What changed in this filing

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Item 1. Financial Statements

2012-08-13 compared with 2012-05-09 · 342 added, 249 removed, 278 unchanged (68% of the section changed)

Financial Statements.

See the financial statements following

the signature page of this report, which are incorporated herein by reference.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations.

See the financial statements following the

signature page of this report, which are incorporated herein by reference.

Management’s

Discussion and Analysis of Financial Condition

and Results of Operations

The following discussion and analysis

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and distributing medical devices.

We have been focusing on developing the respiratory and oxygen homecare business in particular

We have been focusing on the respiratory and oxygen homecare industry in particular since 2006.

We design, develop and market our own branded

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Business Development

In January 2012, we received Conformité

Européenne (CE) certification for our sleep diagnostic devices and air compressors.

The CE mark recognizes that the two

products meet European Union (EU) health and safety standards and are approved for sale in the 27 member states of the EU and

in the four members of the European Free Trade Association (EFTA).

In March2012, we won a new bid to implement

a government procurement project to provide imaging equipment for township hospitals in Xi’an, Shaanxi, China.

Also in March2012, we obtained two software

copyrights for our CPAP devices.

The addition of these copyrights to our intellectual property portfolio reflects progress in our

ongoing research and development efforts into the new generation of homecare CPAP devices.

In April 2012, we renewed our strategic

cooperation agreement with Timesco of London Ltd.

The agreement appoints us as the exclusive distributor for Timesco’s CXL

and Eclipse series laryngoscope products in mainland China for three years.

In May 2012, we extended our exclusive distribution

authorization with INTERMEDICAL (“IMD”), to distribute its RADIUS C-arm X-ray machines in mainland China.

term runs through 2014.

In June 2012, we entered a three-year strategic

mutual cooperation agreement with HEYER Medical AG (“Heyer”).

According to this agreement, we will continue to be

one of the key Chinese distributors for Heyer’s anesthesia machines and the exclusive distributor of its nebulizers in China.

Also in June 2012, we co-developed a “High-Efficiency

Oxygen Inhaler”

Ding Jianzhang of Beijing Haidian Hospital.

This inhaler is expected to begin selling in mainland

China in the third quarter of 2012.

The portable device is designed for use in homecare oxygen therapy, emergency treatment, disaster

relief activities and high-altitude settings.

In July 2012, we received approval from

China’s State Food and Drug Administration (“SFDA”) for our proprietary homecare medical CPAP device, the DHR-CPAP-C5.

The certificate is valid until July 1,2016 (subject to renewal) and allows us to sell the product in mainland China.

Also between April and June 2012 we obtained

software copyrights from China’s National Copyright Administration for four of our proprietary technologies, including (1)

Analysis and Monitoring Software of Adsorption Tower Oxygen Generation Process, (2) Dehaier Homecare CPAP Controlling Software,

(3) Ventilator of CPAP Controlling Software and (4) Air Compressor Controlling Software.

These copyrights have been approved for

50 years from the grant date.

Growth Strategies

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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 plan to broaden our portfolio of products

distributors, maintaining and expanding our customer base, and promoting steady business growth.

We plan to broaden the portfolio of products

we distribute for other companies by cooperating with more internationally recognized medical equipment manufacturers.

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We plan to expand our product portfolio

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

through continued investment in research and development and pursuing attractive opportunities to acquire complementary products

and technologies.

We have had steady growth in our brand name homecare medical products.

We will expand our distribution channels through many new

options, such as third party e-commerce platforms and chain drug stores.

We plan to create more cross-selling opportunities for

our homecare products while providing oxygen delivery through the service platform.

We have started and intend to continue

developing our home oxygen service business in Beijing and eventually expand this service platform to all major markets in China.

We also plan to offer more value-added services to our customers based on this platform.

We will expand our distribution channels

through many new options, such as third party e-commerce platforms and retail drugstore chains.

