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Item 2. Management’s Discussion and Analysis

2011-11-10 compared with 2011-08-11 · 164 added, 202 removed, 153 unchanged (71% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report.

In this report, the terms “we,” “the Company,” “our company,” and “our” refer to Dehaier Medical Systems Limited, a British Virgin Islands company (“Dehaier”), Dehaier Medical Systems (Hong Kong) Limited, our subsidiary in Hong Kong (“DHK”), Beijing Dehaier Technology Company Limited, our variable interest entity in the People’s Republic of China (“BTL”) and Beijing Dehaier Medical Technology Company Limited, our operating subsidiary in the People’s Republic of China (“BDL”).

The following discussion and analysis of the company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report.

In this report, the terms “we,” “the Company” and “our” refer to Dehaier Medical Systems Limited, a British Virgin Islands company (“Dehaier”), Dehaier Medical Systems (Hong Kong) Limited, our subsidiary in Hong Kong (“DHK”), Beijing Dehaier Technology Company Limited, our variable interest entity in the People’s Republic of China (“BTL”) and Beijing Dehaier Medical Technology Company Limited, our operating subsidiary in the People’s Republic of China (“BDL”).

This discussion contains forward-looking statements that involve risks and uncertainties.

Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.

This section should be read together with the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as the condensed consolidated financial statements for the six and three month periods ended June 30, 2011 and accompanying notes included elsewhere in this document.

We have been focused on the development and distribution of medical devices since our inception, and we began developing our respiratory and oxygen homecare business in 2006.

We design, develop and market our branded products in China.

We import the majority of the products and medical components we sell to our customers.

We design and develop some of the medical components that are part of the branded products to be distributed.

Some of these medical components are manufactured by contractors in China because we do not have a manufacturing facility.

Most of our branded products require light assembly.

In addition to our branded products, we also serve as a distributor of products designed and manufactured by other companies.

We broaden product portfolio through distribution agreements with international manufacturers.

Our distributed offerings are mainly conventional equipments used in the operating room, intensive care unit (“ICU”) and emergency room.

We sell products primarily to distributors;

however, we also sell products directly to hospitals, clinics and government health bureaus.

We continually seek to broaden our market reach by introducing new and more advanced products and new product lines that address different end-user populations.

Major Highlights

This section should be read together with the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as the condensed consolidated financial statements for the nine- and three-month periods ended September 30, 2011 and related notes thereto.

We are a company in the business of developing and distributing medical devices.

We have been focusing on developing the respiratory and oxygen homecare business 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 equipments 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 branded 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 branded products require light assembly by us before distribution.

We sell our products primarily through distributors, but we also make direct sales to hospitals, clinics and government health bureaus.

We continue to further our market reach by introducing newer and more advanced product lines that address different end-user needs.

In July 2011, we commenced our home oxygen therapy service and we plan to grow this early-stage business starting with the Beijing market.

Business Development

In June 2011, we signed a medical equipment supply agreement with Hospital 301, a well-known hospital located in Beijing, China.

We will provide them with medical equipment valued at approximately US$1.32 million.

We will continue to develop and maintain close working relationships with hospitals across China.

In July 2011, we opened the first oxygen filling facility and first service center for home oxygen therapy in Haidian District, Beijing, China.

Meanwhile, we opened a customer experience center (“CEC”) in Shanghai in cooperation with Taiyo-Shanghai.

We seek to cross-sell our branded products to the 50,000 existing clients of Taiyo-Shanghai.

In May 2011, we signed a cooperation agreement with Beijing Kanglian Medicines Co, Ltd to develop, operate and implement a new rural healthcare project in Hunan and Anhui provinces.

The project is supported by China Development Bank Corp, one of China’s three national policy banks.

During the reporting period, we have signed several letters of intent for procurement projects under this cooperation agreement.

In June, 2011, our international department has engaged distributors in Taiwan for our CPAP devices, which marks our first distribution authorization outside the PRC.

Intellectual Property Rights:

On June 8, 2011, we were granted three new patents by the State Intellectual Property Office of the PRC (“SIPO”).

The patents cover the design of our sleep diagnostic products, CPAP products and medical-grade air compressors.

We will continue to strengthen our R&D capabilities and plan to continue to build our intellectual property portfolio.

Research & Development:

On July 8, 2011, Dr.

