What changed in this filing

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Item 5. Other Information

2011-08-11 compared with 2011-05-03 · 229 added, 331 removed, 271 unchanged (67% of the section changed)

Other Information

The following

documents are filed herewith:

The following documents are filed herewith:

Third Amended and Restated Articles of Association of the Registrant (1)

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Incorporated by reference to the registrant’s annual report on Form 10-K, File no.

001-34661, filed on March 31, 2010.

001-34661, filed on June 30, 2010.

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DEHAIER MEDICAL SYSTEMS LIMITED

August 11, 2011

/s/ Ping Chen

Chief Executive Officer

(Principal Executive

(Principal Executive Officer)

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31,

Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and

Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010

Condensed Consolidated Statements of Income and Comprehensive Income for the six and three months ended June 30, 2011 and 2010

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010

Notes to the Unaudited Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED BALANCE SHEETS

（ UNAUDITED ）

CURRENT ASSETS:

Cash and cash equivalents

Accounts receivable-less allowance for doubtful accounts of $88,273 and $87,555 at March 31, 2011 and December 31,

2010, respectively

Accounts receivable-less allowance for doubtful accounts of $89,437 and $87,555 at June 30, 2011 and December 31, 2010, respectively

Other receivables

4 unchanged sentences

Property and equipment, net

LIABILITIES AND SHAREHOLDERS EQUITY

LIABILITIES AND EQUITY

CURRENT LIABILITIES:

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Commitments and Contingency

Shareholders equity

Common stock, $0.002731 par value, 18,307,038 shares authorized, 4,510,000 and 4,500,000 shares issued and outstanding at

March 31, 2011 and December 31, 2010, respectively

Common shares, $0.002731 par value, 18,307,038 shares authorized, 4,510,000 and 4,500,000 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

Additional paid in capital

3 unchanged sentences

Non-controlling interest

Total shareholders equity

Total liabilities and shareholders equity

Total liabilities and equity

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the six months ended

For the three months ended

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Operating income

Financial expenses (including interest expense of $16,177 and $18,828 at March 31, 2011 and December 31, 2010,

respectively)

Financial expenses (including interest expense of $26,993, $26,728, $10,816 and $7,900 for the six and three months ended June 30, 2011 and 2010, respectively)

Change in fair value of warrants liability

1 unchanged sentence

Provision for income tax

Non-Controlling interest in income

Non-controlling interest in (income) loss

Net income attributable to Dehaier Medical Systems Limited

Other comprehensive income

Foreign currency translation adjustments

Comprehensive income

Comprehensive income attributable to the non-controlling interest

Comprehensive income attributable to Dehaier Medical Systems Limited

Earnings per share

Weighted average number of common shares used in computation

The accompanying notes

are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months

For the six months ended

Cash flows from operating activities

Adjustments to reconcile net income to net cash provided by (used in) operating activities

Adjustments to reconcile net income to net cash used in operating activities

Stock-based compensation expense

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Change in fair value of warrants liability

Recovery of doubtful accounts

Recovery of inventory obsolescence

Changes in assets and liabilities:

Increase in accounts receivable

(Increase) Decrease in prepayments and other current assets

Increase in prepayments and other current assets

Decrease (Increase) in other receivables

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Increase (Decrease) in accounts payable

Increase (Decrease) in advances from customers

(Decrease) Increase in accrued expenses and other current liabilities

Decrease in advances from customers

Increase in accrued expenses and other current liabilities

Increase in tax payable

Net cash provided by (used in) operating activities

Net cash used in operating activities

Cash flows from investing activities

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Cash flows from financing activities

Proceeds from bank loan

Repayment of bank loan

Net cash used in financing activities

Net proceeds from issuance of common shares

Net cash provided by financing activities

Effect of exchange rate fluctuations on cash and cash equivalents

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Interest paid

The accompanying notes

are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

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Dehaier Medical Systems Limited (“Dehaier”) was incorporated in the British Virgin Islands in 2003 as a limited liability company.