We plan to leverage our oxygen

delivery service platform to introduce our homecare products to customers, generating potential cross-selling opportunities.

We have started and intend to continue developing

our home oxygen service business in Beijing and eventually expand this service platform to all major markets in China.

plan to offer more value-added services to our customers based on this platform.

Our long-term goal is to provide our customers

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Furthermore, we will continue to leverage our existing network of consumer

experience centers, or CECs, to showcase our new products as well as service, such as home oxygen service.

experience centers, or CECs, to showcase our new products and services, such as our home oxygen services.

We will continue to expand into overseas

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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 continue seeking regulatory approval to

sell these products in the United States and Europe.

We will build our brand name by actively participating in international trade shows and other marketing

To the extent we have adequate demand for our homecare medical products abroad, we will continue seeking regulatory

approval to sell these products in the United States and Europe.

Results of Operations

For the three months ended March 31, 2012

and 2011, our total revenues amounted to approximately $3.32 million and $2.95 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 three months ended March 31, 2012 and 2011 was approximately

$0.13 million and $0.21 million, respectively.

Such decrease in net income was mainly due to the increase in non-cash change in

fair value of warrants liability in Q1 of 2012.

Excluding the effects of non-cash change in fair value of warrants liability (which

resulted in a loss of $199,508 and a gain of $9,526 for three months ended March 31, 2012 and 2011, respectively), the Company’s

net income for the quarter ending March 31, 2012 would have been$325,529, an increase of 66.18% compared to $195,888 for the same

period of 2011.

For the six and three months ended June

30, 2012 and 2011, our total revenues amounted to approximately $10.30 million, $10.67 million, $6.98 million and $7.71 million,

respectively.

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

We deduct these

amounts from our gross revenues to arrive at our total revenues.

Our net income attributable to Dehaier for the six and three

months ended June 30, 2012 and 2011 was approximately $1.82 million, $1.94 million, $1.69 million and $1.74 million, respectively.

Both the revenue and net income attributable to Dehaier decreased slightly, mainly due to the Company’s operating strategy

While we continuously developed our sales channels on traditional medical devices sales,

in recent months, we also began adjusting our strategy to expand into government procurement projects and the burgeoning respiratory

and oxygen homecare market.

Factors Affecting Our Results of Operations –

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

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

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

the level of acceptance of our products among hospitals and

other healthcare facilities;

our ability to price our products at levels that provide favorable

new products introduced by us and our competitors;

our ability to attract and retain distributors and key customers;

Our continued investment in research and development activities and our retention of key employees;

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

our continued investment in research and development activities

and our retention of key employees;

changes in China’s macro-economic environment and healthcare-related

government policies and legislation;

global economic conditions.

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

Medical Devices (Including Related Supporting Products) –

Medical Devices (Including Related

Supporting Products) –

Our Proprietary and Distributed Products

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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.

In addition, we have recently begun

to engage in state-level healthcare projects.

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

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to our revenues.

Respiratory and Oxygen Homecare Products and Home Oxygen

Therapy Service (or “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.

Respiratory and Oxygen Homecare Products

and Home Oxygen Therapy Service (or “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

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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 three months ended March 31, 2012 compared

to the same period in 2011, 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 the increase of our operating expenses.

The following table sets forth the components of our costs

and expenses both in U.S.

dollar amounts (in thousands) and as a percentage of total revenues for the three months indicated.

For the Three months Ended March 31,

Costs and expenses

Cost of Revenues

General and administrative expenses

Selling expenses

Total costs and expenses

Cost of Revenues

Cost of revenues primarily includes raw

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

materials, parts for assembly, wages, handling charges, amortization of software copyrights, and other expenses associated with

the assembly and distribution of product.

General and Administrative Expenses

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

Going forward,

we expect our selling expenses to increase, both on an absolute basis and as a percentage of revenue, as we increase our efforts

to promote our products, especially our new respiratory and oxygen homecare products.