Xiaoqing Wang joined our management team as our new Chief Technology Officer.

Wang is planning to develop second-generation oxygen concentrators and second-generation PAP ventilators.

We believe that Dr.

Wang’s contributions will benefit our homecare products development and innovations.

In July 2011, we opened our first oxygen filling facility and service center for home oxygen therapy in the Haidian District of Beijing.

We have marketed this service to more than 50 hospitals in Beijing.

The number of potential customers for home oxygen therapy service is increasing and so is our professional team for this line of business.

We have also continued to implement our existing contract projects with Hospital 301 of Beijing for a medical supply agreement and with Beijing Kanglian Medicine Co, Ltd for a rural healthcare project in Hunan and Anhui Provinces.

During the third quarter, we recruited several professionals to further build our team for state-level contract projects.

It is expected that we will continue to establish further cooperative relations with the different levels of the government on more projects.

Growth Strategies

Building our brand domestically as both a distributor and a trusted partner by leveraging our relationships with healthcare professionals, agents and other distributors, maintaining and enlarging our customer base, and promoting business growth.

Through our customer sharing database and other tools, we are creating cross-selling opportunities for our homecare products, while providing oxygen delivery through the service platform.

Distribution channels:

(1) medical devices:

becoming a well known Chinese distributor by diversifying our base of third party distributed products;

(2) homecare solutions:

expanding our homecare products sales platform, marketing our oxygen therapy service business through sharing customer sources with the homecare products sales platform, which we expect will provide us with increasing cross-selling opportunities.

Expanding our product portfolio through continuous investment in R&D personnel and hardware.

Seeking to provide customers with an all-in-one solution to meet customers’ individual needs.

Expanding into the U.S.

and Europe through establishment of distribution agreements, OEM partnerships, direct sales force and e-commerce platform.

We will also build brand equity and actively participate in industry events.

We are preparing applications for FDA and CE approvals for several of our homecare products.

None of these products has been approved by the FDA or CE, and we have no guarantee that our applications will be approved.

We will develop our home oxygen services and expand the service platform to dominate the domestic market for this service in China, and we will also implement value-added business based on the same platform.

Eventually, we seek to provide customers with an all-in-one solution in the home healthcare field.

We will expand our product portfolio through continued investment in research and development and acquisition of companies having proper products complementary to our core business.

We plan to release the second generation of home use continuous positive airway pressure products and oxygen concentrators in early 2012.

We have received CE mark approval for our sleep diagnostic device DHR-998, which will be marketed in European countries soon.

We will expand our distribution channels into e-commerce platforms.

We plan to create more cross-selling opportunities for our homecare products, while providing oxygen delivery through the service platform.

We will 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 business growth steadily.

We will expand into overseas markets and establish a distribution network, through distribution agreements, OEM partnerships, direct sales force and e-commerce platforms.

We will build our brand name by actively participating in international trade shows.

We will attempt to have all our homecare medical products approved by the U.S.

Food and Drug Administration and its counterpart in Europe.

Results of Operations

For the six and three months ended June 30, 2011, our total revenues amounted to approximately $10.67 million and $7.71 million, respectively, compared to $7.47 million and $4.83 million for the six and three months ended June 30, 2010, respectively.

For the nine and three months ended September 30, 2011 and 2010, our total revenues amounted to approximately $16.35 million, $12.93 million, $5.69 million and $5.46 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 six and three months ended June 30, 2011 was approximately $1.94 million and $1.74 million, respectively, compared to $1.67 million and $1.14 million for the six and three months ended June 30, 2010.

Such increase in net income was mainly due to increase in sales.

Our total revenues are derived from products we provide in our three product lines, (i) medical devices, (ii) respiratory and oxygen homecare products, and (iii) technical service products.

We currently operate in one business segment for all of the products we distribute.

Medical Devices – Our Branded and Distributed Products

We derive revenues in our medical devices product line from the sale of C-arm X-ray systems, anesthesia machines, patient monitors and general hospital products.

Our medical device line is our largest product line and has the most extensive market penetration of our three product lines.

We anticipate that we will continue to experience revenue growth in our medical devices line as we further penetrate the market through the development and introduction of new advanced product offerings and the participation of favorable government policies.

