2-	ORGANIZATION AND OPERATIONS (continued)

		China Du Kang is the US holding company for Merit, a Hong Kong entity organized under the Companies Ordinance as a limited liability company. Merit was established as a WOFE corporation for the purpose of effecting an acquisition transaction with Huitong, a WOFE corporation incorporated in PRC. Huitong in turn majority owns Xidenghui, which was a Chinese holding company. Xidenghui had two subsidiaries, Baishui Dukang and Brand Management.

		This arrangement provides separate holding companies for the United States, Hong Kong, and PRC. This allows the Company to lawfully conduct operations in China while ownership is represented in shares of the U. S. holding company.

	Note 3-	CONTROL BY PRINCIPAL OWNERS

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

	Note 4-	GOING CONCERN

		As reflected in the accompanying consolidated financial statements, the Company has an accumulated deficit of $21,954,058 at June 30, 2011 that includes a loss of $504,409 for the six months ended June 30, 2011 and a loss of $1,007,604 for the year ended December 31, 2010 and a working capital deficiency of $14,748,848 at June 30, 2011. These factors raise substantial doubt about the Company's ability to continue as a going concern.

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

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

		The Company relied heavily for its financing needs on its affiliates, shareholders/directors as more fully disclosed in Note 12. On July 1, 2011, the related parties contributed their outstanding debt to paid-in capital, see Note 19.

8

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES

		Basis of Presentation

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

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

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

		Use of Estimates

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

		Subsequent Events

		The Company evaluated subsequent events through the date of issuance of these financial statements. We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our consolidated financial statements, except as disclosed in Note 19.


9

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Foreign Currencies Translation

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

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

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

		Period Covered	Balance Sheet Date Rates	Average Rates

		Six months ended June 30, 2011	6.46400	6.54818
		Six months ended June 30, 2010	6.80860	6.83474
		Year ended December 31, 2010	6.61180	6.77875
		Year ended December 31, 2009	6.83720	6.84088

		Statement of Cash Flows

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


10

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Revenue Recognition

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

		(1) Sales of Liquor

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

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

		(2) License Fees

		(a) License fees from liquor manufactures

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

		(b) License fees from liquor stores

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


11

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Deferred Revenue

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

		Cost of License Fees

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

		Cash and Cash Equivalents

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

		Others Receivable

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

		Concentrations of Credit Risk

		Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with high-quality institutions. Deposits held with banks in PRC may not be insured or exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore bear minimal risk.

		Fair Value of Financial Instruments

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


12

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Inventories

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

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

		Property, Plant and Equipment

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

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

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

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

		Intangible Assets

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

			Land use right	50 years
			Trade Mark	10 years


13

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Land Use Right

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

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

		Valuation of Long-Lived assets

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

		Long-term Investment

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

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

		Advertising Costs

		The Company expenses advertising costs as incurred or the first time the advertising takes place, whichever is earlier, in accordance with the FASB ASC 720-35, “Advertising Costs”. The advertising costs were $5,907, and $34,960 for the six months ended June 30, 2011 and 2010, respectively.


14

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Research and Development Costs

		Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred in accordance with the FASB ASC 730, "Research and Development". Research and development costs were immaterial for the six months June 30, 2011 and 2010, 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

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

		Related Parties

		For the purposes of these financial statements, parties are considered to be related if one party has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Company and the party are subject to common control or common significant influence. Related parties may be individuals or other entities.

		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.


15

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		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 and 2010 was 6.375% and 6.375%, respectively, which approximates the interest rate of our bank loan.

		Lease

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

		Pursuant to the lease agreement, Baishui Dukang is required to absorb the pension and unemployment insurance expenses of Sanjiu's original employees until they all reach their retirement age. Pursuant to the applicable laws in PRC, male employees retire when they reach 60 years old, while female employees retire when they reach 55 years old. Accordingly, Sanjiu’s original employees will gradually retire until Year 2032. The pension and unemployment insurance expenses are based on a certain percentage of the employees’ gross payroll. The percentage may be changed as the applicable law is amended. In practice, the expenses can be based on the local average salary published by the local government. Over the life of the lease, the Management anticipates the percentage will remain the same while the local average salary will increase 4% annually. The number of employees that we need to absorb their pension and unemployment insurance expenses will gradually decrease as Sanjiu’s original employees reach their retirement ages. To the best of our estimation, we anticipate the future payment for pension and unemployment insurance expenses for Sanjiu’s original employees as rental payment follows:


