What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2012-03-19 compared with 2011-03-07 · 615 added, 431 removed, 71 unchanged (94% of the section changed)

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Market for Our Common Shares

Our common shares are traded on the NASDAQ Stock Market under the symbol DHRM.

Our common shares are traded on the NASDAQ

Stock Market under the symbol DHRM.

The high and low common stock sales prices per share during the periods indicated were as follows:

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Approximate Number of Holders of Our Common Shares

As of the date of this report there are eight (8) holders of record of our common shares.

This number excludes our common shares

owned by shareholders holding under nominee security position listings.

As of the date of this report there are

eleven (11) holders of record of our common shares.

This number excludes our common shares owned by shareholders holding under

nominee security position listings.

Dividend Policy

We have never declared or paid any cash dividends on our common shares.

We anticipate that we will retain any earnings to support

operations and to finance the growth and development of our business.

We have never declared or paid any cash

dividends on our common shares.

We anticipate that we will retain any earnings to support operations and to finance the growth

and development of our business.

Therefore, we do not expect to pay cash dividends in the foreseeable future.

Any future determination relating to our dividend policy will be made at the discretion of our Board

of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.

(b) The section entitled Use of Proceeds from our registration statement filed

on November 12, 2009, as amended (the Registration Statement) is incorporated herein by reference.

The effective date of the Registration Statement is March 26, 2010, and the Commission file number assigned to the Registration

Statement is 333-163041.

The Registration Statement registered the offering of up to 1,500,000 common shares (the Offering).

As of December 31, 2010, the Company has spent proceeds from the Offering in accordance with the following

Any future determination

relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors,

including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of

Directors may deem relevant.

(b) The section entitled “Use of

Proceeds”

from our registration statement filed on November 12, 2009, as amended (the “Registration Statement”)

is incorporated herein by reference.

The effective date of the Registration Statement is March 26, 2010, and the Commission

file number assigned to the Registration Statement is 333-163041.

The Registration Statement registered the offering of up to 1,500,000

common shares (the “Offering”).

As of December 31, 2011, the Company has spent all of the proceeds from the Offering

in accordance with the following table:

Description of Use

Proposed Expenditure

Proposed Expenditure Amount

Actual Expenditures through

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Working Capital

have not yet completed any acquisitions, our management determined that it was in the best interest of the company to devote IPO proceeds to continue to grow our business.

In particular, we exceeded our anticipated marketing expenditures by $913,309

and our anticipated working capital expenditures by $697,594, in part by participating in several international medical device manufacturer fairs.

To the extent we are able to engage in acquisitions, we will need to rely on a variety of sources of

funding, including but not limited to remaining offering proceeds, operating cash and debt and/or equity financing.

Because we have not yet completed any acquisitions,

our management determined that it was in the best interest of the company to devote IPO proceeds to continue to grow our business.

In particular, we exceeded our anticipated the R&D expenditures by $11,297, our anticipated marketing expenditures by $ 1,337,992

and our anticipated working capital expenditures by $ 770,977 in part by participating in several

international medical device manufacturer fairs.

To the extent we engage in acquisitions in the future, we will need to rely on

a variety of sources of funding, including but not limited to operating cash, and debt and/or equity financing.

Selected Financial Data.

The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains, in addition to historical information, forward-looking statements that involve risks

and uncertainties.

Our actual results could differ materially from those described herein.

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.

products from HEYER (Germany), Welch Allyn (US), IMD (Italy), Timesco (UK), ResMed (Australia) and JMS (Japan).

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.

For the past two fiscal years ended December 31, 2009 and 2010, our total

revenues amounted to approximately $12.37 million and $19.60 million, respectively.

Our revenues are subject to value added tax (VAT), sales returns and trade discounts.

We deduct these amounts from our gross revenues to arrive at our

total revenues.

Our net income attributable to Dehaier for the years ended December 31, 2009 and 2010 was $2.67 million and $4.54 million, respectively.

The Company is not required to provide

the information required by this Item because the Company is a smaller reporting company.

Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

The following discussion contains, in

addition to historical information, forward-looking statements that involve risks and uncertainties.

Our actual results could

differ materially from those described herein.

Company Overview

We are a company in the business of developing

and distributing medical devices.

We have been focusing on developing respiratory and oxygen homecare products in particular since

We distribute products designed and manufactured

by other companies.

We broaden our product portfolio through distribution agreements with international manufacturers, and most

of the products we distribute are imported.

Our distribution offerings are mostly equipment used in the operating room, the intensive

care unit (“ICU”) and the emergency room.

Besides distributing medical devices, we

also design, develop and market our own proprietary products and medical components.

Because we do not run any manufacturing facilities,

we contract some of the medical components to outside manufacturers in China.

Most of our proprietary products require light assembly

by us before distribution.

We sell our products primarily through

distributors, but we also make direct sales to hospitals, clinics, government health bureaus and individual customers.

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

Macro-Economic Factors and Business Trends

In 2009, the Chinese government committed RMB850 billion (US$123 billion) to develop the countrys healthcare system over a

three-year period.

The plan is to create a solid platform for universal healthcare access for all by 2020.

We believe the

prospects for medical device spending in China are substantial.

The government has committed heavily in the construction of thousands of hospitals, healthcare centers, and clinics.

We expect this will lead to increase in spending on capital goods,

including medical devices, equipment and furniture in the near term.

Priority will be given to the construction and

renovation of around 2,000 county-level hospitals, so that each county will have at least one such facility.

County-level hospitals are usually the most well equipped hospitals in the country and must have at least 250 beds.

The central government

will fund the construction of 29,000 township hospitals, and the upgrading of another 5,000, according to the plan.

The government will also fund the construction of village clinics in remote areas so that every village will have at least one unit

by the end of the three-year period.

Since opening its economy to the West in the late 1970s, China has experienced rapid

For 2010, Chinas GDP is estimated at US$5.7 trillion.

While this makes China one of the worlds largest economies, the size of the population means that per capita wealth was around US$4,280 in 2010.