Respiratory and Oxygen Homecare Products – Our Branded and Distributed Products

We derive revenues in our respiratory and oxygen homecare line from sales of oxygen concentrators, CPAP devices, portable sleep diagnostics and rhinitis hyperthermia devices.

We anticipate that, on a percentage basis, net revenues in our respiratory and oxygen homecare product line will increase more rapidly than total net revenues in the near term, as we introduce new and more advanced products in this product line.

We expect to increase our market penetration in the respiratory and oxygen homecare market, both in China and internationally, through the use of distributors as well as through our direct sales platform.

Also, we expect that our business in distributing oxygen therapy to patients will begin to contribute to our revenue in the future.

Technical Service Products – Our Branded Products

We derive revenues in our technical service products line from sales of our air compressors and ventilator trolleys.

We anticipate continued growth in revenues from our technical service products as we further penetrate this market by increasing the number of our distributors and maintaining a competitive pricing model.

Our ability to increase our revenues depends in large part on our ability to (i) increase the market penetration of our existing products, (ii) successfully identify, develop, introduce and commercialize, in a timely and cost-effective manner, new and upgraded products and (iii) enter into international markets in the future.

Generally, we choose to devote our resources to product development efforts that we believe are commercially feasible, can generate significant revenues and margins and can be introduced into the market quickly.

Our net income attributable to Dehaier for the nine and three months ended September 30, 2011 and 2010 was approximately $3.32 million, $3.07 million, $1.38 million and $1.41 million, respectively.

Such increase in net income for the nine months ended September 30, 2011 was mainly due to the increase in sales.

The decrease in net income for the three months ended September 30, 2011 was mainly due to increased expense on marketing for the new home oxygen therapy line of business.

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:

global economic conditions;

the changes in China’s macro-economic environment and healthcare-related government strategies and policies;

the level of acceptance of our products among hospitals and other healthcare facilities;

our ability to attract and retain distributors, key customers and direct sales force;

new product introductions by us and our competitors;

our ability to price our products at levels that provide favorable margins;

continuous investment in research and development activities.

our ability to price our products at levels that are competitive yet provide favorable margins;

our ability to develop and introduce new products and services;

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 China’s macro-economic environment and healthcare-related government policies and legislation;

global economic conditions.

Our total revenues are derived from products we sell in our three product lines:

(i) medical devices, (ii) respiratory and oxygen homecare products, and (iii) technical service products.

Generally, we focus our resources on developing products that we believe are commercially feasible, can generate significant revenues and high margins, and can be quickly introduced into the market.

Medical devices .

We derive revenues in our medical devices product line from the sale of C-arm X-ray systems, anesthesia machines, patient monitors and general hospital products.

Medical devices, our largest product line, have the most extensive market reach among our three product lines.

We anticipate continued revenue growth in our medical devices product line as we further our market reach through the development and distribution of new product and the participation in favorable government health programs.

Respiratory and oxygen homecare products .

We derive revenues in our respiratory and oxygen homecare product line from sales of oxygen concentrators, continuous positive airway pressure devices, portable sleep diagnostics and rhinitis hyperthermia devices.

We anticipate that, on a percentage basis, net revenues in our respiratory and oxygen homecare product line will increase more rapidly than our total net revenues in the near term, as we introduce more advanced products.

We expect to increase our market penetration in the respiratory and oxygen homecare sector both in China and internationally through the use of distributors as well as our direct sales platform.

Technical service products .

We derive revenues in our technical service product line from sales of our air compressors and ventilator trolleys.

We anticipate continued growth in revenues from our technical service products as we further expand our market reach by increasing the number of our distributors and maintaining a competitive pricing model.

Our ability to increase revenues depends in large part on our ability to (i) increase the market reach of our existing products, (ii) successfully identify, develop, introduce and commercialize, in a timely and cost-effective manner, newer and more advanced products, and (iii) continue to expand our international markets.

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 increased as a percentage of our total revenues for the six and three months ended June 30, 2011 compared to the same period in 2010 primarily due to increased professional fees, mainly investor relationship, attorney, accounting and consulting fees, by virtue of being a publicly traded company since March 26, 2010.

Our total operating costs and expenses increased as a percentage of our total revenues for the nine and three months ended September 30, 2011 compared to the same periods in 2010, primarily due to increased professional fees, mainly investor relations, legal, accounting and consulting fees, by virtue of being a publicly traded company since March 26, 2010.

