Filed 2013-03-18 · Period ending 2012-12-31 · 36,053 words · SEC EDGAR
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# Newegg Commerce, Inc. (NEGG) — 10-K
**Filed:** 2013-03-18
**Period ending:** 2012-12-31
**Accession:** 0001144204-13-015840
**Source:** [SEC EDGAR](https://www.sec.gov/Archives/edgar/data/1474627/000114420413015840/)
**Origin leaf:** a41189d1e8d926878faefc85f146ff515cbd86e4833dc56436364226717b1aee
**Words:** 36,053
---
10-K
1
v335536_10k.htm
FORM 10-K
**
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|
|
Annual report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 | |
For the fiscal year ended December 31,
2012
|
|
Transition report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 | |
For the transition period from
to .
Commission File Number 001-34661
Dehaier Medical Systems Limited**
(Exact name of registrant as specified
in its charter)
|
British
Virgin Islands |
|
Not
Applicable | |
|
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. employer
identification number) | |
** **
**Room 501, Jiuzhou Plaza, 83 Fuxing Road**
**Haidian District, Beijing 100856**
**Peoples Republic of China**
(Address of principal executive offices
and zip code)
**+86 (10) 5166-0080**
(Registrants telephone number, including
area code)
Securities registered under Section 12(b)
of the Exchange Act:
|
Title
of each class |
|
Name
of each exchange on which registered | |
|
Common Shares,
par value $0.002731 per share |
|
NASDAQ Capital
Market | |
Securities registered under Section 12(g)
of the Exchange Act: **None.**
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate
by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.45 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer |
|
|
|
Accelerated filer |
|
| |
|
Non-accelerated filer |
|
(Do
not check if a smaller reporting company) |
|
Smaller reporting company |
|
| |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the ordinary
shares, $0.002731 par value per share (Shares), of the registrant held by non-affiliates on June 30, 2012 was $3,364,278.84,
based on a closing price per share on that date of $1.66 and 2,026,674 shares held by non-affiliates.
The Company is authorized to issue 18,307,038
Shares. As of the date of this report, the Company has issued and outstanding 4,620,000 Shares.
| | |
| | |
** **
**DEHAIER MEDICAL SYSTEMS LIMITED**
**FORM 10-K**
**INDEX**
** **
|
PART I |
1 | |
|
Item 1. Business. |
1 | |
|
Item 1A. Risk
Factors. |
13 | |
|
Item 1B. Unresolved
Staff Comments. |
13 | |
|
Item 2. Properties. |
13 | |
|
Item 3. Legal
Proceedings. |
13 | |
|
Item 4. Mine
Safety Disclosures. |
13 | |
|
PART II |
14 | |
|
Item 5. Market
for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
14 | |
|
Item 6. Selected
Financial Data. |
15 | |
|
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations. |
15 | |
|
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk. |
24 | |
|
Item 8. Financial
Statements and Supplementary Data. |
24 | |
|
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure. |
24 | |
|
Item 9A/9A(T). Controls
and Procedures. |
24 | |
|
Item 9B. Other
Information. |
25 | |
|
PART III |
25 | |
|
Item 10. Directors,
Executive Officers and Corporate Governance. |
25 | |
|
Item 11. Executive
Compensation. |
29 | |
|
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
30 | |
|
Item 13. Certain
Relationships and Related Transactions, and Director Independence. |
30 | |
|
Item 14. Principal
Accountant Fees and Services. |
31 | |
|
Item 15. Exhibits,
Financial Statement Schedules. |
32 | |
| | |
| | |
** **
**SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS**
This annual report contains forward-looking
statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements
other than statements of historical fact in this annual report are forward-looking statements. These forward-looking statements
can be identified by words or phrases such as may, will, expect, anticipate,
estimate, plan, believe, is/are likely to or other similar expressions.
The forward-looking statements included in this annual report relate to, among others:
|
| | our strategies and objectives; | |
|
| | our plan to launch new products and obtain new products
certification in the future; | |
|
| | market acceptance of our products and homecare service; | |
|
| | our sales and distribution network and other aspects of
our operations, including our sales and service offices, our
research and development and manufacturing facilities; | |
|
| | relevant government policies, healthcare reform and regulations
relating to the medical device and homecare service industry; | |
|
| | competition in the medical device industry in China and
internationally, and the homecare service industry in China; | |
|
| | our future business development, financial condition and
results of operations; | |
|
| | the effects global macroeconomic conditions and | |
|
| | general economic and business conditions in the places where
our products are sold and our service are provided. | |
These forward-looking statements involve
various risks, assumptions and uncertainties. Although we believe that our expectations expressed in these forward-looking statements
are reasonable, our expectations may turn out to be incorrect. Our actual results could be materially different from our expectations.
Important risks and factors that could cause our actual results to be materially different from our expectations are generally
set forth in Item 1.A of this annual report, Risk Factors and elsewhere in this annual report.
The forward-looking statements made in
this annual report relate only to events or information as of the date on which the statements are made in this annual report.
All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required
by applicable laws and regulations, we undertake no obligation to update any forward-looking statements to reflect events or circumstances
after the date on which the statements are made or to reflect the occurrence of unanticipated events.
Readers are cautioned not to place undue
reliance on these forward-looking statements, which related only to events or information as of the date the statements are made
in this annual report. Except to the extent required by applicable laws and regulations, the Company undertakes no obligation
to update any forward-looking information by press release, periodic report or other method of public disclosure to reflect events
or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.
| | |
| | |
PART I
Item 1. Business.
** **
**Company Overview**
** **
We are a company in the business of developing
and distributing medical devices. We have been focusing on developing respiratory and oxygen homecare products in particular since
2006.
We distribute products designed and manufactured
by other companies. We broaden our product portfolio through distribution agreements with international manufacturers, and most
of the products we distribute are imported. Our distribution offerings are mostly equipment used in the operating room, the intensive
care unit (ICU) and the emergency room.
Besides distributing medical devices,
we also design, develop and market our own proprietary products and medical components. Because we do not run any manufacturing
facilities, we contract some of the medical components to outside manufacturers in China. Most of our proprietary products require
light assembly by us before distribution.
We sell our products primarily through
distributors, but we also make direct sales to hospitals, clinics, government health bureaus, government organizations and individuals.
We continue to further our market reach by introducing newer and more advanced product lines that address different end-user needs.
**Recent Developments**
|
| | In
January
2012,
the
Company
received
Conformit
Europenne
(CE)
certification
for
the
sleep
diagnostic
devices
and
air
compressors.
The
CE
mark
recognizes
that
the
two
products
meet
European
Union
(EU)
health
and
safety
standards
and
are
approved
for
sale
in
the
27
member
states
of
the
EU
and
in
the
four
members
of
the
European
Free
Trade
Association
(EFTA). | |
|
| | In
March
2012,
the
Company
won
a
new
bid
to
implement
a
government
procurement
project
to
provide
imaging
equipment
for
township
hospitals
in
Xian,
Shaanxi,
China. | |
|
| | Also
in
March
2012,
the
Company
obtained
two
software
copyrights
for
the
CPAP
devices.
The
addition
of
these
copyrights
to
our
intellectual
property
portfolio
reflects
progress
in
our
ongoing
research
and
development
efforts
into
the
new
generation
of
homecare
CPAP
devices. | |
|
| | In
April
2012,
the
Company
renewed
its
strategic
cooperation
agreement
with
Timesco
of
London
Ltd.
The
agreement
appoints
Dehaier
as
the
exclusive
distributor
for
Timescos
CXL
and
Eclipse
series
laryngoscope
products
in
mainland
China
for
three
years. | |
|
| | In
May
2012,
the
Company
extended
its
exclusive
distribution
authorization
with
INTERMEDICAL
(IMD),
to
distribute
its
RADIUS
C-arm
X-ray
machines
in
mainland
China.
The
extended
term
runs
through
2014. | |
|
| | In
June
2012,
the
Company
entered
a
three-year
strategic
mutual
cooperation
agreement
with
HEYER
Medical
AG
(Heyer).
According
to
this
agreement,
the
Company
will
continue
to
be
one
of
the
key
Chinese
distributors
for
Heyers
anesthesia
machines
and
the
exclusive
distributor
of
its
nebulizers
in
China. | |
|
| | Also
in
June
2012,
the
Company
co-developed
a
High-Efficiency
Oxygen
Inhaler
with
Dr.
Ding
Jianzhang
of
Beijing
Haidian
Hospital.
This
inhaler
is
expected
to
begin
selling
in
mainland
China
in
the
third
quarter
of
2012.
The
portable
device
is
designed
for
use
in
homecare
oxygen
therapy,
emergency
treatment,
disaster
relief
activities
and
high-altitude
settings. | |
|
| | In
July
2012,
the
Company
received
approval
from
Chinas
State
Food
and
Drug
Administration
(SFDA)
for
its
proprietary
homecare
medical
CPAP
device,
the
DHR-CPAP-C5.
The
certificate
is
valid
until
July
1,
2016
(subject
to
renewal)
and
allows
us
to
sell
the
product
in
mainland
China. | |
|
| | Also
between
April
and
June
2012,
the
Company
obtained
software
copyrights
from
Chinas
National
Copyright
Administration
for
four
of
its
proprietary
technologies,
including
(1)
Analysis
and
Monitoring
Software
of
Adsorption
Tower
Oxygen
Generation
Process,
(2)
Dehaier
Homecare
CPAP
Controlling
Software,
(3)
Ventilator
of
CPAP
Controlling
Software
and
(4)
Air
Compressor
Controlling
Software.
These
copyrights
have
been
approved
for
50
years
from
the
grant
date. | |
|
| | In September 2012, the Company won a 3-year procurement
agreement for its proprietary air compressors and customized
trolleys from a major medical equipment manufacturer in Ukraine. | |
|
| | In September 2012, the Company entered into a two-year distribution
agreement with GCE group, a leading global compressed gas-equipment
company, to become the exclusive distributor for GCE's EASE
II product in Mainland China. The newly-distributed product
can be widely used in many fields including disaster relief
efforts, national defense, emergency rooms, ambulances, and
medical institutions. | |
|
| | In September 2012, the Company signed three medical equipment
procurement agreements with Beijing's Hospitals 304 and 307,
two of China's most well-known first-tier hospitals, and with
Beijing Kanglian Medicines Co. for the China Development Bank
Rural Medical and Health Construction Project. | |
| 1 | |
| | |
|
| | In September 2012, the Company obtained Megapixels software
copyrights for its DHR C-Arm X Ray Machine. The upgraded technology
can produce optimized images with minimal user involvement through
its advanced imaging technology. | |
|
| | In October 2012, the Company won a government procurement
contract with Xinjiang Province to distribute medical equipments
to Hospitals in Xinjiang. The contract will be implemented by
the end of 2012. | |
|
| | In October 2012, the Company renewed its status of National
High Technology Enterprises and received government subsidies
of RMB118,100 for short-term bank loan interest, as a result
of favorable treatment granted to High Technology Enterprises. | |
|
| | In December 2012, the Company was awarded a credit of A-
from Beijing Zhongguancun Enterprises Credit Promotion Association,
as a result of its improved performance of competitiveness in
the industry, relatively strong enterprise system, sustainable
business model and low credit risk. | |
|
| | In December 2012, the Company signed a medical equipment
procurement agreement with Hebei province for the China
Development Bank Rural Medical and Health Construction Project. | |
|
| | In December 2012, the Company presented its newly-developed
Efficient Oxygen Supplement System ("EOS System")
at the 2012 Military Surgical Symposium, held in Tianjin from
November 30 to December 2, 2012. The symposium featured with
highest level of forward-looking medical concepts & theories
and best practice. | |
** **
**Our Products**
Our proprietary and distributed products
include two major categories: (i) medical devices (including supporting products) and (ii) sleep respiratory and oxygen
therapy products (previously defined as respiratory and oxygen homecare products). Our medical devices proprietary and distributed
products are mainly used in hospitals and clinics, while the sleep respiratory and oxygen therapy products are mainly for hospitals,
sleep centers, at-home use by individual, emergency center, national defense and national disaster relief circumstances.
**Our Proprietary Products**
Our management believes that our proprietary
products, which are generally less expensive than products from foreign companies, tend to be more attractive to smaller city
and rural hospitals and healthcare facilities and other end-users for whom price is a significant factor in deciding whether to
purchase our products. Our proprietary products include medical devices and related supporting/technical service products, and
sleep respiratory and oxygen therapy products.
** **
**Medical Devices (Including Related Supporting
Products)**
|
| | Mobile Medical X-Ray Image Devices. We
provide four types of DHR Explorer Series mobile and C-armed
X-ray machines. X-ray is used for visualizing bone structures
and other dense tissues such as tumors. These mobile and C-armed
X-ray machines provide added convenience for use in hospitals
and clinics. Our C-arm series of X-ray systems are suitable
for ortho reduction and fixation procedures, intervertebral
disc imaging and treatment, spinal operation, uterine and oviduct
imaging, bladder and ureter imaging and gastric imaging. | |
** **
|
| | Anesthesia Machines. We provide two types
of DHR ORSA Series anesthesia machines. These machines are used
by anesthesiologists to support the administration of anesthesia.
These machines administer a precise and continuous supply of
anesthetic gases and vapors to the patient at accurate and safe
levels of pressure and flow. These machines maintain a continuous,
closed-loop control over the pressure of gas within a patients
mouth or respiratory according to the selected pressure input.
In addition, these machines feature a modular design for mobility
and ease of maintenance, cleaning and disinfection. | |
** **
|
| | Ventilator Air Compressor. We provide
two types of air compressors to support medical ventilators
in surgery by supplying continuous airflow for the ventilator.
Where a facility lacks a central pressured air supply system,
our C250 and C280 air compressors provide a portable source
of such pressured air. Our air compressors feature oil-less
motors, large locking castors, high flow capacity, and spill-proof
switches. We have designed our air compressors to be adaptable
for use with any ventilator. | |
** **
|
| | Trolleys for Ventilators. We provide
three types of trolleys to hold ventilators and their accessories
for mobility. These trolleys can be fit with a monitor to further
enhance the portability and utility. | |
** **
|
| | Sterilizers for Ventilators. We provide
one type of sterilizer to treat the air from patients in order
to control cross-contamination and infection in a facility in
general and for subsequent ventilator patients in particular. | |
** **
| 2 | |
| | |
** **
**Sleep Respiratory and Oxygen Therapy
Products**
|
| | Oxygen Concentrating Products. We provide
two types of oxygen concentrator products, including, the DHR-3L/5L
Oxi-Fairy and the DHR-3L/5L Oxi-Pioneer. These products use
our patented advanced Pressure Swing Absorbing (PSA)
technology to produce highly-concentrated, therapeutic-level
oxygen (approximately 90% oxygen concentration) from air at
normal temperatures. These products are used by patients with
cardiovascular disease, respiratory diseases, such as chronic
obstructive pulmonary disease, and geriatric patients. | |
** **
|
| | Sleep Apnea Treatment Products. We have
designed and expect to provide several products designed for
obstructive sleep apnea (OSA) therapy. These products
include our DHR CPAP C5, DHR Auto CPAP A8, and DHR Auto S-CPAP
A9. Our DHR CPAP C5, Auto CPAP A8 and DHR S-CPAP A9 are in the
process of obtaining SFDA approval and will not be available
for sale until we receive such approval. While we expect to
receive this approval within the first half of 2010, we cannot
guarantee that we will obtain such SFDA approval in this timeframe
or all. These products are all non-invasive therapy products
that treat symptoms of sleep apnea. Our CPAP devices do not
cure apnea but instead use air pressure to open customers
airways to reduce snoring and apnea disturbances during sleep.
Our automatic CPAP products provide air pressure at a customized,
adjustable level, while our traditional CPAP products provide
a constant level of air pressure. | |
|
| | Sleep Apnea Diagnostic Products. We have
designed and expect to provide two types of screening and diagnosis
products are portable sleep respiratory recording devices that
can be used in a healthcare facility or in a patients
home to assist physicians in determining whether the patient
has obstructive sleep apnea requiring use of a CPAP device.
We have applied to SFDA for approval of our DHR 998 and DHR
999 diagnostic products, and they will not be available for
sale until we receive such approval. While we expect to receive
this approval within the first half of 2010, we cannot guarantee
that we will obtain such SFDA approval in this timeframe or
all. | |
|
| | Effective Oxygen Supplement System. We integrate
an effective oxygen supplement system on the basis of newly-distributed
oxygen valve and portable oxygen tanks. This enhanced system
can be widely applied to particular circumstances including
hospital, emergency treatment, disaster relief, national defense,
homecare and homecare oxygen therapy service (HOTS). | |
**Research and Development of Our Proprietary
Products**
** **
Our success to date has in part resulted
from our strong research and development capabilities, which allow us to regularly introduce new and more advanced products at
competitive prices. We increased our annual investment in research and development activities as a percentage of net revenues
every year since 2003. Research and development costs were $230,854 and $268,038 for the years ended December 31, 2012 and
2011, respectively. Our research and development team consists of 27 engineers, representing more than one-tenth of our employees.
Our project selection goals focus on projects
that we believe are commercially feasible, can generate significant revenue and can be introduced into the market in the near-term.
While our research and development department may conduct research into areas that are likely to lead to short-, medium- and long-range
business opportunities for our company, we focus our development of products on those solutions we believe are most likely to
generate significant near-term revenues. Thus, we would generally devote more resources to a solution expected to have an immediate
financial return (for example, a ventilator) than to a project with a potentially greater overall payoff that is more distant
and tenuous (for example, an artificial lung).
Our management seeks feedback from our
distribution network to learn about needs for future products and improvements to existing products that our research and development
department can seek to address. Once we identify a product opportunity, our sales and service, research and development, and assembly
teams work closely together to determine potential market demand for a product and how it fits with our current design and assembly
capabilities. We organize regular meetings in which our sales and service, research and development and assembly teams review
progress and, if necessary, adjust the emphasis of our research and development projects.
If we deem a new product to be commercially
feasible, our research and development team will work closely with our assembly team to move assembly forward. This integrated
approach allows us to identify potential difficulties in commercializing our proprietary product or product improvement. Furthermore,
it enables us to make adjustments as necessary and develop cost-efficient assembly processes prior to distribution. We believe
these abilities can significantly shorten the time it takes to launch a commercialized product. In the last three years, we have
developed and brought to market 7 new products, which appeal to a wide range of end-users.
| 3 | |
| | |
We maintain a 5,400 square foot research
and development center in our facility in Beijing, which allows us to compete for skilled research and development technicians
and managers. In addition, we are enhancing our research and development ability by cooperating with the research institutes of
two top ranking Universities in China: Beijing University of Aeronautics & Astronautics and Beijing University of Technology
and Science.
**Principal Suppliers Our Proprietary
Products**
** **
We us the following principal suppliers
to manufacture the components in the products we develop and assemble:
|
| | Friend of Health (Chuzhou) Medical Technology Co., Ltd. | |
|
| | IMD Beijing Medical equipment Co, Ltd | |
|
| | China Medical Equipment Co. Ltd | |
|
| | C&D
(Beijing)
Co.,
Ltd. | |
|
| | China National Electronic Device Corp. | |
We believe the components provided by
our suppliers are widely available and do not anticipate that we will be unable to obtain these components from other suppliers
in the event our principal suppliers are unable or unwilling to supply us. We provide the technical specifications and files needed
for our suppliers to manufacture components. We purchase the same components from a wide variety of suppliers.
