Newegg Commerce, Inc. 10-Q

Item 5. Other Information. None. Item 6. Exhibits. The following documents are filed herewith: Exhibit Number Document 3(i).1 Third Amended and Restated Articles of Association of the Registrant (1) 3(ii).1 Third Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (1) 10.1 Form of Share Option Plan (1) 10.2 Translation of lease agreement for Product Center dated September 23, 2008 (1) 10.3 Translation of lease agreement for Principal Executive Office dated December 21, 2009, effective January 1, 2010 (1) 10.4 Distribution agreement with IMD (1) 10.5 Distribution agreement with Heyer (2) 10.6 Translation of form of independent distributor agreement (1) 10.7 Translation of Executive Officer Employment Agreement for Ping Chen (1) 10.8 Translation of Executive Officer Employment Agreement for Weibing Yang (1) 10.9 Translation of Executive Officer Employment Agreement for Aileen Qi (2) 10.10 Translation of Form of Purchase Agreement with Poverty Aid Office (1) 10.11 Translation of Production Agreement with Friend of Health (Chuzhou) Medical Technology Co., Ltd. (1) 10.12 Mortgage Contract between ICBC and BDL (1) 10.13 Indemnification and Guarantee Contract between Ping Chen and BTL (1) 10.14 Description of oral loan contract between BTL and BDL (1) 10.15 Loss Absorption Agreement between BDL, BTL and shareholders of BTL (1) 21.1 Subsidiaries of the Registrant (1) 12 31.1 Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) 31.2 Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) 32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) 99.1 Code of Business Conduct and Ethics (1) 99.2 Audit Committee Charter (3) 101.INS XBRL Instance Document (4) 101.SCH XBRL Taxonomy Extension Schema Document (4) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (4) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (4) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (4) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (4) (1) Incorporated by reference to the registrant’s registration statement on Form S-1, File no. 333-163041, filed on November 12, 2009, as amended. (2) Filed herewith. (3) Incorporated by reference to the registrant’s annual report on Form 10-K, File no. 001-34661, filed on September 30, 2010. (4) Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. 13 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DEHAIER MEDICAL SYSTEMS LIMITED May 9, 2012 By: /s/ Ping Chen Ping Chen Chief Executive Officer (Principal Executive Officer) and Duly Authorized Officer 14 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE INDEX TO FINANCIAL STATEMENTS PAGE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 F-2 Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011 F-3 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 F-4 Notes to the Unaudited Condensed Consolidated Financial Statements F-5 F- 1 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, December 31, 2012 2011 US$ US$ ASSETS CURRENT ASSETS: Cash and cash equivalents 2,299,270 3,694,486 Accounts receivable -less allowance for doubtful accounts of $860,826 and $859,509 12,899,579 12,159,842 Other receivables 4,223,142 2,522,136 Prepayment and other current assets 6,632,088 6,714,001 Inventories, net 4,157,547 5,532,311 Tax receivable 371,283 888,452 Deferred tax asset 118,210 118,030 Total Current Assets 30,701,119 31,629,258 Property and equipment, net 3,240,476 3,348,533 Total Assets 33,941,595 34,977,791 LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term borrowings 1,747,152 1,585,890 Accounts payable 28,386 32,925 Advances from customers 194,197 303,000 Accrued expenses and other current liabilities 322,523 349,158 Taxes payable 548,897 2,042,048 Warranty obligation 335,193 334,680 Total Current Liabilities 3,176,348 4,647,701 OTHER LIABILITIES Warrants liability 295,977 96,469 Total Liabilities 3,472,325 4,744,170 Commitments and Contingency Equity Common shares, $0.002731 par value, 18,307,038 shares authorized, 4,565,000 and 4,560,000 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively 12,467 12,454 Additional paid in capital 13,341,429 13,281,374 Retained earnings 13,067,592 12,941,572 Accumulated other comprehensive income 2,628,283 2,585,488 Total Dehaier Medical Systems Limited shareholders' equity 29,049,771 28,820,888 Non-controlling interest 1,419,499 1,412,733 Total equity 30,469,270 30,233,621 Total liabilities and equity 33,941,595 34,977,791 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 2 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months ended March 31, 2012 2011 US$ US$ Revenue 3,315,931 2,952,706 Costs of revenue (2,074,656 ) (1,955,247 ) Gross profit 1,241,275 997,459 Service income 40,397 84,833 Service expenses (17,460 ) (40,697 ) General and administrative expense (490,713 ) (503,526 ) Selling expense (318,679 ) (239,701 ) Operating Income 454,820 298,368 Financial expenses ( including interest expense of $27,163 and $16,177) (27,649 ) (15,613 ) Change in fair value of warrants liability (199,508 ) 9,526 Income before provision for income tax 227,663 292,281 Provision for income tax (97,048 ) (82,537 ) Net income 130,615 209,744 Non-Controlling