Cost of Revenues

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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 investor relationship, 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 incur costs related to the anticipated growth of our business.

General and administrative expenses consist primarily of salaries, benefits and related costs for our administrative personnel and management, fees and expenses from our outside advisers including investor relations, legal, auditing 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 revenues, as we incur costs related to the anticipated growth of our business.

In addition, we expect to incur additional general and administrative expenses associated with being a public company.

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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

As our business grows quickly, we are looking forward to having more opportunities in the market.

Going forward, we expect our selling expenses to increase, both on an absolute basis and as a percentage of revenues, as we increase our efforts to promote our products and services, especially our new respiratory and oxygen homecare line of business.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

As our business grows, we look forward to having more opportunities in the market.

We believe that period-to-period comparisons of operating results should not be relied upon as indicative of future performance.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010.

Our total revenues increased by 42.7% from $7.47 million for the six months ended June 30, 2010 to $10.67 million for the six months ended June 30, 2011.

The increase in revenues was due to the increased acceptance of our products among hospitals and other healthcare facilities as many of our end users such as hospitals became repeat customers when they needed new medical equipment;

moreover, the increase in sales was mainly attributable to the increases in units sold for the six months ended June 30, 2011.

We maintained good relationships with our clients in the first half-year of 2011, and that contributed to our revenue growth.

In addition, we have further strategic development plans to create cooperation opportunities with government projects and hospitals.

We also continued to expand our homecare oxygen business in China, which promoted a greater market presence for our company and products.

Our total revenues increased by 26% from $12.93 million for the nine months ended September 30, 2010 to $16.35 million for the same period in 2011.

This was due to the increased acceptance of our products resulting in additional units sold among hospitals and other healthcare facilities, as many of our end users such as hospitals became repeat customers when they needed new medical equipment.

We maintained good relationships with our clients during the three quarters of 2011, which contributed to our revenue growth.

We continued to expand our homecare oxygen business in China, which promoted a greater market presence for our brand name and our products.

In addition, we have further plans for strategic development to create cooperative opportunities with government programs and hospitals.

Cost of Revenues

Our cost of revenues increased 49.1% from $4.58 million for the six months ended June 30, 2010 to $6.83 million for the six months ended June 30, 2011.

The cost of medical components and parts are the major cause for the increase of cost of revenues.

Also, we were selected to participate in several government projects, and these projects purchased products with relatively higher product costs.

Our cost of revenues increased by 30.0% from $7.78 million for the nine months ended September 30, 2010 to $10.10 million for the same period in 2011.

Because our cost of revenues grew slightly faster than our revenues, our gross margin decreased.

The cost of medical components and parts are the major cause for the increase in cost of revenues.

Operating Expenses

Our operating expenses increased by 70.5% from $1.00 million for the six months ended June 30, 2010 to $1.71 million for the six months ended June 30, 2011.

This increase was due to an increase in general and administrative and selling expenses, for the reasons described below.

Operating Expenses—General 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 and the registration of foreign exchange certificate.

Our general and administrative expenses increased by 95.26% from $0.52 million for the six months ended June 30, 2010 to $1.02 million for the six months ended June 30, 2011.

Our operating expenses increased by 47.0% from $1.71 million for the nine months ended September 30, 2010 to $2.51 million for the nine months ended September 30, 2011.

This increase was due to an increase in general and administrative expenses and selling expenses, for the reasons described below.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and related costs for our administrative personnel and management, expenses associated with our research and development, and expenses for the registration of foreign exchange certificate.

Our general and administrative expenses increased by 60% from $0.88 million for the nine months ended September 30, 2010 to $1.41 million for the same period in 2011.

This increase was mainly due to three factors:

Public company expense .

After listing on NASDAQ market on April 22, 2010, we incurred implementation expenses for Sarbanes-Oxley Section 404 compliance.

In order to improve our visibility and exposure on the capital market, we also hired professional employees and retained professional consulting firms.

Research & Development Expense .

The Company has been involved in the research and development activities for sleep and respiratory products.

In 2011, these research and development activities moved to the clinic test stage, which increased R&D expenses.

Labor Expenses .

Our labor costs increased as we implemented an employee reward policy to strengthen our corporate culture.