16

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- SIGNIFICANT ACCOUNTING POLICIES (continued)

		Lease (continued)

	Estimated Pension and Unemployment Insurance Expenses

	Year	Pension Insurance Expense					Unemployment Insurance Expense					Total		Present Value as of December 31, 2010 (the incremental interest rate is 8%)
		Province average salary (RMB)	Annual increase rate	Percentage	No. of employees	Estimated pension insurance expense (RMB)	City average salary (RMB)	Annual increase rate	Percentage	No. of employees	Estimated pension insurance expense	USD$1.00=RMB¥6.61180 @12/31/2010
		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	(RMB)	(USD)	(RMB)	(USD)
	2010	13,784	4%	20%	316	871,143	10,980	4%	2.50%	316	86,745	957,888	144,876
	2011	14,335	4%	20%	309	885,919	11,420	4%	2.50%	309	88,217	974,136	147,333	835,165	126,314
	2012	14,909	4%	20%	301	897,502	11,876	4%	2.50%	301	89,370	986,872	149,259	783,411	118,487
	2013	15,505	4%	20%	282	874,483	12,351	4%	2.50%	282	87,078	961,561	145,431	706,776	106,896
	2014	16,125	4%	20%	268	864,312	12,846	4%	2.50%	268	86,065	950,377	143,740	646,811	97,827
	2015	16,770	4%	20%	258	865,344	13,359	4%	2.50%	258	86,168	951,512	143,911	599,614	90,688
	2016	17,441	4%	20%	244	851,123	13,894	4%	2.50%	244	84,752	935,875	141,546	546,074	82,591
	2017	18,139	4%	20%	228	827,124	14,449	4%	2.50%	228	82,362	909,486	137,555	491,367	74,317
	2018	18,864	4%	20%	215	811,162	15,027	4%	2.50%	215	80,772	891,935	134,900	446,189	67,484
	2019	19,619	4%	20%	199	780,828	15,629	4%	2.50%	199	77,752	858,580	129,856	397,689	60,148
	2020	20,404	4%	20%	173	705,963	16,254	4%	2.50%	173	70,297	776,260	117,405	332,925	50,353
	2021	21,220	4%	20%	148	628,103	16,904	4%	2.50%	148	62,544	690,647	104,457	274,265	41,481
	2022	22,068	4%	20%	135	595,849	17,580	4%	2.50%	135	59,332	655,182	99,093	240,909	36,436
	2023	22,951	4%	20%	113	518,698	18,283	4%	2.50%	113	51,650	570,348	86,262	194,181	29,369
	2024	23,869	4%	20%	102	486,933	19,015	4%	2.50%	102	48,487	535,420	80,979	168,787	25,528
	2025	24,824	4%	20%	77	382,290	19,775	4%	2.50%	77	38,067	420,357	63,577	122,698	18,557
	2026	25,817	4%	20%	52	268,497	20,566	4%	2.50%	52	26,736	295,233	44,652	79,792	12,068
	2027	26,850	4%	20%	41	220,167	21,389	4%	2.50%	41	21,923	242,091	36,615	60,583	9,163
	2028	27,924	4%	20%	25	139,618	22,244	4%	2.50%	25	13,903	153,521	23,219	35,573	5,380
	2029	29,041	4%	20%	18	104,546	23,134	4%	2.50%	18	10,410	114,957	17,387	24,664	3,730
	2030	30,202	4%	20%	12	72,485	24,059	4%	2.50%	12	7,218	79,703	12,055	15,834	2,395
	2031	31,410	4%	20%	6	37,692	25,022	4%	2.50%	6	3,753	41,446	6,268	7,624	1,153
	2032	32,667	4%	20%	1	6,533	26,023	4%	2.50%	1	651	7,184	1,087	1,224	185
	Total					11,825,175					1,177,507	13,002,682	1,966,587	7,012,153	1,060,551

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


17

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Pension and Employee Benefits

		Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Company to accrue for these benefits based on certain percentages of the employees' salaries. The Management believes full time employees who have passed the probation period are entitled to such benefits. The total provisions for such employee benefits was $37,184 and $11,518 for the six months ended June 30, 2011 and 2010, respectively.

		Government Subsidies

		The Company records government grants as current liabilities upon reception. A government subsidy revenue is recognized only when there is reasonable assurance that the Company has complied with all conditions attached to the grant. The Company recognized government subsidy of $0 and $0 for the six months ended June 30, 2011 and 2010, 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.