The Chinese government expanded the health insurance program to cover all rural residents by the end of 2008.

Urban health insurance was

already well established, covering nearly all working citizens, and will be extended to cover all urban dwellers, including the unemployed and children who were not covered previously, by 2010.

China imposed lower import tariffs on more than 600 commodities effective January 1, 2010, including medical products and

pharmaceuticals, in a move to honor commitments made when it joined the WTO in 2001.

The government said it hopes the cuts will increase domestic spending on foreign products to boost industrial and rural development.

From an industry perspective,

the lower tariffs should result in lower retail prices and higher spending on foreign medical devices.

Based on the data

shown above and actions taken by Chinese government, we still believe that our company is likely to continue to grow in 2011 because our business is poised to directly benefit from Chinas increasingly enhanced investment in its health care

system as China is exerting more focus and efforts on sustaining the social development and stability.

In 2011, the Chinese Ministry

of Science and Technology announced a medical technology development policy under the “12th Five-Year Plan,”

to transfer business focus to the development of new drugs, medical equipment and advanced traditional Chinese medicine, and

to the development of the emerging industries of biomedicine.

The plan focuses on researching and developing the

medium- and high-level diagnostic and curative medical devices which are in high demand and widely used, actively promoting the

development of cost-effective medical devices for use in primary health care institutions, enhancing the stability and reliability

of medical services and products, and researching and developing supplementary medical equipment which can be easily operated for

family and self healthcare.

Under the 12th Five-Year Plan, China will proactively promote the reform of healthcare infrastructure

system and offer safe, effective, convenient and low-cost medical services to its residents.

According to China’s medical

device industry analysis and forecast report of 2011 released by S&P Consulting, it is estimated that the

entire medical instrument and equipment market in China will double, reaching $53.7 billion by 2015.

compound annual growth rate (“CAGR”) of the Chinese medical device industry is expected to remain at 20% to

30% during this period.

Currently, the output of global medical devices account for 42% of the total

global pharmaceutical market, while in China, medical devices only account for 14% of the total Chinese pharmaceutical

As a result, management anticipates growth in the Chinese pharmaceutical market.

Current medical device purchases by individuals

in China are much lower than they are in Europe and the U.S.

Twenty percent of individual expenditures on home medical care in

China are for medical devices, compared to 50% of such expenditures in Europe and the U.S.

As China’s population continues

to age, management expects rapid increase in demand for medical devices, and, as a result, growth in China’s medical

device industry.

It is the initial stage of rapid growth

of China’s home medical equipment market.

As residents’

living standards and consumption structure

change, the demand for healthcare services and self-care will substantially increase, creating growth

opportunities for participants in the market.

In summary, as a vital component of

China’s current health system reform, the medical device industry has been incorporated into the

national strategic development plan.

In 2012, we anticipate new opportunities, combined with favorable government

policies, will position us for continued growth.

New Opportunities in Our Business

According to Chinas Health Statistics Yearbook 2010, healthcare spending in China totaled $259 billion (5.1% of

total Chinese GDP) in 2009, which lagged behind other developed countries.

We anticipate that the increasing affluence in larger cities is likely to increase awareness of health and wellness, and desire to improve overall quality of life.

For 2010, Espicom estimates medical device market growth to be in the region of 13.6%;

one of the fastest growing markets in

High rates of growth are not uncommon in the Asian region, but on the back of a huge market size, Chinas growth is particularly pronounced.

Also according to Espicom, the medical device market in China is expected to reach $28

billion by 2014, doubled compared with the total sales in 2006.

In addition, the UN estimates that the Chinese population

over the age of 60 will increase from 167 million in 2010 to 440 million in 2050;

hence, the aging population and increasing incidence of respiratory disorders are expected to drive additional growth in respiratory homecare products in the

For 2011, Espicom, a highly regarded market

research company, estimates Chinese medical device market growth to be in the region of 13.1%, one of the fastest growing markets

in the world.

High rates of growth are not uncommon in the Asian region, but on the back of a huge market size, China’s growth

is particularly pronounced.

Also according to Espicom, the medical device market in China is expected to reach $28 billion by 2014,

doubled compared with the total sales in 2006.

Chinese government programs are aimed

at rebuilding and renovating urban health centers, and building hospitals and medical centers in rural areas.

The government is

setting up the goal of having one up-to-standard hospital in every county, one government-run medical center in every township

and one clinic in every administrative village.

Major portion of the domestic large-scale medical equipment procurement is government

centralized procurement.

For example, China Development Bank launched the “Supporting Health Infrastructure in Rural Areas”

Program with a $690 million budget in the three years from 2011 through 2013.

Fortune magazine predicted homecare

medical equipment to be ranked first among the fastest-growing industries in the 21st century.

In western countries with mature

and large health care markets, home medical equipment accounts for 40% of the entire medical device output.

in China because of the limited coverage and level of treatment in the public health systems, residents tend to be more aware of

their health and wellness and to seek treatment at home before resorting to public health systems.

Thus management expects that

homecare medical equipment could become as ubiquitous as home appliances.

In addition, the UN estimates that the

Chinese population over the age of 60 will increase from 167 million in 2010 to 440 million in 2050;

hence, the aging population

and increasing incidence of respiratory disorders are expected to drive additional growth in respiratory homecare products in the

Chinese marketplace.

Chinese government programs are aimed at rebuilding and renovating urban health centers, and building

hospitals and medical centers in rural areas.

The government is setting up the goal of having one up-to-standard hospital in every county, one government-run medical center in every township and one clinic in every administrative village.

Recently, Shanghais government launched medical insurance to subsidize cost of homecare oxygen tanks, and we anticipate

other cities will be pushing for similar legislation.

We will seek to participate if such a program is implemented in Beijing.

Based on the data shown above, both from a market and a government perspective, we are leveraging our broad sales network in order to

introduce additional products from leading international brands into the Chinese market and planning to enlarge our Customer Experience Center (CEC) network penetration across China.