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

On October 23, 2003, Dehaier established a wholly-owned subsidiary in Hong Kong, De-haier Medical System (Hong Kong) Limited (DHK) (collectively, the Company).

Both BDL and BTL were incorporated in the

Peoples Republic of China (PRC).

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 October 23, 2003, Dehaier established a wholly-owned subsidiary in Hong Kong, De-haier Medical Systems (Hong Kong) Limited (“DHK”) (collectively, the “Company”).

Both BDL and BTL were incorporated in the People’s Republic of China (“PRC”).

The Company distributes branded, proprietary medical equipment, such as sleep apnea machines, patient monitors, air compressors, and oxygen generators;

moreover, standard product registration,

product certification and quality management system have been established in the Company.

moreover, standard product registration, product certification and quality management system have been established in the Company.

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.

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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying

condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

In the opinion of the Companys management, the unaudited condensed consolidated financial statements include all adjustments necessary to present fairly the condensed consolidated financial

position, results of operations and cash flows of the Company for the periods presented.

The results of operations for the three months ended March 31, 2011 are not necessarily indicative of operating results expected for the full year or

future interim periods.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended

December 31, 2010, filed on March 7, 2011 (the Annual Report).

The accompanying condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company for the periods presented.

The results of operations for the six and three months ended June 30, 2011 are not necessarily indicative of operating results expected for the full year or future interim periods.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on March 7, 2011.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Dehaier, BDL, its majority-owned subsidiary, and its wholly-owned subsidiary, DHK

as well as BTL.

The condensed consolidated financial statements include the accounts of Dehaier, BDL, its majority-owned subsidiary, and its wholly-owned subsidiary, DHK as well as BTL.

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, and BDL is the primary beneficiary.

BTL owns a building which is pledged as collateral for

BDLs bank loans.

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 BDL’s bank loans.

In exchange, BDL loans money to BTL to finance its operations.

BTL’s primary operation is to provide repairs and transportation services to BDL’s customers.

Because of these arrangements, BDL is the primary

beneficiary of BTL, as the entity that is most closely associated with BTL.

Because of these arrangements, BDL is the primary beneficiary of BTL, as the entity that is most closely associated with BTL.

Dehaier has included BTL in its condensed consolidated financial statements through the consolidation with BDL since December 31, 2006.

Dehaier, BDL and BTL were under

common control until October 31, 2009, when each share of preferred share was converted into a common share (see Note 9).

Because the Chief Executive Officer held more than 50% of the voting ownership interest of each of Dehaier, BDL, BTL and

DHK at December 31, 2006, the Company initially measured the assets, liabilities and non-controlling interest of the variable interest entity at the amounts at which they were carried in the accounts of the reporting entity that controls the

variable interest entity pursuant to FASB ASC 810-10.

Dehaier, BDL and BTL were under common control until October 31, 2009, when each share of preferred share was converted into a common share.

Because the Chief Executive Officer held more than 50% of the voting ownership interest of each of Dehaier, BDL, BTL and DHK at December 31, 2006, the Company initially measured the assets, liabilities and non-controlling interest of the VIE at the amounts at which they were carried in the accounts of the reporting entity that controls the VIE.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basis of Consolidation (Continued)

On October 31, 2009, BDL reconsidered whether it is the primary beneficiary of BTL when

Dehaiers preferred stock was converted into common shares.

While such conversion dilutes the Chief Executive Officer's interest in BDL such that BDL and BTL are not under common control after October 31, 2009, BDL still has the obligation

to absorb the expected losses of BTL.

BTL is still a variable interest entity because all of its activities either involve or are conducted on behalf of the reporting enterprise and its related parties.

BDL is BTLs only customer referral

On October 31, 2009, BDL reconsidered whether it is the primary beneficiary of BTL when Dehaier’s preferred stock was converted into common shares.

While such conversion dilutes the Chief Executive Officer’s interest in BDL such that BDL and BTL are not under common control after October 31, 2009, BDL still has the obligation to absorb the expected losses of BTL.