		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.


18

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Statutory Reserves

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

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

		Comprehensive Income

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

		Segment Reporting

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


19

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Earnings (Loss) Per Share

		The Company reports earnings per share in accordance with FASB ASC 260, “Earnings Per Share” , which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no potentially dilutive securities outstanding (options and warrants) for the six months ended June 30, 2011 and 2010, 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
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 5-	SIGNIFICANT ACCOUNTING POLICIES (continued)

		Recent Accounting Pronouncements

		In June 2011, the Financial Accounting Standards Board (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 Management does not expect the adoption of this new guidance will have a material effect on the Company’s financial position and results of operations.

		In May 2011, the Financial Accounting Standards Board (FASB) issued amended standards to achieve a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards. For assets and liabilities categorized as Level 3 and recognized at fair value, these amended standards require disclosure of quantitative information about unobservable inputs, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. In addition, these amended standards require that we disclose the level in the fair value hierarchy for financial instruments disclosed at fair value but not recorded at fair value. These new standards are effective for us beginning in the first quarter of 2012; early adoption of these standards is prohibited. The Management does not expect the adoption of this new guidance will have a material effect on the Company’s financial position and results of operations.

		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 Management does not expect the adoption of this new guidance will have a material effect on the Company’s financial position and results of operations.

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

		In December 2010, FASB issued an amendment to goodwill impairment test. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this new guidance did not have a material effect on the Company’s financial position and results of operations.


21

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6-

ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:
	June 30,		December 31,
	2011		2010
	(unaudited)
Accounts receivable	$	61,080	$	-
Less: Allowance for doubtful accounts		-		-
Accounts receivable, net	$	61,080	$	-

Bad debt expense charged to operations was $0 and $0 for the six months ended June 30, 2011 and 2010, respectively.

The outstanding accounts receivables related to sales to related parties consisted of $61,080 and $0 at June 30, 2011 and December 31, 2010, respectively. Refer to Footnote 14 for Sales of Liquor to Related Party.

Note 7-

PREPAID EXPENSES

Prepaid expenses consist of the following:
	June 30,		December 31,
	2011		2010
	(unaudited)
Machinery and parts	$	54,997	$	39,626
Raw materials and supplies		511,645		485,372
Packing and supply materials		484,525		96,626
Office expenses		6,278		4,072
Total	$	1,057,445	$	625,696

Note 8-

INVENTORIES

Inventories consist of following:
	June 30,		December 31,
	2011		2010
	(unaudited)
Finished goods	$	-	$	948,300
Work-in-progress		9,424		1,985,260
Raw materials		-		102,934
Supplies and packing materials		272		237,499
	$	9,696	$	3,273,993

Note 9-

PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment:
	June 30,			December 31,
	2011			2010
	(unaudited)
Building and warehouses	$	3,218,655		$	3,171,057
Machinery and equipment		2,097,484			2,015,433
Office equipment and furniture		214,692			182,278
Motor vehicles		348,856			341,059
Leased assets		2,331,286			2,300,810
Total		8,210,973			8,010,637
Less: Accumulated depreciation		(4,160,325	)		(3,849,240	)
		4,050,648			4,161,397
Add: Construction in progress		377,546			262,665
Total	$	4,428,194		$	4,424,062


		Depreciation expense charged to operations was $182,075 and $178,554 for the six months ended June 30, 2011 and 2010, respectively.


22

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Note 10-	INTANGIBLE ASSETS

The following is a summary of intangible assets, less amortization:
	June 30,			December 31,
	2011			2010
	(unaudited)

Land use right	$	2,053,307		$	2,007,407
Trade Mark of "Xidenghui"		69,616			68,060
Trade Mark of "Baishui Du Kang"		25,526			24,955
Total intangible assets		2,148,449			2,100,422

Less: Accumulated amortization		(123,655	)		(97,300	)

Total intangible assets, net	$	2,024,794		$	2,003,122

		Amortization expense charged to operations was $23,820 and $4,910 for the six months ended June 30, 2011 and 2010, respectively.