We outsource the production of some of
our oxygen concentrators and air compressors to Friend of Health under production agreements. We provide the technical specifications
and files needed for Friend of Health to manufacture these proprietary products. We provide separately outsourced core parts to
Friend of Health to incorporate into the components they assemble and distribute for us. We test and approve each part produced
by Friend of Health before they begin mass production. We require Friend of Health to maintain minimum supplies of our proprietary
products and components for use in our proprietary products, and we permit them to sell our proprietary products only in Chuzhou.
Friend of Health delivers products to us on credit, and we are required to make payment within 45 days after the date of delivery.
Friend of Health is the only supplier that also assembles and distributes finished proprietary products for us.
**Assembly of Our Proprietary Products**
** **
After our research and development team
designs the technical specifications and computer models for our proprietary products, we typically work with an independent contractor
to fabricate working prototypes before we commence with the production run of a product. We test prototypes to confirm that they
operate as expected and with the quality we require. During the prototyping process, we apply for SFDA approval as necessary.
Once both of these processes are completed, we commission a production run of components for assembly into our proprietary products.
We depend on component and product manufacturing
and logistical services provided by third parties. All of our proprietary products are manufactured in whole or in part by a variety
of third-party manufacturers. While these arrangements may lower operating costs, they also reduce our direct control over production.
It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or on our flexibility
to respond to changing conditions.
We maintain a 32,000 square foot product
center in Changping Science Park in Beijing. This product center contains our research and development area and our assembly facilities.
Final assembly of our products is currently performed in this facility by our 37 employees in assembly and by some of our external
vendors, such as Friend of Health. Currently, the supply and manufacture of many critical components is performed by sole-sourced
third-party vendors in China.
**Proprietary Rights for Our Proprietary Products**
** **
We are developing a portfolio of intellectual
property rights in China to protect the technologies, inventions and improvements that we believe are significant to our business
in China. We have two practical patents issued in China for oxygen concentrators. We have five design patents related to our CPAP
devices (2), portable sleep screening (2) and diagnostic services (1). In addition, we obtained 9 software copyrights to
our C-arm X-Ray machine (1), CPAP machine (5), air compressor (1) and air concentrator (2). Moreover, we possess proprietary technology
and know-how in assembly processes, design and engineering. We have not filed for any patent protection outside of China. To protect
our brand name recognition, we have registered the brand name Dehaier for trademark protection in China.
Our success in the medical equipment industry
depends in substantial part on effective management of both intellectual property assets and infringement risks. In particular,
we must be able to protect our own intellectual property as well as minimize the risk that any of our proprietary products may
infringe upon the intellectual property rights of others.
| 4 | |
| | |
We enter into agreements with all our
employees involved in research and development, under which all intellectual property generated during their employment belongs
to us, and they waive all relevant rights or claims to such intellectual property. All our employees involved in research and
development are also bound by a confidentiality obligation and have agreed to disclose and assign to us all inventions conceived
by them during their term of employment.
We believe that we have successfully established
our brand in China. We have registered trademarks in China for the Dehaier name and logo used on our own-brand products. As part
of our overall strategy to protect and enhance the value of our brand, we actively enforce our registered trademarks against any
unauthorized use by a third party.
** **
**Our Distributed Products**
Our management believes that our distributed
products, which are generally more expensive than products from Chinese companies, tend to be more attractive to larger city hospitals
and more affluent healthcare facilities and other end-users for whom perceived quality is a significant factor in deciding which
products to purchase. While we believe that the quality of our proprietary products is also strong, we understand that some consumers
in China associate more well-known international brands with higher quality than they associate with domestically produced brands.
We serve as a significant distributor
in China for several foreign producers of medical devices and sleep respiratory and oxygen therapy products, including IMD, Timesco,
HEYER, eVent and GCE. We believe this extensive platform allows us to be responsive to local market demand. We distribute medical
devices and sleep respiratory and oxygen therapy products for these companies.
** **
**Medical Devices**
|
| | Mobile Medical X-Ray Image Devices. We
provide two types of X-ray machines developed by other companies:
the IMD Radius Series mobile and C-armed X-ray machine and the
IMD Compact Series mobile-X-ray machine. | |
|
| | Medical Ventilators. We provide one type
of ventilator developed by another company: the Inspiration
Ventilators from eVent. The Inspiration Series of medical ventilators
mechanically move breathable air to and from the lungs to support
breathing support for patients who are physically unable to
breathe or who are breathing insufficiently. | |
|
| | Anesthesia Machines. We provide two types
of anesthesia machines developed by other companies: the Nakomat
and Modular models from HEYER. These machines are used by anesthesiologists
to support the administration of anesthesia. These machines
administer a precise and continuous supply of anesthetic gases
and vapors to the patient at accurate and safe pressure and
flow levels. These machines maintain a continuous, closed-loop
control over the pressure of gas within a patients respiratory
system according to the selected pressure input. In addition,
these machines feature a modular design for mobility and ease
of maintenance, cleaning and disinfection. | |
|
| | Ultrasonic Nebulizers. We provide one type
of ultrasonic nebulizer developed by another company: the Cumulus
model from HEYER. These devices are used to treat patients with
respiratory disease such as asthma, bronchitis and pneumonia.
The ultrasonic nebulizers convert low viscosity liquid drug
into fine like particles so that the particles can reach to
infectious area in the respiratory tract. Our distributed model,
the Cumulus, is the only model in the market to effectively
treat infection in the lower respiratory tract area. | |
|
| | Laryngoscopes. We provide three types of laryngoscopes
developed by other companies: the Optima, Optima XL and Eclipse
lines of laryngoscopes from Timesco. Laryngoscopes are flexible
lighted tubes that are used to look at the inside of the larynx.
Anesthesiologists make use of laryngoscopes to assist with intubation
in surgery. | |
** **
**Sleep Respiratory and Oxygen Therapy Products**
** **
|
| | Oxygen Valve. We offer a high-flow oxygen
device named EASE from Gas Control Equipment Corp. It can be
connected with a portable oxygen tank or medical gas pipeline
system to deliver high flows of oxygen to patients with minimal
breathing resistance. In addition, it helps to deliver high-flow,
minimal resistance oxygen to patients. This device effectively
increases the degree of blood oxygen saturation and accelerates
the recovery of cell functions when patients experience severe
hypoxia. | |
** **
**Our Relationships with Suppliers of Our Distributed
Products**
** **
While we develop, assemble, market and
sell our proprietary products, we also serve as the distributor for a number of international companies looking to sell their
brands of products in China. We are a distribution agent for some or all products marketed in China by IMD (Italy), Timesco (UK),
HEYER (Germany), eVent (USA) and GCE (Sweden). In this capacity, we are responsible for sales, marketing and after-sale services
of these products.
| 5 | |
| | |
We sign agency agreements with these international
suppliers annually with the aim of settling marketing promotion modes, costs, product training and resolution of customer service
issues. The agency agreements cover purchasing price, purchasing intervals, order quantity, transportation and type of payment,
spare part supply and after-sale service terms. We negotiate renewal of these agency agreements as they expire to confirm ongoing
distributor expectations.
We seek to enlarge the scope of products
we are able to sell as agent for these companies and constantly try to identify competitive suppliers and products on the international
market to assist them with marketing and selling their products in China.
**Principal Suppliers Our Distributed
Products**
** **
In addition to the products we design, we distribute products
designed and manufactured by the following companies:
|
| | IMD (Italy) | |
|
| | Timesco (UK) | |
|
| | HEYER (Germany) | |
|
| | eVent (USA) | |
|
| | GCE (Sweden) | |
The exact products from these suppliers
are available only from such suppliers; however, we believe that we will be able to obtain similar products from other suppliers
in the event our principal suppliers are unable or unwilling to supply us.
**Our Service Centers**
We maintain a 24-hour customer service
center in Beijing for technical support and repair. We staff our customer service center with senior technical support engineers
who provide preliminary support. Our engineers attempt to quickly diagnose and assist in repairing problems over the phone, or
determine whether a service visit to the customers premises is necessary. In some instances, our engineers will provide
on-site operating guidance and repair service. We periodically review customer calls to ensure that any issues raised by our customers
are resolved to their satisfaction.
**Customers**
We have three categories of customers:
(i) distributors, (ii) hospitals and government agencies and (iii) individual consumers to whom we sell directly. Our customer
base is widely dispersed on both a geographic and revenues basis.
**Our distributors. **Sales
to our distributors make up the substantial majority of our revenues as over 90% of our sales are to distributors. Based on the
expected use of products sold to distributors, we estimate that they sell approximately 60% of our products to hospitals, 20%
to clinics and 10% to individuals. As a result, we estimate that approximately 67% of our products (on a revenue basis, rather
than unit basis) are sold to hospitals, approximately 21% to clinics and approximately 12% to individuals. We have contractual
distribution relationships with over 2,000 independent distributors. We do not own, employ or control these independent distributors.
**Hospital and governmental agency
customers. ** Our hospital and governmental agency customers primarily include hospitals as well as provincial level
public health bureaus and population and family planning bureaus. We also refer to these customers as our Key Accounts.
These customers typically place large volume orders that are awarded based on bids submitted by competing medical equipment companies
through a state-owned bidding agent.
**Individual consumers. **We
sell our home respiratory therapy products directly to consumers through our customer experience centers, or CECs,
and plan to sell through third-party E-commerce platforms.
**Dependence on Major Customers. **For
the years ended December 31, 2012 and 2011, approximately 13% of the Companys revenues were received from each of two customers.
**Concentration of Receivables***. *At
December 31, 2011, receivables from two customers were approximately 12% and 10%, respectively. No customer represented more than
10% of amounts receivable at December 31, 2012.
**Dependence on Major Suppliers. **At
December 31, 2012 and 2011, payables due to three suppliers were approximately 34%, 33%, 19% and 50%, 8%, 6%, respectively.
* *
| 6 | |
| | |
* *
**Competition**
The medical device industry is characterized
by rapid product development, technological advances, intense competition and a strong emphasis on proprietary information. Across
all product lines and product tiers, we face direct competition from both domestic and international competitors. We compete based
on factors such as price, value, customer support, brand recognition, reputation, and product functionality, reliability and compatibility.
Each of our proprietary products competes against functionally similar products from domestic and international companies.
Our competitors include publicly traded
and privately held multinational companies, such as Respironics, Inc., ResMed Inc., and Covidien, as well as domestic Chinese
companies such as Beijing Aoji, Beijing Yaao, Jiangsu Yuyue and Zhejiang Longfei. We believe that we can continue to compete
successfully in China because our established domestic distribution network and customer support and service network allows us
significantly better access to Chinas small and medium-sized hospitals. In addition, our strong investment in research
and development, coupled with our low-cost operating model, allows us to compete effectively for sales to large hospitals.
We believe our competitive position in
China varies depending on the product in question. While we are a much smaller company overall than, for example, General Electric,
Siemens or Philips and are unable to offer the range or depth of products each of those companies offers, we believe our market
position is favorable in several segments. The following charts provide our marketing departments estimations of our primary
competitors by product, both as to our proprietary products and as to our distributed products:
|
Proprietary Product |
|
Primary Competitors
in China |
|
Dehaiers
Estimated Competitive Position* | |
|
DHR Explorer Series C-armed X-ray machine |
|
Nanjing Pulang, Beijing Wantong, Beijing Smart, Shenzhen Nanyun |
|
Average | |
|
|
|
| |
|
DHR ORSA Series anesthesia machines |
|
Drugg, GE, Spacelab |
|
Average | |
|
|
|
| |
|
C250 and C280 air compressors |
|
Beijing Yian, Guangdong Puling |
|
Greater than average | |
|
|
|
| |
|
Trolleys |
|
An OEM business model, N/A |
|
N/A | |
|
|
|
| |
|
Sterilizers |
|
An OEM business model, N/A |
|
N/A | |
|
|
|
| |
|
DHR oxygen concentrator |
|
Beijing Aoji, Beijing Yaao, Jiangsu Yuyue and Zhejiang
Longfei |
|
Smaller than average | |
|
|
|
| |
|
DHR CPAP C5 |
|
Foreign companies such as Respironics, ResMed, and Covidien |
|
Not in market yet | |
|
|
|
| |
|
DHR Homecare CPAP * DHR Homecare APAP * DHR Homecare S * DHR
Homecare ST |
Foreign companies such as Respironics, ResMed, and
Covidien |
Updated product line not in the market yet | |
|
|
|
| |
|
DHR 998* and DHR 999* screening and diagnosis products |
|
Foreign companies such as Respironics, ResMed, and Covidien |
|
Greater than average | |
| 7 | |
| | |
|
Distributed Product |
|
Primary Competitors
in China |
|
Dehaiers
Estimated Competitive Position | |
|
IMD C-armed X-ray machine |
|
Philips, GE, Siemens |
|
Smaller than average | |
|
|
|
| |
|
eVent Ventilators |
|
Drugg (GER), GE, TYCO (USA), Newport (USA) |
|
Smaller than average | |
|
|
|
| |
|
HEYER Anesthesia Machine |
|
Drager (GER), Datex-Ohmeda (US), Primas (UK) |
|
Smaller than average | |
|
|
|
|
|
| |
|
HEYER Ultrasonic Nebulizer |
|
PARI (GER), YUYUE (China) |
|
Average | |
|
|
|
|
|
| |
|
Timesco laryngoscope |
|
Kirchner & Wilhelm (GER), WelchAllyn (USA) |
|
Greater than average | |
*A greater than average
position indicates Dehaier estimates its competitive position in the top third of all competitors. Average indicates
Dehaier estimates its competitive position in the middle third of all competitors. Smaller than average indicates
Dehaier estimates its competitive position in the bottom third of all competitors.
As we expand into international markets,
our competitors will include publicly traded and privately held multinational companies such as Respironics and Covidien. These
companies typically focus on the premium segments of the market. We believe we can successfully penetrate certain international
markets by offering products of comparable quality at lower prices. We will also face competition in international sales from
companies that have local operations in the markets in which we sell our proprietary products. We believe that we can compete
successfully with these companies by offering high quality proprietary products at comparable prices.
**Methods of Competition**
Chinas medical device market currently
features a significant number of small distributors. We seek to distinguish our company from our competitors by being able to
offer proprietary and distributed products that address the device needs of customers that may have very different needs.
For example, China is currently investing
heavily in health care nationwide; however, money for healthcare is currently unevenly distributed. There are a number of large
hospitals that have significant resources and a number of rural clinics that have extremely limited budgets. We are able to provide
distributed products that reach the more affluent customers, as these customers frequently tend to ascribe more perceived value
to products made by well-known foreign companies, such as Timesco and HEYER. We are also able to supply our proprietary products
to customers who tend to care less about perceived value and more about functionality. One of our strategies in competing in this
market is to make our products as mobile as possible. For this reason, our air compressors, mobile X-ray devices, trolleys and
the like are all portable. This portability addresses the budgetary limitations of, for instance, a rural clinic that can only
afford to purchase a single air compressor.
We currently compete on three levels.
First, we have well-established distribution channels and close relations with more than 2,000 dealers and distributors, reaching
an estimated 3,000 hospitals. We maintain relationships with healthcare bureaus as well as other key accounts to actively participate
in state-level contracted procurement projects. Second, our proprietary homecare medical products are designed to provide an all-in-one
solution for end users. Together with our new home oxygen therapy service, we provide homecare medical solutions that combine
products and services. Third, we have emphasized international growth, including seeking approval to sell our products in Europe
and other countries and establishing a U.S. subsidiary to enable us to compete in North America. We focus on maintaining a high
quality to price ratio in our proprietary products. In addition, being a NASDAQ-listed company has helped to build our brand image
and reputation with potential customers and business partners.
**Employees**
As of March 18, 2013, we have 165 full-time
employees, of which, 37 are employed in assembly; 27 are in research and development; 15 are in general administration; 78 are
in marketing, sales, and customer support and service; and 8 are in procurement and supply management. As required by PRC regulations,
we participate in various employee benefit plans that are organized by municipal and provincial governments, including pension,
work-related injury benefits, maternity insurance, and medical and unemployment benefit plans. We are required under PRC law to
make contributions to the employee benefit plans at specified percentages of the salaries, bonuses, housing funds and certain
allowances of our employees, up to a maximum amount specified by the local government from time to time. We make contributions
to employee benefits equal to 10% of employee salaries.
| 8 | |
| | |
Generally, we enter into a three-year
standard employment contract with all of our officers, managers and other key employees and a one-year standard employment contract
with all other employees. According to these employment contracts, all of our employees are prohibited from engaging in any activities
that compete with our business during the period of their employment with us.
Under Chinese law, we may only terminate
employment agreements without cause and without penalty by providing notice of non-renewal one month prior to the date on which
the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate an employment agreement
in the absence of cause, then we are obligated to pay the employee one months salary for each year we have employed the
employee. We are, however, permitted to terminate an employee for cause without penalty to our company, where the employee has
committed a crime or the employees actions or inactions have resulted in a material adverse effect to us.
Regulations
Our products are medical devices and are
subject to regulatory controls governing medical devices. As a distributor of medical equipment and supplies we are subject to
regulation and oversight by different levels of the food and drug administration in China, in particular the SFDA. We are also
subject to other PRC government laws and regulations. SFDA requirements include obtaining certifications, permits, compliance
with clinical testing standards, assembly practices, quality standards, applicable industry standards and adverse event reporting,
and advertising and packaging standards.
**Chinas Regulation of Medical Devices**
**Classification of Medical Devices**
** **
In China, medical devices are classified
by the SFDA into three different categories, Class I, Class II and Class III, depending on the degree of risk associated
with each medical device and the extent of control needed to ensure safety and effectiveness. Classification of a medical device
is important because the class to which a medical device is assigned determines, among other things, whether a company needs to
obtain a permit and the level of regulatory authority involved in obtaining such permit. Classification of a device also determines
the types of registration required and the level of regulatory authority involved in effecting the product registration.
Class I devices require product certification
and are those with low risk to the human body and are subject to general controls. Class I devices are regulated
by the city level food and drug administration where the company is located. Class II devices are those with medium risk
to the human body and are subject to special controls. Class II devices require product certification, usually
through a quality system assessment, and are regulated by the provincial level food and drug administration where the company
is located. Class III devices are those with high risk to the human body, such as life-sustaining, life-supporting or implantable
devices. Class III devices also require product certification and are regulated by the SFDA under the strictest regulatory
control.
The majority of our products are classified
as Class II or Class III devices. Our anesthesia machines and ventilators are classified as Class III medical devices,
while the remainder of our products are either classified as Class II or, in the case of our ventilator trolleys and sterilizers,
not categorized devices.
**Assembly Permit**
** **
A company must obtain a permit from the
provincial level food and drug administration before commencing the assembly of Class II and Class III medical devices.
No assembly permit is required for Class I devices, but the company must notify the provincial level food and drug administration
where the company is located and file for record with it. An assembly permit, once obtained, is valid for five years and is renewable
upon expiration.
We have a single assembly permit, which
covers all products we assemble and is scheduled to expire on September 15, 2013. To renew an assembly permit, a company
needs to submit to the provincial level food and drug administration an application to renew the permit, along with required information
six months before the expiration date of the permit. If we are unable to renew the permit before it expires, we could lose our
ability to assemble our medical devices until the situation is rectified. Although we have not yet renewed our permit, we anticipate
filing our renewal application in the near future.
**Distribution License**
** **
A manufacturer or distributor must obtain
a distribution license in order to engage in sales and distribution of Class II and Class III medical devices in China.