BTL is still a VIE because all of its activities either involve or are conducted on behalf of the reporting enterprise and its related parties.

BDL is BTL’s only customer referral source.

On March 3, 2010, BDL entered into a Loss Absorption Agreement memorializing the understanding that BDL would continue to loan money to BTL as needed to fund its working capital such that BDL would absorb BTL’s losses.

Management makes ongoing reassessments of whether BDL is the primary beneficiary of BTL.

The carrying amount and classification of BTL’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:

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Total liabilities

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.

The accounts of BTL are consolidated in the accompanying financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10, “Consolidation.” As a VIE, BTL’s revenues are included in the Company’s service income, and its income from operations is consolidated with the Company’s.

Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation of the Company’s and BTL’s financial statements.

Use of Estimates

The preparation of the

condensed consolidated financial statements in conformity with US GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

The preparation of the condensed consolidated financial statements in conformity with US GAAP 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 condensed 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 condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants liability, stock-based compensation and useful lives of property and

Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants liability, stock-based compensation and useful lives of property and equipment.

Actual results could differ from those estimates.

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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.

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.

An allowance, if required, is based on a combination of historical experience, aging analysis, and an evaluation of the collectibility of specific accounts.

Receivables are considered past due after 3 years and written off.

In accordance with the accounting policies, management has determined that an allowance of $88,273 and $87,555 was

required at March 31, 2011 and December 31, 2010, respectively.

In accordance with the accounting policies, management has determined that allowances of $89,437 (RMB 578,068) and $87,555 (RMB 578,068) were required at June 30, 2011 and December 31, 2010, respectively.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Advances to Suppliers and Advances from Customers

The Company, as is the common practice in the PRC, will often pay advance payments to suppliers for unassembled parts, or receive advance payments from

Advances to suppliers were $7,410,756 and $4,515,737 at March 31, 2011 and December 31, 2010, respectively, which were included in prepayment and other current assets.

Advances from customers were $294,437 and $269,189 as of

March 31, 2011 and December 31, 2010, respectively.

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 $8,731,847 and $4,515,737 at June 30, 2011 and December 31, 2010, respectively, which were included in prepayment and other current assets.

Advances from customers were $152,969 and $269,189 as of June 30, 2011 and December 31, 2010, respectively.

None of these advances was from or to any related party.

Fair Value of Financial Instruments

The carrying amounts reported in the condensed consolidated financial statements for current assets and current liabilities approximate fair value due to

the short-term nature of these financial instruments.

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 Entity's Own Stock.

ASC topic 815 provides a framework for determining whether an instrument is indexed to an entity's own stock.

ASC topic 815 became

effective for the Company when warrants were issued in connection with the Company's initial public offering.

The carrying amounts reported in the condensed consolidated financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial instruments.

The Company adopted 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.

ASC topic 815 became effective for the Company when warrants were issued in connection with the Company’s initial public offering.

Such 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 statement of operations (see Note 9).

The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level

valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

The three levels

are defined as follows:

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 condensed consolidated statement of income and comprehensive income (see Note 9).

The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

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 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.

Warrants liabilities qualify as financial instruments.

Warrant liabilities qualify as financial instruments.

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, as level 2 inputs, and recorded the change in earnings.

As a result, the derivative liability is carried on the balance sheet at its fair value (see note 10).

The fair value of the warrants was determined using the Black Scholes Model, as level 2 inputs, and management recorded the change in earnings.

As a result, the derivative liability is carried on the condensed consolidated balance sheets at its fair value (see note 9).

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 $49,256 and $48,855 for March 31, 2011 and December 31, 2010, respectively, and the provision is included in the operating expenses in the condensed consolidated

statements of operations.

The Company reviews its inventory annually for possible obsolete goods and to determine if any reserves are necessary.

The reserves for obsolescence were $49,905 (RMB 322,556) and $48,855 (RMB 322,556) for June 30, 2011 and December 31, 2010, respectively, and these provisions are included in the operating expenses in the condensed consolidated statements of operations.

Property and Equipment

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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 measures impairment by comparing 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

If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset, is recognized.