	Note 11-	DUE FROM RELATED PARTIES

Due from related parties consists of the following:
		June 30,		December 31,
		2011		2010
Name of Related Party	Description	(unaudited)

Shaanxi Yellow-river Wetlands Park Co., Ltd.	Non-consolidated subsidiary	$	-	$	1,777,125
Shaanxi Gurong Agriculture Development Co., Ltd.	Affiliate		-		385,674
Shaanxi Zhongke Spaceflight Agriculture
Development Stock Co., Ltd.	Affiliate		-		15,102
Shaanix Mining New Energy Co., Ltd.	Affiliate		-		399,286
Total		$	-	$	2,577,187

Note 12-

ACCRUED EXPENSES

Accrued expenses consist of the following:
	June 30,		December 31,
	2011		2010
	(unaudited)

Accrued payroll	$	35,902	$	26,448
Accrued employee benefits		60,613		59,312
Accrued pension and employee benefit		104,905		69,824
Accrued payment for a capital lease		74,257		-
Accrued office expenses		18,337		4,928
Total	$	294,014	$	160,512


23

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 13-	DUE TO RELATED PARTIES

Due to related parties consists of the following:

		June 30,		December 31,
		2011		2010
Name of Related Party	Description	(unaudited)

Shaanxi Dukang Group Co., Ltd.	Affiliate	$	1,931,299	$	3,354,548
Shaanxi Baishui Dukang Marketing Management Co., Ltd.	Affiliate		13,610		13,306
Shaanxi Baishui Dukang Commercial and Trade Co., Ltd.	Affiliate		76,375		74,668
Shaanxi Baishui Dukang Spirits Industry Development Co., Ltd.	Affiliate		1,332,941		865,303
Shaanxi Baishui Shiye Co., Ltd.	Affiliate		393,318		399,649
Shaanxi Lantian Fuping Investment Co., Ltd.	Affiliate		309,406		302,489
Shaanxi Changjiang Petrol Co., Ltd.	Affiliate		258,354		252,579
Mr. Hongjun Zhang	Shareholder		2,473,399		2,095,957
Mr. Guoqi Diao	Prior director of Xidenghui		13,549		406,482
Ms. Ping Li	Secretary of the Board		616,537		602,755
Mr. Pingjun Nie	Shareholder		4,629,523		4,526,035
Ms. Hong Ge	Prior director of Xidenghui		279,927		273,670
Mr.Hailong Tian	Prior director of Xidenghui		2,927,328		2,861,891
Ms. Ming Chen	Shareholder		359,825		182,387
Mr. Shengli Wang	Prior director of Xidenghui		824,994		806,553
Total		$	16,440,385	$	17,018,272

Imputed interest expense charged to operations was $523,335 and $474,152 for the six months ended June 30, 2011 and 2010, respectively.

	Note 14-	SALES OF LIQUOR TO RELATED PARTY

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

		For the Three Months Ended					For the Six Months Ended
		June 30,					June 30,
Name of Related Party	Description	2011		2010			2011		2010
		(unaudited)		(unaudited)			(unaudited)		(unaudited)

Shaanxi Dukang Group Co., Ltd.	Affiliate	$	207,750	$	222,593		$	565,994	$	441,562
Shaanxi Baishui Dukang Marketing Management Co., Ltd.	Affiliate		-		-			-		-
Shaanxi Baishui Dukang Commercial and Trade Co., Ltd.	Affiliate		-		(56,167	)		-		-
Shaanxi Baishui Dukang Spirits Industry Development Co., Ltd.	Affiliate		-		-			-		-
Shaanxi Baishui Dukang Trade Co., Ltd.	Affiliate		-		58,879			-		58,879
Shanxi Baishui Shiye Co., Ltd.	Affiliate		38,423		26,369			106,226		26,369
		$	207,750	$	225,305		$	672,220	$	526,810


24

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 15-	BANK LOANS

		Bank loan consists of the following as of June 30, 2011:

		Loan		Monthly	Guaranteed
Financial Institutions		Amount	Duration	Interest Rate	By
Baishui Branch of Agriculture Bank of China	$	773,515	08/02/2010-08/01/2011	6.372%	Buildings
Total	$	773,515

		Interest expense charged to operations for this bank loan was $27,862 for the six months ended June 30, 2011. The weighted-average outstanding bank loan balance is $773,515; and the weighted-average monthly interest rate is 6.026‰.

		Bank loan consists of the following as of December 31, 2010:

		Loan		Annual	Guaranteed
Financial Institutions		Amount	Duration	Interest Rate	By
Baishui Branch of Agriculture Bank of China	$	756,224	08/02/2010-08/01/2011	6.372%	Buildings
Total	$	756,224

		Interest expense charged to operations for this bank loan was $1,403 for the six months ended June 30, 2010. The weighted-average outstanding bank loan balance is $33,905; and the weighted-average monthly interest rate is 6.49‰.