We expect that our general and administration expenses will increase in the near future.

After listing on the NASDAQ stock market on April 22, 2010, we incurred implementation expenses to comply with Sarbanes-Oxley Act, Section 404.

In order to improve our visibility and exposure on the capital markets, we hired professional employees and retained professional consulting firms.

Research and development expense .

We have been involved in the research and development activities for sleep and respiratory products.

In 2011, these research and developing activities moved to the clinical test stage, which increased the associated cost.

Labor expense .

Our labor costs increased as we implemented an employee reward program to incentivize the company personnel.

We expect that our general and administration expenses will increase in the near term.

First, we expect our expenses to increase as our business expands.

Second, we anticipate continued spending in the research and development of sleep and respiratory and other related products.

Third, as a listed company, we will need to continue working closely with our attorneys, our auditor and our investor relationship company in the future.

Operating Expenses—Selling Expense

Our selling expenses primarily consist of salaries and related expenses for personnel engaged in sales, marketing and customer support functions and costs associated with advertising and other marketing activities.

Our selling expenses increased by 43.84% from $0.48 million for the six months ended June 30, 2010 to $0.69 million for the six months ended June 30, 2011, mainly due to an increase in our sales staff to strengthen our distribution network.

We also participated in several medical exhibitions in and outside of China to network with existing and new customers.

Second, we anticipate continued spending in the research and development of sleep, respiratory and other related products.

Third, as a publicly traded company, we will continue to incur professional service fees from our attorneys and our auditor.

Selling Expenses

Our selling expenses consist primarily of salaries and related expenses for personnel engaged in sales, marketing and customer support functions, and costs associated with advertising and marketing activities.

Our selling expenses increased by 31% from $0.83 million for the nine months ended September 30, 2010 to $1.09 million for the same period in 2011, mainly due to an increase in the number of our sales staff to strengthen our distribution network.

We also participated in several international medical exhibitions to network with existing and prospective customers.

Finally, we recruited several professionals in order to better implement our government medical projects as well as our home oxygen therapy business, which resulted in an increase in labor costs.

We expect that our selling expenses in absolute numbers will continue to increase in the near term after our series of new products are introduced in the market.

We expect to promote our new products by different advertising methods, such as participation in domestic and overseas medical exhibitions to show our products to the public and potential purchasers.

Also, among other strategies to expand our business, we plan to open more CECs.

These CECs give our potential customers an opportunity to experience our products first-hand in an environment that is similar to the environment in which they will use the products, whether that is a home or healthcare facility.

We expect to promote our new products through a variety of advertising methods, including participation in domestic and overseas medical exhibitions to showcase our products.

In addition, because our home oxygen therapy business is still in a relatively early stage, we expect to incur initial costs in its marketing and promotion, together with maintenance expenses in relation to our customer experience centers.

Operating Income

As a result of the foregoing, we generated an operating income of approximately $2.22 million in the first half year of 2011, compared to approximately $2.00 million in the same period of 2010.

Operating income increased 10.94%, mainly due to the increase in sales.

Our income tax expense was approximately $0.40 million during the six months of 2011, compared to approximately $0.30 million in the same period of 2010.

Our tax expense increased primarily due to the increase in taxable income.

As a result of the foregoing, we had net income of approximately $1.95 million in the six months of 2011, compared to approximately $1.67 million in the same period of 2010.

After deduction of non-controlling interest in income, net income attributable to Dehaier was approximately $1.94 million and $1.66 million in the first half year of 2011 and 2010, respectively.

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010.

Our total revenues increased by 59.66% from $4.83 million for the three months ended June 30, 2010 to $7.71 million for the three months ended June 30, 2011.

As mentioned before, we have worked on government projects that produced nearly $2.60 million in revenue during the three months ended June 30, 2011.

The increase in revenues was also due to the increased acceptance of our products among hospitals and other healthcare facilities as many of our end users such as hospitals became repeat customers when they needed new medical equipment.

In addition, we maintained good relationship with our clients in the second quarter of 2011 and that contributed to our revenue growth.

Finally, we continued to expand our Customer Experience Centers (CEC) network in China, which helped create greater market presence.

As a result of the foregoing, we generated an operating income of approximately $3.88 million for the nine months ended September 30, 2011, compared to approximately $3.61 million in the same period of 2010.