Management has determined

no impairment exists at the balance sheet dates.

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.

If the sum of the expected future cash flows is less than the carrying amount of the asset, 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

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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 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 products that require installation, revenues are recognized when the installation is completed.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (Continued)

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.

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;

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Foreign Currency Translation

accounts of Dehaier, BDL, BTL and DHK are measured using the currency of the primary economic environment in which the entity operates (the functional currency).

The accompanying condensed consolidated financial statements are presented

in US dollars.

The accounts of Dehaier, BDL, BTL and DHK are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”).

The accompanying condensed 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 condensed consolidated statements of operations.

The foreign currency accounts of DHK, 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 in non-controlling interest.

Generally, foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the condensed consolidated statements of income and comprehensive income.

The foreign currency accounts of DHK, 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 People’s 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.

Warranty costs are included in general and

administrative expenses.

Warranty costs are included in general and administrative expenses.

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 be required to revise its estimated product warranty liability.

Should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, the Company may be required to revise its estimated product warranty liability.

The term of the product warranty is generally twelve months.

The reserve for warranty costs was $303,936 and $301,464

at March 31, 2011 and December 31, 2010, respectively.

Warranty expense for the three months ended March 31, 2011 and 2010 was $29,527 and $25,020, respectively.

The reserves for warranty costs were $307,943 (RMB 1,990,363) and $301,464 (RMB 1,990,363) at June 30, 2011 and December 31, 2010, respectively.

Warranty expenses for the six months ended June 30, 2011 and 2010, and for the three months ended June 30, 2011 and 2010 were $106,648, $65,422, $77,121 and $40,402, respectively.

Earnings per Share

The Company follows the provisions of ASC 260-10, Earnings per

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.

The following table

sets forth computation of basic and diluted weighted average share information:

For the three months ended

Weighted average number of common shares outstanding

Dilutive effect of warrants

Weighted average number of common shares outstanding, assuming dilution

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.

The average stock price for the first and second quarters of 2011 did not exceed the exercise price of the outstanding warrants, therefore none of the outstanding warrants were included in the diluted earnings per share.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Value Added Tax

The Company reports revenues net of PRCs value added tax for all the periods presented in the condensed consolidated statements of operations.

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

The Company reports revenues net of PRC’s value added tax for all the periods presented in the condensed consolidated statements of income and comprehensive income.

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 entity’s 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.

As of March 31, 2011 and December 31, 2010 respectively, the Company was not required to record any deferred tax assets or liabilities.

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.

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.

As of each of June 30, 2011 and December 31, 2010, the Company was not required to record any deferred tax assets or liabilities.

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.

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

previous years Value Added Tax (VAT) returns for some of its customers.

The Company is awaiting resolution of certain complex tax issues and has not yet filed its previous years’ 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 condensed consolidated financial statements.

The implementation of ASC 740-10 resulted in no material liability for unrecognized tax benefits and no material change to the beginning

retained earnings of the Company.

As of March 31, 2011 and December 31, 2010 respectively, the Company did not have a liability for any unrecognized tax benefits.

The Company recognizes interest and penalties, if any, related to

unrecognized tax benefits as income tax expense in the statement of operations.

During the three months ended March 31, 2011 and 2010 respectively, the Company did not incur any interest or penalties.

Income tax returns for the year prior to 2008 are no longer subject to examination by tax authorities.

The implementation of ASC 740-10 resulted in no material liability for unrecognized tax benefits and no material change to the beginning retained earnings of the Company.

As of each of June 30, 2011 and December 31, 2010, the Company did not have a liability for any unrecognized tax benefits.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations.

During each of the six months ended June 30, 2011 and 2010, the Company did not incur any interest or penalties.

Income tax returns for years prior to 2008 are no longer subject to examination by tax authorities.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Reclassification

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

These modifications did not have any impact to the Company’s Condensed Consolidated statement of income and Comprehensive income.

Recently Issued Accounting Standard

On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-04 (“ ASU 2011-04 ”), Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.