A distribution license is valid for five years and is renewable upon expiration. Our distribution license will expire on September
15, 2013. If we are unable to renew the permit before it expires, we could lose our ability to distribute medical devices until
the situation is rectified. Although we have not yet renewed our permit, we anticipate filing our renewal application in the near
future.
| 9 | |
| | |
**Registration Requirement**
** **
Before a medical device can be manufactured
for commercial distribution, a company must affect medical device registration by proving the safety and effectiveness of the
medical device to the satisfaction of respective levels of the food and drug administration. In order to conduct a clinical trial
on a Class II or Class III medical device, the SFDA requires companies to apply for and obtain in advance a favorable
inspection result for the device from an inspection center jointly recognized by the SFDA and the Administration of Quality Supervision,
Inspection and Quarantine. The application to the inspection center must be supported by appropriate data, such as animal and
laboratory testing results. If the inspection center approves the application for clinical trial, and the respective levels of
the food and drug administration approve the institutions which will conduct the clinical trials, the company may begin the clinical
trial. A registration application for a Class II or Class III device must provide required pre-clinical and clinical
trial data and information about the device and its components regarding, among other things, device design, production and labeling.
The provincial level food and drug administration, within 60 days of receiving an application for the registration of a Class II
device, and the SFDA, within 90 days of receiving an application for the registration of a Class III device, will notify
the applicant whether the application for registration is approved. If approved, a registration certificate will be issued within
ten days of written approval. If the food and drug administration requires supplemental information, the approval process may
take much longer. The registration is valid for four years.
The SFDA may change its policies, adopt
additional regulations, revise existing regulations or tighten enforcement, each of which could block or delay the approval process
for a medical device.
The following table discloses the current
registration expiration dates for the products we sell. It is the obligation of that produces the product to seek registration
and any renewals. We are responsible for registering our proprietary products but must rely on the suppliers of other products
to seek registration for those products. We will either cease to sell such product or seek comparable products from other suppliers
in the event the registration is not renewed on expiration.
*Medical Devices (Including Related Supporting
Products)*
|
Product
Type |
|
Product
Model |
|
Registration Expiration | |
|
Mobile Medical X-Ray Image Devices. |
|
Explorer Series mobile and C-armed
X-ray machine |
|
July 2015 | |
|
|
|
IMD Compact Series mobile-X-ray
machine |
|
January 2015 | |
|
Anesthesia Machines. |
|
DHR ORSA Series anesthesia machine |
|
February 2014 | |
|
Ventilator Air Compressor. |
|
DHR280 Air Compressor for Ventilators |
|
September 2013 | |
|
Laryngoscope |
|
Timesco Laryngoscope |
|
September 2014 | |
|
Injection Pump |
|
JMS Injection Pump SP-500 |
|
May 2015 | |
|
Anesthesia Machine |
|
Heyer Narkomat |
|
August 2015 | |
|
Trolleys for Ventilators. |
|
Not applicable |
|
Not a medical
device | |
|
Sterilizers for Ventilators. |
|
Not applicable |
|
Not a medical
device | |
*Respiratory and Oxygen Homecare Products*
* *
|
Product
Type |
|
Product
Model |
|
Registration Expiration | |
|
Oxygen Concentrating Products. |
|
Oxygen concentrator |
|
April 2014 | |
|
Sleep Apnea Treatment Products. |
|
CPAP C5
Auto CPAP A8
Auto S-CPAP A9 |
|
July 2016
July 2016
July 2016 | |
|
Diagnostic Products. |
|
DHR 998
DHR 999 |
|
Application stage
Application stage | |
** **
**Continuing SFDA Regulation**
** **
We are subject to continuing regulation
by the SFDA. In the event of significant modification to an approved medical device, its labeling or its assembly process, a new
premarket approval or premarket approval supplement may be required. Our products are subject to, among others, the following
regulations:
|
| | SFDAs quality system regulations which require companies
to create, implement and follow certain design, testing, control,
documentation and other quality assurance procedures; | |
| 10 | |
| | |
|
| | medical device reporting regulations, which require that
companies report to the SFDA certain types of adverse reaction
and other events involving their products; and | |
|
| | SFDAs general prohibition against promoting products
for unapproved uses. | |
Class II and III devices may also
be subject to special controls applicable to them, such as supply purchase information, performance standards, quality inspection
procedures and product testing devices which may not be required for Class I devices. We believe we are in compliance with
the applicable SFDA guidelines, but we could be required to change our compliance activities or be subject to other special controls
if the SFDA changes or modifies its existing regulations or adopts new requirements.
We are also subject to inspection and
market surveillance by the SFDA to determine compliance with regulatory requirements. If the SFDA decides to enforce its regulations
and rules, the agency can institute a wide variety of enforcement actions such as:
|
| | fines, injunctions and civil penalties; | |
|
| | recall or seizure of our products; | |
|
| | the imposition of operating restrictions, partial suspension
or complete shutdown of assembly; and | |
|
| | criminal prosecution. | |
** **
**China Compulsory Certification Requirements**
** **
China Compulsory Certification, or CCC,
inclusive of a certificate and a mark, serves as evidence that the covered products can be imported, marketed or used in China.
The CCC mark is administered by the China National Certification and Accreditation Administration, which designates the China
Quality Certification Center to process CCC mark applications. Some medical devices are required to have a CCC mark. We have received
a certificate and a mark for each of our proprietary products for which a CCC mark is required.
**Other National and Provincial Level Laws and Regulations
in China**
Beyond those laws and regulations we consider
material to our business, we are subject to evolving regulations under many other laws and regulations administered by governmental
authorities at the national, provincial and city levels, some of which are, or may be, applicable to our business. Our hospital
customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships
with us.
Laws regulating the conduct of business
in our industry cover a broad array of subjects. We must comply with numerous additional state and local laws relating to matters
such as safe working conditions, environmental protection and fire hazard control, which affect all companies doing business in
China. We believe we are currently in compliance with these laws and regulations in all material respects. We may be required
to incur significant costs to comply with these laws and regulations in the future. Unanticipated changes in existing regulatory
requirements or adoption of new requirements could have a material adverse effect on our business, financial condition and results
of operations.
**Restriction on Foreign Ownership**
** **
The principal regulation governing foreign
ownership of medical device businesses in the PRC is the 2011 Foreign Investment Industrial Guidance Catalogue (the Catalogue).
The Catalogue classifies the various industries into four categories: encouraged, permitted, restricted and prohibited. As confirmed
by the government authorities, BDL is engaged in an encouraged industry. Such a designation offers businesses distinct advantages.
For example, businesses engaged in encouraged industries:
|
| | are not subject to restrictions on foreign investment, and,
as such, foreign can own a majority in Sino-foreign joint ventures
or establish wholly-owned foreign enterprises in the PRC; | |
|
| | provided such company has total investment of less than
$100 million, the company is subject to regional (not central)
government examination and approval which are generally more
efficient and less time-consuming; and | |
|
| | may import certain equipment while enjoying a tariff and
import-stage value-added tax exemption. | |
The National Development and Reform Commission
and the Ministry of Commerce periodically jointly revise the Foreign Investment Industrial Guidance Catalogue. As such, there
is a possibility that our companys business may fall outside the scope of the definition of an encouraged industry in the
future. Should this occur, we would no longer benefit from such designation.
| 11 | |
| | |
**Regulation of Foreign Currency Exchange**
** **
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations (1996), as amended, and the Administration Rules
of the Settlement, Sale and Payment of Foreign Exchange (1996). Under these regulations, Renminbi are freely convertible for current
account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions,
but not for most capital account items, such as direct investment, loan, repatriation of investment and investment in securities
outside China, unless the prior approval of SAFE or its local counterparts is obtained. In addition, any loans to an operating
subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference between its respective
approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign loan must be
registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment
and registered capital must be approved by the PRC Ministry of Commerce or its local counterpart. We may not be able to obtain
these government approvals or registrations on a timely basis, if at all, which could result in a delay in the process of making
these loans.
The dividends paid by the subsidiary to
its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration Rules of the Settlement,
Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange, subject
to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions
under the capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant
PRC governmental authorities.
**Regulation of Dividend Distribution**
** **
The principal regulations governing the
distribution of dividends by foreign holding companies include the Foreign Investment Enterprise Law (1986), as amended, and the
Administrative Rules under the Foreign Investment Enterprise Law (2001).
Under these regulations, foreign investment
enterprises in China may pay dividends only out of their retained profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, foreign investment enterprises in China are required to allocate at least 10% of their
respective retained profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered
capital of the enterprises. These reserves are not distributable as cash dividends.
**Notice 75**
** **
On October 21, 2005, SAFE issued
Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local
SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore
company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to registration or filing with
the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise
in the offshore company or overseas funds raised by such offshore company, or any other material change involving a change in
the capital of the offshore company.
Moreover, Notice 75 applies retroactively.
As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in
the PRC in the past are required to complete the relevant registration procedures with the local SAFE branch. Under the relevant
rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed
on the foreign exchange activities of the relevant onshore company, including the increase of its registered capital, the payment
of dividends and other distributions to its offshore parent or affiliate and capital inflow from the offshore entity, and may
also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.
PRC residents who control our company
are required to register with SAFE in connection with their investments in us. Such individuals completed this registration in
2007, and 2008, as amended. If we use our equity interest to purchase the assets or equity interest of a PRC company owned by
PRC residents in the future, such PRC residents will be subject to the registration procedures described in Notice 75.
**Trademark Rights**
** **
The PRC Trademark Law, adopted in 1982
and revised in 2001, with its implementation rules adopted in 2002, protects registered trademarks. The Trademark Office of the
State Administration of Industry and Commerce (SAIC), handles trademark registrations and grants trademark registrations
for a term of ten years.
| 12 | |
| | |
**Regulations on Offshore Parent Holding Companies
Direct Investment in and Loans to Their PRC Subsidiaries**
** **
An offshore company may invest equity
in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such equity investment
is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include
the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint
Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on
the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to
the Change of Registered Capital of Foreign-Invested Enterprises.
Under the aforesaid laws and regulations,
the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval
authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered
with SAIC and SAFE.
Shareholder loans made by offshore parent
holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purpose, which is subject to
a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration
on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the
Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under these regulations, the shareholder
loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total
amount of foreign debts that can be borrowed by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference
between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to the
governmental approval.
Item 1A. Risk Factors.
The Company is not required to provide
the information required by this Item because the Company is a smaller reporting company.
Item 1B. Unresolved Staff Comments.
The Company is not required to provide
the information required by this Item because the Company is a smaller reporting company.
Item 2. Properties.
We are headquartered and our principal
executive offices are located at Jiuzhou Plaza in Beijing. We assemble and test all our branded products at our 32,000 square
foot product facility at the Changping Science Park in Beijing.
|
Office |
|
Address |
|
Rental Term
Expiration |
|
Space | |
|
Principal Executive Office |
|
Room 501, Jiuzhou Plaza, 83 Fuxing Road
Haidian District, Beijing 100856 P.R. China |
|
December 31, 2014 |
|
2,583 square feet | |
|
Product Center |
|
45 Yong An Road, Science Park,
Changping District, Beijing, 102200, P.R. China |
|
December 31, 2013 |
|
32,000 square feet | |
Item 3. Legal Proceedings.
From time to time, we may become involved
in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business,
financial condition or operating results.
Item 4. Mine Safety Disclosures.
Not applicable.
| 13 | |
| | |
PART II
Item 5. Market for Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)
**Market for Our Common Shares**
Our common shares are traded on the NASDAQ
Stock Market under the symbol DHRM. The high and low common stock sales prices per share during the periods indicated were as
follows:
|
Quarter Ended | |
Mar. 31 | | |
June 30 | | |
Sept. 30 | | |
Dec. 31 | | |
Year | | |
|
Fiscal year 2012 | |
| | |
| | |
| | |
| | |
| | |
|
Price per common share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
High | |
$ | 3.38 | | |
$ | 3.95 | | |
$ | 2.99 | | |
$ | 2.50 | | |
$ | 3.95 | | |
|
Low | |
$ | 1.26 | | |
$ | 1.59 | | |
$ | 1.47 | | |
$ | 1.54 | | |
$ | 1.26 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Fiscal year 2011 | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Price per common share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
High | |
$ | 7.74 | | |
$ | 5.30 | | |
$ | 3.30 | | |
$ | 2.08 | | |
$ | 7.74 | | |
|
Low | |
$ | 4.90 | | |
$ | 2.18 | | |
$ | 1.95 | | |
$ | 1.40 | | |
$ | 1.40 | | |
**Approximate Number of Holders of Our Common Shares**
As of the date of this report there are
ten (10) holders of record of our common shares. This number excludes our common shares owned by shareholders holding under nominee
security position listings.
**Dividend Policy**
We have never declared or paid any cash
dividends on our common shares. We anticipate that we will retain any earnings to support operations and to finance the growth
and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination
relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors,
including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of
Directors may deem relevant.
**Recent Sales of Unregistered Securities**
On January 9, 2012, we issued 5,000 common
shares as consideration to a non-employee in connection with individual consulting services provided by the recipient. On April
5, 2012, we issued 5,000 common shares as consideration to a non-employee in connection with individual consulting services provided
by the recipient. On August 22, 2012, we issued 20,000 common shares as consideration to a non-employee in connection with financial
advisory services provided by the recipient. On November 26, 2012, we issued 20,000 common shares as consideration to a non-employee
in connection with financial advisory services provided by the recipient. Also on November 26, 2012, we issued 10,000 common shares
as consideration to a non-employee in connection with financial advisory services provided by the recipient.
The issuances of the above securities
were exempt from registration under the Securities Act of 1933, as amended (Securities Act), in reliance upon Section 4(2)
of the Securities Act as transactions by an issuer not involving any public offering. The recipients of the securities in each
of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof, and appropriate legends were placed upon the book-entry entitlements issued
in each such transaction.
(b) Not applicable.
(c) None.
| 14 | |
| | |
Item 6. Selected Financial Data.
The Company is not required to provide
the information required by this Item because the Company is a smaller reporting company.
Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations.
The following discussion contains, in
addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those described herein.
**Company Overview**
** **
We are a company in the business of developing
and distributing medical devices. We have focused on developing respiratory and oxygen homecare products in particular since 2006.
We distribute products designed and manufactured
by other companies. We broaden our product portfolio through distribution agreements with international manufacturers, and most
of the products we distribute are imported. Our distribution offerings are mostly equipment used in the operating room, the intensive
care unit (ICU) and the emergency room.
Besides distributing medical devices,
we also design, develop and market our own proprietary products and medical components. Because we do not run any manufacturing
facilities, we contract some of the medical components to outside manufacturers in China. Most of our proprietary products require
light assembly by us before distribution.
We sell our products primarily through
distributors, but we also make direct sales to hospitals, clinics, government health bureaus and individuals. We continue to further
our market reach by introducing newer and more advanced product lines that address different end-user needs.
**Macro-Economic Factors and Business Trends**
** **
In 2011, the Chinese Ministry
of Science and Technology announced a medical technology development policy under the 12th Five-Year Plan, proposing
to transfer business focus to the development of new drugs, medical equipment and advanced traditional Chinese medicine,
and to the development of the emerging industries of biomedicine. The plan focuses on researching and developing
the medium- and high-level diagnostic and curative medical devices which are in high demand and widely used, actively promoting the
development of cost-effective medical devices for use in primary health care institutions, enhancing the stability and reliability
of medical services and products and researching and developing supplementary medical equipment which can be easily operated for
family and self-healthcare. Under the 12th Five-Year Plan, China will proactively promote the reform of healthcare infrastructure
system and offer safe, effective, convenient and low-cost medical services to its residents. As a result, management anticipates
growth in the Chinese pharmaceutical market.
Current medical device purchases by individuals
in China are much lower than they are in Europe and the U.S. It is estimated that twenty percent of individual expenditures on
home medical care in China are for medical devices, compared to 50% of such expenditures in Europe and the U.S. As Chinas
population continues to age, management expects a rapid increase in demand for medical devices, and, as a result, growth in
Chinas medical device industry.
It is the initial stage of rapid growth
of Chinas home medical equipment market. As residents living standards and consumption structure
change, the demand for healthcare services and self-care will substantially increase, creating growth
opportunities for participants in the market.
In summary, as a vital component
of Chinas current health system reform, the medical device industry has been incorporated into the
national strategic development plan. In 2013, we anticipate new opportunities, combined with favorable government
policies, will position us for continued growth.
**New Opportunities in Our Business**
** **
Chinese government programs are aimed
at rebuilding and renovating urban health centers, and building hospitals and medical centers in rural areas. The government is
setting up the goal of having one up-to-standard hospital in every county, one government-run medical center in every township
and one clinic in every administrative village. Major portion of the domestic large-scale medical equipment procurement is government
centralized procurement. For example, China Development Bank launched the Supporting Health Infrastructure in Rural Areas
Program with a $690 million budget in the three years from 2011 through 2013.
| 15 | |
| | |
Fortune magazine predicted homecare
medical equipment to be ranked first among the fastest-growing industries in the 21st century. In western countries with mature
and large health care markets, home medical equipment accounts for 40% of the entire medical device output. However,
in China because of the limited health insurance coverage and level of treatment in the public health systems, residents tend
to be more aware of their health and wellness and to seek treatment at home before resorting to public health systems. Thus, management
expects that homecare medical equipment could become as abundant as home appliances.
In addition, the UN estimates that the
Chinese population over the age of 60 will increase from 167 million in 2010 to 440 million in 2050; hence, the aging population
and increasing incidence of respiratory disorders are expected to drive additional growth in respiratory homecare products in
the Chinese marketplace.
In 2011, the Shanghai government launched
its medical insurance program to subsidize its citizens on homecare oxygen tanks. We anticipate Beijing and other cities will
be pushing for similar legislation. Accordingly, in 2011 we partnered with two other companies to provide homecare oxygen tank
services in Beijing.
Based on the data shown above, both from
a market and a government perspective, we are leveraging our broad sales network in order to introduce additional products from
leading international brands into the Chinese market and participating in government healthcare projects. At the same time, we
will also increase our investment in R&D, continue marketing penetration for our proprietary products, expand coverage for
home oxygen therapy service and focus on broadening international markets. We believe that the favorable market conditions will
support growth in sales and that our market expansion strategy will benefit our business growth in the future.
**Growth Strategy**
** **
We plan to build our brand name domestically
as both a distributor and a trusted partner by leveraging our relationships with healthcare professionals, agents and other downstream
distributors, maintaining and expanding our customer base, and promoting steady business growth.
We plan to broaden the portfolio of products
we distribute for other companies by cooperating with more internationally recognized medical equipment manufacturers. We also
intend to take advantage of our well-established distribution network to grow sales revenues. By actively participating in state-level
contracted healthcare programs, we will continue to expand our key account business and build a higher level of contact and relationships
with the government and other healthcare industrial insiders.
We plan to expand our product portfolio
through continued investment in research and development and pursuing attractive opportunities to acquire complementary products
and technologies. We will establish an efficient and innovative sleep diagnostic system by developing advanced technologies, continuously
strong efforts in research and development of proprietaries and will broaden the market by seeking cooperation with first-class
sleep centers in nationwide.
We will continue developing sleep respiratory
and oxygen therapy business domestically. We will launch a series of product combinations to address the each specific market
of oxygen therapy, including emergency treatment, disaster relief and homecare oxygen therapy services.
We will continue to expand into overseas
markets and establish a distribution network, through distribution agreements, OEM partnerships and direct sales force efforts.