interest in income (4,594 ) (4,330 ) Net income attributable to Dehaier Medical Systems Limited 126,021 205,414 Net income 130,615 209,744 Other comprehensive income Foreign currency translation adjustments 42,795 187,280 Comprehensive Income 173,410 397,024 Comprehensive loss (income) attributable to the non-controlling interest (6,766 ) 6,576 Comprehensive income attributable to Dehaier Medical Systems Limited 166,644 403,600 Earnings per share -Basic 0.03 0.05 -Diluted 0.03 0.04 Weighted average number of common shares used in computation -Basic 4,562,611 4,502,667 -Diluted 4,710,528 4,660,167 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 3 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the three months ended March 31, 2012 2011 US$ US$ Cash flows from operating activities Net income 130,615 209,744 Adjustments to reconcile net income to net cash used in operating activities Stock-based compensation expense 60,068 59,300 Depreciation and amortization 118,724 109,373 Change in fair value of warrants liability 199,508 (9,526 ) Increase in accounts receivable (739,737 ) (752,897 ) Decrease (Increase) in prepayments and other current assets 81,913 (2,884,433 ) Decrease (Increase) in other receivables (1,701,006 ) 167,707 Decrease in inventories 1,374,764 484,029 Decrease ( Increase) in tax receivable 517,169 (69,169 ) Increase (Decrease) Increase in accounts payable (4,539 ) 116,617 Decrease (Increase) in advances from customers (108,803 ) 25,248 Increase in accrued expenses and other current liabilities (26,122 ) (17,345 ) (Decrease) Increase in tax payable (1,493,151 ) 447,618 Net cash used in operating activities (1,590,597 ) (2,113,734 ) Cash flows from investing activities Capital expenditures and other additions (5,758 ) (8,274 ) Advances to related parties - (2,358 ) Net cash used in investing activities (5,758 ) (10,632 ) Cash flows from financing activities Proceeds from bank loan 791,315 - Repayment of bank loan (631,428 ) (610,816 ) Net cash provided by (used in) financing activities 159,887 (610,816 ) Effect of exchange rate fluctuations on cash and cash equivalents 41,252 184,469 Net decrease in cash and cash equivalents (1,395,216 ) (2,550,713 ) Cash and cash equivalents at beginning of period 3,694,486 5,923,386 Cash and cash equivalents at end of period 2,299,270 3,372,673 Supplemental cash flow information Income tax paid 775,123 4,583 Interest paid 27,163 16,177 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 4 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Dehaier Medical Systems Limited (“Dehaier”) was incorporated in the British Virgin Islands in 2003 as a limited liability company. Dehaier distributes and provides after-sale services for medical equipment in China mainly through its majority-owned subsidiary Beijing Dehaier Medical Technology Co. Limited (“BDL”) and its affiliate Beijing Dehaier Technology Limited (“BTL”). On October 23, 2003, Dehaier established a wholly-owned subsidiary in Hong Kong, De-haier Medical System (Hong Kong) Limited (“DHK”), DHK was shut down on December 19, 2011 due to a change in business strategy. On November 9, 2011, Dehaier established a wholly-owned subsidiary in the United States, Breathcare LLC (“Breathcare”). Both BDL and BTL were incorporated in the People’s Republic of China (“PRC”). Dehaier, through its subsidiaries and affiliate, distributes branded, proprietary medical equipment, such as sleep apnea machines, ventilator air compressors, and oxygen generators. Standard product registration, product certification and quality management system have been established; ISO13485 industry standard has also already been passed. It also has the distribution rights for a number of international medical equipment suppliers for products including anesthesia equipment, patient monitors, mobile C-arm X-ray machines and other medical equipment accessories. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company for the periods presented. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of operating results expected for the full year or future interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 19, 2012. Basis of Consolidation The condensed 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 bank loans. In exchange, BDL loans money to BTL to finance its operations. BTL’s primary operation is to provide repairs and transportation services to BDL’s customers. Because of these arrangements, BDL is the primary beneficiary of BTL, as the entity that is most closely associated with BTL. Management makes ongoing reassessments of whether BDL is the primary beneficiary of BTL. F- 5 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Consolidation - Continued The carrying amount and classification of BTL’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows: March 31, December 31, 2012 2011 US$ US$ Total current assets 428,679 425,464 Total assets 1,430,128 1,448,432 Total current liabilities 10,629 35,699 Total liabilities 10,629 35,699 The accounts of BTL are consolidated in the accompanying financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10, “Consolidation”. As a VIE, BTL’s revenues are included in the Company’s service income, and its income from operations is consolidated with the Company’s. Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation of the Company’s and BTL’s financial statements. Use of Estimates The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company's condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, 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 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 due. Management has determined that an allowance of $860,826 (RMB5,419,725) and $859,509 (RMB5,419,725) was appropriate at March 31, 2012 and December 31, 2011 respectively. Advances to Suppliers and Advances from Customers The Company, as is the common practice in the PRC, often makes advance payments to suppliers for unassembled parts, or receives advance payments from customers. Advances to suppliers were $3,747,665 and $4,348,847 as of March 31, 2012 and December 31, 2011, respectively, which were included in prepayments and other current assets. Advances from customers were $194,197 and $303,000 as of March 31, 2012 and December 31, 2011, respectively. F- 6 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments The carrying amounts reported in the condensed consolidated financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial instruments. The Company adopted the provisions of ASC topic 815, “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 condensed consolidated statement of income and comprehensive income (see Note 11). 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 condensed consolidated 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. Inventories Inventories are stated at the lower of cost or market and consist of assembled and unassembled parts relating to medical devices. The Company reviews its inventory annually for possible obsolete goods and to determine if any reserves are necessary. The reserve for obsolescence was $51,233 (RMB322,556) and $51,154 (RMB322,556) as of March 31, 2012 and December 31, 2011, respectively, and the provision is included in the operating expenses in the condensed consolidated statements of operations. F- 7 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives: Leasehold improvements Shorter of the useful lives or the lease term Building and land use rights 20-40 years Machinery and equipment 10-15 years Furniture and office equipment 5 years Motor vehicles 5 years 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 value of the asset, is recognized. Management has determined no impairment exists at the balance sheet dates. Revenue Recognition The Company recognizes revenues when all the followings conditions have been satisfied: *Persuasive evidence of an arrangement exists; *Delivery and/or installation has occurred (e.g.,risks and rewards of ownership has passed); *The sales price is fixed or determinable; and, *Collectibility is reasonably assured. All revenues are based on firm customer orders with fixed terms and conditions. Because the products are assembled to the customers’ specification, there is no right of return. The Company does not provide its customers with price protection or cash rebates. For products which include software, the software is an off-the-shelf package and an integral part of the products being delivered. The Company does not provide any significant post-sale customer support services and does not provide customers with upgrades. The software is incidental to the product as a whole. For products that do not require installation, revenues are recognized when the products are delivered. For products that require installation, revenues are recognized when the installation is completed. For all service income, the Company recognizes the revenue upon the completion of the repairs when the equipment has been returned to and accepted by the customers. In the PRC, value added tax (VAT) of 17% of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities. F- 8 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign Currency Translation The accounts of Dehaier, BDL, BTL and DHK are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The accompanying condensed consolidated financial statements are presented in US dollars. Foreign currency transactions are translated into US dollars using fixed exchange rates in effect at the time of the transaction. Generally, foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the condensed consolidated statements of income and comprehensive income. The foreign currency accounts of DHK, BDL and BTL are translated in accordance with ASC 830-10, “Foreign Currency Matters”. Assets and liabilities are translated at current exchange rates quoted by the People’s Bank of China at the balance sheet dates and revenues and expenses are translated at average exchange rates in effect during the periods. Resulting translation adjustments are recorded as other comprehensive income (loss) and accumulated as a separate component of equity Warranty Costs The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company's estimates, the Company may revise its estimated product warranty liability. The term of the product warranty is generally twelve months. The reserve for warranty costs was $335,193 (RMB2,110,361), $334,680 (RMB2,110,361) at March 31, 2012 and December 31, 2011, respectively. Warranty expense for the three months ended March 31, 2012 and 2011 was $8,311 and $29,527, respectively. Earnings per Share The Company follows the provisions of ASC 260-10, “Earnings per Share”. Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the years. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. The average stock price for the year of 2011 did not exceed the exercise price of the outstanding warrants; therefore none of the outstanding warrants were included in the diluted earnings per share. Value Added Tax The Company reports revenues net of PRC’s value added tax for all the periods presented in the condensed consolidated statements of income and comprehensive income. 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. F- 9 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of March 31, 2012, the Company recorded a deferred tax asset for the temporary differences arising from allowance for doubtful accounts and certain accrued expenses. The company believes it can utilize the deferred tax asset to offset future taxable income. Therefore, no valuation allowance has been provided as of March 31, 2012 and December 31, 2011. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties, if any, are included as components of income tax expense and income taxes payable. The Company had filed its 2008 and 2009 Value Added Tax (“VAT”) returns for some of its customers during the year 2011 and three months ended March 31, 2012. All the potential VAT liabilities on these VAT returns occurred in current period were also 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. As of March 31, 2012 and December 31, 2011, the Company did not have a liability for any unrecognized tax benefits. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the three months ended March 31, 2012 and 2011, the Company did not incur any interest or penalties. Income tax returns for the year prior to 2009 are no longer subject to examination by tax authorities. F- 10 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. OTHER RECEIVABLES Other receivables consist of the following: March 31, December 31, 2012 2011 US$ US$ Due from suppliers 1,065,766 350,679 Deposits for ongoing contracts 3,084,327 2,110,942 Employee advances 73,049 60,515 4,223,142 2,522,136 4. PREPAYMENT AND OTHER CURRENT ASSETS Prepayment and other current assets consist of the following: March 31, December 31, 2012 2011 US$ US$ Advances to suppliers 3,747,665 4,348,847 Prepayment for equipment purchase 2,631,507 2,300,415 Other prepaid expenses 252,916 64,739 6,632,088 6,714,001 5. PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following: March 31, December 31, 2012 2011 US$ US$ Buildings 1,351,692 1,349,624 Land use rights 308,769 308,297 Plant and machinery 2,982,319 2,973,593 Automobiles 43,936 43,869 Office and computer equipment 506,205 503,833 5,192,921 5,179,216 Less: Accumulated depreciation and amortization (1,952,445 ) (1,830,683 ) Property and equipment, net 3,240,476 3,348,533 At March 31, 2012 and December 31, 2011, BTL’s building was pledged to a bank as collateral for short-term borrowings of RMB11,000,000 (US$1,747,152) and RMB10,000,000 (US$1,585,890), respectively (see Note 7). Depreciation and amortization expense was $118,724 and $109,373, for the three months ended March 31, 2012 and 2011 , respectively. F- 11 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. PROPERTY AND EQUIPMENT, NET (CONTINUED) Land Use Rights There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights are reported at the purchase price (RMB1,944,000 in 2002). 6. TAX RECEIVABLE Tax receivable consists of the following: March 31, December 31, 2012 2011 US$ US$ Value added tax receivable 371,283 888,452 Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a VAT in accordance with Chinese laws. The standard VAT is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of unassembled medical components of the Company’s product used in contract and production can be used to offset the VAT due on sales of the product. The tax receivable as of March 31, 2012 and December 31, 2011 represents VAT credit on the purchased products. These amounts can be used to offset the VAT due on sales of the finished product. 7. SHORT-TERM BORROWINGS The Company has a line of credit for RMB10,000,000 with a commercial bank in China to finance its working capital. The credit line bears interest at a variable rate and is renewed annually on May 18th. Average interest rates for the three months ended March 31, 2012 and 2011 were 5.78% and 5.84%, respectively. Pursuant to the terms of the agreement, the line of credit is secured by BTL’s building (see note 5) and guaranteed by BDL and an officer of the Company. On June 14, 2011, the bank renewed the Company's credit line that bears interest at a variable rate with payments due on January 20, 2012 and June 14, 2012 for RMB4,000,000 and RMB6,000,000, respectively. On January 19, 2012, RMB 4,000,000 was paid. On February 2, 2012, the Company entered into