GAAP and IFRS .

ASU 2011-04 completes a major project of the boards’ joint work to improve IFRS and US GAAP and to bring about their convergence.

For US GAAP, ASU 2011-04 will supersede most of the guidance in Topic 820, although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.

It also reflects the FASB’s consideration of the different characteristics of public and non-public entities and the needs of users of their financial statements.

ASU 2011-04 will be effective for public entities for interim and annual periods beginning after December 15, 2011, and should be applied prospectively.

The adoption of this accounting standard is not expected to have a material effect on the Company’s condensed consolidated financial statements.

On June 16, 2011, FASB issued Accounting Standards Update 2011-05 (“ ASU 2011-05 ”), Comprehensive Income (Topic 220)-Presentation of Comprehensive Income.

ASU 2011-05 eliminates the current option to report other comprehensive income and its components in the statement of changes in equity, and requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.

The amendments in ASU 2011-05 should be applied retrospectively.

For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

The adoption of this accounting standard is not expected to have a material effect on the Company’s condensed consolidated financial statements.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PREPAYMENT AND OTHER CURRENT ASSETS

4 unchanged sentences

PROPERTY AND EQUIPMENT, NET

equipment consist of the following:

Property and equipment consist of the following:

Land use rights

3 unchanged sentences

Property and equipment, net

At March 31, 2011 and December 31, 2010, BTLs building was pledged to a bank as collateral for short-term

borrowings of RMB6,000,000 (US$916,224), RMB10,000,000 (US$1,514,620), respectively (see Note 6).

Depreciation and amortization expense was

$109,373 and $85,750, for the three months ended March 31, 2011 and 2010, respectively.

At June 30, 2011 and December 31, 2010, BTL’s building was pledged to a bank as collateral for short-term borrowings of RMB 10,000,000 (US$1,547,170) and RMB 10,000,000 (US$1,514,620), respectively (see Note 6).

Depreciation and amortization expenses were $219,976, $172,314, $110,603 and $86,564, for the six and three months ended June 30, 2011 and 2010, respectively.

Land Use Rights

1 unchanged sentence

Land is owned by the government and the government grants land use rights for specified terms.

Companys land use rights are reported at the purchase price (RMB1,944,000 in 2002).

The Company’s land use rights are reported at the purchase price (RMB 1,944,000 in 2002).

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TAX RECEIVABLE

Tax receivable consists

of the following:

Tax receivable consists of the following:

Value added tax receivable

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.

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 March 31, 2011 and December 31, 2010

represents VAT credit on the purchased products.

A credit is available whereby VAT paid on the purchases of unassembled medical components of the Company’s product used in contract and production can be used to offset the VAT due on sales of the product.

The tax receivable as of June 30, 2011 and December 31, 2010 represents VAT credit on the purchased products.

These amounts can be used to offset the VAT due on sales of the finished product.

SHORT-TERM BORROWINGS

The Company has a

line of credit for RMB10,000,000 (USD1,574,620 at December 31, 2010) with a commercial bank in the PRC to finance its working capital.

The credit line bears interest at a variable rate and is renewed annually on May 18th.

Average interest

rates for the three months ended March 31, 2011 and 2010 were 5.84% and 5.58%, respectively.

Pursuant to the terms of the agreement, the line of credit is secured by BTLs building (see note 4) and guaranteed by BDL and an officer of the

The Company has a line of credit for RMB 10,000,000 (US$1,574,620 at December 31, 2010 and US$1,547,170 at June 30, 2011) with a commercial bank in the PRC to finance its working capital.

The credit line bears interest at a variable rate and is renewed annually on June 15th.

Any outstanding loan balance must be repaid before annual renewal.

Average interest rates for the six months ended June 30, 2011 and 2010 were 6.94% and 5.84%, respectively.

Pursuant to the terms of the agreement, the line of credit is secured by BTL’s building (see note 4) and guaranteed by BDL and an officer of the Company.