We believe that the favorable market conditions will trigger

tremendous market volume and our market expansion strategy will benefit our business growth in the future.

In 2011, the Shanghai government launched

its medical insurance program to subsidize its citizens on homecare oxygen tanks.

We anticipate Beijing and other cities will be

pushing for similar legislation.

Accordingly, in 2011 we partnered with two other companies to provide homecare oxygen tank services

Based on the data shown above, both from

a market and a government perspective, we are leveraging our broad sales network in order to introduce additional products from

leading international brands into the Chinese market and participating in government healthcare projects.

At the same time, we

will also increase our investment in R&D, continue marketing penetration for our proprietary products, expand coverage for

home oxygen therapy service and focus on broadening international markets.

We believe that the favorable market conditions will

support growth in sales and that our market expansion strategy will benefit our business growth in the future.

Growth Strategy

We will continue building our domestic brand to increase penetration of the medical device market and homecare solution from the key initiatives below:

Expand footprint of Customer Experience Centers (CECs) as a sales and marketing tool for consumers and healthcare professionals

Leverage strong relationships with healthcare professionals to increase awareness of DHRMs homecare products

Build international business through establishment of distribution agreements, OEM partnerships and direct sales force

Diversify base of third party distributed products through expansion of existing relationships and pursuit of new distribution partners

Increase portfolio of DHRM-branded medical devices and homecare products through R&D and potential strategic acquisition

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 our products we distribute.

Medical Devices Our Branded and Distributed

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 business line of products 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.

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.

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.

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:

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 our product portfolio through

continued investment in research and development and pursuing attractive opportunities to acquire complementary companies.

had steady growth in our brand name homecare medical products.

We will expand our distribution channels through tools such as e-commerce

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

the service platform.

We will develop our home oxygen service

business and expand the service platform to dominate the domestic market for this service in China and to implement value-added

business based on this platform.

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

We plan to leverage our existing network of consumer experience centers, or CECs, to showcase our home oxygen service business

in those markets in which we offer home oxygen services.

We will expand our distribution channels

through tools such as 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 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 and other marketing activities.

To the extent

we have adequate demand for our homecare medical products abroad, we will seek regulatory approval to sell these products in the

United States and Europe.

Our total revenues are derived from our

medical devices and our respiratory and oxygen homecare products and services.

Medical Devices (Including Related Supporting Products) –

Our Proprietary and Distributed Products

We derive revenues in our medical devices

product line from the sale of C-arm X-ray systems, anesthesia machines, medical ventilators, general hospital products and related

supporting products.

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

We anticipate

that we will continue to experience revenue growth in our medical devices line as we further develop our market through the introduction

of new advanced product offerings and the participation in favorable government programs.

In addition, we have begun to engage

in state-level healthcare projects recently.

We may procure high-end medical equipment for our clients, which may not necessarily

be part of our existing distributed brands portfolio.

We refer to these kinds of contracted projects as “key account business.”

Although this business may carry lower margins, the contract value for such business is typically larger and can contribute materially

to our revenues.

Respiratory and Oxygen Homecare Products and HOTS

We derive revenues

in our respiratory and oxygen homecare line from sales of oxygen concentrators, CPAP devices, and portable sleep diagnostics devices.

We anticipate that, on a percentage basis, revenues from our respiratory and oxygen homecare product line will increase more rapidly

than total revenues in the near term, as we introduce new and more advanced products.

We expect to develop our market for respiratory

and oxygen homecare market in China and internationally through the use of distributors as well as through our direct sales platform.

In addition, we launched our home oxygen

therapy service (“HOTS”) in Beijing in the third quarter of 2011.

While we strongly believe in the tremendous growth

potential of HOTS business in the coming years, we are still in the early stage of this business.

In 2012, management will focus

on laying a solid foundation, such as the delivery network, rather than generating considerable revenue.

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.

Factors Affecting Our Results of Operations

We believe the most significant factors

that directly or indirectly affect our sales revenues and net income are:

global economic conditions;

the changes in Chinas macro-economic environment and healthcare-related government strategies and policies;

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;

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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 decreased a little as a percentage of our total revenues for the year ended December 31, 2010 compared to the

same period in 2009 primarily due to increased economies of scale and an increase in revenue.

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 both as a percentage of our total revenues and in absolute amount for the year ended December 31, 2011 compared to the

same period in 2010, primarily due to the development of government-related projects, homecare and oxygen therapy clients and international

market development.

Further, our research and development investments and efforts in maintaining capital market relationships contributed

to our operating expenses.

The following table sets forth the components of our costs and expenses both in U.S.

dollar amounts (in thousands) and as a percentage of total net

revenues for the years indicated.

dollar amounts

(in thousands) and as a percentage of total revenues for the years indicated.

For the Year Ended December 31,

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Cost of revenues

General and administrative expense

Selling expense

General and administrative expenses

Selling expenses

Total costs and expenses

Cost of Revenues

Cost of revenues primarily includes wages, parts for assembly, handling charges, and other expenses associated with the assembly and distribution of product.

Cost of revenues primarily includes raw materials,

parts for assembly, wages, handling charges, and other expenses associated with the assembly and distribution of product.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and benefits and related costs for our administrative personnel and management, fees and expenses of our outside advisers, including

legal, audit and valuation expenses, expenses associated with our administrative offices and the depreciation of equipment used for administrative purposes.

We expect that our general and administrative expenses will increase, both on an absolute

basis and as a percentage of revenue, as we hire additional personnel and incur costs related to the anticipated growth of our business.

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

General and administrative expenses consist

primarily of salaries and benefits and related costs for our administrative personnel and management, fees and expenses of our

outside advisers, including legal, audit and valuation expenses, expenses associated with our administrative offices and the depreciation

of equipment used for administrative purposes.

We expect that our general and administrative expenses will increase, both on an

absolute basis and as a percentage of revenue, as we hire additional personnel and incur costs related to the anticipated growth

of our business.

In addition, we expect to continue to incur significant general and administrative expenses as a public company.