	Note 16-	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 year ended December 31, 2010 and 2009 is as follows:

	For the Six Months Ended					For the Six Months Ended
	June 30,					June 30,
	2011		2010			2011		2010
	(unaudited)		(unaudited)			(unaudited)		(unaudited)
REVENUE
Sales of Liquor	$	258,941	$	248,528		$	686,620	$	538,932
Franchise Fees		242,636		192,447			526,453		392,285

COST OF SALES
Sales of Liquor	$	215,384	$	282,852		$	529,835	$	560,301
Franchise Fees		-		-			-		-

GROSS PROFITS
Sales of Liquor	$	43,557	$	(34,324	)	$	156,785	$	(21,369	)
Franchise Fees		242,636		192,447			526,453		392,285

						June 30,		December 31,
							2011		2010
						(unaudited)

TOTAL ASSETS OF LIQUOR PRODUCTION AND DISTRIBUTION						$	11,700,977	$	12,314,784

TOTAL ASSETS OF BRAND NAME FRANCHISE						$	5,185,800	$	3,576,180

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 16-	SEGMENT REPORTING (continued)

		Major Customers

		There were six major customers who made sales approximately 5% or more of the Company’s total sales as summarized in the following:

		For the Six Months Ended June 30,
		2011					2010
		(unaudited)					(unaudited)

Major	Type of			Percentage of					Percentage of
Customer	Customer	Revenue		Total Revenue			Revenue		Total Revenue
Shaanxi Dukang Group Co., Ltd.	Distributor	$	565,994		46.66	%	$	439,979		47.25	%
Shaanxi Baishui Dukang Shiye Co., Ltd.	Distributor		106,226		8.76	%		82,068		8.81	%
Ms. Xiaoyan Shi	Agent		101,356		8.36	%		-		-
Mr. Anxian Xie	Agent		86,878		7.16	%		76,180		8.18	%
Ms. Xiaoli Du	Agent		72,398		5.97	%		-		-
Ms. Sue Dong	Agent		72,398		5.97	%		68,793		7.39	%
Total		$	1,005,249		82.87	%	$	667,020		71.63	%

	Major Suppliers

	There were nine major customers who made sales approximately 5% or more of the Company’s total sales as summarized in the following:

	For the Six Months Ended June 30,
	2011					2010
	(unaudited)					(unaudited)

Major			Percentage of					Percentage of
Suppliers	Purchase		Total Purchase			Purchase		Total Purchase
Sichuan Guangan Detai Glass Co., Ltd.	$	25,396		6.23	%	$	-		-
Yuncheng Aofeng Glass Co., Ltd.		85,071		20.88	%		-		-
Wuhan Huaruiyang Stainless Co., Ltd.		-		-			59,009		18.08	%
Hunan Fengling Liangyou China Co., Ltd.		27,599		6.77	%		46,760		14.33	%
Shanxi Wenxifa Glass Co., Ltd.		68,526		16.82	%		46,000		14.10	%
Mr. Liu, Zhiming		-		-			44,061		13.50	%
Hunan Xinshiji Taochi Co., Ltd.		150,403		36.91	%		26,437		8.10	%
Wenzhou Chuangwei Qinggong Co., Ltd.		-		-			20,715		6.35	%
Baishui Spring Water Co., Ltd.		-		-			18,010		5.52	%
Total	$	356,994		87.61	%	$	260,992		79.98	%


26

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 17-	STATEMENT OF CONSOLIDATED COMPRESENTATIVE INCOME

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net income	$	(260,112	)	$	(388,475	)	$	(460,540	)	$	(657,625	)
Other comprehensive income, net of tax:
Effects of foreign currency conversion		(118,840	)		(29,191	)		(164,544	)		(30,293	)
Total other comprehensive, not of tax		(118,840	)		(29,191	)		(164,544	)		(30,293	)
Comprehensive income		(378,952	)		(417,666	)		(625,084	)		(687,918	)
Comprehensive income attributable to
the noncontrolling interest		14,201			(12,796	)		46,773			(3,876	)
Comprehensive income attributable to
China Du Kang Co., Ltd.	$	(393,153	)	$	(404,870	)	$	(671,857	)	$	(684,042	)