We will build our brand name by actively participating in international trade shows and other marketing activities. To the extent
we have adequate demand for our sleep respiratory and oxygen therapy products abroad, we will continue seeking regulatory approval
to sell these products in the United States and Europe.
**Results of Operations**
**Overview**
For the years ended December 31, 2012
and 2011, our total revenues amounted to approximately $21.37 million and $21.64 million, respectively. Our revenues are subject
to value added tax (VAT), sales returns and trade discounts. We deduct these amounts from our gross revenues to
arrive at our total revenues. Our net income attributable to Dehaier for the years ended December 31, 2012 and 2011 was approximately
$3.21 million and $3.10 million, respectively. Although revenue decreased slightly, net income attributable to Dehaier increased
slightly, mainly due to the Companys operating strategy changes that reduced expenses. While we continuously developed
our sales channels on traditional medical devices sales, we have also been adjusting our strategy to expand into government procurement
projects and the burgeoning respiratory and oxygen homecare market.
** **
| 16 | |
| | |
** **
**Factors Affecting Our Results of Operations
Generally**
We believe the most significant factors
that directly or indirectly affect our sales revenues and net income are:
|
| | the level of acceptance of our products among hospitals and
other healthcare facilities; | |
|
| | our ability to price our products at levels that provide favorable
margins; | |
|
| | new products introduced by us and our competitors; | |
|
| | our ability to attract and retain distributors and key customers; | |
|
| | our continued investment in research and development activities
and our retention of key employees; | |
|
| | changes in Chinas macro-economic environment and healthcare-related
government policies and legislation; and | |
|
| | global economic conditions. | |
** **
**Revenues**
Our total revenues are derived from our
medical devices and our respiratory and oxygen homecare products and services. In 2012, our revenues decreased slightly as we
saw a weakening in our traditional medical sales due to increased competition in our market. While we have been successful in
growing our higher-margin sales in 2012, we believe that we are still at an early stage in this market and have not yet overcome
the traditional market decrease.
**Medical Devices (Including Related Supporting Products)
Our Proprietary and Distributed Products**
We derive revenues in our medical devices
product line from the sale of C-arm X-ray systems, anesthesia machines, medical ventilators, general hospital products and related
supporting products (previously defined as technical service products). Our medical device line is our largest product line and
has the most extensive market penetration. We anticipate that we will continue to experience revenue growth in our medical devices
line as we further develop our market through the introduction of new advanced product offerings and the participation in favorable
government programs. In addition, we have begun to engage in state-level healthcare projects recently. We may procure high-end
medical equipment for our clients, which may not necessarily be part of our existing distributed brands portfolio. We refer to
these kinds of contracted projects as key account business. Although this business may carry lower margins, the
contract value for such business is typically larger and can contribute materially to our revenues.
**Sleep Respiratory and Oxygen Therapy Products**
We derive revenues in our sleep respiratory
and oxygen therapy line from sales of oxygen concentrators, CPAP devices, and portable sleep diagnostics devices. We anticipate
that, on a percentage basis, revenues from sleep respiratory and oxygen therapy product line will increase more rapidly than total
revenues in the near term, as we introduce new and more advanced products. We expect to develop our market for sleep respiratory
and oxygen therapy market in China and internationally through the use of distributors as well as through our direct sales platform.
In addition, we launched the new Effective Oxygen Supplement System in 2012. This system is able to satisfy more demands from
a much more detailed and specific market. While we strongly believe in the tremendous growth potential of sleep respiratory and
oxygen therapy business in coming years, we are still in the early stage of this business. In 2013, management will be focusing
on laying solid foundation, such as introducing more advanced products and penetrating the market, for sleep respiratory and oxygen
therapy business, rather than generating considerable revenue from this business.
** **
**Operating Costs and Expenses**
Our operating costs and expenses consist
of cost of revenues, general and administrative expenses, selling expenses and other expenses. Our total operating costs and expenses
slightly decreased both as a percentage of our total revenues and in absolute amount for the year ended December 31, 2012 compared
to the same period in 2011, primarily due to the decrease in spending in the homecare and oxygen therapy clients and international
market development. Further, our research and development investments and efforts in maintaining capital market relationships
contributed to our operating expenses. The following table sets forth the components of our costs and expenses both in U.S. dollar
amounts (in thousands) and as a percentage of total revenues for the years indicated.
| 17 | |
| | |
** **
|
| |
For the year ended December 31, | | |
|
| |
2012 | | |
2011 | | |
Change | | |
|
| |
USD (000) | | |
% | | |
USD (000) | | |
% | | |
USD (000) | | |
% | | |
|
Revenues | |
| 21,370 | | |
| 100.00 | | |
| 21,639 | | |
| 100.00 | | |
| (269 | ) | |
| -1.24 | % | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Costs and expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Cost of revenues | |
| 13,255 | | |
| 62.03 | | |
| 13,697 | | |
| 63.30 | | |
| (442 | ) | |
| -3.23 | | |
|
General and administrative expense | |
| 2,599 | | |
| 12.16 | | |
| 2,621 | | |
| 12.11 | | |
| (22 | ) | |
| -0.84 | | |
|
Selling expense | |
| 1,358 | | |
| 6.35 | | |
| 1,877 | | |
| 8.67 | | |
| (519 | ) | |
| -27.65 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Total costs and expenses | |
| 17,212 | | |
| 80.54 | | |
| 18,195 | | |
| 84.08 | | |
| (983 | ) | |
| -5.40 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Net Income | |
| 3,216 | | |
| 15.05 | | |
| 3,126 | | |
| 14.45 | | |
| 90 | | |
| 2.88 | | |
** **
**Cost of Revenues**
Cost of revenues primarily includes finished
goods, parts for assembly, wages, handling charges, and other expenses associated with the assembly and distribution of product.
**General and Administrative Expenses**
General and administrative expenses consist
primarily of salaries and benefits and related costs for our administrative personnel and management, fees and expenses of our
outside advisers, including legal, audit and valuation expenses, expenses associated with our administrative offices and the depreciation
of equipment used for administrative purposes. We expect that our general and administrative expenses will increase, both on an
absolute basis and as a percentage of revenue, as we hire additional personnel and incur costs related to the anticipated growth
of our business. In addition, we expect to continue to incur significant general and administrative expenses as a public company.
**Selling Expenses**
Selling expenses consist primarily of compensation
and benefits for our sales and marketing staff, expenses for promotional, advertising, travel and entertainment activities, lease
payments for our sales offices, and depreciation expenses related to equipment used for sales and marketing activities. Going
forward, we expect our selling expenses to increase, both on an absolute basis and as a percentage of revenue, as we increase
our efforts to promote our products, especially our new respiratory and oxygen homecare products.
**Results of Operations**
We believe that period-to-period comparisons
of operating results should not be relied upon as indicative of future performance.
**Fiscal Year Ended December 31, 2012 Compared to Fiscal
Year Ended December 31, 2011.**
**Revenues**
Our
total revenues decreased by 1.24% from $21.64 million for the fiscal year ended December 31, 2011 to $21.37 million for the
fiscal year ended December 31, 2012. In 2012, we continuously developed our sales channels for traditional medical
devices sales. At the same time, we also began to adjust our operating strategy to expand into government procurement projects
and the burgeoning respiratory and oxygen homecare market. Management
believes revenues have decreased slightly in traditional device sales due to an increasingly challenging market and new competitors.
Further, our government procurement efforts and homecare business are still at a relatively early stage. As a result, our overall
revenues are slightly lower than in 2011.
| 18 | |
| | |
**Cost of Revenues**
Our
cost of revenues decreased by 3.23% from $13.70 million for the fiscal year ended December 31, 2011 to $13.25 million for
the fiscal year ended December 31, 2012. Our efforts to manage our inventory and costs allowed us to decrease our
cost of revenues slightly more quickly than our decrease in revenues.
**Gross Profit**
** **
Our gross profit increased from $7.94 million
in 2011 to $8.12 million in 2012, and our gross margin increased slightly from 36.70% in 2011 to 37.98% in 2012. Management believes
the shift in the Companys revenue mix away from traditional device sales resulted in increases in gross margin and net
income.
**Operating Expenses**
** **
Our
operating expenses decreased by 12.02% from $4.50 million for the fiscal year ended December 31, 2011 to $3.96 million for
the fiscal year ended December 31, 2012. The expenses decreased more than revenues, largely due to our efforts to reduce
traveling and marketing expenses by leveraging our increasingly mature distribution network and shifting away from in-person marketing
visits when appropriate. We analyzed our operating expenses by general and administrative expenses and selling expenses
in the following parts.
**Operating ExpensesGeneral and Administrative
Expenses**
** **
General and administrative expenses consist
primarily of salaries and benefits and related costs for our administrative personnel and management, and expenses associated
with our research and development, registration of patent and intellectual property rights in China and abroad.
Our general and administration expenses
decreased by 0.82% from $2.62 million for the fiscal year ended December 31, 2011 to $2.60 million for the fiscal year ended
December 31, 2012. This decrease was mainly due to a reduction in R&D expenses.
We expect that our general and administration
expenses will increase in the near future as a result of business expansion..
**Operating ExpensesSelling Expense**
Our selling expenses decreased by 27.66%
from $1.88 million for the fiscal year ended December 31, 2011 to $1.36 million for the fiscal year ended December 31,
2012.
These selling expense decreases are a result
of operating efficiency improvements related to more focused marketing efforts that reduced travel expenses when appropriate.
We expect our selling expenses will grow as we invest in strengthening our distribution network, growing relationships with our
customers, developing the homecare device market (in particular our oxygen therapy service initiative) and driving top-line growth
in these areas.
**Operating Income**
As a result of the foregoing, we generated
an operating income of approximately $4.39 million in 2012, compared to approximately $3.61 million in 2011. Operating income
increased by 21.46% largely due to the decrease in selling expenses.
**Taxation**
Our income tax expense was approximately
$0.86 million in 2012, compared to approximately $0.66 million in 2011. Our taxable income increased primarily due to the increase
in net income.
**Net Income**
As a result of the foregoing, we had net
income of approximately $3.22 million in 2012, compared to approximately $3.13 million in 2011. After deduction of non-controlling
interest in income, net income attributable to Dehaier was approximately $3.21 million and $3.10 million in 2012 and 2011, respectively.
** **
| 19 | |
| | |
** **
**Liquidity and Capital Resources**
**Cash Flows and Working Capital**
As of December 31, 2012, we had $3,505,330
in cash and cash equivalents. As a result of decreased cash flow associated with intellectual property investment, partially offset
by increased cash flow from operating activities, net cash decreased from $3,694,486 at December 31, 2011. We believe that
our currently available working capital of $28,852,500, including cash, should be adequate to meet our anticipated cash needs
and sustain our current operations for at least 12 months. To the extent we engage in acquisitions in the future, we may need
to rely on a variety of sources of funding, including but not limited to operating cash, and debt and/or equity financing.
**Operating Activities**
Net
cash provided by operating activities was $1,704,876 for the year ended December 31, 2012 as compared to $3,161,752 used
in operating activities for the same period in 2011. The reasons for this change are mainly as follows:
|
| (i) | Accounts receivable decreased by $344,341 in 2012, compared
with an increase of $3,797,045 in 2011. The aggregate decrease
in accounts receivable from the beginning of 2011 through the
end of 2012 of $4,141,386 is attributable to better aging management,
which reduced accounts receivable amounts. | |
|
| (ii) | Prepayments and other current assets increased by $1,730,704
in 2012, while in 2011, it increased by $1,413,176. The aggregate
increase of $3,143,880 in prepayments and other current assets
from the beginning of 2011 through the end of 2012 is due to
the Companys decision to lock in supply costs by prepaying
certain amounts in order to avoid increases in raw material prices. | |
|
| (iii) | Other receivables increased by $1,617,781 in 2012,
while in 2011, other receivables decreased by $642,287.
This increase of $2,260,068 in other receivables from the beginning
of 2011 through the end of 2012 represents contract and contract
bid deposits to participate in large contracts, which typically
have a longer turnover than smaller contracts due to increased
completion time. | |
|
| (iv) | Inventories decreased by $931,844 in 2012, while in the 2011,
inventories decreased by $842,052. The aggregate decrease
in inventories of $1,773,896 from the beginning of 2011 through
the end of 2012 is mainly because the Company improved its inventory
management by better matching production cycles with customer
orders. | |
**Investing Activities**
Net cash used in investing activities for
the year ended December 31, 2012 was $2,726,507, compared to $155,419 for the same period of 2011. The cash used in investing
activities in each year was mainly attributable to capital expenditures for the purchase of new equipment. The increase in 2012
was mainly because the Company completed software copyright registrations for which it had previously invested in research and
development.
**Financing Activities**
We received $2.4 million in proceeds from
a short-term bank loan in 2012, which was fully paid during the year, as compared to $1.5 million in 2011.
**Contractual Obligations and Commercial Commitments**
The following table sets forth our contractual
obligations as of December 31, 2012:
|
| |
Payments due by period | | |
|
Contractual obligations | |
Total | | |
Less than 1 year | | |
1-3 years | | |
More than 3 years | | |
|
Operating Lease Obligations | |
$ | 144,451 | | |
$ | 97,589 | | |
$ | 46,862 | | |
| - | | |
|
Short-term borrowings | |
$ | 2,407,200 | | |
$ | 2,407,200 | | |
| - | | |
| - | | |
|
Total | |
$ | 2,551,651 | | |
$ | 2,504,789 | | |
$ | 46,862 | | |
| - | | |
The leased properties are principally located
in the PRC, and we use such properties for administration and warehouse facilities. The leases are renewable subject to negotiation.
Short-term borrowings represent short-term
loans from two banks, which are due in May 2013 and March 2014.
| 20 | |
| | |
**Capital Expenditures**
We made capital expenditures of approximately
$2.73 million and $0.15 million in 2012 and 2011, respectively, representing 12.73% and 0.69% of our total revenues, respectively.
Our capital expenditures were used to purchase machinery for our assembly line and obtain software copyrights. As of December
31, 2012, we had no capital expenditure obligations.
**Off-Balance Sheet Commitments and Arrangements**
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts
that are indexed to our shares and classified as shareholders equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity
that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and
development services with us.
**Tax Matters Applicable to Our Company**
** **
**Generally**
** **
Dehaier is a tax-exempt company incorporated
in the British Virgin Islands. BDL and BTL were incorporated in the PRC and are governed by PRC laws.
The Company pays PRC enterprise income taxes,
value added taxes and business taxes in China for revenues from BDL, and is governed by British Virgin Islands tax laws as to
Dehaier.
**British Virgin Islands Tax**
** **
We are exempt from all provisions of the
Income Tax Act of the British Virgin Islands, including with respect to all dividends, interests, rents, royalties, compensation
and other amounts payable by or to persons who are not resident in the British Virgin Islands. Capital gains realized with respect
to any of our shares, debt obligations or other securities by persons who are not resident in the British Virgin Islands are also
exempt from all provisions of the Income Tax Act of the British Virgin Islands. No estate, inheritance tax succession or gift
tax rate, duty, levy or other charge is payable by persons who are not resident in the British Virgin Islands with respect to
any of our shares, debt obligations, or other securities. No stamp duty is payable in the British Virgin Islands in relation to
a transfer of shares in a British Virgin Islands Business Company.
**PRC Enterprise Income Taxes**
** **
PRC enterprise income tax is calculated
based on taxable income determined under PRC accounting principles.
The Company is subject to the Enterprise
Income Tax Law (the EIT Law) which provides for a unified enterprise income tax rate of 25%. We are eligible for
preferential tax treatment in accordance with the currently prevailing tax laws and administrative regulations through December
31, 2012.
Furthermore, under the EIT Law, an enterprise
established outside of the PRC with de facto management bodies within the PRC is considered a resident enterprise
and will normally be subject to the enterprise income tax at the rate of 25% on its global income. If the PRC tax authorities
subsequently determine that we or any of our non-PRC subsidiaries should be classified as a PRC resident enterprise, then such
entitys global income will be subject to PRC income tax at a tax rate of 25%. In addition, under the EIT Law, payments
from BDL to us may be subject to a withholding tax. The EIT Law currently provides for a withholding tax rate of 20%. If Dehaier
is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 10% on any dividends paid
by its Chinese subsidiaries to Dehaier. In practice, the tax authorities typically impose the withholding tax rate of 10% rate,
as prescribed in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance
is provided by relevant government authorities. We are actively monitoring the proposed withholding tax and are evaluating appropriate
organizational changes to minimize the corresponding tax impact.
In addition, entities that qualify as high
and new technology enterprises will enjoy a 15% preferential tax rate under the EIT Law. Enterprise that have been certified
as high and new technology enterprises shall pre-pay EIT at the rate of 25% temporarily until re-certified as high
and new technology enterprises under Circular 172.
| 21 | |
| | |
Under the current PRC laws, PRC government
grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the
period of validity for the certification of high technology companies is three years. In 2009, BDL renewed its certification for
high technology company, and qualified for the 15% income tax rate to calculate the income tax expense for the periods
ended December 31, 2012 and 2011. In 2012, the Company renewed the high technology company status to maintain its 15% income tax
rate. The current preferential rate is scheduled to expire unless renewed in 2015.The income tax rate for BTL was 25% in 2011
and 2012.
**PRC Value Added Tax**
** **
All entities and individuals that are engaged
in the businesses of sales of goods, provision of repair and placement services and importation of goods into China are generally
subject to a VAT at a rate of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross sales
proceeds received, less any VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in
the production of goods or provisions of services that have generated the gross sales proceeds.
**PRC Business Tax**
** **
Companies in China are generally subject
to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20% on revenue generated from
providing services and revenue generated from the transfer of intangibles.
**United States Tax**
** **
As of December 31, 2012, Breathcare LLC
was treated as a pass-through entity under the Internal Revenue Code, so Breathcare LLC does not pay U.S. federal income tax at
the entity level. Moreover, to date, Breathcare LLC has not generated any revenues.
**Critical Accounting Policies**
** **
**Basis of Consolidation**
** **
The consolidated financial statements include
the accounts of Dehaier, and its majority-owned and wholly-owned subsidiaries (collectively, the Company). All significant
inter-company transactions and balances are eliminated in consolidation.
A group of shareholders, including the Chief
Executive Officer, originally held more than 50% of the voting ownership interest of Dehaier, BDL and BTL. BTL is a variable interest
entity (VIE), and BDL is the primary beneficiary. BTL owns a building which is pledged as collateral for BDLs
bank loans. In exchange, BDL loans money to BTL to finance its operations. BTLs primary operation is to provide repairs
and transportation services to BDLs customers. Because of these arrangements, BDL is the primary beneficiary of BTL, as
the entity that is most closely associated with BTL. Management makes ongoing reassessments of whether BDL is the primary beneficiary
of BTL.
**Use of Estimates**
** **
The preparation of the consolidated financial
statements 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 dates of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant
accounting estimates reflected in the Company's consolidated financial statements include revenue recognition, allowance for doubtful
accounts, warranty obligation, warrants liability, stock-based compensation and useful lives of property and equipment. Actual
results could differ from those estimates.