a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $792,945 (RMB 5,000,000) with floating interest rate which was approximately 8.2% per year, due on January 30, 2013. Pursuant to the terms of the agreement, the line of credit is guaranteed by an officer of the Company. F- 12 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8. NON-CONTROLLING INTEREST Non-controlling interest consists of the following: March 31, December 31, 2012 2011 US$ US$ Original paid-in capital 384,211 384,211 Retained Earnings 749,287 744,693 Accumulated other comprehensive income 286,001 283,829 1,419,499 1,412,733 9. COMMITMENTS AND CONTINGENCY Leases The lease commitments are for office premises and a warehouse facility, all of which are classified as operating leases. These non-cancelable leases have lease terms expiring through December 2012 for one year. Approximate future minimum lease payments under these leases at March 31, 2012, are as follows: Future payment for the twelve months ending March 31, 2013 US$ 2013 36,530 Rent expense for the three months ended March 31, 2012 and 2011 was $21,478 and $17,279, respectively. Employment Contracts Under the PRC labor law, all employees have signed employment contracts with the Company. Management employees have employment contracts with terms up to three years and non-management employees have a one year employment contract renewable on an annual basis. Contingency The Labor Contract Law of the People’s Republic of China, requires employers to assure the liability of the severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The Company has estimated its possible severance payments of approximately $276,000 and $235,000 as of March 31, 2012 and December 31, 2011, respectively, which have not been reflected in its condensed consolidated financial statements, because it is more likely than not that this will not be paid or incurred. F- 13 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. EQUITY Common Shares On March 8, 2011, Dehaier issued 10,000 unregistered common shares to an investment relations firm. The fair value of the shares on the issuance date based on the closing price was $59,300. On November 16, 2011, Dehaier issued 50,000 unregistered common shares to a consulting firm. The fair value of the shares on the issuance date based on the closing price was $84,250. On January 9, 2012, Dehaier issued 5,000 unregistered common shares to an independent contractor. The fair value of the shares on the issuance date based on the closing price was $11,000. Statutory Surplus Reserves A PRC company is required to make appropriations to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“ PRC GAAP ”). Appropriations to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s’ registered capital. The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital. Since Dehaier is a British Virgin Islands’ company, it will not be subject to the statutory surplus reserve provisions. BDL is a joint-venture company and the statutory surplus reserve provisions will be determined by its board of directors. As of March 31, 2012, BDL’s board of directors has not yet made such determination. Therefore, no amount was allocated to the statutory surplus reserve account. BTL appropriated 10% of its net profits as statutory surplus reserve, which is included as part of the non-controlling interest in the equity section. For the three months ended March 31, statutory surplus reserve activity was as follows: For the three months ended March 31, 2012 US$ Balance at December 31, 2011 744,693 Addition to statutory reserves 4,594 Balance at March 31, 2012 749,287 F- 14 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. EQUITY (CONTINUED) Stock Option Plan Under the employee stock option plan, the Company’s stock options expire five years from the date of grant. On December 29, 2011, the Company entered into five-year agreements with its employees and directors. In connection with their services, the Company issued an aggregate of 450,000 options to acquire the Company’s common shares at an exercise price of $1.45 per share. The options vest in equal annually installments over the five years of the agreements. As of December 29, 2011, none of the 450,000 options have been fully vested. The Company valued the stock options using the Black-Scholes model with the following assumptions: Expected Terms (years) Expected Volatility Dividend Yield Risk Free Interest Rate Grant Date Fair Value Employees 5 126 % 0 % 0.83 % 1.45 Directors and officers 5 126 % 0 % 0.83 % 1.45 The following is a summary of the option activity: Stock options Shares Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding as of December 31, 2011 450,000 $ 1.45 Granted - Forfeited - Exercised - Outstanding as of March 31, 2012 450,000 $ 1.45 $ 400,500 Following is a summary of the status of options outstanding and exercisable at March 31, 2012: Outstanding options Exercisable options Average Exercise price Number Average remaining contractual life (years) Average Exercise price Number Average remaining contractual life (years) $ 1.45 450,000 5 $ 1.45 90,000 5 For the three months ended March 31, 2012 and 2011, the Company recognized $27,390 and $0, respectively, as compensation expense under its stock option plan. F- 15 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11. WARRANTS On April 21, 2010, the Company issued to Anderson & Strudwick Incorporated (“A&S”) 150,000 warrants, as a portion of the placement commission for the IPO. On the same day, the Company granted a total of 7,500 warrants to Hawk Associates Inc.