	Note 18-	COMMITMENTS AND CONTINGENCIES

		Contingent Liability from Prior Operation

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

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

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

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


27

CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Note 19-	SUBSEQUENT EVENTS

		On July 1, 2011, the Company entered into debt conversion agreements with various affiliated companies, related directors and shareholders (collectively the "Related Parties") pursuant to which approximately $16,440,385 of debt owed to the Related Parties by the Company's subsidiary Shaanxi Xidenghui Technology Stock Co., Ltd. (the "Subsidiary") would be contributed to paid-in capital of the Subsidiary. The contribution of debt to paid-in capital is subject to approval by the Chinese Regulators. As a result of the contribution of the debt into paid-in capital, the debt is no longer outstanding.


28

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS THEN ENDED JUNE 30, 2011

Revenue

Total revenues for the three months ended June 30, 2011 were $501,577 as compared to $440,975 for the same period of 2010. These include sales of liquor, which were $258,941 for the three months ended June 30, 2011 and $248,528 for the same period of 2010. The license fees revenue for the three months ended June 30, 2011 were $242,636 and $192,447 for the same period of 2010.

Gross Margin

The overall gross margin for the three month ended June 30, 2011 was 57.06% as compared to 35.86% for the comparable period of 2010 which is due to the significant gross margin decrease on sales of liquor for the three months ended June 30, 2011 compared with gross margin for the comparable period of 2010. Gross margin on sales of liquor was 16.82% in the three months ended June 30, 2011, representing a increase of 31%, compared to (13.81%) for the comparable period in 2010.

Operating Expenses

Expenses from operations totaled $231,855 and $302,769 for the three months ended June 30, 2011 and 2010, respectively. The decrease in operating expenses of $70,914 was due to decreased selling expenses from $95,552 for the three months ended June 30, 2010 to $69,792 for the same period 2011, respectively; as well as decreased total general and administrative expenses from $207,217 for the three months ended June 30, 2010 to $162,063 for the same period 2011, respectively. As an effect, the results from operations increased $198,984 from an operating loss of $(144,646) for the three months June 30, 2010 to an operating income of $54,338 for the comparable period in 2011.

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

Other Income and Expenses

The Company has incurred total interest expense and imputed interest expense of $280,768 and $240,175 for the three months ended June 30, 2011 and 2010, respectively. The increased in interest expense was due to increased in bank loans and related parties loans for working capital purposes.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011

Revenue

Total revenues for the period ended June 30, 2011 were $1,213,073 as compared to $931,217 for the same period of 2010. These include sales of liquor, which were $686,620 for the period ended June 30, 2011 and $538,932 for the same period of 2010. The license fees in the six months ended June 30, 2011 were $526,453 and $392,285 for the same period of 2010.

Gross Margin

The overall gross margin for the six month ended June 30, 2011 was 56.32% as compared to 39.83% for the comparable period of 2010 which is due to the significant gross margin decrease on sales of liquor for the six months of 2011 compared with gross margin for the comparable period of 2010. Gross margin on sales of liquor was 22.83% in the six months ended June 30, 2011, representing a increase of 27%, compared to (3.97%) for the comparable period in 2010.

Selling Expenses

Total selling expenses improved from $130,996 for the six months ended June 30, 2010 to $77,433 for the same period of 2011. Advertising expenses decreased from $78,211 to $19,267 for the respective periods.

General and Administrative Expenses

Total general and administrative expenses increased from $391,605 for the six months ended June 30, 2010 to $425,890 for the same period 2011. Office expenses increased from $22,259 for the period ended June 30, 2010 to $28,889 for the same period of 2011. For the same periods respectively payroll increased from $95,293 to $150,955; employee benefits from $597 to $40,726; depreciation and amortization from $69,084 to $83,928; professional and consultancy fees from $84,844 to $56,226; loss on physical inventory count from 0 to $25,849; travel and entertainment from $89,788 to $18,082; and other general and administrative expenses from $18,459 to $2,257.

Operating Results

Expenses from operations totaled $503,323 and $522,601 for the six months ended June 30, 2011 and June 30, 2010, respectively. The losses from operations improved from ($151,685) for the six months June 30, 2010 to $179,915 for the six months ended June 30, 2011.