Selling Expenses

Selling expenses consist primarily of compensation and benefits for our sales and marketing staff, expenses for promotional, advertising,

travel and entertainment activities, lease payments for our sales offices, and depreciation expenses related to equipment used for sales and marketing activities.

Going forward, we expect our selling expenses to increase, both on an absolute basis

and as a percentage of revenue, as we increase our efforts to promote our products, especially our new respiratory and oxygen homecare products.

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

Our limited operating history makes it difficult to predict future operating results.

We believe that period-to-period comparisons of

operating results should not be relied upon as indicative of future performance.

Fiscal Year Ended December 31, 2010 Compared to

Fiscal Year Ended December 31, 2009.

Our total revenues increased by 58.45% from $12.37 million for the fiscal year ended December 31, 2009 to $19.60 million for the

fiscal year ended December 31, 2010.

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.

We also signed exclusive distribution agreements with HEYER and Welch Allyn, expanding our product lines in 2010 and contributing to our revenue growth.

In addition, we have further expanded our Customer Experience

Centers (CEC) network in China, which help leading to greater market presence in 2010.

We believe that period-to-period comparisons

of operating results should not be relied upon as indicative of future performance.

Fiscal Year Ended December 31, 2011 Compared to Fiscal

Year Ended December 31, 2010.

Our total revenues

increased by 10.41% from $19.60 million for the fiscal year ended December 31, 2010 to $21.64 million for the fiscal year

ended December 31, 2011.

In 2011, we changed our development strategy that not only focused on traditional medical devices

sales but also government procurement projects and the burgeoning r espiratory and oxygen homecare market .

Overall, revenue of traditional medical devices, including centralized government procurement projects, was 89.47% of the total

revenues, while r espiratory and oxygen homecare was 10.53% of revenues in 2011.

In 2010, revenue

of traditional medical devices was 97.75% and r espiratory and oxygen homecare was only 2.25%.

This shift in revenue mix reflects management’s efforts to focus on driving growth in homecare medical devices.

Cost of Revenues

Our cost of revenues increased 59.52% from $7.51 million for the fiscal year ended December 31, 2009 to $11.98

million for the fiscal year ended December 31, 2010.

Our cost of revenues grew in U.S.

dollars as our revenues grew.

Our gross margin decreased slightly because of the increase of labor cost.

Our cost of revenues increased by 14.36%

from $11.98 million for the fiscal year ended December 31, 2010 to $13.70 million for the fiscal year ended December 31,

Our cost of revenues grew in tandem with our revenue growth.

Our gross margin decreased due to the increased cost of the

products and assembly parts we purchased and increased labor cost, which were mainly affected by country-wide inflation in China.

To the extent inflation pressures persist, we could see continued increase in our cost of revenues.

Our gross profit increased from $7.62 million

in the year ended December 31, 2010 to $7.94 million in the same period of 2011, while the gross margin decreased from 38.86% in

2010 to 36.70% in 2011.

We are seeking to address these trends by focusing on higher-margin projects and seeking some lower margin

yet high contract value projects that help stabilize our revenue base.

Operating Expenses

Our operating expenses increased by 49.72% from $1.79 million for the fiscal year ended December 31, 2009 to $2.68 million for the fiscal year ended December 31, 2010.

This increase was due to

increase in general and administrative and selling expenses, for the reasons described below.

ExpensesGeneral and Administrative Expenses

General and administrative expenses consist primarily of salaries

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

Our general and administration expenses increased by 15.60% from $1.09 million for the fiscal year ended December 31, 2009 to $1.26

million for the fiscal year ended December 31, 2010.

This increase was small and mainly because of three reasons.

First, in accordance with our market expansion strategy, we opened new CECs (Customer Experience Centers) in China during 2010,

which require an initial investment before we expect them to generate any revenues.

Second, we incurred implementation expenses for Sarbanes-Oxley Section 404 compliance, as we hired an employee to carry out these functions, which did not apply

to us before our initial public offering.

Third, our labor costs increased as a result of our employee reward policy, which is designed to improve company culture and morale.

We expect that our general and administration expenses will increase in the near future as a result of expansion of business.

We anticipate using a portion of the net proceeds from our initial public

offering to expand our marketing efforts to continue to grow our revenues in China and internationally.

Among other strategies to expand our business, we plan to open more CECs, in order to strengthen our market presence in China.

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.

Operating ExpensesSelling Expense

Our selling expense increased by 102.86% from $0.70 million for the fiscal year ended December 31, 2009 to $1.42 million for the fiscal year ended December 31, 2010.

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 in 2010, mainly due to an increase in our sales staff in further strengthening our

distribution network.

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

We expect that our selling expenses will increase in the next year after new products are introduced in the market.

We tend to promote our new products by different advertising methods, such as to

participate in domestic and overseas medical exhibitions to show our products to the public and potential purchasers.

Our operating expenses increased by 67.91%

from $2.68 million for the fiscal year ended December 31, 2010 to $4.50 million for the fiscal year ended December 31, 2011.

expenses increased more quickly than revenues, largely due to the increase in general and administrative and selling expenses,

which include higher expenses in relation to government projects and the research and development.

Operating Expenses—General and Administrative

General and administrative expenses consist

primarily of salaries and benefits and related costs for our administrative personnel and management, and expenses associated with

our research and development, registration of patent and intellectual property rights in China and abroad.

and administration expenses increased by 107.93% from $1.26 million for the fiscal year ended December 31, 2010 to $2.62 million

for the fiscal year ended December 31, 2011.

This increase was mainly due to:

Provision for Doubtful Accounts .

Provision for doubtful accounts was approximately $0.75 million for the year

ended December 31, 2011, an increase of approximately $0.77 million, compared to a recovery of doubtful accounts of

approximately $0.018 million for the

December 31, 2010.

We have experienced delays in

payments from our distributors.

Due to increasing competition, the

distributors experienced a deterioration of the operating environment and were under pressure to repay its debts incurred

during the years of expansion.

