What changed in this filing

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Item 1. Financial Statements

2012-11-13 compared with 2012-08-13 · 210 added, 235 removed, 385 unchanged (54% of the section changed)

2 unchanged sentences

Management’s

Discussion and Analysis of Financial Condition

and Results of Operations

Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis

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This section should be read together with

the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31,

2011, which was filed on March 19, 2012.

the condensed consolidated financial statements and related notes thereto contained in Item 1 of Part I in this form 10-Q with

our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed on March 19, 2012.

We are a company in the business of developing

and distributing medical devices.

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

We have focused primarily on the respiratory and oxygen homecare industry since 2006.

We design, develop and market our own branded

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

Business Development

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.

Recent Business Developments

In September 2012, we won a 3-year procurement

agreement for our proprietary air compressors and customized trolleys from a major medical equipment manufacturer in Ukraine.

In September 2012, we entered into a two-year

distribution agreement with GCE group, a leading global compressed gas-equipment company, to become the exclusive distributor

for GCE's EASE II product in Mainland China.

The newly-distributed product can be widely used in many fields including disaster

relief efforts, national defense, emergency rooms, ambulances, and medical institutions.

In September 2012, we signed three medical

equipment procurement agreements with Beijing's Hospitals 304 and 307, two of China's most well-known first-tier hospitals, and

with Beijing Kanglian Medicines Co.

for the China Development Bank Rural Medical and Health Construction Project.

In September 2012, we obtained software

copyrights for Mega Pixels, which is used in our Dehaier Explorer C-Armed X Ray Machine Series.

This is the fifth software copyright

we obtained this year.

In October 2012, we won a government procurement

contract with Xinjiang Province to distribute medical equipment to Hospitals in Xinjiang.

The contract will be implemented by

the end of 2012.

In October 2012, we received government

subsidies of RMB118,100 for short-term bank loan interest, as a result of favorable treatment granted to High Technology Enterprises

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 steady business growth.

distributors, maintaining and expanding our customer base, and promoting steady business gr o wth.

We plan to broaden the portfolio of products

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Results of Operations

For the six and three months ended June

For the nine and three months ended September

30, 2012 and 2011, our total revenues amounted to approximately $15.83 million, $16.35 million, $5.53 million and $5.69 million,

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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.

Our net income attributable to Dehaier for the nine and three

months ended September 30, 2012 and 2011 was approximately $2.85 million, $3.32 million, $1.04 million and $1.38 million, respectively.

While we continuously developed our sales channels on traditional medical device sales, in recent months,

we also began adjusting our strategy to expand into government procurement projects and the burgeoning respiratory and oxygen

homecare market.

Because revenues have decreased in traditional device sales and our government procurement efforts and homecare

business are still at a relatively early stage, our overall revenues and net income are slightly lower than in 2011.

Factors Affecting Our Results of Operations –

We believe the most significant factors

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

that directly or indirectly affect our 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;

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

In 2012, management will focus on laying a solid

foundation, such as the delivery network, rather than generating considerable revenue.

In 2012, we have focused on laying a solid foundation,

such as the delivery network, rather than generating considerable revenue.

As 2012 comes to a close, we are evaluating how best

to allocate our resources in this market.

Our ability to increase our revenues depends

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Cost of Revenues

Cost of revenues primarily includes raw

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

the assembly and distribution of product.

Cost of revenues primarily include raw 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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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.

Nine Months Ended September 30, 2012 Compared to Nine Months

Ended September 30, 2011.

Our total revenues decreased by 3.22% 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.

$16.35 million for the nine months ended September 30, 2011 to $15.83 million for the nine months ended September 30, 2012.

the past three quarters of 2012, we continuously developed our sales channels for traditional medical devices sales.

time, we also began to adjust our operating strategy to expand into government procurement projects and the burgeoning respiratory

and oxygen homecare market.

Because revenues have decreased in traditional device sales and our government procurement efforts

and homecare business are still at a relatively early stage, our overall revenues and net income are slightly lower than in 2011.

Cost of Revenues

Our cost of revenues decreased by 3.16%

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 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 the result of operating efficiency.

from $10.10 million for the nine months ended September 30, 2011 to $9.78 million for the nine months ended September 30, 2012.

Our efforts to manage our inventory and costs allowed us to decrease our cost of revenues at largely in line with our decrease

Our gross margin declined slightly, mainly because finished government procurement projects generally contributed

lower gross margin than the Company’s traditional businesses.

Although these government procurement projects sometimes have

lower margins than our traditional business, we believe the potential for involvement in such projects to improve our reputation

and lead to higher total revenue justifies our focus on this market.

Our gross profit decreased from $6.26 million

in the three months ended September 30, 2011 to $6.05 million in the same period of 2012, while our gross margin decreased slightly

from 38.25% in 2011 to 38.22% in 2012 due to the faster decrease in revenues than in cost of revenues.

Management believes the

Company’s gross margin is likely to remain relatively stable over the near term.

Operating Expenses

Our operating expenses decreased by 3.19%

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.

from $2.51 million for the nine months ended September 30, 2011 to $2.43 million for the nine months ended September 30, 2012.

We analyzed our nine months operating expenses by general and administrative expenses and selling expenses in the following parts.

Operating Expenses—General

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Our general and administration expenses

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 R&D expenditures.

increased by 3.60% from $1.41 million for nine months ended September 30, 2011 to $1.46 million for the nine months ended September

30, 2012, maintaining consistent spending between the periods.

We expect our general and administration

expenses to increase in the near future as a result of further R&D expenditures and investment in professional services associated

with being a public company in the U.S.

Operating Expenses - Selling Expenses

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with advertising and other marketing activities.

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.

Our selling expenses decreased by 11.53% from $1.09 million for the nine months

ended September 30, 2011 to $0.97 million for the nine months ended September 30, 2012.

These selling expense decreases are a

result of operating efficiency improvements as we have focused on key performance indicators and reduced selling expenses accordingly.

We expect our selling expenses will grow in absolute amount and as a percentage of our revenues 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

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

operating income of approximately $3.79 million in the nine months ended September 30, 2012, compared to approximately $3.88 million

in the same period of 2011.

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

Operating income decreased by 2.25%, mainly because of the narrowed gross margin.

Our income tax expense was approximately

$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.

$0.65 million in the nine months ended September 30, 2012, compared to approximately $0.67 million in the same period of 2011,

primarily due to a decrease in our taxable income.

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.

was approximately $2.85 million in the nine months ended September 30, 2012, compared to approximately $3.33 million in 2011,

a decrease by 14.47%, mainly because of a change in the fair value of our warrants liability.

We calculate the fair value of our

warrants liability at the end of each reporting period, resulting in a non-cash gain or loss.

When the fair value of our

warrants liability has increased during the period, we record a loss;

consequently, when the fair value of our warrants liability

has decreased during the period, we record a gain.

Excluding the effects of such non-cash changes in fair value of our warrants

liability (which was a charge to operations of $187,823 and a gain of $177,358 for nine months ended September 30, 2012 and 2011,

respectively), our net income for the nine months ended September 30, 2012 would have been $3,039,368, a slight decrease of 3.72%

as compared to $3,156,780 for the same period of 2011.

After deduction of non-controlling interest

in income, net income attributable to Dehaier was approximately $2.85 million and $3.32 million in the nine months ended September

30, 2012 and 2011, respectively.

Three Months Ended September 30, 2012 Compared to Three

Months Ended September 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.

decreased by 2.81% from $5.69 million for the three months ended September 30, 2011 to $5.53 million for the three months ended

September 30, 2012.

In the third quarter of 2012, the decrease in revenues was mainly attributed to our operating strategy changes.

In the recent months, we made the strategic decision to expand 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 resulted in decreased revenue.

However, the management

expects the new strategy to benefit the Company in the future as we rely more on a combination

of higher revenue government projects and higher margin revenues from our home oxygen therapy 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 cost of revenues increased by 5.80%

from $3.27 million for the three months ended September 30, 2011 to $3.46 million for the three months ended September 30, 2012.

The amortization of our newly launched software and the cost increase in raw material resulted in this increase in cost of revenue.

We predict the amortization of software will continue and that inflation pressures are likely to persist for at least the near

term, which could lead to increases in our cost of revenues in future periods.

Our gross profit decreased from $2.42 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 the three months ended September 30, 2011 to $2.07 million in the same period of 2012, while the gross margin decreased from

42.49% in 2011 to 37.39% in 2012.

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

The management believes such decrease in gross margin is a result of the increase in cost of

Operating Expenses

Our operating expenses decreased by 7.5%

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:

from $0.8 million for the three months ended September 30, 2011 to $0.74 million for the three months ended September 30, 2012.

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

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

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.

increased by 8.94% from $0.40 million for the three months ended September 30, 2011 to $0.43 million for the three months ended

September 30, 2012.

This increase was mainly due to the increased provision of accounts receivables to reflect the movement

of some accounts receivable into overdue status and the continuous investment in capital market consulting services.

We expect our general and administration

expenses to increase in the near future as a result of further R&D expenditures and investment in professional services associated

with being a public company in the U.S.

Operating Expenses - Selling Expenses

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Our selling expenses decreased by 23.70% from $0.40 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.

ended September 30, 2011 to $0.30 million for the three months ended September 30, 2012.

These selling expense decreases are as

a result of increased operating efficiency through our focus on key performance indicator 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.

operating income of approximately $1.41 million and $1.66 million in the three months ended September 30, 2012 and 2011.

Our income tax expense was approximately

$0.23 million in the three months ended September 30, 2012, compared to approximately $0.27 million in the same period of 2011,

due to the decrease in our taxable income.

Our net income

was approximately $1.04 million in the three months ended September 30, 2012, compared to approximately $1.38 million in 2011,

a decrease of 24.72%, mainly because of the increase in general and administrative expenses, financial expenses and change in

the fair value of our warrants liability.

Excluding the effects of such non-cash changes in fair value of our warrants

liability (which was a charge to operations of $95,756 and a gain of $27,491 for three months ended September 30, 2012 and 2011,

respectively), our net income for the three months ended September 30, 2012 would have been $1,138,378, a decrease of 16.14% as

compared to $1,357,502 for the same period of 2011.

After deduction of non-controlling interest in

income, net income attributable to Dehaier was approximately $1.04 million and $1.37 million in the three months ended September

30, 2012 and 2011, respectively.

Liquidity and Capital Resources

Cash Flows and Working Capital

As of June 30, 2012, we had approximately

$1.11 million in cash and cash equivalents.

As of September 30, 2012, we had $3,165,481

cash and cash equivalents.

As a result of the total cash activities, net cash decreased from $3,694,486 at December 31, 2011,

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.

mainly because we invested in obtaining copyright protection for our software for our future development.

We believe that our

currently available working capital of $28,025,309, including cash, 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 or equity

Operating Activities

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

Net cash provided

by operating activities was $1,390,960 for the nine months ended September 30, 2012, as compared to $4,054,852 used in operating

activities for the same period in 2011.

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.

For the nine months ended September 30, 2011, accounts receivable increased by $5,920,452, while in

the same period of 2012, they only increased by $985,298.

This difference of increase in accounts receivable of

$4,935,154 is attributable to better aging management, which slowed the growth of accounts receivable

For the nine months ended September 30, 2011, prepayments and other current assets increased by $3,071,808, while

in the same period of 2012, it increased by $587,315.

This decrease of $2,484,493 in prepayments and other current assets

is due to the Company’s efforts to improve its operating efficiency, which accelerated the turnover of prepayments and

current assets.

For the nine months ended September 30, 2011, other receivables increased by $541,386, while

in the same period of 2012, other receivables increased by $1,568,096.

This increase of $1,026,710 in other

receivables represents contract deposits for large contracts that we are required to make to secure performance under the

Such deposits are returned to us after project completion and expiration of any associated warranty periods.

For the nine months ended September 30, 2011, inventories increased by $62,401, while in the same period of

2012, inventories decreased by $1,729,100.

This decrease of $1,791,501 in inventories is mainly because the Company

improved its inventory turnover by managing its production and purchasing decisions based on orders received.

Investing Activities

Net cash used in investing activities for

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 software copyrights.

Net cash used

in investing activities for the nine months ended September 30, 2012 was $ 2,717,838 , compared

to $ 98,100 for the same period of 2011.

The cash used in investing activities was mainly attributable

to capital expenditures for software copyrights.

Financing Activities

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.

For the nine months ended September 30,

2012, we repaid $1,580,436 of short-term borrowings and entered into a new loan agreement for $2,373,145.

The net amount provided

by financing activities was $0.79 million at September 30, 2012.

Capital Expenditures

We made capital expenditures of approximately

$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

$2.7 million and $95 thousand in the first nine 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 copyrights.

Off-Balance Sheet Commitments and

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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.

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 established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the

currently prevailing tax laws and administrative regulations shall, under the regulations of the State Council, gradually become

subject to the EIT Law rate over a five-year transition period starting from the date of effectiveness of the EIT Law.

of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises

approved for establishment prior to March 16, 2007, such as us, were adopted in January 2008.

The Company is subject to the Enterprise

Income Tax Law (the “EIT Law”) which provides for a unified enterprise income tax rate of 25%.

We are eligible for

preferential tax treatment in accordance with the currently prevailing tax laws and administrative regulations through December

Furthermore, under the EIT Law, an enterprise

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organizational changes to minimize the corresponding tax impact.

The State Council issued the “Notice

on Implementation of the Transition Period for Preferential Enterprise Income Tax,”

or the “Transition Implementation

Notice,”

on December 26, 2007, which provides detailed rules on how preferential tax rates under previous income tax

laws or regulations would transition to the uniform 25% EIT rate.

In addition, entities that qualify as “high and new technology

enterprises”

In addition, entities that qualify as “high

and new technology enterprises”

will enjoy a 15% preferential tax rate under the EIT Law.

The Ministry of Science and Technology, the Ministry

of Finance and the State Administration of Taxation issued the “Measures on Qualification of High and New Technology Enterprises,”

or “Circular 172,”

on April 14, 2008, which provides detailed standards for “high and new technology enterprises.”

In addition, according to the Notice on Prepayment of Enterprise Income Tax issued by the State Administration of Taxation, enterprises

that have been certified as “high and new technology enterprises”

shall pre-pay EIT at the rate of 25% temporarily

until re-certified as “high and new technology enterprises”

Enterprise that have been certified

as “high and new technology enterprises”

shall pre-pay EIT at the rate of 25% temporarily until re-certified as “high

and new technology enterprises”

under Circular 172.

5 unchanged sentences

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.

income tax expense for the nine months ended September 30, 2012 and 2011.

The Company renewed its high technology company

status to retain the 15% income tax rate after September 30, 2012 and received the approval in October 2012.

The Company has not

received the preferential tax rate certificate as of the filing date but anticipates receipt in the near future.

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

PRC Value Added Tax

66 unchanged sentences

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

Prior to 2011, receivables were considered

past due after 3 years and written off.

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.

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.

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

81 unchanged sentences

condensed consolidated financial statements.

Quantitative and Qualitative Disclosures about Market

and Qualitative Disclosures about Market Risk.

Not applicable.

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