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

LIQUIDITY AS OF JUNE 30, 2011 AND FOR THE SIX MONTHS THEN ENDED

We experienced a net loss of $460,540 for the six months ended June 30, 2011 as compared to a loss of $657,625 for the same period of 2010. Adjustments to reconcile the net loss to cash provided by operating activities included $523,335 for imputed interest for the six months ended June 30, 2011 as compared to $474,152 for the same period of 2010. Depreciation remained relatively stable at $182,075 from $178,554 for the same respective periods. Also, amortization increased to $23,820 from $4,910.

Changes in operating assets and liabilities included an increase in accounts receivable from 0 from the period June 30, 2010 to $(60,295). It also included an increase in others receivable from $48,587 to 71,929 for the same period. Prepaid expenses decreased from $207,214 for the six months ended June 30, 2010 to $(412,076) for the same six months of 2011. Inventories for the same periods increased from $3,138,472 to $4,405,660. Accounts payable decreased for the same periods from $1,080,918 to $1,040,356. Similarly, accrued expenses increased from $158,409 to $294,014 for the respective period, as did other payables from $46,063 to $75,926 and deferred revenue from $781,053 to $2,254,843. Taxes payable for June 30, 2010 were $240,789 as compared to $563,262 for the same period of 2011. Overall, net cash provided by operating activities declined from $527,141 for the six months ended June 30, 2010 to $(290,045) for the same period of 2011, which was primarily attributed to the increase in the accounts receivable and inventories.

Purchase of fixed assets for the six months ended June 30, 2010 were $(87,816) to $(124,427) for the same period of 2011. Purchase of land use rights increased from 0 to $(1,965,706) as did advances to related

parties from $(219,467) to $(610,900) for the same periods. The net cash used by investing activities were $(307,283) and $(2,395,583) for the six months ended June 30, 2010 and 2011 respectively, the increase was primarily attributed to the purchase of land use right and advances to related parties.

Net cash used by financing activities changed from $(347,994) for the six months ended June 30, 2010 to $1,953,096 for the same period of 2011. The change was attributable to from the proceeds from related parties of $1,963,037 in the six months ended June 30, 2011, which was primarily used to purchase of land use right. Repayments to related parties went from $(1,704,650) for the six months ended June 30, 2010 and (9,941) for the same period 2011. We did not take or payback Bank loans for the six months ended June 30, 2011, as compared to paying back of bank loan of (292,622) in the six months ended June 30, 2010. Cash at the end of the period for the six months ended June 30, 2010 was $543,752 and $1,336,289 as of June 30, 2011.

We have historically funded our cash needs through a series of debt transactions, primarily with related parties. On July 1, 2011, the related parties contributed their outstanding debt to paid-in capital, as more fully disclosed in the Note 19 to our consolidated financial statements.

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

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

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

CAPITAL RESOURCES AS OF JUNE 30, 2011 AND FOR THE SIX MONTHS THEN ENDED

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 December 31, 2010 and June 30, 2011 were $14,210,146 and $15,172,939, respectively. Total current assets increased for the same periods from $5,968,025 to $6,863,515, for the same period. The prepaid expenses also increased from $625,696 as of December 31, 2010 to $1,057,445 at June 30, 2011. Meanwhile, accounts receivable increased from 0 at December 31, 2010 to $61,080 at June 30, 2011. Inventories increased from $3,273,993 to $4,405,660 for the same respective periods. Other receivables decreased from $74,210 to $3,041.

Property, plant and equipment increased slightly from $4,424,062 at December 31, 2010 to $4,428,194 at

June 30, 2011 due to normal depreciation. For the same respective periods net intangible assets increased from $2,003,122 to $2,024,794 and long term investment from $1,814,937 to $1,856,436 due to the change of currency exchange rate.

Total liabilities decreased from December 31, 2010 to June 30, 2011 from $24,020,008 to $22,507,363. Total current liabilities decreased slightly from $23,085,771 to $21,612,363. Land use right purchase payable was the most significant change of current liabilities, decreasing from $1,946,792 at December 31, 2010 to $0 at June 30, 2011, as we paid off the purchase liability. The due to related parties decreased from 17,018,272 at December 31, 2010 to $16,440,385 as of June 30, 2011. Deferred revenue for the same periods increased from $1,587,115 to $2,254,843. There were also increase in accounts payable from $891,409 to $1,040,356; taxes payable from $491,137 to $563,262 and accrued expenses from $160,512 to $294,014.