We expect longer collection periods on accounts receivable and higher probability of

uncollectable accounts receivable, and therefore have changed the accounting estimate on allowance for doubtful accounts.

Our collection policy treats account receivables older

than one year as past due.

As a result, our provision for doubtful

accounts increased.

To address this issue, we have engaged accounts collection personnel to seek prompt payment from

customers to increase the likelihood that our internal payment periods are met.

Research and Development Expense .

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

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

Management expects these expenses to continue to increase in the coming year as our development moves through the clinical

test stage to production and as we move to secure intellectual property rights in our products.

Further, we plan to start new research

and developing projects for our homecare medical devices.

Research and development expenses were $0.27 million and $0.08 million

for the years ended December 31, 2011 and 2010, respectively.

Public Company Expense .

After listing on the NASDAQ Capital Market on April 22, 2010, we hired employees and engaged

experienced consulting firms to improve our visibility and exposure on the capital market.

We expect that our general and administration

expenses will increase in the near future as a result of business expansion and public company compliance in the U.S.

Operating Expenses - Selling Expenses

Our selling expenses increased by 32.39%

from $1.42 million for the fiscal year ended December 31, 2010 to $1.88 million for the fiscal year ended December 31,

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 other marketing activities.

Our selling expenses increased in 2011 mainly because we have invested in strengthening

our distribution network, relationship with government and other customers, and development of the homecare device market (in particular

our oxygen therapy service initiative).

We expect our selling expenses will continue to grow as we drive top-line growth in these

Operating Income

As a result of the foregoing, we generated an operating income of approximately $5.13 million in 2010, compared to approximately $3.35 million in 2009.

Operating income increased 53.13% largely due to the

increase of revenue.

Our income tax expense was approximately $0.85 million in 2010, compared to approximately $0.53 million in 2009.

Our taxable income increased primarily due to the increase in net income.

As a result of the foregoing, we had net income of approximately $4.56 million in 2010, compared to approximately $2.73 million in 2009.

After deduction of non-controlling interest in income, net income

attributable to Dehaier was approximately $4.54 million and $2.67 million in 2010 and 2009, respectively.

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

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

The shares were required to remain in escrow until the Company files its Form 10-K with the Securities and

Exchange Commission for the year ended December 31, 2010.

The shares in escrow (Make-Good Shares) were 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 $0.80, the Company would have been required to redeem, pro rata, such shares in order to cause the effective earnings per share to equal $0.80.

For the year ended December 31, 2010, however, the earnings per share of the company was

$1.09, or approximately 36% higher than the per share price upon which the Companys initial public offering valuation was based.

Thus, the Company does not need to redeem or prorate such shares.

The shares will be returned to the founders 45

days after the filing of this Form 10-K.

These shares are included as part of the calculation of the basic and diluted earnings per share for all the periods presented in the accompanying consolidated financial statements.

As a result of the foregoing, we generated

an operating income of approximately $3.61 million in 2011, compared to approximately $5.13 million in 2010.

Operating income decreased

by 29.57% largely due to the increase in operating expenses.

Our income tax expense was approximately

$0.66 million in 2011, compared to approximately $0.85 million in 2010.

Our taxable income decreased primarily due to the decrease

in net income.

As a result of the foregoing, we had net

income of approximately $3.13 million in 2011, compared to approximately $4.56 million in 2010.

After deduction of non-controlling

interest in income, net income attributable to Dehaier was approximately $3.10 million and $4.54 million in 2011 and 2010, respectively.

Make-Good Escrow

On March 22, 2010, our founders placed an

aggregate of 600,000 common shares into escrow.

Such shares equaled 40% of the maximum number of shares that were sold in the initial

public offering (“IPO”).

The shares remained in escrow until we filed our Form 10-K with the Securities and Exchange

Commission for the year ended December 31, 2010.

The shares in escrow (Make-Good Shares) were accounted for as an element in the

IPO and we did not recognize any compensation expense upon the return of such Make-Good Shares to the holders.

To the extent our earnings per share for

the year ended December 31, 2010 were less than $0.80, we would have redeemed the make good shares, pro rata.

At December 31, 2010,

our earnings per share were $1.09.

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

The shares were returned to our

founders on May 5, 2011 and are included as part of the calculation of the basic and diluted earnings per share in the accompanying

consolidated financial statements.

Liquidity and Capital Resources

Cash Flows and Working Capital

In 2009, we financed our operations

primarily through cash flows from operations.

In 2010, we financed our operations primarily from proceeds of common stock issuances.

As of December 31, 2010, we had approximately $5.92 million in cash and cash equivalents.

As a result of the

total cash activities, net cash increased from $1,151,721 at December 31, 2009 to $5,923,386 at December 31, 2010.

We believe that our currently available working capital of $22,618,735, including cash of $5,923,386, should be adequate to

meet our anticipated cash needs and sustain our current operations for at least 12 months.

In 2010, we financed our operations primarily

from proceeds of common stock issuances.

In 2011, we mainly used the cash proceeds from our IPO and from our operations.

December 31, 2011, we had approximately $3.69 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 $3,694,486 at December 31, 2011.

We believe that our currently

available working capital of $26,981,557, including cash of $3,694,486, should be adequate to meet our anticipated cash needs and

sustain our current operations for at least 12 months.

To the extent we engage in acquisitions in the future, we will need to rely

on a variety of sources of funding, including but not limited to operating cash and debt/equity financings.

Operating Activities

Net cash used in operating activities was $4,977,955 for the year ended December 31, 2010 as compared to $1,789,967 net cash provided

in operating activities for the same period in 2009.

Cash flow due to increase of $1,829,219 in net income .

Our net income increased primarily because of a growth in sales volume in 2010.

Cash outflow due to increase of $3,609,438 in prepayment .

The increase in prepayment is attributable to signing some large new sales contracts in fourth quarter

of 2010, which required us to order and pay for products in advance.

Cash outflow due to increase of $1,665,312 in other receivables .

The increase in other receivable is mainly caused by our contract bidding deposits and guaranty.