Results of Operations

We believe that period-to-period comparisons

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

Three Months Ended March 31, 2012

Compared to Three Months Ended March 31, 2011.

Our total revenues increased by12.30% from

$2.95 million for the three months ended March 31, 2011 to $3.32 million for the three months ended March 31, 2012.

first quarter of 2012, we continuously developed our sales channels on traditional medical devices sales as well as government

procurement projects and the burgeoning respiratory and oxygen homecare market.

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.

Six Months Ended June 30, 2012 Compared to Six Months Ended

June 30, 2011.

We believe that historical period-to-period

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

Our total revenues decreased by 3.44% from

$10.67 million for the six months ended June 30, 2011 to $10.30 million for the six months ended June 30, 2012.

half-year of 2012, we continuously developed our sales channels for traditional medical devices sales.

At the same time, we also

began to adjust our operating strategy to expand into government procurement projects and the burgeoning respiratory and oxygen

homecare market.

Cost of Revenues

Our cost of revenues increased by 6.11%

from $1.96 million for the three months ended March 31, 2011 to $2.07 million for the three months ended March 31, 2012.

Our cost of revenues grew at a slower rate than our revenue growth.

Our gross margin increased due to reduced material consumption

during product production through effective and efficient inventory and cost management starting from the last quarter in 2011.

However, we predict inflation pressures are likely to persist, which could lead increase our cost of revenues in the coming period.

Our cost of revenues decreased by 7.46%

from $6.83 million for the six months ended June 30, 2011 to $6.32 million for the six months ended June 30, 2012.

to manage our inventory and costs allowed us to decrease our cost of revenues at a faster rate than our revenues declined.

reduction in material consumption caused our gross margins to increase.

However, we predict inflation pressures are likely to

persist in China, which could lead to an increase in our cost of revenues in the coming quarters.

Our gross profit increased from $3.84 million

in the three months ended March 31, 2011 to $1.24 million in the same period of 2012, while the gross margin increased from 33.78%

in thesis months ended June 30, 2011 to $3.98 million in the same period of 2012, while our gross margin increased from 35.99%

in 2011 to 38.66% in 2012.

The management believes such increase in gross margin is a result of operating effectiveness.

The management believes such increase in gross margin is the result of operating efficiency.

Operating Expenses

Our operating expenses increased by 8.90%

from $0.74 million for the three months ended March 31, 2011 to $0.81 million for the three months ended March 31, 2012.

expense increases were 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.

The expenses increased slightly more slowly than revenues

because we enhanced performance appraisals for our employees, which allowed us to manage labor expenses while incentivizing revenue

Our operating expenses decreased by 0.95%

from $1.71 million for the six months ended June 30, 2011 to $1.69 million for the six months ended June 30, 2012.

and administrative and selling expenses generally remained the stable in both 2012 and 2011.

We analyzed our six months operating

expenses by general and administrative expenses and selling expenses in the following parts.

Operating Expenses—General

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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.

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

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

Our general and administration expenses

decreased by 2.54% from $0.50 million for the three months ended March 31, 2011 to $0.49 million for the three months ended

March 31, 2012.

This decrease was mainly due to the improvement in on budget management and cost accounting effectiveness.

increased by 1.51% from $1.02 million for six months ended June 30, 2011 to $1.03 million for the six months ended June 30, 2012,

maintained generally the same for the six months ended June 30, 2012 as it was in the same period of 2011.

We expect that our general and administration

expenses may increase in the near future as a result of further development in our R&D projects and professional fees for being

a public company in the U.S.

expenses may increase in the near future as a result of further R&D expenditures.

Operating Expenses - Selling Expenses

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with advertising and other marketing activities.

Our selling expenses increased by 32.95% from $0.24 million for the three months

ended March 31, 2011 to $0.32 million for the three months ended March 31, 2012.These selling expense increases primarily

because we have invested in strengthening our distribution network, relationships with customers, and development of the homecare

device market (in particular our oxygen therapy service initiative).