(“Hawks”), the Company’s investor relations consultancy. On January 10, 2012, the Company issued 100,000 warrants to Firs Trust Group, Inc., (“Firs Trust”), the Company’s investor relations consultancy. The Company had 257,500 warrants outstanding as of March 31, 2012. All the warrants issued to “A&S” have the right to purchase one share of common stock for an exercise price of $10.00 per share with a term of 5 years. All the warrants granted to Hawks have the right to purchase one share of common stock for an exercise price of $9.60 per share with a term of 5 years. All the warrants granted to Firs Trust have the right to purchase one share of common stock for an exercise price of $4.00 per share with a term of 5 years. The fair values of the outstanding warrants at March 31, 2012 were calculated using the Black Scholes Model with the following assumptions: Market price per share (USD/share) 2.34 Exercise price (USD/share) 4.00 to 10.00 Risk free rate 1.04%, 0.51% Dividend yield - Expected term/Contractual life (years) 3.06 to 4.78 Expected volatility 136.4 % The following table sets forth by level within the fair value hierarchy of our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, respectively. Carrying Value at March, 2012 Fair Value Measurement at March 31, 2012 Level 1 Level 2 Level 3 Warrants liability $ 295,977 $ - $ 295,977 $ - The following is a reconciliation of the beginning and ending balances of warrants liability measured at fair value on a recurring basis using Level 2 inputs: March 31, 2012 December 31, 2011 US$ US$ Beginning balance 96,469 318,109 Warrants issued - - Fair value change of the issued warrants included in earnings 199,508 (221,640 ) Ending balance 295,977 96,469 Following is a summary of the warrants activity: Number Weighted Average Exercise Price Weighted Average Remaining Contractual Life Outstanding as of December 31, 2011 157,500 $ 9.98 3.31 Granted 100,000 Forfeited - Exercised - Outstanding as of March 31, 2012 257,500 $ 7.66 3.73 F- 16 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. INCOME TAXES British Virgin Islands Dehaier is a tax-exempt company incorporated in the British Virgin Islands. BDL and BTL were incorporated in the PRC and are governed by the PRC laws. Hong Kong DHK is subject to Hong Kong profits tax at a rate of 17.5% on its assessable profits. No Hong Kong profits tax has been provided as the Company did not have any taxable profit that was earned in or derived from Hong Kong during the years presented. PRC PRC enterprise income tax is calculated based on the Enterprise Income Tax Law (the “EIT Law”). Under the EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises. Under the current PRC laws, PRC government grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the period of validity for the certification of high technology companies is three years. In 2009, BD L updated its certification for “high technology” company. Therefore, BDL used a 15% income tax rate to calculate the income tax expense for the three months ended March 31, 2012 and 2011. The high technology certification will expire and be renewed in September 2012. The tax rate for BTL is 25% in 2012 and 2011. United States Breathcare is a limited liability company and is not subject to federal income tax. As of March 31, 2012, Breathcare was inactive. F- 17 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 13. CONCENTRATIONS Major Customers For the three months ended March 31, 2012, approximately 27% of the Company’s revenues was received from one customer. For the three months ended March 31, 2011, approximately 18% of the Company’s revenues was received from one customer. At March 31, 2012 and 2011, receivables from four customers were approximately 11%, 9%, 8%, 8% and 12%, 11%, 11%, 10%, respectively. Revenues For the three months ended March 31, 2012 and 2011, the Company’s three top selling products accounted, in the aggregate, for approximately 81% and 90%, respectively, of its total net revenues. The following represents the revenues by product line, all derived from China: For the three months ended March 31, 2012 2011 Product Line US$ US$ Medical Devices 2,924,301 2,743,701 Respiratory and Oxygen Homecare 391,630 209,005 3,315,931 2,952,706 Subsequent Events The Company issued 5,000 shares to an investor relationship consultant on April 5, 2012 pursuant to a consulting agreement signed on January 9, 2012. The fair value of the shares granted on April 5, 2012 was approximately $12,000 based on the closing price on that date. On April 23, 2012, the Company signed a strategic cooperation agreement with Timesco of London Ltd., to be its exclusive distributor in mainland China for Timesco’s entire laryngoscope Optima series of products in the next three years. F- 18