As we begin to expand our business and our product lines, we need to pay a portion of the contract amounts to our customers as bidding deposits or guaranty, and our customers will return these deposits to us, generally in 3-6 months.

Cash outflow due to increase of $4,042,481 in inventories .

The increase in inventories is attributable to the following two reasons:

1) We increased inventory on

hand to meet anticipated sales needs.

2) As we signed some exclusive distribution agreements with HEYER, and Welch Allyn to expand our product line in third quarter of 2010, we had to stock our inventories with these manufacturers products.

Net cash used in operating activities was

$3,161,752 for the year ended December 31, 2011 as compared to $4,977,955 for the same period in 2010.

(i) Cash flow due to decrease of $1,435,560 in net income .

Our net income decreased primarily because of the increase of

operating costs and expenses in 2011.

(ii) Cash outflow due to decrease of $2,196,262 in prepayment .

The decrease in prepayment is attributable to the change to

our cooperating strategy with our suppliers.

(iii) Cash outflow due to decrease of $2,307,599 in other receivables .

The decrease in other receivables is mainly because

we collected refundable deposits from suppliers.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2010 was $878,702, compared to net cash used in investing activities of $914,527 for the year ended December 31, 2009.

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

Net cash used in investing activities for

the year ended December 31, 2011 was $155,419, compared to $878,702 for the same period of 2010.

The cash used in investing

activities in each year was mainly attributable to capital expenditures for the purchase of new equipment.

Financing Activities

Net cash provided by financing activities for the year 2010 and 2009 was $9,944,207 and $0, respectively.

The cash provided by financing activities for year ended December 31, 2010 was due to net

proceeds from our IPO.

We received $1.5 million in proceeds from

a short-term bank loan in 2011, which was fully paid during the year.

The cash provided by financing activities for the year ended

December 31, 2010 was due to the net proceeds from our IPO.

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations as of December 31, 2010:

Contractual obligations

The following table sets forth our contractual

obligations as of December 31, 2011:

Payments due by period

Contractual obligations

Less than 1 year

More than 3 years

Operating Lease Obligations

Short-term borrowings

The leased properties

are principally located in the PRC, and we use such properties for administration and warehouse facilities.

The leased properties are principally located

in the PRC, and we use such properties for administration and warehouse facilities.

The leases are renewable subject to negotiation.

Short-term borrowings represent short-term loans from a bank which is due in June 2011.

Short-term borrowings represent short-term

loans from a bank, which is due in June 2012.

Capital Expenditures

We made capital expenditures of approximately

$0.89 million and $0.92 million in 2010 and 2009, respectively, representing 4.54%, 7.44%, of our total revenues, respectively.

In the past, our capital expenditures were used to purchase machines for our assembly line.

Our capital expenditures may

increase in the near term as our business continues to grow and as we expand and improve our financial and accounting systems and infrastructure.

$0.15 million and $0.89 million in 2011 and 2010, respectively, representing 0.69% and 4.54% of our total revenues, respectively.

Our capital expenditures were used to purchase machinery for our assembly line.

Off-Balance Sheet Commitments and Arrangements

We have not entered

into any financial guarantees or other commitments to guarantee the payment obligations of any third parties.

We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders equity or that are

not reflected in our consolidated financial statements.

Furthermore, we do not have

any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

We do not have any variable interest

in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

We have not entered into any financial guarantees

or other commitments to guarantee the payment obligations of any third parties.

We have not entered into any derivative contracts

that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial

Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that

serves as credit, liquidity or market risk support to such entity.

We do not have any variable interest in any unconsolidated entity

that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development

services with us.

Tax Matters Applicable to Our Company

Dehaier is a tax-exempt company incorporated in the

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 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.

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.

British Virgin Islands Tax

We are exempt from all provisions of the Income Tax Act of the British Virgin Islands, including with respect to all dividends, interests, rents, royalties, compensation and other amounts payable by or to

persons who are not resident in the British Virgin Islands.

Capital gains realized with respect to any of our shares, debt obligations or other securities by persons who are not resident in the British Virgin Islands are also exempt from all

provisions of the Income Tax Act of the British Virgin Islands.

No estate, inheritance tax succession or gift tax rate, duty, levy or other charge is payable by persons who are not resident in the British Virgin Islands with respect to any of our

shares, debt obligations, or other securities.

No stamp duty is payable in the British Virgin Islands in relation to a transfer of shares in a British Virgin Islands Business Company.

We are exempt from all provisions of the

Income Tax Act of the British Virgin Islands, including with respect to all dividends, interests, rents, royalties, compensation

and other amounts payable by or to persons who are not resident in the British Virgin Islands.

Capital gains realized with respect

to any of our shares, debt obligations or other securities by persons who are not resident in the British Virgin Islands are also

exempt from all provisions of the Income Tax Act of the British Virgin Islands.

No estate, inheritance tax succession or gift tax

rate, duty, levy or other charge is payable by persons who are not resident in the British Virgin Islands with respect to any of

our shares, debt obligations, or other securities.

No stamp duty is payable in the British Virgin Islands in relation to a transfer

of shares in a British Virgin Islands Business Company.

PRC Enterprise Income Taxes

PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles.

In accordance with the Enterprise Income Tax Law (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.

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.

If the PRC tax authorities subsequently determine that we or

any of our non-PRC subsidiaries should be classified as a PRC resident enterprise, then such entitys global income will be subject to PRC income tax at a tax rate of 25%.

In addition, under the EIT Law, payments from BDL to us may be subject

to a withholding tax.

PRC enterprise income tax is calculated based

on taxable income determined under PRC accounting principles.

In accordance with the Enterprise Income Tax Law (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.

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

Furthermore, under the EIT Law, an enterprise

established outside of the PRC with “de facto management bodies”

within the PRC is considered a resident enterprise

and will normally be subject to the enterprise income tax at the rate of 25% on its global income.