We expect our selling expenses will continue to grow (possibly

more quickly than revenues) as we drive top-line growth in these areas.

Our selling expenses decreased by 4.56% from $0.69 million for the six months

ended June 30, 2011 to $0.66 million for the six months ended June 30, 2012.

These selling expense decreases are a result of operating

We expect our selling expenses will grow as we invest in strengthening our distribution network, growing relationships

with our customers, developing the homecare device market (in particular our oxygen therapy service initiative) and driving top-line

growth in these areas.

Operating Income

As a result of the foregoing, we generated

an operating income of approximately $0.45 million in the three months ended March 31, 2012, compared to approximately $0.30 million

operating income of approximately $2.38 million in the six months ended June 30, 2012, compared to approximately $2.22 million

in the same period of 2011.

Operating income increased by 52.44%, largely due to the increase in gross margin.

Operating income increased by 7.18%, mainly because of the improvement of gross margin and expense

Our income tax expense was approximately

$0.10 million in the three months ended March 31, 2012, compared to approximately $0.08 million in the same period of 2011was primarily

$0.42 million in the six months ended June 30,2012, compared to approximately $0.40 million in the same period of 2011, primarily

due to an increase in our taxable income.

We had net income

of approximately $0.13 million in the three months ended March 31, 2012, compared to approximately $0.21 million in 2011, decreased

The decrease in net income was mainly affected by the change in fair value of our warrants liability.

the effects of non-cash change in fair value of our warrants liability (which was a loss of $199,508 and a gain of $9,526 for three

months ended March 31, 2012 and 2011,respectively), the Company’s net income for the quarter ending March 31, 2012 would

have been$325,529, an increase of 66.18% as comparing to $195,888 for the same period of 2011.

deduction of non-controlling interest in income, net income attributable to Dehaier was approximately $0.21 million and $0.13 million

in the three months ended March 31, 2012 and 2011, respectively.

Liquidity and Capital

Our net income

was approximately $1.81 million in the six months ended June 30, 2012, compared to approximately $1.95 million in 2011, a decrease

by 7.19%, mainly because of a change in the fair value of our warrants liability.

We calculate the fair value of our warrants

each quarter, resulting in a non-cash liability or benefit, depending on whether the fair value our common shares has increased

or decreased over the prior period.

Excluding the effects of non-cash change in fair value of our warrants liability (which

was a charge to operations of $92,067 and a gain of $149,867 for six months ended June 30, 2012 and 2011, respectively), our net

income for the six months ended June 30, 2012 would have been $1,900,990, an increase of 5.65% as compared to $1,799,278 for the

same period of 2011.

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

to Dehaier was approximately $1.82 million and $1.94 million in the six months ended June 30, 2012 and 2011, respectively.

Three Months Ended June 30, 2012 Compared to Three Months

Ended June 30, 2011.

Our total revenues

decreased by 9.46% from $7.71 million for the three months ended June 30, 2011 to $6.98 million for the three months ended June

In the second quarter of 2012, the decrease in revenues was mainly attributed to the company’s operating strategy

In recent months, the company has made strategic decision by expanding into government procurement

projects and homecare oxygen therapy services, while we maintaining our sales growth in our

traditional medical devices business.

In the short term, this strategy adjustment has caused some temporary softness in our revenue

However, the management expects the new strategy to benefit the Company in the future

as we rely more on higher margin proprietary products and services.

Cost of Revenues

Our cost of revenues decreased by 12.90%

from $4.87 million for the three months ended June 30, 2011 to $4.24 million for the three months ended June 30, 2012.

to manage our inventory and costs allowed us to decrease our cost of revenues at a faster rate than our revenues declined.

reduction in material consumption caused our gross margins to increase.

However, we predict inflation pressures are likely to

persist, which could lead increase our cost of revenues in the coming period.