Operating income increased by 7% mainly due to the increase in sales.

Our income tax expense was approximately $0.67 million during the nine months of 2011, compared to approximately $0.54 million in the same period of 2010.

Our income tax expense increased primarily due to the increase in taxable income.

As a result of the foregoing, we had net income of approximately $3.33 million for the nine months ended September 30, 2011, compared to approximately $3.08 million in the same period of 2010.

After deduction of non-controlling interest in income, net income attributable to the Company was approximately $3.32 million and $3.07 million for the nine months ended September 30, 2011 and 2010, respectively.

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Our total revenues increased by 4% from $5.46 million for the three months ended September 30, 2010 to $5.69 million for the same period in 2011.

This was due to the increased acceptance of our products among hospitals and other healthcare facilities, many of which became our repeat customers.

We maintained good relationship with our clients in the third quarter of 2011, which contributed to our revenue growth.

Cost of Revenues

Our cost of revenues increased 67.33% from $2.91 million for the three months ended June 30, 2010 to $4.87 million for the three months ended June 30, 2011.

The cost of medical components and parts are the major cause for the increase of cost of revenues.

Also, we were selected to participate in several government projects, and these projects purchased products with relatively higher product costs.

Our cost of revenues increased by 2% from $3.2 million for the three months ended September 30, 2010 to $3.27 million for the same period in 2011.

As our revenue from homecare medical products sales increased, the gross profit margin increased slightly over the same period last year.

Operating Expenses

Our operating expenses increased by 58.08% from $0.61 million for the three months ended June 30, 2010 to $0.96 million for the three months ended June 30, 2011.

This increase was due to an increase in general and administrative and selling expenses, for the reasons described below.

Operating Expenses—General and Administrative Expenses

Our general and administration expenses increased by 72.59% from $0.30 million for the three months ended June 30, 2010 to $0.51 million for the three months ended June 30, 2011.

This increase was mainly due to the following factors:

Our operating expenses increased by 11% from $0.71 million for the three months ended September 30, 2010 to $0.79 million for the same period in 2011.

This increase was due to an increase in general and administrative expenses and selling expenses, for the reasons described below.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and related costs for our administrative personnel and management, and expenses associated with our research and development.

Our general and administration expenses increased by 12% from $0.36 million for the three months ended September 30, 2010 to $0.4 million for the same period in 2011.

This increase was mainly due to three factors:

Public company expense .

After listing on NASDAQ market on April 22, 2010, we incurred implementation expenses for Sarbanes-Oxley Section 404 compliance.

In order to improve our visibility and exposure on the capital market, we also hired professional employees and retained professional consulting firms.

Research & Development Expense .

The company has been involved in the research and development activities for sleep and respiratory products.

In 2011, these research and development activities moved to the clinic test stage, which increased R&D expenses.

Labor Expenses .

After listing on the NASDAQ stock market on April 22, 2010, we incurred implementation expenses to comply with Section 404 of Sarbanes-Oxley Act.

In order to improve our visibility and exposure on the capital markets, we also hired professional employees and retained professional consulting firms.

Research and development expense .

We have been involved in the research and development activities for sleep and respiratory products.

In 2011, these research and developing activities moved to the clinical test stage, which increased research and development expenses.

Besides, research and development of the second generation products requires higher expenses in industrial design and testing.

Labor expense .

Our labor costs increased as we implemented an employee reward policy to strengthen our corporate culture.

We expect that our general and administration expenses will increase in the near future.

First, we expect our expenses to increase as our business expands.

Second, we anticipate continued spending in the research and development of sleep and respiratory and other related products.

Third, as a listed company, we will need to continue working closely with our attorneys, our auditor and our investor relationship company in the future.

Operating Expenses—Selling Expense

Our selling expenses increased by 44.4% from $0.31 million for the three months ended June 30, 2010 to $0.45 million for the three months ended June 30, 2011, mainly due to an increase in our sales staff to strengthen our distribution network.

We also participated in several medical exhibitions in and outside of China to network with existing and new customers.

We expect that our general and administration expenses will increase in the near term as a result of our growing business, spending on research and development and expenses related to our continued public listing.

Selling Expense

Our selling expenses primarily consist of salaries and related expenses for personnel engaged in sales, marketing and customer support functions, and costs associated with advertising and marketing activities.