If the PRC tax authorities subsequently

determine that we or any of our non-PRC subsidiaries should be classified as a PRC resident enterprise, then such entity’s

global income will be subject to PRC income tax at a tax rate of 25%.

In addition, under the EIT Law, payments from BDL to us may

be subject to a withholding tax.

The EIT Law currently provides for a withholding tax rate of 20%.

If Dehaier is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 10% on any dividends paid by its Chinese

subsidiaries to Dehaier.

In practice, the tax authorities typically impose the withholding tax rate of 10% rate, as prescribed in the implementation regulations;

however, there can be no guarantee that this practice will continue as more guidance is

provided by relevant government authorities.

We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact.

The State Council issued the Notice on Implementation of the Transition Period for Preferential Enterprise Income Tax, or the

Transition Implementation Notice, on December 26, 2007, which provides detailed rules on how preferential tax rates under previous income tax laws or regulations would transition to the uniform 25% EIT rate.

In addition, entities

that qualify as high and new technology enterprises will enjoy a 15% preferential tax rate under the EIT Law.

The Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation issued the

Measures on Qualification of High and New Technology Enterprises, or Circular 172, on April 14, 2008, which provides detailed standards for high and new technology enterprises. In addition, according

to the Notice on Prepayment of Enterprise Income Tax issued by the State Administration of Taxation, enterprises that have been certified as high and new technology enterprises shall

pre-pay EIT at the rate of 25% temporarily until re-certified as high and new technology enterprises under Circular 172.

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 periods ended

December 31, 2010 and 2009.

The tax rate for BTL is 25% in 2009 and 2010.

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

In practice, the tax authorities typically impose the withholding tax rate of 10% rate, as prescribed in the implementation

however, there can be no guarantee that this practice will continue as more guidance is provided by relevant government

We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize

the corresponding tax impact.

Under the current PRC laws, PRC government

grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the

period of validity for the certification of high technology companies is three years.

In 2009, BDL renewed its certification for

“high technology”

company, and qualified for the 15% income tax rate to calculate the income tax expense for the periods

ended December 31, 2011 and 2010.

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

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

Pursuant to the Provisional Regulation of

China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the businesses of sales of

goods, provision of repair and placement services and importation of goods into China are generally subject to a VAT at a rate

of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross sales proceeds received, less any

VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in the production of goods or provisions

of services that have generated the gross sales proceeds.

PRC Business Tax

Companies in China are generally subject to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20% on revenue generated from providing services and revenue

generated from the transfer of intangibles.

Companies in China are generally subject

to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20% on revenue generated from

providing services and revenue generated from the transfer of intangibles.

United States Tax

As of December 31, 2011, Breathcare LLC was

Treated as a pass-through entity under the Internal Revenue Code, Breathcare LLC does not pay U.S.

federal income tax

at the entity level.

Critical Accounting Policies

Basis of Consolidation

The 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.

In exchange, BDL loans

money to BTL to finance its operations.

BTLs primary operation is to provide repairs and transportation services to BDLs customers.

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

associated with BTL.

Dehaier has included BTL in its 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.

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 noncontrolling 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.

On October 31, 2009, BDL reconsidered whether it was the primary beneficiary of BTL when Dehaiers preferred stock was

converted into common shares.

While such conversion dilutes the Chief Executive Officers 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

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 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 BTLs losses.

The accounts of BTL are consolidated in the accompanying financial statements pursuant to Accounting Standards Codification

(ASC) 810-10, Consolidation.

As a VIE, BTLs revenues are included in the Companys

service income, and its income from operations is consolidated with the Companys.

Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation of the

Companys and BTLs financial statements.

The consolidated financial statements include

the accounts of Dehaier, and its majority-owned and wholly-owned subsidiaries (collectively, the “Company”).

All significant

inter-company transactions and balances are eliminated in consolidation.

A group of shareholders, including the Chief

Executive Officer, originally held more than 50% of the voting ownership interest of Dehaier, BDL and BTL.

BTL is a variable interest

entity (“VIE”), and BDL is the primary beneficiary.

BTL owns a building which is pledged as collateral for BDL’s

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.

Dehaier has included BTL in its 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.

Because the Chief Executive Officer held more than

50% of the voting ownership interest of each of Dehaier, BDL and BTL 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.

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

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.

Use of Estimates

The preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting

Estimates are adjusted to reflect actual experience when necessary.

Significant accounting estimates reflected in the Companys consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory

obsolescence, warranty obligation, warrants liability and useful lives of property and equipment.

The preparation

of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts

of assets and liabilities and disclosure of contingent assets and liabilities at the dates of

the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

are adjusted to reflect actual experience when necessary.

Significant accounting estimates reflected in the Company’s consolidated

financial statements include revenue recognition, allowance for doubtful accounts, warranty obligation, warrants liability, stock-based

compensation and useful lives of property and equipment.

Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are recorded at net

realizable value.

Accounts receivable terms typically are 60-180 days from the end of the month in which services are provided or goods are delivered.

Our typical trade receivable terms vary based on the type of customer.

We general require 100%

prepayment before delivering our products to individual clients.

Our contract terms general require 10%-30% prepayment for our hospital and healthcare center clients, and the trade receivable term in contracts for those clients is generally between

60 and 90 days.

Our contract terms general require 10% prepayment from our distributor clients, and the trade receivable term in contracts for those clients is generally between 60 and 180 days.

With the exception of the prepayments we require in

some cases, our 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 collectability of

specific accounts.

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

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.

Accounts receivable are recorded at net realizable

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.

Prior to 2011, receivables were considered past due after 3 years.

In 2011, after assessing the distributors’

economic factors and Company’s historic experience, management decided that receivables over 1 year will be considered past

Fair Value of Financial Instruments

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

The Company follows the provisions of ASC 820-10, Fair Value Measurements and Disclosures, which establishes a

single authoritative definition of fair value and a framework for measuring fair value and expands disclosure of fair value measurements for both financial and nonfinancial assets and liabilities.

This standard defines fair value, provides guidance

for measuring fair value and requires certain disclosures.