NON-CONTROLLING INTEREST

Non-controlling

interest consists of the following:

Non-controlling interest consists of the following:

Original paid-in capital

1 unchanged sentence

Accumulated other comprehensive income

SHAREHOLDERS EQUITY

2011, the Company issued 10,000 shares of its restricted common shares to a former investors relation firm pursuant to an agreement.

The total fair value of the common shares issued was $59,300.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCY

Common Shares

On March 22, 2010, the founders of the Company placed an aggregate of 600,000 common shares of the Company into escrow.

shares equaled 40% of the maximum number of shares which were sold in the initial public offering (IPO).

The shares would remain in escrow until the Company filed its Form 10-K with the Securities and Exchange Commission for the year

ended December 31, 2010.

The shares in escrow (Make-Good Shares) are accounted for as an element in the IPO and the Company will not recognize any compensation expense upon the return of such Make-Good Shares to the holders.

To the extent

the Companys earnings per share for the year ended December 31, 2010 were less than $.80, the Company would redeem, pro rata, such shares.

Alternatively, if the closing price of the common shares is equal to at least 2.5 times of the IPO

offering price for five trading days in any ten trading day period, then the Make-Good Shares will be returned to the founders.

At December 31, 2010, the earnings per share of the company is $1.09.

Thus, the Company does not need to redeem or

pro rata such shares.

During the period from IPO date to December 31, 2010, there was no day on which the closing price of the common shares was higher than 2.5 times of the IPO offering.

The shares would be returned to the founders 45 days

after the Companys Form 10-K for the year ended December 31, 2010 was filed.

At March 31, 2011, the return of these shares was in progress and these shares are included as part of the calculation of the basic and diluted earning per

share for all the periods presented in the accompanying condensed consolidated financial statements.

Such shares equaled 40% of the maximum number of shares sold in the initial public offering (“IPO”).

The shares were required to remain in escrow until the Company filed its Form 10-K with the Securities and Exchange Commission for the year ended December 31, 2010.

The shares in escrow (the “Make-Good Shares”) are accounted for as an element of the IPO, and the Company would not recognize any compensation expense upon the return of such Make-Good Shares to the holders.

To the extent the Company’s earnings per share for the year ended December 31, 2010 were less than $0.80, the Company would redeem, pro rata, such shares to the extent needed to raise earnings per share to $0.80.

Alternatively, if the closing price of the common shares was equal to at least 2.5 times of the IPO offering price for five trading days in any ten trading day period, then the Make-Good Shares would be returned to the founders.

During the period from IPO date to December 31, 2010, there was no day on which the closing price of the common shares was higher than 2.5 times of the IPO offering, so the Make-Good Shares were not returned to the founders prior to the end of 2010.

For the year ended December 31, 2010, the earnings per share of the Company were $1.09.

Thus, the Company did not need to redeem any of the Make-Good Shares.

These shares were returned to the founders on May 5, 2011 and are included as part of the calculation of the basic and diluted earnings per share for all the periods presented in the accompanying condensed consolidated financial statements.

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 2012.

Approximate future minimum lease payments under these leases at March 31, 2011, are as follows:

Future payment for the twelve months ending March 31, 2011

These non-cancelable leases have lease terms expiring through December 2012.

Approximate future minimum lease payments under these leases at June 30, 2011, are as follows:

Future payment for the twelve months ending June 30,

Total minimum lease payments

Rent expense for the three months

ended March 31, 2011 and 2010 was $17,279 and $13,290, respectively.

Rent expense paid to the spouse of the Chief Executive Officer for

the three months ended March 31, 2011 and 2010 was $0 and $7,472, 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.

Rent expenses for the six and three months ended June 30, 2011 and 2010, were $72,155, $56,605, $54,876 and $43,315, respectively.

Rent expenses paid to the spouse of the Chief Executive Officer for the six and the three months ended June 30, 2011 and 2010 were $0, $11,638, $0 and $7,472, respectively.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND CONTINGENCY (CONTINUED)

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 $226,000 and $188,000 as of March 31, 2011 and December 31, 2010, respectively, which have not been reflected in

its condensed consolidated financial statements, because it is more likely than not that this will not be paid or incurred.