Our selling expenses increased by 14% from $0.35 million for the three months ended September 30, 2010 to $0.4 million for the same period in 2011, mainly due to an increase in the number of our sales staff to strengthen our distribution network.

We also participated in several international medical exhibitions to network with existing and prospective customers.

We expect that our selling expenses in absolute numbers will continue to increase in the near term after our series of new products are introduced in the market.

We expect to promote our new products by different advertising methods, such as participation in domestic and overseas medical exhibitions to show our products to the public and potential purchasers.

Also, among other strategies to expand our business, we plan to open more CECs.

We expect to promote our new products through a variety of advertising methods, including participation in domestic and overseas medical exhibitions to showcase our products.

In addition, because our home oxygen therapy business is still in a relatively early stage, we expect to incur initial costs in its marketing and promotion, together with maintenance fees in relation to our customer experience centers.

Operating Income

As a result of the foregoing, we generated an operating income of approximately $1.93 million in the second quarter of 2011, compared to approximately $1.36 million in the same period of 2010.

Operating income increased 41.97%, mainly due to the increase in sales.

Our income tax expense was approximately $0.31 million during the three months ended June 30, 2011, compared to approximately $0.20 million in the same period of 2010.

Our tax expense increased primarily due to the increase in taxable income.

As a result of the foregoing, we had net income of approximately $1.74 million in the three months ended June 30, 2011, compared to approximately $1.14 million in the same period of 2010.

After deduction of non-controlling interest in income, net income attributable to Dehaier was approximately $1.74 million and $1.14 million in the second quarter of 2011 and 2010, respectively.

As a result of the foregoing, we generated operating income of approximately $1.66 million in the third quarter of 2011, compared to approximately $1.61 million in the same period of 2010.

Operating income increased by 3%, mainly due to the increase in sales.

Our income tax expense was approximately $0.27 million during the three months ended September 30, 2011, compared to approximately $0.25 million in the same period of 2010.

Our income tax expense increased primarily due to the increase in taxable income.

As a result of the foregoing, we had net income of approximately $1.38 million in the three months ended September 30, 2011, compared to approximately $1.41 million in the same period of 2010.

After deduction of non-controlling interest in income, net income attributable to Dehaier was approximately $1.38 million and $1.41 million for the three-month periods ended September 30, 2011 and 2010, respectively.

Liquidity and Capital Resources

Cash Flows and Working Capital

To date, we have financed our operations primarily through cash flows from operations, short-term borrowings and, after completion of our initial public offering, proceeds from that offering.

As of June 30, 2011, we had approximately $3.01 million in cash and cash equivalents.

As a result of the total cash activities, net cash decreased from $5,923,386 on December 31, 2010 to $3,008,023 on June 30, 2011.

We believe that our currently available working capital of $25,101,586, including cash of $3,008,023, should be adequate to meet our anticipated cash needs and sustain our current operations for at least 12 months.

To date, we have financed our operations primarily through cash flows from operations, short-term borrowings, and proceeds from our initial public offering.

As of September 30, 2011, we had approximately $2.6 million in cash and cash equivalents.

As a result of the total cash activities, net cash decreased from $5,923,386 at December 31, 2010 to $2,600,907 at September 30, 2011.

We believe that our currently available working capital of $26,841,099, including cash of $2,600,907, should be adequate to meet our anticipated cash needs and sustain our current operations for at least twelve months.

Operating Activities

Net cash used in operating activities was $3,356,331 for the six months ended June 30, 2011 as compared to $4,622,473 net cash used in operating activities for the same period in 2010.

Net cash used in operating activities was $4,054,851 for the nine months ended September 30, 2011 as compared to $5,696,022 net cash used in operating activities for the same period in 2010.

The reasons for this change are as follows:

Increase of $252,380 in net income .

Our net income increased primarily due to the increase in sales for the six months ended June 30, 2011.

Our net income increased primarily due to the increase in sales for the nine months ended September 30, 2011.

Increase of $3,767,238 in accounts receivable .

The increase of accounts receivable is mainly attributable to our extension of the credit period for our customers with good credit records.

Decrease of $1,906,742 in inventories .

The decrease in inventories is mainly due to better inventory management that sped up the inventory turnover.

Decrease of $1,361,738 in prepayments .