This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value

of future income or cash flows) and the cost approach (cost to replace the service capacity of an asset or replacement cost).

For purposes of ASC 820-10-15, nonfinancial assets and nonfinancial liabilities would include all assets and liabilities

other than those meeting the definition of a financial asset or financial liability as defined in ASC 820-10-15-15-1A.

Company adopted the provisions of ASC Topic 815 (formerly Emerging Issue Task Force 07-5), Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entitys Own Stock.

ASC Topic 815 provides a framework for

determining whether an instrument is indexed to an entitys own stock.

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

warrants are indexed to the Companys common shares, which is traded in US dollars.

Since the Companys functional currency is the RMB, such warrants are considered liabilities.

The fair value of the warrant liabilities is measured each

reporting period with the resulting change in fair value recorded in the statement of operations.

The carrying amounts reported in the consolidated

financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial

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 consolidated statement of income

and comprehensive income.

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 3 inputs to the valuation

methodology are unobservable and significant to the fair value measurement.

Warrants liabilities qualify as financial instruments,

and are carried on the balance sheet at its fair value.

Financial assets and liabilities are classified

in their entirety based on the lowest level of input that is significant to the fair value measurement.

The fair value of

the warrants was determined using the Black Scholes Model, with level 2 inputs, and the change is recorded in earnings.

increased in 2011 and decreased in 2010 due to the change in fair value of these warrants.

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.

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 value of the asset, is recognized.

Revenue Recognition

The Company recognizes revenues when all the followings conditions have been satisfied:

Persuasive evidence an arrangement exists;

Delivery and/or installation has occurred (e.g., risks and rewards of ownership have passed);

The sales price is fixed or determinable;

Collectability is reasonably assured.

All revenues are based on firm customer orders with fixed terms and conditions.

Because the products are assembled to the customers specification, there is no right of return.

The Company does not

provide its customers with price protection or cash rebates.

For products which include software, the software is an off-the-shelf package and an integral part of the products being delivered.

The Company does not provide any significant post-sale

customer support services and does not provide customers with upgrades.

The software is incidental to the product as a whole.

The Company recognizes revenues when all

the followings conditions have been satisfied:

evidence of an arrangement exists;

and/or installation has occurred (e.g., risks and rewards of ownership has passed);

sales price is fixed or determinable;

Collectibility

is reasonably assured.

All revenues are based on firm customer orders

with fixed terms and conditions.

Because the products are assembled to the customers’

specification, there is no right of

The Company does not provide its customers with price protection or cash rebates.

For products which include software,

the software is an off-the-shelf package and an integral part of the products being delivered.

The Company does not provide any

significant post-sale customer support services and does not provide customers with upgrades.

The software is incidental to the

product as a whole.

For products that do not require installation, revenues are recognized when the products are delivered.

For products that

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

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.

The Companys 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 Companys estimates, the Company may be required to revise its estimated product warranty liability.

The term of the product warranty is generally twelve months.

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:

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

The Company uses the asset and liability

method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.”

Under this method,

income tax expense is recognized for the amount of:

(i) taxes payable or refundable for the current year;

and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entitys financial statements or tax returns.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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.

740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return.

Under ASC 740-10, a tax benefit from an uncertain tax position taken or

expected to be taken may be recognized only if it is more likely than not that the position is sustainable upon examination, based on its technical merits.

The tax benefit of a qualifying position under ASC 740-10 would equal the largest

amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all the relevant information.

A liability (including interest and penalties, if applicable) is

established in the financial statements to the extent a current benefit has been recognized on a tax return for matters that are considered contingent upon the outcome of an uncertain tax position.

Related interest and penalties, if any, are

included as components of income tax expense and income taxes payable.

The Company is awaiting resolution of certain complex tax issues and has not yet filed its 2008 and 2009 Value Added Tax (VAT) tax returns for some of its customers.

However, all the potential VAT liabilities on these VAT returns were accrued and included in the accompanying consolidated financial statements.

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 December 31, 2010 and 2009, 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.

Quantitative and Qualitative Disclosures about Market Risk.

The Company is not required to provide the information

required by this Item because the Company is a smaller reporting company.

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 December 31, 2011, the

Company recorded deferred tax assets for the temporary differences arising from allowance for doubtful accounts and certain accrued

We believe we can utilize this deferred tax benefit to offset future taxable income and have not provided a valuation

allowance against our deferred tax asset.

This deferred tax benefit increased our net income in 2011 by approximately $118,000.

ASC 740-10 prescribes a recognition threshold

and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return.

Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more

likely than not”

that the position is sustainable upon examination, based on its technical merits.

The tax benefit of a qualifying

position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon

ultimate settlement with a taxing authority having full knowledge of all the relevant information.

A liability (including interest

and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on

a tax return for matters that are considered contingent upon the outcome of an uncertain tax position.

Related interest and penalties,

if any, are included as components of income tax expense and income taxes payable.

The Company is awaiting resolution of certain

complex tax issues and has not yet filed its 2008 and 2009 Value Added Tax (“VAT”) returns for some of its customers.

However, all the potential VAT liabilities on these VAT returns were accrued and included in the accompanying consolidated financial

The implementation of ASC 740-10 resulted

in no material liability for unrecognized tax benefits.

As of December 31, 2011 and 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 the years ended December 31, 2011 and 2010, the Company did not incur

any interest or penalties.

Stock-Based Compensation

The Company follows the provisions of ASC

718-10, “Compensation-Stock Compensation.”

The Company has a share incentive plan which authorizes the issuance of

up to 10% of the number of shares outstanding.

Pursuant to the plan, the Company may issue options to purchase its common shares

to employees and directors of the Company and its affiliates.

The Company fair values share-based awards granted under the plan.

Accordingly, compensation is measured on the grant date using appropriate valuation models.

Quantitative and Qualitative Disclosures

about Market Risk.

The Company is not required to provide

the information required by this Item because the Company is a smaller reporting company.

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-K

Item 5. Market for Registrant’s Common Equity