**Accounts Receivable**
** **
Accounts receivable are recorded at net
realizable value. Accounts receivable terms typically are 60-180 days from the end of the month in which services are provided
or goods are delivered. Our typical trade receivable terms vary based on the type of customer. We general require 100% prepayment
before delivering our products to individual clients. Our contract terms general require 10%-30% prepayment for our hospital and
healthcare center clients, and the trade receivable term in contracts for those clients is generally between 60 and 90 days. Our
contract terms general require 10% prepayment from our distributor clients, and the trade receivable term in contracts for those
clients is generally between 60 and 180 days. With the exception of the prepayments we require in some cases, we generally do
not require collateral or other security to support accounts receivable. An allowance, if required, is based on a combination
of historical experience, aging analysis, and an evaluation of the collectability of specific accounts.
| 22 | |
| | |
**Fair Value of Financial Instruments**
** **
The carrying amounts reported in the consolidated
financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial
instruments.
The Company follows the provisions of ASC
820-10, Fair Value Measurements and Disclosures, which establishes a single authoritative definition of fair value
and a framework for measuring fair value and expands disclosure of fair value measurements for both financial and nonfinancial
assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures.
This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income or cash flows) and the cost approach (cost to
replace the service capacity of an asset or replacement cost). For purposes of ASC 820-10-15, nonfinancial assets and nonfinancial
liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial
liability as defined in ASC 820-10-15-15-1A.
The Company adopted the provisions of ASC
Topic 815 (formerly Emerging Issue Task Force 07-5), Determining Whether an Instrument (or an Embedded Feature) is Indexed
to an Entitys Own Stock. ASC Topic 815 provides a framework for determining whether an instrument is indexed to
an entitys own stock. ASC Topic 815 became effective for the Company this period when warrants were issued in connection
with the Companys initial public offering (IPO). Such warrants are indexed to the Companys common
shares, which is traded in US dollars. Since the Companys functional currency is the RMB, such warrants are considered
liabilities. The fair value of the warrant liabilities is measured each reporting period with the resulting change in fair value
recorded in the statement of operations. An increase of the warrants liability due to a change in fair value would decrease net
income and earnings per share. A decrease in warrants liability due to a change in fair value would increase net income and earnings
per share of the Company.
**Revenue Recognition**
** **
The Company recognizes revenues when all
the followings conditions have been satisfied:
Persuasive
evidence of an arrangement exists;
Delivery
and/or installation has occurred (e.g., risks and rewards of ownership has passed);
The
sales price is fixed or determinable; and,
Collectibility
is reasonably assured.
All revenues are based on firm customer
orders with fixed terms and conditions. Because the products are assembled to the customers specification, there is no
right of return. The Company does not provide its customers with price protection or cash rebates. For products which include
software, the software is an off-the-shelf package and an integral part of the products being delivered. The Company does not
provide any significant post-sale customer support services and does not provide customers with upgrades. The software is incidental
to the product as a whole. For products that do not require installation, revenues are recognized when the products are delivered.
For products that require installation, revenues are recognized when the installation is completed.
**Income Taxes**
** **
The Company uses the asset and liability
method of accounting for income taxes in accordance with ASC 740-10, Accounting for Income Taxes. Under this method,
income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax
consequences of temporary differences resulting from matters that have been recognized in an entitys financial statements
or tax returns. 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 the results of operations in the period that includes the enactment date.
A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and
negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
| 23 | |
| | |
ASC 740-10 prescribes a recognition threshold
and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return.
Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is more
likely than not that the position is sustainable upon examination, based on its technical merits. The tax benefit of a
qualifying position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized
upon ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including
interest and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized
on a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and
penalties, if any, are included as components of income tax expense and income taxes payable. The Company is awaiting resolution
of certain complex tax issues and has not yet filed its 2008 and 2009 Value Added Tax (VAT) returns for some of
its customers. However, all the potential VAT liabilities on these VAT returns were accrued and included in the accompanying consolidated
financial statements.
**Stock-Based Compensation**
** **
The Company follows the provisions of ASC
718-10, Compensation-Stock Compensation. The Company has a share incentive plan which authorizes the issuance of
up to 10% of the number of shares outstanding. Pursuant to the plan, the Company may issue options to purchase its common shares
to employees and directors of the Company and its affiliates. The Company fair values share-based awards granted under the plan.
Accordingly, compensation is measured on the grant date using appropriate valuation models.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
The Company is not required to provide
the information required by this Item because the Company is a smaller reporting company.
Item 8. Financial Statements and Supplementary Data.
The Companys financial statements
and the related notes, together with the report of Friedman LLP are set forth following the signature pages of this report.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None.
Item 9A/9A(T). Controls and Procedures.
** **
**Evaluation of Disclosure Controls
and Procedures**
** **
As of December 31, 2012 (the Evaluation
Date), the Company carried out an evaluation, under the supervision of and with the participation of management, including
the Companys chief executive officer and chief financial officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934). Based on the foregoing, the chief executive officer and chief financial officer concluded that as of the Evaluation
Date the companys disclosure controls and procedures were effective and designed to ensure that all material information
required to be included in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure
that information required to be disclosed is accumulated and communicated to our management, including our principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow timely decision regarding required
disclosure.
** **
**Managements Annual Report on Internal
Control over Financial Reporting**
** **
The Companys management is responsible
for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f)
under the Securities and Exchange Act of 1934, as amended. The Companys internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with generally accepted accounting principles. The Companys internal control
over financial reporting includes those policies and procedures that:
|
| (1) | pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the recording of transactions of the
Companys assets; | |
| 24 | |
| | |
|
| (2) | provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial statements
in accordance with U.S. GAAP, and that the Companys receipts
and expenditures are being made only in accordance with the authorization
of its management and directors; and | |
|
| (3) | provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the consolidated financial
statements. | |
Because of its inherent limitations, a system
of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement
preparation and presentation and may not prevent or detect misstatements, Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The Companys management assessed
the effectiveness of its internal control over financial reporting as of December 31, 2012. In making this assessment, management
used the framework set forth in the report entitled Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. Based on this assessment, the Companys management believes that, as
of the Evaluation Date, its internal control over financing reporting is effective based on the criteria established in the Internal
ControlIntegrated Framework issued by COSO.
**Changes in Internal Control over Financial
Reporting**
** **
There were no changes in the Companys
internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three
or twelve months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the companys
internal control over financial reporting.
|
Item 9B. Other Information. | |
None.
PART III
|
Item 10. Directors, Executive Officers and Corporate Governance. | |
** **
**Regulation S-K Item 401:**
**Executive Officers and Directors**
The following table sets forth our executive
officers and directors, their ages and the positions held by them:
|
Name |
|
Age |
|
Position
Held | |
|
Ping
Chen(1)(2) |
|
48 |
|
Chief Executive Officer and Chairman
and Director | |
|
Jingli
(Charles) Li(1) |
|
27 |
|
Chief Financial Officer | |
|
Weibing
Yang(1)(3) |
|
45 |
|
Director | |
|
Yunxiang
(Phil) Fan(1)(3)(4)(5)(6) |
|
45 |
|
Independent Director | |
|
Genhui
Chen(1)(4)(5)(6)(7) |
|
48 |
|
Independent Director | |
|
Mingwei
Zhang(1)(4)(5)(6)(7) |
|
59 |
|
Independent Director | |
|
| (1) | The individuals business address is c/o Suite
501, Jiuzhou Plaza, 83 Fuxing Road, Haidian District, Beijing
100856 China. | |
|
| (2) | Class III director whose term expires in 2015. | |
|
| (3) | Class II director whose term expires in 2014. | |
|
| (4) | Member of audit committee. | |
|
| (5) | Member of compensation committee. | |
|
| (6) | Member of nominating committee. | |
|
| (7) | Class I director whose term expires in 2013. | |
*Ping Chen. *Mr. Chen is
our Chief Executive Officer. Prior to his service as our Chief Executive Officer, from 1993-2000, Mr. Chen served as the
CEO of Beijing Chengcheng Medical Electronic Equipment Co. Prior to 1993, Mr. Chen served as an engineer at the No. 2
Academy, Ministry of Aeronautics and Astronautics from 1987 to 1991 and moved up to the Head of the Civilian Products Division
there from 1991-1993. Mr. Chen founded BTL in 2001 and has served as CEO since that time. Mr. Chen received his bachelors
degree in 1984 from the National University of Defense Technology and his masters degree in 1987 from the Ministry of Aeronautics
and Astronautics. Mr. Chen has been chosen as a director because he is our CEO, the leader of our Company and a key experienced
member of management.
| 25 | |
| | |
*Jingli (Charles) Li*.**Mr.
Li is our Chief Financial Officer and is familiar with US GAAP, China GAAP and the Sarbanes-Oxley Act. Mr. Li has supported Dehaier
with the establishment of its internal control system and procedures since November 2010. He previously worked as a senior auditor
in KPMG Huazhen Beijing from September 2008 through November 2010. Mr. Li earned his bachelor degree in Economics at Beijing University
of Technology in 2008 and is a member of the Internal Control Institute as a Certified Internal Control Specialist.
* *
*Weibing Yang. *Dr. Yang has
served as the Registrants vice president of sales and marketing since 2003. Dr. Yang was a sales director at
Beijing Dehaier Technology Company Limited from 2001 through 2003. From 1996 to 1997, Dr. Yang was a product manager
at Amtronix Inc., a medical equipment company. From 1993 to 1996, Dr. Yang served as a sales manager at Planmeca Medical
Equipment Co. From 1989 to 1992, Dr. Yang was a doctor at the Affiliated Hospital of Shipbuilding Industry Group. Dr.
Yang graduated from the Medical School of SooChow University in 1989. Dr. Yang was chosen as a director because of
his extensive experience in sales and marketing of medical equipment.
*Yunxiang (Phil) Fan.* Mr. Fan
is a director of our company. In 2003, Mr. Fan co-founded Tri-Tech Holding Inc., a company operating in the water pollution
remediation, software and engineering industry in China (Tri-Tech). He currently serves as the President and a director
of Tri-Tech. Prior to founding Tri-Tech, Mr. Fan provided technical, engineering and management services in several U.S.
engineering firms, including Black and Beatch, Parsons Brinckerhoff, Inc., and Chastain-Skillman, Inc. From 2003 through 2005,
Mr. Fan was the Asia Regional Sales Manager for Met-Pro Corporation. Mr. Fan earned his bachelors and masters
degrees in environmental engineering from Hunan University and a masters degree in civil engineering from Louisiana State
University. Mr. Fan has been a registered professional engineer in the United States since 2001. Mr. Fan was chosen
as a director because we believe we can benefit from the guidance of the president of a Chinese company publicly traded in the
U.S.* *
* *
*Genhui Chen.* Dr. Chen is president
of Beijing Wenfeng Medical Technology Ltd. (BWMT), a privately-held pharmaceutical research and development company
focusing on novel cancer and dermatological products. Dr. Chen has over 15 years of experience, from1993 to 2008, in the pharmaceutical
industry in the areas of clinical research, regulatory compliance, corporate development and management, for a variety of companies
ranging from start-ups to public companies, both in Canada and in China. Prior to joining BWMT in 2010, Dr. Chen was a founder,
president and chief executive officer of Welichem Biotech Inc., a Canadian pharmaceutical company listed on the TSX Venture Exchange
since 2008. From 1999 until he founded Welichem, Dr. Chen was a senior scientist at Terragen Discovery Inc., a subsidiary of Cubist
Pharmaceuticals. Dr. Chen received his M.Sc. and Ph.D. degrees in biology from Simon Fraser University in Vancouver, Canada in
1988 and 1991, respectively. Dr. Chen was chosen as a director because of his extensive experience in research and development,
regulatory compliance, corporate development and management.
*Mingwei Zhang*. Mr. Zhang has extensive
knowledge and experience in accounting from the perspective as an academic and a practicing accountant. Since September 2007,
Mr. Zhang has served as Chief Financial Officer and a Director of Sino-Global Shipping America, Ltd. (NasdaqCM: SINO). From May
2001 until December 2007, Mr. Zhang was a partner in Baker Tilly China, an international public accounting firm. From July 1994
to June 2003, he served as a Lecturer at Monash University in Australia. Mr. Zhang received a Bachelors degree
and a Masters degree in Accounting from Tianjin University of Finance and Economics. He also received a Masters
degree in Commerce from the University of Newcastle. Mr. Zhang is a Certified Management Accountant in Australia. Mr. Zhang was
chosen as a director because of his financial experience.* *
** **
**Employment Agreements**
Under Chinese law, we may only terminate
employment agreements without cause and without penalty by providing notice of non-renewal one month prior to the date on which
the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate an employment agreement
in the absence of cause, then we are obligated to pay the employee one months salary for each year we have employed the
employee. We are, however, permitted to terminate an employee for cause without penalty to our company, where the employee has
committed a crime or the employees actions or inactions have resulted in a material adverse effect to us.
Our employment agreements with our executive
officers generally provide for a term of three (3) years and a salary to be paid monthly. The agreements also provide that
executive officers are to work an average of forty hours per week and are entitled to all legal holidays as well as other paid
leave in accordance with PRC laws and regulations and our internal work policies. Under such agreements, our executive officers
can be terminated for cause without further compensation. The employment agreements also provide that we will pay for all mandatory
social security programs for our executive officers in accordance with PRC regulations. During the agreement and for one (1) year
afterward, our executive officers are subject to keep trade secrets confidential.
| 26 | |
| | |
**Share Option Pool**
In connection with our initial public
offering, we established a pool for share options for our employees. This pool contains options to purchase up to 450,000 of our
common shares. The options will vest at a rate of 20% per year for five years and have an exercise price of the market price
of our shares on the date the options are granted. As of the date of this report, we have issued all 450,000 options out of our
employee share option pool.
**Board of Directors and Board Committees**
Our board of directors currently consists
of 5 directors. There are no family relationships between any of our executive officers and directors. The directors are divided
into three classes. Class I directors shall face re-election at our annual general meeting of shareholders in 2013 and every three
years thereafter. Class II directors shall face re-election at our annual general meeting of shareholders in 2014 and every three
years thereafter. Class III directors shall face re-election at our annual general meeting of shareholders in 2015 and every three
years thereafter.
A director may vote in respect of any
contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such
contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice
or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or
any committee thereof of the nature of a directors interest shall be sufficient disclosure and after such general notice
it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum
upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested
and may vote on such motion. There are no membership qualifications for directors. Further, there are no share ownership qualifications
for directors unless so fixed by us in a general meeting.
The Board of Directors maintains a majority
of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market
Rule 4200(a)(15). Messrs. Fan, Zhang and Genhui Chen are our independent directors.
Mr. Ping Chen currently holds both
the positions of Chief Executive Officer and Chairman of the Board. These two positions have not been consolidated into one position;
Mr. Chen simply holds both positions at this time. We do not have a lead independent director because of the foregoing reason
and also because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company
board. We believe this leadership structure is appropriate because we are a smaller reporting company in the process of listing
on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr. Chen as both our principal
executive officer and Chairman of the Board.
Board Committees
Currently, three committees have been
established under the board: the audit committee, the compensation committee and the nominating committee. The audit committee
is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements
of our company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation
committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our
officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our
board retains the authority to interpret those plans). The nominating committee of the board of directors is responsible for the
assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations
or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience
when nominating directors.
Duties of Directors
Under British Virgin Islands law, our
directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to
exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling
their duty of care to us, our directors must ensure compliance with our third amended and restated memorandum and articles of
association. We have the right to seek damages if a duty owed by our directors is breached. The functions and powers of our board
of directors include, among others:
|
| | appointing officers and determining the term of office of
the officers; | |
| 27 | |
| | |
|
| | authorizing the payment of donations to religious, charitable,
public or other bodies, clubs, funds or associations as deemed
advisable; | |
|
| | exercising the borrowing powers of the company and mortgaging
the property of the company; | |
|
| | executing checks, promissory notes and other negotiable
instruments on behalf of the company; and | |
|
| | maintaining or registering a register of mortgages, charges
or other encumbrances of the company. | |
** **
Limitation of Director and Officer
Liability
British Virgin Islands law does not limit
the extent to which a companys memorandum and articles of association may provide for indemnification of officers and directors,
except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such
as to provide indemnification against civil fraud or the consequences of committing a crime.
Under our third amended and restated memorandum
and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees,
and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative
or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director,
officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view
to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe
their conduct was unlawful.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions, we have been informed
that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable as a matter of United States law.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of
our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors,
or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree
or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities
laws, or a finding of any violation of federal or state securities or commodities laws, any laws respecting financial institutions
or insurance companies, any law or regulation prohibiting mail or wire fraud in connection with any business entity or been subject
to any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization,
except for matters that were dismissed without sanction or settlement.
**Regulation S-K Item 405:**
Based solely upon a review of Forms 3
and 4 and amendments thereto furnished to the Company under 17 CFR 240.16a-3(e) during its most recent fiscal year and Form 5
and amendments thereto furnished to the Company with respect to its most recent fiscal year, and any written representation referred
to in paragraph (b)(1) of this section, the Company is not aware of any director, officer, beneficial owner of more than ten percent
of any class of equity securities of the Company registered pursuant to Section 12 that failed to file on a timely basis,
as disclosed in the above Forms, reports required by Section 16(a) during the most recent fiscal year or prior years.
**Regulation S-K Item 406:**
The Company has adopted a Code of Ethics
and has filed a copy of the Code of Ethics with the Commission as an exhibit to the Registration Statement.
**Regulation S-K Item 407(c)(3):**
None.
| 28 | |
| | |
**Regulation S-K Item 407(d)(4) and (5):**
The Board of Directors maintains a majority
of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market
Rule 4200(a)(15). The Company has an audit committee, consisting solely of independent directors of the Company, Mr. Yunxiang
(Phil) Fan, Mr. Genhui Chen and Mr. Mingwei Zhang. Mr. Zhang qualifies as the audit committee financial expert. The
Companys audit committee charter was filed as Exhibit 99.2 to the Companys annual report for the year ended December
31, 2009 and is available on the Companys website (www.dehaier.com.cn).
|
Item 11. Executive Compensation. | |
**Executive Compensation**
The following table shows the annual
compensation paid by us for the years ended December 31, 2011 and 2012 to Ping Chen, our principal executive officer. No
other officer had a salary during either of the previous two years of more than $100,000.
**Summary Executive Compensation Table**
|
Name and principal position | |
Year | | |
Salary | | |
Bonus | | |
Option Awards | | |
All Other Compensation | | |
Total | | |
|
Ping Chen, | |
| 2012 | | |
$ | 36,520 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 36,520 | | |
|
Principal Executive Officer | |
| 2011 | | |
$ | 35,656 | | |
$ | 0 | | |
$ | 183,000 | (1) | |
$ | 0 | | |
$ | 218,656 | | |
|
| (1) | On December 29, 2011, 150,000 share options were awarded to Mr. Chen, which options vest over a period of five years, the first
20% of which vested on December 29, 2012. The grant date fair value of the options is $1.22. | |
**Director Compensation**
All directors hold office until the next
annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been
duly elected and qualified. There are no family relationships among our directors or executive officers. Officers are elected
by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services.
Non-employee directors are entitled to receive payment for serving as directors and may receive option grants from our company.
For service on our Board of Directors, Mr. Zhang receives $4,000 per year, and Mr. Fan and Mr. Genhui Chen receive $2,000 per
meeting attended.