The Labor Contract Law of the People’s 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.

The Company has estimated its possible severance payments of approximately $229,000 and $188,000 as of June 30, 2011 and December 31, 2010, respectively, which have not been reflected in its condensed consolidated financial statements, because it is more likely than not that this will not be paid or incurred.

WARRANTS LIABILITY

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

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.

(“Hawk”), the Company’s investor relations consultancy.

The Company had 157,500 warrants outstanding as of March 31, 2011.

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 Hawk 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.

The fair value of the outstanding warrants at March 31, 2011 for A&S was calculated using the Black Scholes Model with the following

Fair value per share (USD/share)

Exercise price (USD/share)

The Company had 157,500 warrants outstanding as of June 30, 2011.

All the warrants issued to A&S have the right to purchase one common share for an exercise price of $10.00 per share with a term of 5 years.

All the warrants granted to Hawk have the right to purchase one common share for an exercise price of $9.60 per share with a term of 5 years.

The fair value of the outstanding warrants at June 30, 2011 for A&S was calculated using the Black Scholes Model with the following assumptions:

Fair value per share

Exercise price

Risk free rate

2 unchanged sentences

Expected volatility

The fair value of the outstanding

warrants at March 31, 2011 for Hawk was calculated using the Black Scholes Model with the following assumptions:

Fair value per share (USD/share)

Exercise price (USD/share)

The fair value of the outstanding warrants at June 30, 2011 for Hawk was calculated using the Black Scholes Model with the following assumptions:

Fair value per share

Exercise price

Risk free rate

2 unchanged sentences

Expected volatility

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 March 31, 2011.

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 June 30, 2011.

Carrying Value at

Fair Value Measurement

March 31, 2011

June 30, 2011

Fair Value Measurement at

June 30, 2011

Warrants liability

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

WARRANTS LIABILITY (CONTINUED)

The following is a reconciliation of the beginning and ending balances of warrants liability measured at

fair value on a recurring basis using significant observable inputs (Level 2) as of March 31, 2011:

Beginning balance at December 31, 2010

Warrants issued for the three months ended March 31, 2011

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:

Beginning balance, January 1, 2011

Warrants issued

Fair value change of the issued warrants included in earnings

Ending balance at March 31, 2011

(1) Fair Value of Underlying Ordinary Shares

The $5.23 is the close price of the Company on March 31, 2011.

Ending balance, June 30, 2011

(1) Fair value of underlying common shares

The $2.67 is the closing price of the Company’s common shares on June 30, 2011.

(2) Exercise price

1 unchanged sentence

(3) Risk-free interest rate

Risk-free interest rate was estimated

based on the yield to maturity of U.S.

Risk-free interest rate was estimated based on the yield to maturity of U.S.

Treasury notes with a maturity period close to the term of the warrants.

3 unchanged sentences

Life to expiration was based on contractual term of the warrants.

The volatility of the underlying ordinary shares during the life of the warrants was estimated based on the

historical stock price volatility of listed comparable companies over a period comparable to the expected term of the warrants.

value of the each A&S warrant at March 31, 2011 was $2.06.

The total fair value of such warrants was $308,583 at March 31, 2011.

(6) Volatility

The volatility of the underlying common shares during the life of the warrants was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the warrants.

The fair value of each A&S warrant at June 30, 2011 was $1.12.

The total fair value of such warrants was $168,242 at June 30, 2011.

The fair value of the warrants for A&S was $270,000 on the date of grant which was recognized as IPO expense.

The decrease in the fair value of the

warrants during the period was recognized as a change in fair value of warrants liability which was included in statements of operations.

fair value of each Hawk warrant at March 31, 2011 was $2.11.

The decrease in the fair value of the warrants during the period was recognized as a change in fair value of warrants liability which was included in condensed consolidated statements of income and comprehensive income.

The fair value of each Hawk warrant at June 30, 2011 was $1.14.