Our gross profit decreased from $2.84 million

in the three months ended June 30, 2011 to $2.74 million in the same period of 2012, while the gross margin increased from 36.84%

in 2011 to 39.24% in 2012.

The management believes such increase in gross margin is a result of operating efficiency improvements.

Operating Expenses

Our operating expenses decreased by 8.52%

from $0.97 million for the three months ended June 30, 2011 to $0.88 million for the three months ended June 30, 2012.

expense was divided into general and administrative and selling expenses, which are analyzed below:

Operating Expenses—General

and Administrative Expenses

General and administrative expenses consist

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

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

Our general and administration expenses

increased by 5.49% from $0.51 million for the three months ended June 30, 2011 to $0.54 million for the three months ended June

This increase was mainly due to the continuous investment in our R&D projects.

We expect that our general and administration

expenses may increase in the near future as a result of further development in our R&D projects and professional fees for

being a public company in the U.S.

Operating Expenses - Selling Expenses

Our selling expenses consist primarily

of salaries and related expenses for personnel engaged in sales, marketing and customer support functions, and costs associated

with advertising and other marketing activities.

Our selling expenses decreased by 24.32% from $0.45 million for the three months

ended June 30, 2011 to $0.34 million for the three months ended June 30, 2012.

These selling expense decreases are considered

as a result of operating efficiency and effectiveness management.

We expect our selling expenses will grow as we invest in strengthening

our distribution network, growing relationships with customers, developing the homecare device market (in particular our oxygen

therapy service initiative) and driving top-line growth in these areas.

Operating Income

As a result of the foregoing, we generated

operating income of approximately $1.93 million in the three months ended June 30, 2012 and 2011.

Tax expenses were calculated by taxable

Our income tax expense was approximately $0.32 million in the three months ended June 30, 2012, compared to approximately

$0.31 million in the same period of 2011.

Our net income was approximately $1.68

million in the three months ended June 30,2012, compared to approximately $1.74 million in 2011, a decrease of 3.51%, mainly because

of the increase in financial expenses and change in fair value of warrants.

Liquidity and Capital Resources

Cash Flows and Working Capital

As of March 31, 2012, we had approximately

As of June 30, 2012, we had approximately

$1.11 million in cash and cash equivalents.

As a result of the total cash activities, net cash decreased from $3,694,486 at December 31,

2011 to $2,299,270 at March 31, 2012.

We believe that our currently available working capital of $27,524,771, including cash

of $2,299,270, 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 or other business expansion 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.

2011 to $1,107,942 at June 30, 2012.

This is mainly because we invested in obtaining copyright protection for our software, for

our future development.

We believe that our currently available working capital of $25,920,190, including cash of $1,107,942,

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 or other business expansion 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

$1,590,597 for the three months ended March 31, 2012, as compared to $2,113,734 for the same period in 2011 because management’s

focus on operating effectiveness resulted in the improvement of turnover of accounts receivable and inventory.

Net cash used

in operating activities was $767,199 for the six months ended June 30, 2012, as compared to $3,356,331 for the same period in

The reasons for this change are mainly as follows:

(i) For the six months ended June 30,

2011, account receivables increased by $3,451,269, while in

the same period of 2012, it increased by $282,688.

is a decrease of $3,168,581 in account receivables.

is attributable to the better aging management, which enhanced

the collection of account receivables.

(ii) For the six months ended June 30,

2011, prepayments and other current assets increased by $4,240,759,

while in the same period of 2012, it increased by $522,831.

There is a decrease of $3,717,928 in prepayments and other current

The Company improved its operating efficiency that accelerated

the turnover of prepayments and current assets.

(iii) For the six months ended June

30, 2011, other receivables decreased by $2,810, while

in the same period of 2012, other receivables increased

by $1,670,623.

There is a increase of $1,673,433 in

other receivables.

The increase is mainly because of implement

of large contracts that increased the deposit amount.

(iv) For the six months ended June 30,

2011, tax payable increased by $ 2,022,812 ,

while in the same period of 2012, it decreased by $ 1,616,959 .

There is a decrease of $3,639,771 in tax payable.

mainly because we have settled up the tax payables of previous

years since the last quarter of 2011.

Investing Activities

Net cash used in investing activities for

the three months ended March 31, 2012 was $5,758, compared to $10,632for the same period of 2011.

the six months ended June 30, 2012 was $2,405,707, compared to $64,660 for the same period of 2011.

The cash used in investing

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

activities in each quarter was mainly attributable to capital expenditures for software copyrights.

Financing Activities

During the first quarter 2012, the Company

repaid $631,428 of its short-term bank loan on maturity and entered into a new loan agreement for $791,315.The net amount provided

by financing activities was $0.16 million at March 31, 2012.

During the first half year 2012, we repaid

$1,580,436 of short-term bank loan on maturity and entered into a new loan agreement for $2,373,145.

The net amount provided by

financing activities was $0.79 million at June 30, 2012.

Capital Expenditures

We made capital expenditures of approximately

$6 thousand and $8 thousand in the three months of 2012 and 2011, respectively.

Our capital expenditures were used to purchase

machinery for our assembly line.

$2.4 million and $65 thousand in the six months of 2012 and 2011, respectively.

In 2011, our capital expenditures were generally

used to purchase machinery for our assembly line, while in 2012, our capital expenditures were mainly used to obtain software

Off-Balance Sheet Commitments and

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We do not have any variable interest in any unconsolidated

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

services with us.

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 the Company

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

The Company pays PRC enterprise income

taxes, value added taxes and business taxes in China for revenues from BDL, and is governed by British Virgin Islands tax laws

as to Dehaier.

The Company pays PRC enterprise income taxes,

value added taxes and business taxes in China for revenues from BDL, and is governed by British Virgin Islands tax laws as to

British Virgin Islands Tax

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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.

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

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based on taxable income determined under PRC accounting principles.

According to the Foreign-invested Enterprises and Foreign Enterprises

Income Tax Law (the “FIE Income Tax Law”) and the related implementing rules, both of which issued in 1991, foreign-invested

enterprises established in China are generally subject to an income tax rate of 33% (consisting of 30% enterprise income tax and

3% local income tax).

The FIE Income Tax Law and the related implementing rules provide certain favorable tax treatments to qualified

foreign invested enterprises.

The FIE Income Tax Law was replaced by

the Enterprise Income Tax Law (the “EIT Law”) as of January 1, 2008.

According to the Foreign-invested Enterprises and Foreign

Enterprises Income Tax Law (the “FIE Income Tax Law”) and the related implementing rules, both of which issued in

1991, foreign-invested enterprises established in China are generally subject to an income tax rate of 33% (consisting of 30%

enterprise income tax and 3% local income tax).

The FIE Income Tax Law and the related implementing rules provide certain favorable

tax treatments to qualified foreign invested enterprises.

The FIE Income Tax Law was replaced by the

Enterprise Income Tax Law (the “EIT Law”) as of January 1, 2008.

Under the EIT Law, a unified enterprise income

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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.

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

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.

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

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

In 2009, BDL updated its certification for

“high technology”

Therefore, BDL used a 15% income tax rate to calculate the income tax expense for periods

ended September 30, 2011 and2010.

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

In 2009, BD L

updated its certification for “high technology”

Therefore, BDL used a 15% income tax rate to calculate the

income tax expense for the six months ended June 30, 2012 and 2011.

The high technology certification will expire and be subject

to renewal in September 2012.

The tax rate for BTL is 25% in 2012 and 2011.

PRC Value Added Tax

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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.

subject to a VAT at a rate of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross sales

proceeds received, less any VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in

the production of goods or provisions of services that have generated the gross sales proceeds.

PRC Business Tax

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Presentation in Accordance with US GAAP

We prepared our accompanying condensed

consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US

GAAP”).

These accounting principles require us to make judgments, estimates and assumptions on the reported amounts of assets

and liabilities at the end of each fiscal period, and the reported amounts of revenues and expenses during each fiscal period.

We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current

business and other conditions, our expectations regarding the future based on available information and assumptions that we believe

to be reasonable.

We prepared our accompanying condensed consolidated

financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

These accounting principles require us to make judgments, estimates and assumptions on the reported amounts of assets and liabilities

at the end of each fiscal period, and the reported amounts of revenues and expenses during each fiscal period.

We continually

evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and

other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable.

Basis of Consolidation

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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.

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.

Management makes ongoing reassessments of whether BDL is the primary

beneficiary of BTL.

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

The accounts of BTL are consolidated in

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experience when necessary.

Significant accounting estimates reflected in the Company’s condensed consolidated financial statements

include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants liability,

Stock-based compensation and useful lives of property and equipment.

Significant accounting estimates reflected in the Company’s condensed consolidated financial

statements include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants

liability, Stock-based compensation and useful lives of property and equipment.

Actual results could differ from those estimates.

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clients is generally between 60 and 180 days.

With the exception of the prepayments we require in some cases, we generally do not

require collateral or other security to support accounts receivable.

An allowance, if required, is based on a combination of historical

experience, aging analysis, and an evaluation of the collectability of specific accounts.

With the exception of the prepayments we require in some cases, we generally do

not require collateral or other security to support accounts receivable.

An allowance, if required, is based on a combination

of historical experience, aging analysis, and an evaluation of the collectability of specific accounts.

Prior to 2011, receivables were considered

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Management 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.

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.

In 2011, after assessing the distributors’

economic factors and the Company’s

historic experiences, management decided that receivables over 1 year are considered past due.

Because this change was not retroactive,

the current period’s net income and earnings per share are lower than the comparable period in 2011.

economic factors and

the Company’s historic experiences, management decided that receivables over 1 year are considered past due.

change was not retroactive, the current period’s net income and earnings per share are lower than the comparable period

Fair Value of Financial Instruments

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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.

(comparable market prices), the income approach (present value of future income or cash flows) and the cost approach (cost to

replace the service capacity of an asset or replacement cost).

For purposes of ASC 820-10-15, nonfinancial assets and nonfinancial

liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial

liability as defined in ASC 820-10-15-15-1A.

The Company adopted the provisions of ASC

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to an Entity’s Own Stock.”

ASC Topic 815 provides a framework for determining whether an instrument is indexed to an

entity’s own stock.

ASC Topic 815 became effective for the Company this period when warrants were issued in connection with

the Company’s initial public offering (“IPO”).

Such warrants are indexed to the Company’s common shares,

which is traded in US dollars.

Since the Company’s 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.

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 this period when warrants were issued in connection

with the Company’s initial public offering (“IPO”).

Such warrants are indexed to the Company’s common

shares, which is traded in US dollars.

Since the Company’s functional currency is the RMB, such warrants are considered

The fair value of the warrant liabilities is measured each reporting period with the resulting change in fair value

recorded in the statement of operations.

An increase of the warrants liability would decrease net income and earnings per share.

in warrants liability would increase net income and earnings per share of the Company.

A decrease in warrants liability would increase net income and earnings per share of the Company.

Revenue Recognition

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Because the products are assembled to the customers’

specification, there is no right

specification, there is no

right of return.

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

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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.

allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence,

it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The 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.

ASC 740-10 prescribes a recognition threshold

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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 previous years’

Value Added Tax (“VAT”) returns for some of its

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

consolidated financial statements.

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 previous years’

Value Added Tax (“VAT”) returns for

some of its customers.

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

condensed consolidated financial statements.

Quantitative and Qualitative Disclosures about Market

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

What changed 10-Q

Item 1. Financial Statements