**Summary Director Compensation Table**
|
Name | |
Fees earned or paid in cash | | |
Option awards | | |
Total(1) | | |
|
Ping Chen(2) | |
$ | 36,520 | | |
$ | 0 | | |
$ | 36,520 | | |
|
Yunxiang (Phil) Fan | |
$ | 4,000 | | |
$ | 0 | | |
$ | 4,000 | | |
|
Jimin (Peter) Zhuo(3) | |
$ | 4,000 | | |
$ | 0 | | |
$ | 4,000 | | |
|
Genhui Chen | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
|
Weibing Yang(2) | |
$ | 21,600 | | |
$ | 0 | | |
$ | 21,600 | | |
|
Mingwei Zhang(4) | |
$ | 4,000 | | |
$ | 0 | | |
$ | 4,000 | | |
|
| (1) | None of the directors received any common share awards, option awards, nonqualified deferred compensation earnings or non-equity
incentive plan compensation in fiscal year 2012. | |
|
| (2) | Mr. Ping Chen and Mr. Yang received compensation in their capacity as officers of our company and/or subsidiaries/affiliates
but did not receive any compensation for serving as directors of our company. | |
|
| (3) | Mr. Zhuo ceased to be a director of our company on March 1, 2012. | |
|
| (7) | Mr. Zhang became a director of our company on March 1, 2012. | |
| 29 | |
| | |
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
|
Plan category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | |
Weighted-average exercise price of outstanding options, warrants and rights (b) | | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | |
|
Equity compensation plans approved by security holders | |
| 450,000 | | |
$ | 1.45 | | |
| 0 | | |
** **
**Principal Shareholders**
The following table sets forth information
with respect to beneficial ownership of our common shares as of March 18, 2013 by:
|
| | Each person who is known by us to beneficially own more
than 5% of our outstanding common shares; | |
|
| | Each of our directors and named executive officers; and | |
|
| | All directors and named executive officers as a group. | |
The number and percentage of common shares
beneficially owned are based on 4,620,000 common shares outstanding as of March 18, 2013. Information with respect to beneficial
ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common shares. Beneficial ownership
is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power
with respect to securities. In computing the number of common shares beneficially owned by a person listed below and the percentage
ownership of such person, common shares underlying options, warrants or convertible securities held by each such person that are
exercisable or convertible within 60 days of March 18, 2013 are deemed outstanding, but are not deemed outstanding for computing
the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by
applicable community property laws, all persons listed have sole voting and investment power for all common shares shown as beneficially
owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of BDL,
Room 501, Jiuzhou Plaza, 83 Fuxing Road, Haidian District, Beijing 100856, Peoples Republic of China. As of the date of
this filing, we have ten (10) shareholders of record.
|
Named Executive Officers and Directors | |
Amount of Beneficial Ownership(1) | | |
Percentage Ownership(2) | | |
|
Ping Chen, CEO, Director | |
| 1,134,742 | (3) | |
| 24.56 | % | |
|
Weibing Yang, VP of Sales and Marketing, Director | |
| 273,471 | (4) | |
| 5.91 | % | |
|
Yunxiang (Phil) Fan | |
| 8,000 | (5) | |
| * | | |
|
Genhui Chen | |
| 4,000 | (5) | |
| * | | |
|
Mingwei Zhang | |
| 0 | (5) | |
| * | | |
|
| |
| | | |
| | | |
|
All officers and directors as a group | |
| 1,368,213 | | |
| 29.97 | % | |
|
Chen Ping Ltd. | |
| 1,104,742 | (3) | |
| 24.20 | % | |
|
| * | Less than 1%. | |
|
| (1) | Beneficial ownership is determined in accordance with
the rules of the SEC and includes voting or investment
power with respect to the common shares. | |
|
| (2) | The number of our common shares outstanding used in
calculating the percentage for each listed person excludes
the common shares underlying options held by such person. | |
|
| (3) | Ping Chen has the sole power to direct the voting and
disposition of the 1,104,742 shares held by Chen Ping Ltd.
The number also includes 30,000 shares underlying options,
which will have vested within 60 days hereof. | |
|
| (4) | The number also includes 10,000 shares underlying options,
which will have vested within 60 days hereof. | |
|
| (5) | The number represents shares underlying options, which
will have vested within 60 days hereof. | |
Item 13. Certain Relationships and Related Transactions,
and Director Independence.
Since the beginning of Dehaiers
last fiscal year, there have been no related party transactions required to be disclosed pursuant to Item 404(d) of Regulation
S-K.
| 30 | |
| | |
**Promoters and Certain Control Persons**
We did not have any promoters at any
time during the past five fiscal years. Except as set forth in our discussion above, none of our directors or officers has been
involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required
to be disclosed pursuant to the rules and regulations of the SEC.
**Director Independence**
The Board of Directors maintains a majority
of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market
Rule 4200(a)(15). Messrs. Fan, Zhang and Genhui Chen are our independent directors.
Item 14. Principal Accountant Fees and Services.
Friedman LLP was appointed by the Company
to serve as its independent registered public accounting firm for fiscal 2011. Audit services provided by Friedman LLP for fiscal
2011 included the examination of the consolidated financial statements of the Company; and services related to periodic filings
made with the SEC.
**Fees Paid To Independent Registered Public Accounting Firm**
**Audit Fees**
During fiscal 2012 and 2011, Friedman
LLPs fees for the annual audit of our financial statements and the quarterly reviews of the financial statements were $181,000
and $175,000, respectively.
**Audit Related Fees**
The Company has not paid Friedman LLP
for audit-related services in fiscal 2012 and 2011.
**Tax Fees**
The Company has not paid Friedman LLP
for tax services in fiscal 2012 and 2011.
**All Other Fees**
The Company has not paid Friedman LLP
for any other services in fiscal 2012 and 2011.
**Audit Committee Pre-Approval Policies**
Before Friedman LLP was engaged by the
Company to render audit or non-audit services, the engagement was approved by the Companys audit committee. All services
rendered by Friedman LLP have been so approved.
**Percentage of Hours**
The percentage of hours expended on the
principal accountants engagement to audit our consolidated financial statements for 2012 that were attributed to work performed
by persons other than Friedman LLPs full-time permanent employees was 75%.
| 31 | |
| | |
Item 15. Exhibits, Financial Statement Schedules.
The following documents are filed herewith:
|
Exhibit
Number |
|
Document | |
|
|
| |
|
3(i).1 |
|
Third Amended and Restated Articles
of Association of the Registrant(1) | |
|
|
| |
|
3(ii).1 |
|
Third Amended and Restated Memorandum
of Association of the Registrant(1) | |
|
|
| |
|
4.1 |
|
Specimen Share Certificate(1) | |
|
|
| |
|
10.1 |
|
Form of Share Option Plan(1) | |
|
|
| |
|
10.2 |
|
Translation of lease agreement for
Product Center dated September 23, 2008(1) | |
|
|
| |
|
10.3 |
|
Translation of Production Agreement
with Friend of Health (Chuzhou) Medical Technology Co., Ltd.(1) | |
|
|
| |
|
10.4 |
|
Mortgage Contract between ICBC and
BTL(1) | |
|
|
| |
|
10.5 |
|
Indemnification and Guarantee Contract
between Ping Chen and BTL(1) | |
|
|
| |
|
10.6 |
|
Description of oral loan contract
between BTL and BDL(1) | |
|
|
| |
|
10.7 |
|
Loss Absorption Agreement between
BDL, BTL and shareholders of BTL(1) | |
|
|
| |
|
21.1 |
|
Subsidiaries of the Registrant(2) | |
|
|
| |
|
23.1 |
|
Consent of Friedman LLP, independent
registered public accounting firm(2) | |
|
|
| |
|
31.1 |
|
Certifications pursuant to Rule 13a-14(a)
or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002(2) | |
|
|
| |
|
31.2 |
|
Certifications pursuant to Rule 13a-14(a)
or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002(2) | |
|
|
| |
|
32.1 |
|
Certifications pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3) | |
|
|
| |
|
32.2 |
|
Certifications pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3) | |
|
|
| |
|
99.1 |
|
Code of Business Conduct and Ethics(1) | |
|
|
| |
|
99.2 |
|
Audit Committee Charter(4) | |
|
|
|
| |
|
99.3 |
|
Press release dated March 18, 2013, titled Dehaier Medical Announces 2012 Fourth Quarter and Year
End Financial Results. | |
|
|
| |
|
101.INS |
|
XBRL Instance Document(3) | |
|
|
| |
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document(3) | |
|
|
| |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation
Linkbase Document(3) | |
|
|
| |
|
101.DEF |
|
XBRL Taxonomy Extension Definition
Linkbase Document(3) | |
|
|
| |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase
Document(3) | |
|
|
| |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation
Linkbase Document(3) | |
|
| (1) | Incorporated by reference to the registrants
registration statement on Form S-1, File no. 333-163041,
filed on November 12, 2009, as amended. | |
|
| (2) | Filed herewith. | |
|
| (3) | Furnished herewith. | |
|
| (4) | Incorporated by reference to the registrants
Form 10-K, File no. 001-34661, filed on March 31,
2010. | |
** **
| 32 | |
| | |
** **
**SIGNATURES**
In accordance with the requirements of
the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
DEHAIER MEDICAL SYSTEMS
LIMITED | |
|
|
|
| |
|
March 18, 2013 |
|
By: |
|
/s/
PING CHEN | |
|
|
|
|
|
Ping Chen | |
|
|
|
|
|
Chief Executive
Officer | |
|
|
|
|
|
(Principal
Financial and Accounting Officer) | |
Pursuant to the requirements of the Securities
Act of 1933, as amended, this report has been signed by the following persons in the capacities and on the dates indicated:
|
Signature |
|
Title |
|
Date | |
|
|
|
| |
|
/s/
PING CHEN |
|
Chief Executive Officer and Director |
|
March 18, 2013 | |
|
Ping Chen |
|
(Principal Executive Officer) |
|
| |
|
|
|
| |
|
/s/
JINGLI (CHARLES) LI |
|
Chief Financial Officer (Principal
Accounting and Financial Officer) |
|
March 18, 2013 | |
|
Jingli (Charles)
Li |
|
|
|
| |
|
|
|
| |
|
/s/
WEIBING YANG |
|
Director |
|
March 18, 2013 | |
|
Weibing Yang |
|
|
|
| |
|
|
|
| |
|
/s/
GENHUI CHEN |
|
Director |
|
March 18, 2013 | |
|
Genhui Chen |
|
|
|
| |
|
|
|
| |
|
/s/
PHIL FAN |
|
Director |
|
March 18, 2013 | |
|
Phil Fan |
|
|
|
| |
|
|
|
| |
|
/s/
MINGWEI ZHANG |
|
Director |
|
March 18, 2013 | |
|
Mingwei Zhang |
|
|
|
| |
| | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**INDEX TO FINANCIAL STATEMENTS**
** **
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
PAGE |
| |
|
|
|
|
| |
|
Report of Independent Registered Public Accounting Firm |
|
F-2 |
| |
|
|
|
|
| |
|
Consolidated Balance Sheets as of December 31, 2012 and 2011 |
|
F-3 |
| |
|
|
|
|
| |
|
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2012 and 2011 |
|
F-4 |
| |
|
|
|
|
| |
|
Consolidated Statements of Equity for the Years Ended December 31, 2012 and 2011 |
|
F-5 |
| |
|
|
|
|
| |
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011 |
|
F-6 |
| |
|
|
|
|
| |
|
Notes to the Consolidated Financial Statements |
|
F-7 |
| |
| F-1 | |
| | |
** **
** **
** **
**REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM**
To the Board of Directors and Shareholders
Dehaier Medical Systems Limited
We have audited the accompanying consolidated
balance sheets of Dehaier Medical Systems Limited and Affiliate as of December 31, 2012 and 2011, and the related consolidated
statements of income and comprehensive income, cash flows and equity for the years then ended. Dehaier Medical Systems Limited
and Affiliates management is responsible for these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Dehaier Medical Systems
Limited and Affiliate as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, New York
March 18, 2013
** **
** **
** **
** **
| F-2 | |
| | |
** **
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
** **
**CONSOLIDATED BALANCE SHEETS**
** **
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
| |
| | |
| | |
|
ASSETS | |
| | | |
| | | |
|
CURRENT ASSETS: | |
| | | |
| | | |
|
Cash and cash equivalents | |
| 3,505,330 | | |
| 3,694,486 | | |
|
Accounts receivable -less allowance for doubtful accounts of $865,769 and $859,509 | |
| 11,960,193 | | |
| 12,159,842 | | |
|
Contract Deposits | |
| 3,027,616 | | |
| 2,110,942 | | |
|
Other receivables, net | |
| 556,635 | | |
| 411,194 | | |
|
Advances to Suppliers | |
| 4,470,756 | | |
| 4,348,847 | | |
|
Prepayment and other current assets | |
| 4,069,975 | | |
| 2,365,154 | | |
|
Inventories, net | |
| 4,654,827 | | |
| 5,532,311 | | |
|
Tax receivable | |
| 328,208 | | |
| 888,452 | | |
|
Deferred tax asset | |
| 119,437 | | |
| 118,030 | | |
|
Total Current Assets | |
| 32,692,977 | | |
| 31,629,258 | | |
|
| |
| | | |
| | | |
|
Property and equipment, net | |
| 2,895,523 | | |
| 3,348,533 | | |
|
Intangible assets, net | |
| 2,694,439 | | |
| - | | |
|
Total Assets | |
| 38,282,939 | | |
| 34,977,791 | | |
|
| |
| | | |
| | | |
|
LIABILITIES AND EQUITY | |
| | | |
| | | |
|
CURRENT LIABILITIES: | |
| | | |
| | | |
|
Short-term borrowings | |
| 2,407,200 | | |
| 1,585,890 | | |
|
Accounts payable | |
| 37,640 | | |
| 32,925 | | |
|
Advances from customers | |
| 248,940 | | |
| 303,000 | | |
|
Accrued expenses and other current liabilities | |
| 406,452 | | |
| 349,158 | | |
|
Taxes payable | |
| 401,574 | | |
| 2,042,048 | | |
|
Warranty obligation | |
| 338,671 | | |
| 334,680 | | |
|
Total Current Liabilities | |
| 3,840,477 | | |
| 4,647,701 | | |
|
| |
| | | |
| | | |
|
OTHER LIABILITIES | |
| | | |
| | | |
|
Warrants liability | |
| 374,166 | | |
| 96,469 | | |
|
Total Liabilities | |
| 4,214,643 | | |
| 4,744,170 | | |
|
| |
| | | |
| | | |
|
Commitments and Contingency | |
| | | |
| | | |
|
Equity | |
| | | |
| | | |
|
Common shares, $0.002731 par value, 18,307,038 shares authorized, 4,620,000 and 4,560,000 shares issued and outstanding at December 31, 2012 and 2011, respectively | |
| 12,618 | | |
| 12,454 | | |
|
Additional paid in capital | |
| 13,500,847 | | |
| 13,281,374 | | |
|
Retained earnings | |
| 16,147,723 | | |
| 12,941,572 | | |
|
Accumulated other comprehensive income | |
| 2,967,202 | | |
| 2,585,488 | | |
|
Total Dehaier Medical Systems Limited shareholders' equity | |
| 32,628,390 | | |
| 28,820,888 | | |
|
Non-controlling interest | |
| 1,439,906 | | |
| 1,412,733 | | |
|
Total equity | |
| 34,068,296 | | |
| 30,233,621 | | |
|
Total liabilities and equity | |
| 38,282,939 | | |
| 34,977,791 | | |
The accompanying notes are an integral part
of these consolidated financial statements.
| F-3 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
** **
**CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME**
** **
|
| |
For the years ended December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Revenue | |
| 21,370,325 | | |
| 21,639,283 | | |
|
| |
| | | |
| | | |
|
Costs of revenue | |
| (13,254,587 | ) | |
| (13,696,743 | ) | |
|
| |
| | | |
| | | |
|
Gross profit | |
| 8,115,738 | | |
| 7,942,540 | | |
|
| |
| | | |
| | | |
|
Service income | |
| 300,338 | | |
| 281,656 | | |
|
Service expenses | |
| (71,376 | ) | |
| (113,861 | ) | |
|
General and administrative expense | |
| (2,599,368 | ) | |
| (2,620,845 | ) | |
|
Selling expense | |
| (1,357,972 | ) | |
| (1,877,303 | ) | |
|
| |
| | | |
| | | |
|
Operating Income | |
| 4,387,360 | | |
| 3,612,187 | | |
|
| |
| | | |
| | | |
|
Financial expenses ( including interest expense of $149,488 and $82,136) | |
| (151,720 | ) | |
| (86,712 | ) | |
|
Other income | |
| 23,872 | | |
| 34,965 | | |
|
Other expense | |
| (173 | ) | |
| (232 | ) | |
|
Change in fair value of warrants liability | |
| (180,192 | ) | |
| 221,640 | | |
|
| |
| | | |
| | | |
|
Income before provision for income tax and non-controlling interest | |
| 4,079,147 | | |
| 3,781,848 | | |
|
| |
| | | |
| | | |
|
Provision for income tax | |
| (862,795 | ) | |
| (656,297 | ) | |
|
| |
| | | |
| | | |
|
Net income | |
| 3,216,352 | | |
| 3,125,551 | | |
|
| |
| | | |
| | | |
|
Non-Controlling interest in income | |
| (10,201 | ) | |
| (22,431 | ) | |
|
| |
| | | |
| | | |
|
Net income attributable to Dehaier Medical Systems Limited | |
| 3,206,151 | | |
| 3,103,120 | | |
|
| |
| | | |
| | | |
|
Net income | |
| 3,216,352 | | |
| 3,125,551 | | |
|
| |
| | | |
| | | |
|
Other comprehensive income | |
| | | |
| | | |
|
Foreign currency translation adjustments | |
| 398,686 | | |
| 1,174,044 | | |
|
| |
| | | |
| | | |
|
Comprehensive Income | |
| 3,615,038 | | |
| 4,299,595 | | |
|
Comprehensive income attributable to the non-controlling interest | |
| (27,173 | ) | |
| (85,442 | ) | |
|
| |
| | | |
| | | |
|
Comprehensive income attributable to Dehaier Medical Systems Limited | |
| 3,587,865 | | |
| 4,214,153 | | |
|
| |
| | | |
| | | |
|
Earnings per share | |
| | | |
| | | |
|
-Basic | |
| 0.70 | | |
| 0.69 | | |
|
-Diluted | |
| 0.70 | | |
| 0.69 | | |
|
| |
| | | |
| | | |
|
Weighted average number of common shares used in computation | |
| | | |
| | | |
|
-Basic | |
| 4,578,151 | | |
| 4,514,329 | | |
|
-Diluted | |
| 4,601,907 | | |
| 4,514,329 | | |
** **
The accompanying notes are an integral part
of these consolidated financial statements.