The decrease of prepayments is mainly due to our efforts to shorten the purchase period and decrease the upper limit for each purchase.

Decrease of $1,066,854 in other receivables .

The decrease in other receivables is attributable to the better aging management, which enhanced the collection of other receivables.

Decrease of $933,742 in inventories.

The decrease of inventories is mainly because of better inventory management that speeds up the inventory turnover.

Our prepayment has increased for the past two quarters in 2011 largely because we have signed several large sales contracts, especially a government project.

We have needed to make prepayments to our suppliers to ensure that we are able to timely perform under these contracts.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2011 was $64,660, compared to net cash used in investing activities of $98,258 for the same period of 2010.

Net cash used in investing activities for the nine months ended September 30, 2011 was $98,100, compared to that of $843,317 for the same period of 2010.

The cash used in investing activities was mainly attributable to capital expenditures for the purchase of new equipment.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2011 and 2010 were $9,076 and $9,944,207.

The cash provided by financing activities for the six months ended June 30, 2011 and was attributable to bank loan proceeds and repayment.

The cash proceed provided by financing activities for the six months ended June 30, 2010 was attributable to proceeds from the issuance of common shares in our initial public offering.

Net cash provided by financing activities for the nine months ended September 30, 2011 and 2010 were $9,076 and $9,944,207, respectively.

The cash provided by financing activities for the nine months ended September 30, 2011 was attributable to bank loan proceeds and repayments.

The cash proceeds provided by financing activities for the nine months ended September 30, 2010 was attributable to proceeds from the issuance of common shares in our initial public offering.

Capital Expenditures

We made capital expenditures of approximately $62,302 and $94,397 in the six months ended June 30, 2011 and 2010, respectively, representing 0.58% and 1.26%, of our total revenues, respectively.

Our capital expenditures were mainly used to purchase machines for our R&D projects and our assembly line.

We made capital expenditures of approximately $95,742 and $839,456 in the nine months ended September 30, 2011 and 2010, respectively, representing 0.59% and 6.49% of our total revenues, respectively.

Our capital expenditures are mainly used to purchase machineries for our research and development projects and our assembly line.

The capital expenditures may increase in the near term as our business continues to grow and expand.

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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

Tax Matters Applicable to the Company

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.

BDL and BTL were incorporated in the People’s Republic of China (“PRC”) and are governed by PRC laws.

DHK is subject to Hong Kong profits tax rate.

Our 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.

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

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Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the currently prevailing tax laws and administrative regulations shall, under the regulations of the State Council, gradually become subject to the EIT Law rate over a five-year transition period starting from the date of effectiveness of the EIT Law.

The details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for establishment prior to March 16, 2007, such as our company, were adopted in January 2008.

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.

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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%, as prescribed in the implementation regulations;

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.

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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 periods ended June 30, 2011 and 2010.

The tax rate for BTL is 25% for periods ended June 30, 2011 and 2010.

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

The tax rate for BTL is 25% for periods ended September 30, 2011 and 2010.

PRC Value Added Tax

Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, issued in December 1993, 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.

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

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Basis of Consolidation

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

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We general require 100% prepayment before delivering our products to individual clients.

Our contract terms generally 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 generally 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, our company generally does not require collateral or other security to support accounts receivable.

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.

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Management has determined this write-off policy by reviewing the decrease in likelihood of collection as a function of time and concluded that collectability of accounts receivable after three years was significantly impaired compared with collectability prior to such time.

At June 30, 2011 and December 31, 2010, an allowance for doubtful accounts has been provided based on historical experience and management’s analysis of performance and current aging of accounts receivable.

Based on this analysis, management believes that its historical bad debt rates and long-term accounts receivable (over one year) are relatively low and that, as a result, the allowance for doubtful accounts is adequate.

Fair Value of Financial Instruments

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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 (“IPO”).

ASC Topic 815 became effective for the Company this period when warrants were issued in connection with the Company’s initial public offering (“IPO”).

Such warrants are indexed to the Company’s common shares, which is traded in US dollars.

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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.

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 inventories annually for possible obsolete goods and to determine if any reserves are necessary.

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 disposition.

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.

Revenue Recognition

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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.

(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.

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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.

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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 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.

Quantitative and Qualitative Disclosures about Market Risk.

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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 2. Management’s Discussion and Analysis