The total fair value of such warrants was $8,567, which has not been reflected in the Company’s condensed consolidated financial statements due to immateriality.

The fair value

of the warrants for Hawk was $15,000 at the grant date.

The decrease in fair value of the warrants resulted in a gain of $806, which has not been reflected in the Companys condensed consolidated financial statements due to immateriality.

The fair value of the warrants for Hawk was $15,000 at the grant date.

The decrease in fair value of the warrants resulted in a loss of $6,433, which has not been reflected in the Company’s condensed consolidated financial statements due to immateriality.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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 entity’s 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 31, 2011, BDLs board of directors has not yet made such determination.

As of June 30, 2011, BDL’s 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 three months ended March 31, statutory surplus reserve activity was as follows:

For the three months ended

March 31, 2011

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 six months ended June 30, 2011 statutory surplus reserve activity was as follows:

Balance at December 31, 2010

Addition to statutory reserves

Balance at March 31, 2011

Balance at June 30, 2011

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.

is subject to Hong Kong profits tax at a rate of 17.5% on its assessable profits.

BDL and BTL were incorporated in the PRC and are governed by the PRC laws.

DHK is subject to Hong Kong profits tax at a rate of 17.5% on its assessable profits.

No Hong Kong profits tax has been provided as the Company did not have any taxable profit that was earned in or derived from Hong Kong during the years presented.

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES (CONTINUED)

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, BDL updated its

certification for high technology company.

Therefore, BDL used a 15% income tax rate to calculate the income tax expense for the three months ended March 31, 2011 and 2010.

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, BDL updated its certification for “high technology” company.

Therefore, BDL used a 15% income tax rate to calculate the income tax expense for the six months ended June 30, 2011 and 2010.

The high technology certification will expire in 2012.

The tax rate for BTL is 25% in 2010 and 2011.

1 unchanged sentence

Major Customers

For the three months ended March 31, 2011 and 2010, approximately 18% and 17% of the Companys revenues was received from one

At March 31, 2011 and 2010, receivables from four customers were approximately 12%, 11%, 11%, 10% and 9%, 8%, 8%, 7%,

respectively.

the three months ended March 31, 2011 and 2010, the Companys three top selling products accounted, in the aggregate, for approximately 90% and 61%, respectively, of its total net revenues.

For the six months ended June 30, 2011 and 2010, and for the three months ended June 30, 2011 and 2010, approximately 13%, 10%, 15% and 16% of the Company’s revenues were received from one customer.

At June 30, 2011 and 2010, receivables from four customers were approximately 12%, 10%, 10%, 9% and 11%, 11%, 10%, 8%, respectively.

For the six months ended June 30, 2011 and 2010, and for the three months ended June 30, 2010 and 2011, the Company’s three top selling products accounted, in the aggregate, for approximately 80%, 56%, 82% and 53%, respectively, of its total net revenues.

The following represents the revenues by products, all derived from operations in the PRC:

For the six months ended

For the three months ended

2 unchanged sentences

Technical Service

DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUBSEQUENT EVENTS

In April 2011, BTL

signed strategic cooperation agreements with Taiyo Nippon Sanso Shenwei (Shanghai) Medical Gas Co., Ltd (Taiyo-Shanghai) and Beijing Orient Medical Gas Co., Ltd (Beijing Orient) to develop oxygen therapy services for the home

use market in Beijing.

Leveraging the expertise of each company, these agreements include oxygen production, oxygen filling, selling and providing home service for medical oxygen in Beijing.

On April 29, 2011, BDL signed a cooperation agreement with Beijing Kanglian Medicines Co, Ltd, to develop, operate and implement a new rural healthcare construction project in Hunan and

Anhui provinces.

This project is supported by China Development Bank Corp (CDB), one of Chinas three national policy banks.

It is aimed at improving the national healthcare system through the development and upgrade of medical

facilities and health centers in nearly 2,900 counties, cities and districts across China.

BDL was selected for this project as a result of its broad product portfolio, which includes solutions at a variety of price points, including those

that meet the requirements of cost conscious facilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 5. Other Information