| F-4 | |
| | |
** **
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**CONSOLIDATED STATEMENTS OF EQUITY**
** **
|
Dehaier
Medical Systems Limited | |
|
| |
Common stock | | |
Additional Paid-in
Capital | | |
Retained Earnings | | |
Accumulated other
comprehensive income | | |
Non-controlling
interest | | |
Total | | |
|
| |
Shares | | |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
US$ | | |
|
Balance as of January 1, 2011 | |
| 4,500,000 | | |
| 12,290 | | |
| 13,137,085 | | |
| 9,838,452 | | |
| 1,474,455 | | |
| 1,327,291 | | |
| 25,789,573 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Issuance of 10,000 shares to non-employees. | |
| 10,000 | | |
| 27 | | |
| 59,273 | | |
| - | | |
| - | | |
| - | | |
| 59,300 | | |
|
Issuance of 50,000 shares to non-employees. | |
| 50,000 | | |
| 137 | | |
| 84,113 | | |
| - | | |
| - | | |
| - | | |
| 84,250 | | |
|
Issuance of 450,000 options to employees, officers and directors | |
| - | | |
| - | | |
| 903 | | |
| - | | |
| - | | |
| - | | |
| 903 | | |
|
Foreign currency translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,111,033 | | |
| 63,011 | | |
| 1,174,044 | | |
|
Net income | |
| - | | |
| - | | |
| - | | |
| 3,103,120 | | |
| - | | |
| 22,431 | | |
| 3,125,551 | | |
|
Balance as of December 31, 2011 | |
| 4,560,000 | | |
| 12,454 | | |
| 13,281,374 | | |
| 12,941,572 | | |
| 2,585,488 | | |
| 1,412,733 | | |
| 30,233,621 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Issuance of 5,000 shares to non-employee | |
| 5,000 | | |
| 14 | | |
| 11,086 | | |
| | | |
| | | |
| | | |
| 11,100 | | |
|
Issuance of 5,000 shares to non-employee | |
| 5,000 | | |
| 14 | | |
| 12,361 | | |
| | | |
| | | |
| | | |
| 12,375 | | |
|
Issuance of 20,000 shares to non-employee | |
| 20,000 | | |
| 55 | | |
| 31,945 | | |
| | | |
| | | |
| | | |
| 32,000 | | |
|
Issuance of 20,000 shares to non-employee | |
| 20,000 | | |
| 54 | | |
| 35,945 | | |
| | | |
| | | |
| | | |
| 35,999 | | |
|
Issuance of 10,000 shares to non-employee | |
| 10,000 | | |
| 27 | | |
| 17,973 | | |
| | | |
| | | |
| | | |
| 18,000 | | |
|
Stock based Compensation | |
| - | | |
| - | | |
| 110,163 | | |
| | | |
| | | |
| | | |
| 110,163 | | |
|
Foreign currency translation | |
| | | |
| | | |
| | | |
| | | |
| 381,714 | | |
| 16,972 | | |
| 398,686 | | |
|
Net income | |
| | | |
| | | |
| | | |
| 3,206,151 | | |
| | | |
| 10,201 | | |
| 3,216,352 | | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Balance as of December
31, 2012 | |
| 4,620,000 | | |
| 12,618 | | |
| 13,500,847 | | |
| 16,147,723 | | |
| 2,967,202 | | |
| 1,439,906 | | |
| 34,068,296 | | |
The accompanying notes are an integral part
of these consolidated financial statements.
| F-5 | |
| | |
** **
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**CONSOLIDATED STATEMENTS OF CASH FLOWS**
** **
|
| |
For the years ended December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Cash flows from operating activities | |
| | | |
| | | |
|
| |
| | | |
| | | |
|
Net income | |
| 3,216,352 | | |
| 3,125,551 | | |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities | |
| | | |
| | | |
|
Stock-based compensation expense | |
| 314,479 | | |
| 144,453 | | |
|
Depreciation and amortization | |
| 552,086 | | |
| 450,518 | | |
|
Change in fair value of warrants liability | |
| 180,192 | | |
| (221,640 | ) | |
|
(Recovery of) Provision for doubtful accounts | |
| (3,939 | ) | |
| 749,280 | | |
|
Provision for doubtful accounts - other receivables | |
| 598,747 | | |
| - | | |
|
Provision for warranty reserve | |
| - | | |
| 37,303 | | |
|
Deferred tax benefit | |
| - | | |
| (118,030 | ) | |
|
Changes in assets and liabilities: | |
| | | |
| | | |
|
Decrease (Increase) in accounts receivable | |
| 344,341 | | |
| (3,797,045 | ) | |
|
Increase in prepayments and other current assets | |
| (1,730,704 | ) | |
| (1,413,176 | ) | |
|
Decrease (Increase) in other receivables | |
| (1,617,781 | ) | |
| 642,287 | | |
|
Decrease in inventories | |
| 931,844 | | |
| 842,052 | | |
|
Decrease in tax receivable | |
| 563,816 | | |
| 2,630,467 | | |
|
Increase in accounts payable | |
| 4,271 | | |
| 3,607 | | |
|
(Decrease)Increase in advances from customers | |
| (56,965 | ) | |
| 33,811 | | |
|
Increase in accrued expenses and other current liabilities | |
| 52,482 | | |
| 14,470 | | |
|
Decrease in taxes payable | |
| (1,644,345 | ) | |
| (6,285,660 | ) | |
|
Net cash provided by (used in) operating activities | |
| 1,704,876 | | |
| (3,161,752 | ) | |
|
| |
| | | |
| | | |
|
Cash flows from investing activities | |
| | | |
| | | |
|
Capital expenditures and other additions | |
| (11,054 | ) | |
| (153,061 | ) | |
|
Software Copyrights | |
| (2,715,453 | ) | |
| - | | |
|
Advances to related parties | |
| - | | |
| (2,358 | ) | |
|
Net cash used in investing activities | |
| (2,726,507 | ) | |
| (155,419 | ) | |
|
| |
| | | |
| | | |
|
Cash flows from financing activities | |
| | | |
| | | |
|
Proceeds from bank loan | |
| 2,373,145 | | |
| 1,542,680 | | |
|
Repayment of bank loan | |
| (1,580,436 | ) | |
| (1,533,604 | ) | |
|
Net cash provided by financing activities | |
| 792,709 | | |
| 9,076 | | |
|
| |
| | | |
| | | |
|
Effect of exchange rate fluctuations on cash and cash equivalents | |
| 39,766 | | |
| 1,079,195 | | |
|
| |
| | | |
| | | |
|
Net decrease in cash and cash equivalents | |
| (189,156 | ) | |
| (2,228,900 | ) | |
|
| |
| | | |
| | | |
|
Cash and cash equivalents at beginning of year | |
| 3,694,486 | | |
| 5,923,386 | | |
|
| |
| | | |
| | | |
|
Cash and cash equivalents at end of year | |
| 3,505,330 | | |
| 3,694,486 | | |
|
| |
| | | |
| | | |
|
Supplemental cash flow information | |
| | | |
| | | |
|
Income tax paid | |
| 1,416,958 | | |
| 1,906,763 | | |
|
Interest paid | |
| 149,488 | | |
| 82,136 | | |
The accompanying notes
are an integral part of these consolidated financial statements.
| F-6 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES | |
Dehaier
Medical Systems Limited (Dehaier) was incorporated in the British Virgin Islands in 2003 as a limited liability company.
Dehaier distributes and provides after-sale services for medical equipment in China mainly through its majority-owned subsidiary
Beijing Dehaier Medical Technology Co. Limited (BDL) and its affiliate Beijing Dehaier Technology Limited (BTL).
On November 9, 2011, Dehaier established a wholly-owned subsidiary in the United States, Breathcare LLC (Breathcare).
Both BDL and BTL were incorporated in the Peoples Republic of China (PRC). Dehaier, through its subsidiaries
and affiliate, distributes branded, proprietary medical equipment, such as sleep apnea machines, ventilator air compressors, and
oxygen generators. Standard product registration, product certification and quality management system have been established;
ISO13485 industry standard has also already been passed.
It also has the distribution rights for a number of international medical equipment suppliers for products including anesthesia
equipment, patient monitors, mobile C-arm X-ray machines and other medical equipment accessories.
** **
|
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of Consolidation
The consolidated financial statements include
the accounts of Dehaier, and its majority-owned and wholly-owned subsidiaries (collectively, the Company). All significant
inter-company transactions and balances are eliminated in consolidation.
A group of shareholders, including the
Chief Executive Officer, originally held more than 50% of the voting ownership interest of Dehaier, BDL and BTL. BTL owns a building
which is pledged as collateral for BDLs bank loans. In exchange, BDL loans money to BTL to finance its operations. BTLs
primary operation is to provide repairs and transportation services to BDLs customers. Because of these arrangements, BDL
is the primary beneficiary of BTL, as the entity that is most closely associated with BTL. BTL is considered a variable interest
entity(VIE). Management makes ongoing reassessments of whether BDL is the primary beneficiary of BTL.
The carrying amount and classification
of BTLs assets and liabilities included in the Consolidated Balance Sheets are as follows:
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Total current assets | |
| 240,420 | | |
| 425,464 | | |
|
Total assets | |
| 1,457,986 | | |
| 1,448,432 | | |
|
Total current liabilities | |
| 18,080 | | |
| 35,699 | | |
|
Total liabilities | |
| 18,080 | | |
| 35,699 | | |
The accounts of BTL are consolidated in
the accompanying financial statements pursuant to Accounting Standards Codification (ASC) 810-10, Consolidation.
As a VIE, BTLs revenues are included in the Companys service income, and its income from operations is consolidated
with the Companys. Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation
of the Companys and BTLs financial statements.
| F-7 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
Use of Estimates
The preparation of the consolidated financial
statements 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 dates of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant
accounting estimates reflected in the Companys consolidated financial statements include revenue recognition, allowance
for doubtful accounts, warranty obligation, warrants liability, stock-based compensation and useful lives of intangible assets,
and property and equipment. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash
on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months
or less when purchased. The Company maintains uninsured cash and cash equivalents with various financial institutions mainly in
the PRC and the States.
Accounts Receivable
Accounts receivable are recorded at net
realizable value. Accounts receivable terms typically are net 60-180 days from the end of the month in which the services were
provided, or when goods were delivered. The Company generally does not require collateral or other security to support accounts
receivable. An allowance, if required, is based on a combination of historical experience, aging analysis, and an evaluation of
the collectibility of specific accounts. Management considers that receivables over 1 year to be past due. Management has determined
that an allowance of $865,769 (RMB5,394,874) and $859,509 (RMB5,419,725) was appropriate at December 31, 2012 and 2011, respectively.
Other Receivables, Net
Other receivables primarily include advances
to employees and advance to suppliers. Management regularly reviews aging of receivables and changes in payment trends and records
a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off after
exhaustive efforts at collection. Management has determined that an allowance of $598,747 was appropriate at December 31, 2012.
Advances to Suppliers and Advances from
Customers
The Company, as is the common practice
in the PRC, often makes advance payments to suppliers for unassembled parts, or receives advance payments from customers. Advances
to suppliers were $4,470,756 and 4,348,847 as of December 31, 2012 and 2011, respectively. Advances from customers were $248,940
and $303,000 as of December 31, 2012 and 2011, respectively.
| F-8 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated
financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial
instruments.
The Company follows the provisions of ASC
topic 815, Derivatives and Hedging. ASC topic 815 provides a framework for determining whether an instrument is indexed
to an entity's own stock. Warrants are indexed to the Company's stock, which is traded in US dollars. Since the Company's functional
currency is the RMB, such warrants are considered liabilities. The fair value of the warrants liability is measured each reporting
period with the resulting change in fair value recorded in the consolidated statements of income and comprehensive income (see
Note 14).
The accounting standards regarding fair
value of financial instruments and related fair value measurements define fair value, and establish a three-level valuation hierarchy
for disclosures of fair value.
The three levels are defined as follows:
|
| | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets. | |
|
| | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instrument. | |
|
| | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value
measurement. | |
Financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value of
the warrants was determined using the Black Scholes Model, with level 2 inputs.
Inventories
Inventories are stated at the lower of
cost or market and consist of assembled and unassembled parts relating to medical devices. The Company reviews its inventory annually
for possible obsolete goods and to determine if any reserves are necessary. The reserve for obsolescence was $51,764 (RMB322,556)
for each of 2012 and 2011, and the provision, when necessary, is included in the operating expenses in the consolidated statements
of income and comprehensive income.
| F-9 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
Property and Equipment
Property and equipment are recorded at
cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over
the following estimated useful lives:
|
Leasehold improvements |
Shorter of the useful lives or the lease term | |
|
Building and land use rights |
20-40 years | |
|
Machinery and equipment |
10-15 years | |
|
Furniture and office equipment |
5 years | |
|
Motor vehicles |
5 years | |
Intangible Assets
Intangible assets are recorded at cost
less accumulated amortization. Amortization is calculated on a straight-line basis over the following estimated useful lives:
|
Leasehold improvements |
Shorter of the useful lives or the lease term | |
|
Software copyrights |
20 years | |
|
Other software |
5 years | |
Impairment of Long-Lived Assets
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.
When these events occur, the Company compares the carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from the use of the asset and eventual disposition. If the sum of the expected future cash flows
is less than the carrying amount of the asset, the Company applies a discount rate to the estimated cash flows, and an impairment
loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. Management has determined no
impairment exists at the balance sheet dates.
Revenue Recognition
The Company recognizes revenues when all
the followings conditions have been satisfied:
*Persuasive evidence
of an arrangement exists;
*Delivery and/or installation
has occurred (e.g., risks and rewards of ownership have passed);
*The sales price is
fixed or determinable; and,
*Collectibility is reasonably
assured.
All revenues are based on firm customer
orders with fixed terms and conditions. Because the products are assembled to the customers specification, there is no right
of return. The Company does not provide its customers with price protection or cash rebates. For products that include software,
the software is an off-the-shelf package and an integral part of the products being delivered. The Company does not provide any
significant post-sale customer support services and does not provide customers with upgrades. The software is incidental to the
product as a whole. For products that do not require installation, revenues are recognized when the products are delivered. For
products that require installation, revenues are recognized when the installation is completed.
For all service income, the Company recognizes
the revenue upon the completion of the repairs when the equipment has been returned to and accepted by the customers.
In the PRC, value added tax (VAT) of 17%
of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue
of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.
| F-10 | |
| | |
** **
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
** **
Cost of Revenues
Cost of revenues primarily includes wages
to assemble parts and the costs of unassembled parts, handling charges, and other expenses associated with the assembly and distribution
of product.
Service income and expense
Service income and expense represents activities
related to repair services provided for the customers by BTL.
Foreign Currency Translation
The accounts of Dehaier, BDL, BTL and Breathcare
are measured using the currency of the primary economic environment in which the entity operates (the functional currency).
The accompanying consolidated financial statements are presented in US dollars. Foreign currency transactions are translated into
US dollars using fixed exchange rates in effect at the time of the transaction. Generally, foreign exchange gains and losses resulting
from the settlement of such transactions are recognized in the consolidated statements of income and comprehensive income. The
foreign currency accounts of BDL and BTL are translated in accordance with ASC 830-10, Foreign Currency Matters.
Assets and liabilities are translated at current exchange rates quoted by the Peoples Bank of China at the balance sheet
dates and revenues and expenses are translated at average exchange rates in effect during the periods. Resulting translation adjustments
are recorded as other comprehensive income (loss) and accumulated as a separate component of equity
Warranty Costs
The Company provides for the estimated
cost of product warranties at the time revenue is recognized. The Company's warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting product failure. Should actual product failure rates,
material usage or service delivery costs differ from the Company's estimates, the Company may revise its estimated product warranty
liability. The term of the product warranty is generally twelve months. The reserve for warranty costs was $338,671 and $334,680
at December 31, 2012 and 2011, respectively. Warranty expense for the years ended December 31, 2012 and 2011 was $97,937 and $18,926,
respectively.
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 as incurred, Research and development costs were $230,854 and $268,038 for the years ended December 31, 2012 and 2011,
respectively.
Shipping and Handling Expenses
Shipping and handling expenses of $58,078
and $91,017 for the years ended December 31, 2012 and 2011 were included in the operating expenses in the consolidated statements
of income and comprehensive income, respectively.
Advertising Costs
Advertising costs are expensed as incurred,
Advertising costs were $56,656 and $232,400 for the years ended December 31, 2012 and 2011, respectively.
| F-11 | |
| | |
** **
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
Earnings per Share
The Company follows the provisions of ASC
260-10, Earnings per Share. Basic earnings per share is computed by dividing net income attributable to holders of
common shares by the weighted average number of common shares outstanding during the years. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into
common shares. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation
of diluted earnings per share.
Value Added Tax
The Company reports revenues net of PRCs
value added tax for all the periods presented in the consolidated statements of income and comprehensive income.
Stock-Based Compensation
The Company follows the provisions of ASC
718-10, Compensation-Stock Compensation. The Company has a share incentive plan which authorizes the issuance of
up to 10% of the number of shares outstanding. Pursuant to the plan, the Company may issue options to purchase its common shares
to employees and directors of the Company and its affiliates. The Company fair values share-based awards granted under the plan.
Accordingly, compensation is measured on the grant date using appropriate valuation models.
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes in accordance with ASC 740-10, Accounting for Income Taxes. Under this method,
income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax
consequences of temporary differences resulting from matters that have been recognized in an entitys financial statements
or tax returns. 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 the results of operations in the period that includes the enactment date. A valuation
allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company recorded a deferred
tax asset for the temporary differences arising from allowance for doubtful accounts and certain accrued expenses. The Company
believes it can utilize the deferred tax asset to offset future taxable income. Therefore, no valuation allowance has been provided
as of December 31, 2012 and 2011.
| F-12 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
** **
Income Taxes (Continued)
ASC 740-10 prescribes a recognition threshold
and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return.
Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is more
likely than not that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying
position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon
ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest
and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on
a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties,
if any, are included as components of income tax expense and income taxes payable. The Company had filed its 2008 and 2009 Value
Added Tax (VAT) returns for some of its customers during the year ended December 31, 2011 and 2012. All the potential
VAT liabilities on these VAT returns occurred in current period were also accrued as incurred and included in the accompanying
consolidated financial statements.
The implementation of ASC 740-10 resulted
in no material liability for unrecognized tax benefits. The Company recognizes interest and penalties, if any, related to unrecognized
tax benefits as income tax expense in the statements of income and comprehensive income. During the years ended December 31, 2012
and 2011, the Company did not incur any interest or penalties.
Income tax returns for the year prior to
2010 are no longer subject to examination by tax authorities.
Reclassification
Certain reclassifications have been made
to the prior year financial statements to conform to the current year presentation.
Recently Issued Accounting Standards
The FASB has issued Accounting Standards
Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses
that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated
other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net
income or other comprehensive income in financial statements. All of the information that this ASU requires already is required
to be disclosed elsewhere in the financial statements under U.S. GAAP. The amendments are effective for reporting periods beginning
after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private
companies. Early adoption is permitted. The adoption will not have any material impact on the Companys consolidated financial
statements.
The FASB has issued Accounting Standards
Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.
The main objective in developing this Update is to address implementation issues about the scope of Accounting Standards Update
No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The objective of this Update is to
clarify the scope of the offsetting disclosures and address any unintended consequences. The amendments clarify that the scope
of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated
embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending
transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master
netting arrangement or similar agreement. The amendments in this Update affect entities that have derivatives accounted for in
accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements,
and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section
815-10-45 or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial
assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments
make them no longer subject to the disclosure requirements in Update 2011-11. An entity is required to apply the amendments for
fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this accounting
standard will not have any material impact on the Companys consolidated financial statements.
| F-13 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
|
| 3. | OTHER RECEIVABLES, NET |
|
Other receivables consist of the following:
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Due from suppliers | |
| 1,101,866 | | |
| 350,679 | | |
|
Employee advances | |
| 53,516 | | |
| 60,515 | | |
|
| |
| 1,155,382 | | |
| 411,194 | | |
|
Allowance for doubtful accounts | |
| (598,747 | ) | |
| - | | |
|
| |
| 556,635 | | |
| 411,194 | | |
|
| 4. | PREPAYMENT AND OTHER CURRENT ASSETS | |
Prepayment
and other current assets consist of the following:
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Prepayment for equipment purchase | |
| 3,808,938 | | |
| 2,300,415 | | |
|
Other prepaid expenses | |
| 261,037 | | |
| 64,739 | | |
|
| |
| 4,069,975 | | |
| 2,365,154 | | |
|
| 5. | PROPERTY AND EQUIPMENT, NET | |
Property and equipment consist of the following:
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Buildings | |
| 1,365,717 | | |
| 1,349,624 | | |
|
Land use rights | |
| 311,973 | | |
| 308,297 | | |
|
Plant and machinery | |
| 2,980,087 | | |
| 2,973,593 | | |
|
Automobiles | |
| 43,706 | | |
| 43,869 | | |
|
Office and computer equipment | |
| 524,154 | | |
| 503,833 | | |
|
| |
| 5,225,637 | | |
| 5,179,216 | | |
|
| |
| | | |
| | | |
|
Less: Accumulated depreciation and amortization | |
| (2,330,114 | ) | |
| (1,830,683 | ) | |
|
Property and equipment, net | |
| 2,895,523 | | |
| 3,348,533 | | |
At December 31, 2012 and 2011, BTLs
building was pledged to a bank as collateral for short-term borrowings of RMB15,000,000 (US$2,407,200) and RMB10,000,000(US$1,585,890),
respectively (see Note 8).
Depreciation and amortization expense was
$471,727 and $450,518, for the years ended December 31, 2012 and 2011, respectively.
| F-14 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
Land Use Rights
There is no private ownership of land in
China. Land is owned by the government and the government grants land use rights for specified terms. The Companys land
use rights are reported at the purchase price (RMB1,944,000 in 2002).
|
| 6. | INTANGIBLE ASSETS, NET | |
|
| |
December 31, | | |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Software Copyright | |
| 2,733,062 | | |
| - | | |
|
Others | |
| 42,736 | | |
| - | | |
|
| |
| 2,775,798 | | |
| - | | |
|
| |
| | | |
| | | |
|
Less: Accumulated and amortization | |
| (81,359 | ) | |
| - | | |
|
Intangible assets, net | |
| 2,694,439 | | |
| - | | |
Amortization expense for the years ended
December 31, 2012 and 2011 was $80,359 and $0, respectively. Annual future amortization expense at December 31, for each of the
next five years is $265,000 and $1,369,000 thereafter.
|
| 7. | TAX RECEIVABLE | |
Tax receivable consists of the following:
|
| |
December 31, | | |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Value added tax receivable | |
| 328,208 | | |
| 888,452 | | |
Enterprises or individuals, who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a VAT in accordance with Chinese laws. The
standard VAT is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of unassembled medical components
of the Companys product used in contract and production can be used to offset the VAT due on sales of the product.
The tax receivable as of December 31, 2012
and 2011 represents VAT credit on the purchased products. These amounts can be used to offset the VAT due on sales of the finished
product.
| F-15 | |
| | |
|
| 8. | SHORT-TERM BORROWINGS | |
The Company has a line of credit for $1,604,800
(RMB10,000,000) with a commercial bank in China to finance its working capital. The credit line bears interest at a variable rate
and is renewed annually. Average interest rates for the year ended December 31, 2012 and 2011 were 6.60% and 5.78%, respectively.
Pursuant to the terms of the agreement, the line of credit is secured by BTLs building (see note 5) and guaranteed by BDL
and an officer of the Company.
On May 14, 2012, the bank renewed the Company's
credit line that bears interest at a variable rate with payments due on March 14, 2013 and May 14, 2013 for RMB3,000,000 and RMB7,000,000,
respectively.
On February 2, 2012, the Company entered
into a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $802,400 (RMB5,000,000) with floating
interest rate which was approximately 8.2% per year, due on January 30, 2013 (See note 19). Pursuant to the terms of the agreement,
the line of credit is guaranteed by an officer of the Company.
Interest expense on short-borrowings for
the years ended December 31, 2012 and 2011 amounted to $149,488 and 82,136, respectively.
| F-16 | |
| | |
** **
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
|
| 9. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES | |
Accrued expenses and other payables consist
of the following:
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Accrued salaries and social welfare | |
| 259,774 | | |
| 247,973 | | |
|
Accrued expenses | |
| 60,542 | | |
| 34,689 | | |
|
Other payables, non-trade vendors | |
| 51,591 | | |
| 14,195 | | |
|
Deposit from customer | |
| 34,545 | | |
| 52,301 | | |
|
| |
| 406,452 | | |
| 349,158 | | |
** **
|
| 10. | TAXES PAYABLE | |
** **
Taxes payable consist of the following:
** **
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Value added tax | |
| 144,845 | | |
| 1,196,630 | | |
|
Enterprise income tax | |
| 229,854 | | |
| 781,599 | | |
|
Employee withholding taxes | |
| 2,533 | | |
| 2,014 | | |
|
Business tax | |
| 161 | | |
| 771 | | |
|
City construction tax | |
| 24,181 | | |
| 61,034 | | |
|
| |
| 401,574 | | |
| 2,042,048 | | |
** **
|
| 11. | NON-CONTROLLING INTEREST | |
Non-controlling interest consists of the following:
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Original paid-in capital | |
| 384,211 | | |
| 384,211 | | |
|
Retained Earnings | |
| 754,894 | | |
| 744,693 | | |
|
Accumulated other comprehensive income | |
| 300,801 | | |
| 283,829 | | |
|
| |
| 1,439,906 | | |
| 1,412,733 | | |
| F-17 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
|
| 12. | COMMITMENTS AND CONTINGENCY | |
Leases
The lease commitments are for office premises
and a warehouse facility, all of which are classified as operating leases. These non-cancelable leases have lease terms expiring
through December 2014. Approximate future minimum lease payments under these leases at December 31, 2012, are $97,589 for the twelve
months ending December 31, 2013 and $46,862 for the twelve months ending December 31, 2014.
Rent expense for the year ended December
31, 2012 and 2011 was $124,373 and $161,362, respectively.
Employment Contracts
Under the PRC labor law, all employees
have signed employment contracts with the Company. Management employees have employment contracts with terms up to three years
and non-management employees have a one year employment contract renewable on an annual basis.
Contingency
The Labor Contract Law of the Peoples
Republic of China, requires employers to assure the liability of the severance payments if employees are terminated and have been
working for the employers for at least two years prior to January 1, 2008. The Company has estimated its possible severance payments
of approximately $269,656 and $235,000 as of December 31, 2012 and 2011, respectively, which have not been reflected in its consolidated
financial statements, because it is more likely than not that this will not be paid or incurred.
|
| 13. | EQUITY | |
Common Shares
On March 8, 2011, Dehaier issued 10,000
unregistered common shares to an investment relations firm in connection with the investment advice rendered for the Company. The
fair value of the shares on the grant date based on the closing price was $59,300.
On November 16, 2011, Dehaier issued 50,000
unregistered common shares to a consulting firm in connection with the financial advisory services rendered for the Company. The
fair value of the shares on the grant date based on the closing price was $84,250.
During 2012, Dehaier issued 60,000 restrict
unregistered common shares to independent consultants in connection with investment counseling and financial advisory services
rendered for the Company. The fair value of the shares on the grant date based on the closing price was approximately $109,000.
| F-18 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 13. | EQUITY (CONTINUED) | |
Statutory Surplus Reserves
A PRC company is required to make appropriations
to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles
of the PRC (**PRC GAAP**). Appropriations to the statutory surplus reserve is required to be at least 10% of the
after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entitys registered
capital.
The statutory surplus reserve fund is non-distributable
other than during liquidation and can be used to fund previous years losses, if any, and may be utilized for business expansion
or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing
the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue
is not less than 25% of the registered capital.
Since Dehaier is a British Virgin Islands
company, it will not be subject to the statutory surplus reserve provisions. BDL is a joint-venture company and the statutory surplus
reserve provisions will be determined by its board of directors. As of March 18, 2013, BDLs board of directors has not yet
made such determination. Therefore, no amount was allocated to the statutory surplus reserve account.
BTL appropriated 10% of its net profits
as statutory surplus reserve, which is included as part of the non-controlling interest in the equity section. For the years ended
December 31, 2012 and 2011, statutory surplus reserve activity was as follows:
|
| |
December 31, | | |
|
| |
2012 US$ | | |
2011 US$ | | |
|
| |
| | |
| | |
|
Balance beginning of year | |
| 74,469 | | |
| 72,226 | | |
|
Addition to statutory reserves | |
| 1,020 | | |
| 2,243 | | |
|
Balance end of year | |
| 75,489 | | |
| 74,469 | | |
Stock Option Plan
Under the employee stock option plan, the
Companys stock options expire five years from the date of grant. On December 29, 2011, the Company entered into five-year
agreements with its employees and directors. In connection with their services, the Company issued an aggregate of 450,000 options
to acquire the Companys common shares at an exercise price of $1.45 per share. The options vest in equal annual installments
over the five years of the agreements ending December 31, 2016. As of December 31, 2012, 360,000 options have not been vested.
The Company valued the stock options using
the Black-Scholes model with the following assumptions:
|
| |
Expected Terms (years) | | |
Expected Volatility | | |
Dividend Yield | | |
Risk Free Interest Rate | | |
Grant Date Fair Value | | |
|
Employees | |
| 5 | | |
| 126 | % | |
| 0 | % | |
| 0.83 | % | |
| 1.22 | | |
|
Directors and officers | |
| 5 | | |
| 126 | % | |
| 0 | % | |
| 0.83 | % | |
| 1.22 | | |
| F-19 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 13. | EQUITY (CONTINUED) | |
Stock Option Plan (Continued)
The following is a summary of the option activity:
|
Stock options | |
Shares | | |
Weighted Average Exercise Price | | |
Aggregate Intrinsic Value | | |
|
Outstanding as of December 31, 2010 | |
| - | | |
| | | |
| | | |
|
Granted | |
| 450,000 | | |
$ | | | |
| | | |
|
Forfeited | |
| - | | |
| | | |
| | | |
|
Exercised | |
| - | | |
| | | |
| | | |
|
Outstanding as of December 31, 2011 | |
| 450,000 | | |
$ | 1.45 | | |
$ | - | | |
|
Granted | |
| - | | |
| | | |
| | | |
|
Forfeited | |
| - | | |
| | | |
| | | |
|
Exercised | |
| - | | |
| | | |
| | | |
|
Outstanding as of December 31, 2012 | |
| 450,000 | | |
$ | 1.45 | | |
$ | 400,500 | | |
Following is a summary of the status of options
outstanding and exercisable at December 31, 2012:
|
Outstanding options | | |
Exercisable options | | |
|
Average Exercise price | | |
Number | | |
Average remaining contractual life (years) | | |
Average Exercise price | | |
Number | | |
Average remaining contractual life (years) | | |
|
$ | 1.45 | | |
| 450,000 | | |
| 4 | | |
$ | 1.45 | | |
| 90,000 | | |
| 4 | | |
For the year ended December 31, 2012 and 2011,
the Company recognized $110,163 and $903, respectively, as compensation expense under its stock option plan.
| F-20 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 14. | WARRANTS | |
On April 21, 2010, the Company issued to
Anderson & Strudwick Incorporated (A&S) 150,000 warrants, as a portion of the placement commission for
the IPO. On the same day, the Company granted a total of 7,500 warrants to Hawk Associates Inc.(Hawks), the Companys
investor relations consultancy. On January 10, 2012, the Company issued 100,000 warrants to FirsTrust Group, Inc., (FirsTrust),
the Companys investor relations consultancy totaling 257,500 warrants. All the warrants
issued to A&S have the right to purchase one share of common stock for an exercise price of $10.00 per share
with a term of 5 years. All the warrants granted to Hawks have the right to purchase one share of common stock for an exercise
price of $9.60 per share with a term of 5 years. All the warrants granted to FirsTrust have the right to purchase one share of
common stock for an exercise price of $4.00 per share with a term of 5 years.
The fair value of the outstanding warrants
at December 31, 2012 was calculated using the Black Scholes Model with the following assumptions:
|
Market price per share (USD/share) |
|
1.93 |
|
|
Exercise price (USD/share) |
|
$4.00, $9.60, $10.00 |
|
|
Risk free rate |
|
0.25%, 0.25%, 0.75% |
|
|
Dividend yield |
|
- |
|
|
Expected term/Contractual life (years) |
|
2.30, 2.30, 4.02 |
|
|
Expected volatility |
|
187.1% |
|
| F-21 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
|
| 14. | WARRANTS(CONTINUED) | |
The following table sets forth by level
within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis
as of December 31, 2012 and 2011.
|
| |
Carrying Value at December 31, 2012 | | |
Fair Value Measurement at December 31, 2012 | | |
|
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
|
Warrants liability | |
$ | 374,166 | | |
$ | - | | |
$ | 374,166 | | |
$ | - | | |
|
| |
| | | |
| | | |
| | | |
| | | |
|
| |
Carrying Value at December 31, 2011 | | |
Fair Value Measurement at December 31, 2011 | | |
|
| |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
|
Warrants liability | |
$ | 96,469 | | |
$ | - | | |
$ | 96,469 | | |
$ | - | | |
|
| |
| | | |
| | | |
| | | |
| | | |
The following is a reconciliation of the
beginning and ending balances of warrants liability measured at fair value on a recurring basis using Level 2 inputs:
|
| |
December 31, 2012 | | |
December 31, 2011 | | |
|
| |
US$ | | |
US$ | | |
|
Beginning balance | |
| 96,469 | | |
| 318,109 | | |
|
Warrants issued | |
| 97,505 | | |
| - | | |
|
Fair value change of the issued warrants included in earnings | |
| 180,192 | | |
| (221,640 | ) | |
|
Ending balance | |
| 374,166 | | |
| 96,469 | | |
Following is a summary of the warrants activity:
|
| |
Number | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | | |
|
Outstanding as of January 1, 2011 | |
| 157,500 | | |
$ | | | |
| | | |
|
Granted | |
| - | | |
| | | |
| | | |
|
Forfeited | |
| - | | |
| | | |
| | | |
|
Exercised | |
| - | | |
| | | |
| | | |
|
Outstanding as of December 31, 2011 | |
| 157,500 | | |
$ | 9.98 | | |
| 3.31 | | |
|
Granted | |
| 100,000 | | |
| | | |
| | | |
|
Forfeited | |
| - | | |
| | | |
| | | |
|
Exercised | |
| - | | |
| | | |
| | | |
|
Outstanding as of December 31, 2012 | |
| 257,500 | | |
$ | 7.66 | | |
| 2.97 | | |
| F-22 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
|
| 15. | Earnings Per Share | |
The following is a reconciliation of the
basic and diluted earnings per share computation for the years ended December 31, 2012 and 2011:
|
| |
Year ended | | |
|
| |
December 31, | | |
|
| |
2012 | | |
2011 | | |
|
Basic earnings per share | |
| | | |
| | | |
|
Net income available to the companys common shareholders | |
$ | 3,206,151 | | |
$ | 3,103,120 | | |
|
Weighted average shares outstanding - Basic | |
| 4,578,151 | | |
| 4,514,329 | | |
|
Earnings per share - Basic | |
$ | 0.70 | | |
$ | 0.69 | | |
|
| |
| | | |
| | | |
|
| |
| | | |
| | | |
|
Diluted earnings per share | |
| | | |
| | | |
|
Net income available to the companys common shareholders | |
$ | 3,206,151 | | |
$ | 3,103,120 | | |
|
Weighted average shares outstanding - Basic | |
| 4,578,151 | | |
| 4,514,329 | | |
|
Options | |
| 23,756 | | |
| - | | |
|
Weighted shares outstanding - Diluted | |
| 4,601,907 | | |
| 4,514,329 | | |
|
Earnings per share - Diluted | |
$ | 0.70 | | |
$ | 0.69 | | |
For the year ended December 31, 2012, 23,756
shares of the 450,000 stock options were exercisable and included in the diluted EPS calculation.
| F-23 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
** **
|
| 16. | INCOME TAXES | |
British Virgin Islands
Dehaier is a tax-exempt company incorporated
in the British Virgin Islands. BDL and BTL were incorporated in the PRC and are governed by the PRC laws.
PRC
PRC enterprise income tax is calculated
based on the Enterprise Income Tax Law (the EIT Law). Under the EIT Law, a unified enterprise income tax rate of
25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises.
Under the current PRC laws, PRC government
grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the
period of validity for the certification of high technology companies is three years. In 2009 and 2012 BDL
updated its certification for high technology company. Therefore, BDL used a 15% income tax rate to calculate the
income tax expense for the years ended December 31, 2012 and 2011.
The tax rate
for BTL is 25% in 2012 and 2011
A reconciliation of income tax expense
and the amount computed by applying the statutory income tax rate to the income before income tax provision is as follows:
|
| |
Year Ended December 31 | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Tax computed at statutory rate | |
| 852,640 | | |
| 774,327 | | |
|
Decrease in income taxes resulting from temporary differences | |
| - | | |
| (118,030 | ) | |
|
Others | |
| 10,155 | | |
| - | | |
|
| |
| 862,795 | | |
| 656,297 | | |
Provision (Benefit) for income taxes consists
of:
|
| |
Year Ended December 31 | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Current provision | |
| 862,795 | | |
| 774,327 | | |
|
Deferred provision (benefit) | |
| - | | |
| (118,030 | ) | |
|
Total provision for income taxes | |
| 862,795 | | |
| 656,297 | | |
United States
Breathcare is a limited liability company
and, such as, is not subject to federal income tax. Moreover, as of December 31, 2012, Breathcare was inactive and generate no
revenue.
| F-24 | |
| | |
**DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE**
**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**
|
| 17. | OTHER INCOME | |
For the years ended December 31, 2012 and
2011, the Company received approximately $23,871 (RMB150,600) and $27,423 (RMB177,200), respectively, from the local government
in China as subsidy income.
|
| 18. | CONCENTRATIONS | |
** **
Major Customers
For the years ended December 31, 2012 and
2011, approximately 13% of the Companys revenues were received from each of two customers.
At December 31, 2011, receivables from
two customers were approximately 12% and 10%, respectively. No customer represented more than 10% of amounts receivable at December
31, 2012.
Major Suppliers
At December 31, 2012 and 2011, payables
due to three suppliers were approximately 34%, 33%, 19% and 50%, 8%, 6%, respectively.
Revenues
For the years ended December 31, 2012 and
2011, the Companys top three selling products accounted, in the aggregate, for approximately 68% and 27%, respectively,
of its total net revenues.
The following represents the revenues by
product line, all derived from China:
|
| |
For the years ended December 31, | | |
|
| |
2012 | | |
2011 | | |
|
| |
US$ | | |
US$ | | |
|
Products Line | |
| | |
| | |
|
| |
| | |
| | |
|
Medical Devices | |
| 18,547,635 | | |
| 19,362,673 | | |
|
Respiratory and Oxygen Homecare | |
| 2,822,690 | | |
| 2,276,610 | | |
|
| |
| 21,370,325 | | |
| 21,639,283 | | |
|
| 19. | SUBSEQUENT EVENTS | |
On February
4, 2013, the Company repaid the loan in the amount of $802,400 (RMB5,000,000) with Nanjing Bank Company Limited (Beijing
Branch).
On March 5, 2013, the Company entered into
a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $802,400 (RMB5,000,000) with a floating
interest rate which will be approximately 7.5% in 2013. The loan is due on March 4, 2014. Pursuant to the terms of the agreement,
the line of credit is guaranteed by an officer of the Company.
On March 14, 2013, the Company repaid the
credit line in the amount of $481,440 (RMB3,000,000) with a commercial bank in China as documented in Note 8.
| F-25 | |