Shareholder Equity

Shareholders equity at June 30, 2011 and December 31, 2010 were $(7,334,424) and $(9,809,862) respectively. Our accumulated deficit was $(21,954,058) and $(21,449,649). Common stock remained the same at $100,114, paid in capital increased from 14,699,903 to 15,223,238.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not employ derivative financial instruments and have no foreign exchange contracts. Our financial instruments are primarily cash and cash equivalents, but also include receivables, payables, long term debts, and short term notes. We do not try to manage risk of foreign exchange rates or engage in hedging activities.

Foreign Exchange Rates

All of our sales are in the Chinese currency, Renminbi (RMB) but our financial reporting is in U. S. dollars. We are therefore subject to the fluctuations in foreign exchange rates in our reporting requirements. While exchange rates between RMB and USD have been relatively stable, there can be no assurance that changes in foreign exchange rates will not have a material adverse impact on our financial reporting. The impact could express itself in reduced revenues and reduced or eliminated earnings, which could have a negative effect on the prices for our securities.

The balance sheet amounts with the exception of equity at June 30, 2011 were translated at 6.4640 RMB to $1.00 USD as compared to 6.6118 RMB at December 31, 2010. The equity accounts were stated at their historical rate.

Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) in the statement of changes in owners’ equity and amounted to $(852,542) and $(685,094) as of June 30, 2011 and December 31, 2010, respectively. The average translation rates applied to income statement accounts for the six months ended June 30, 2011 and 2010 were 6.54818 RMB and 6.83474 RMB, respectively.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2011, these disclosure controls and procedures were effective to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no material changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS.

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

●	in any bankruptcy petition

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

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

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

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

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

ITEM 1A. RISK FACTORS.

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

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 $21,954,058 at June 30, 2011 that includes a loss of $504,409 for the six months ended June 30, 2011 and a loss of $1,007,604 for the year ended December 31, 2010 and a working capital deficiency of $14,748,848 at June 30, 2011. These factors raise substantial doubt about the Company's ability to continue as a going concern.

Management has taken steps to revise the Company's operating and financial requirements. The Company is actively pursuing additional funding and a potential merger or acquisition candidate and strategic partners, which would enhance owners' investment. However, there can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be

available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.

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

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

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

RISKS RELATING TO OUR SECURITIES

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

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

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

There is currently on an extremely limited trading market for our shares of Common Stock, under the symbol “CDKG.” We have provided no public information and our symbol contains a “skull and crossbones” insignia on the pink sheets until this filing. We currently have a “stop sign” insignia. We are filing this information partly to provide such information to the public although there can be no assurance that a more substantial market will ever develop or be maintained. Any market price for shares of our Common Stock is likely to be very volatile, and numerous factors beyond our control may have a significant adverse effect. In addition, the stock markets generally have experienced, and continue to

experience, extreme price and volume fluctuations which have affected the market price of many small capital companies and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may also adversely affect the market price of our Common Stock. Further, there is no correlation between the present limited market price of our Common Stock and our revenues, book value, assets or other established criteria of value. The present limited quotations of our Common Stock should not be considered indicative of the actual value of the Company or our Common Stock.

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

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

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

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

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

If a market should develop for our securities, of which we have no assurance, the market price is likely to fluctuate significantly. Fluctuations could be rapid and severe and may provide investors little opportunity to react. Factors such as changes in results from our operations, and a variety of other factors, many of which are beyond the control of the Company, could cause the market price of our common stock to fluctuate substantially. Also, stock markets in penny stock shares tend to have extreme price and volume volatility. The market prices of shares of many smaller public companies securities are subject to volatility for reasons that frequently unrelated to the actual operating performance, earnings or other recognized measurements of value. This volatility may cause declines including very sudden and sharp declines in the

market price of our common stock. We cannot assure investors that the stock price will appreciate in value, that a market will be available to resell your securities or that the shares will retain any value at all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

None.

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

None.

Transfer Agent

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS.

14.1 Code of Ethics *

31.1. Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer

31.2. Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer

32.1. Section 1350 Certifications of Chief Executive Officer

32.2. Section 1350 Certifications of Chief Financial Officer

*Previously Filed

(b) Reports on Form 8-K

None.

SIGNATURES

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

CHINA DU KANG CO., LTD.

May 23, 2011

/s/ Wang Yong Sheng, President

Wang Yong Sheng

President

CHINA DU KANG CO., LTD. AND SUBSIDIARIES

F/K/A AMSTAR FINANCIAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS