What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2013-03-18 compared with 2012-03-19 · 367 added, 423 removed, 263 unchanged (75% of the section changed)

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

(a) Market for Our Common Shares

Market for Registrant’s Common Equity,

Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Our Common Shares

Our common shares are traded on the NASDAQ

Stock Market under the symbol DHRM.

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

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

Quarter Ended

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As of the date of this report there are

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

This number excludes our common shares owned by shareholders holding under

nominee security position listings.

ten (10) holders of record of our common shares.

This number excludes our common shares owned by shareholders holding under nominee

security position listings.

Dividend Policy

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Directors may deem relevant.

(b) The section entitled “Use of

Proceeds”

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

is incorporated herein by reference.

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

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

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

common shares (the “Offering”).

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

in accordance with the following table:

Description of Use

Proposed Expenditure Amount

Actual Expenditures through

December 31, 2011

Product Research and Development

Potential Acquisitions

Working Capital

Because we have not yet completed any acquisitions,

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

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

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

international medical device manufacturer fairs.

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

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

Recent Sales of Unregistered Securities

On January 9, 2012, we issued 5,000 common

shares as consideration to a non-employee in connection with individual consulting services provided by the recipient.

5, 2012, we issued 5,000 common shares as consideration to a non-employee in connection with individual consulting services provided

by the recipient.

On August 22, 2012, we issued 20,000 common shares as consideration to a non-employee in connection with financial

advisory services provided by the recipient.

On November 26, 2012, we issued 20,000 common shares as consideration to a non-employee

in connection with financial advisory services provided by the recipient.

Also on November 26, 2012, we issued 10,000 common shares

as consideration to a non-employee in connection with financial advisory services provided by the recipient.

The issuances of the above securities

were exempt from registration under the Securities Act of 1933, as amended (Securities Act), in reliance upon Section 4(2)

of the Securities Act as transactions by an issuer not involving any public offering.

The recipients of the securities in each

of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for

sale in connection with any distribution thereof, and appropriate legends were placed upon the book-entry entitlements issued

in each such transaction.

(b) Not applicable.

Selected Financial Data.

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and distributing medical devices.

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

We have focused on developing respiratory and oxygen homecare products in particular since 2006.

We distribute products designed and manufactured

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

Besides distributing medical devices, we

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

Because we do not run any manufacturing facilities,

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

Most of our proprietary products require light assembly

by us before distribution.

Besides distributing medical devices,

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

Because we do not run any manufacturing

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

Most of our proprietary products require

light assembly by us before distribution.

We sell our products primarily through

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

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

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

We continue to further

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

Macro-Economic Factors and Business Trends

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

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

to the development of the emerging industries of biomedicine.

The plan focuses on researching and developing the

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

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

and to the development of the emerging industries of biomedicine.

The plan focuses on researching and developing

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

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

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

According to China’s medical

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

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

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

30% during this period.

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

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

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

As a result, management anticipates

growth in the Chinese pharmaceutical market.

Current medical device purchases by individuals

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

Twenty percent of individual expenditures on home medical care in

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

As China’s population continues

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

device industry.

It is estimated that twenty percent of individual expenditures on

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

As China’s

population continues to age, management expects a rapid increase in demand for medical devices, and, as a result, growth in

China’s medical device industry.

It is the initial stage of rapid growth

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opportunities for participants in the market.

In summary, as a vital component of

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

In summary, as a vital component

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

national strategic development plan.

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New Opportunities in Our Business

For 2011, Espicom, a highly regarded market

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

in the world.

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

is particularly pronounced.

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

doubled compared with the total sales in 2006.

Chinese government programs are aimed

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

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

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

Thus management expects that

homecare medical equipment could become as ubiquitous as home appliances.

in China because of the limited health insurance coverage and level of treatment in the public health systems, residents tend

to be more aware of their health and wellness and to seek treatment at home before resorting to public health systems.

Thus, management

expects that homecare medical equipment could become as abundant as home appliances.

In addition, the UN estimates that the

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hence, the aging population

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

Chinese marketplace.

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

the Chinese marketplace.

In 2011, the Shanghai government launched

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

We anticipate Beijing and other cities will be

pushing for similar legislation.

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

We anticipate Beijing and other cities will

be pushing for similar legislation.

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

services in Beijing.

Based on the data shown above, both from

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Growth Strategy

We will build our brand name domestically

We plan to build our brand name domestically

as both a distributor and a trusted partner by leveraging our relationships with healthcare professionals, agents and other downstream

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

We will expand our product portfolio through

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

had steady growth in our brand name homecare medical products.

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

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

the service platform.

We will develop our home oxygen service

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

business based on this platform.

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

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

in those markets in which we offer home oxygen services.

We will expand our distribution channels

through tools such as e-commerce platforms.

We plan to create more cross-selling opportunities for our homecare products, while

providing oxygen delivery through the service platform.

We will expand into overseas markets and

establish a distribution network, through distribution agreements, OEM partnerships, direct sales force and e-commerce platforms.

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.

intend to take advantage of our well-established distribution network to grow sales revenues.

By actively participating in state-level

contracted healthcare programs, we will continue to expand our key account business and build a higher level of contact and relationships

with the government and other healthcare industrial insiders.

We plan to expand our product portfolio

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

and technologies.

We will establish an efficient and innovative sleep diagnostic system by developing advanced technologies, continuously

strong efforts in research and development of proprietaries and will broaden the market by seeking cooperation with first-class

sleep centers in nationwide.

We will continue developing sleep respiratory

and oxygen therapy business domestically.

We will launch a series of product combinations to address the each specific market

of oxygen therapy, including emergency treatment, disaster relief and homecare oxygen therapy services.

We will continue to expand into overseas

markets and establish a distribution network, through distribution agreements, OEM partnerships and direct sales force efforts.

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

To the extent

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

United States and Europe.

we have adequate demand for our sleep respiratory and oxygen therapy products abroad, we will continue seeking regulatory approval

to sell these products in the United States and Europe.

Results of Operations

For the years ended December 31, 2012

and 2011, our total revenues amounted to approximately $21.37 million and $21.64 million, respectively.

Our revenues are subject

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

We deduct these amounts from our gross revenues to

arrive at our total revenues.

Our net income attributable to Dehaier for the years ended December 31, 2012 and 2011 was approximately

$3.21 million and $3.10 million, respectively.

Although revenue decreased slightly, net income attributable to Dehaier increased

slightly, mainly due to the Company’s operating strategy changes that reduced expenses.

While we continuously developed

our sales channels on traditional medical devices sales, we have also been adjusting our strategy to expand into government procurement

projects and the burgeoning respiratory and oxygen homecare market.

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

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;

global economic conditions.

Our total revenues are derived from our

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

Medical Devices (Including Related Supporting Products) –

In 2012, our revenues decreased slightly as we

saw a weakening in our traditional medical sales due to increased competition in our market.

While we have been successful in

growing our higher-margin sales in 2012, we believe that we are still at an early stage in this market and have not yet overcome

the traditional market decrease.

Medical Devices (Including Related Supporting Products)

Our Proprietary and Distributed Products

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

supporting products.

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

supporting products (previously defined as technical service products).

Our medical device line is our largest product line and

has the most extensive market penetration.

We anticipate that we will continue to experience revenue growth in our medical devices

line as we further develop our market through the introduction of new advanced product offerings and the participation in favorable

government programs.

In addition, we have begun to engage in state-level healthcare projects recently.

We may procure high-end

medical equipment for our clients, which may not necessarily be part of our existing distributed brands portfolio.

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

Although this business may carry lower margins, the

contract value for such business is typically larger and can contribute materially to our revenues.

Sleep Respiratory and Oxygen Therapy Products

We derive revenues in our sleep respiratory

and oxygen therapy line from sales of oxygen concentrators, CPAP devices, and portable sleep diagnostics devices.

We anticipate

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

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

In addition, we have begun to engage

in state-level healthcare projects recently.

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

be part of our existing distributed brands portfolio.

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

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

to our revenues.

Respiratory and Oxygen Homecare Products and HOTS

We derive revenues

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

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

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

We expect to develop our market for respiratory

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

In addition, we launched our home oxygen

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

While we strongly believe in the tremendous growth

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

In 2012, management will focus

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

Our ability to increase our revenues depends

in large part on our ability to (i) increase the market penetration of our existing products, (ii) successfully identify,

develop, introduce and commercialize, in a timely and cost-effective manner, new and upgraded products and (iii) enter into

international markets in the future.

Generally, we choose to devote our resources to product development efforts that we believe

are commercially feasible, can generate significant revenues and margins, and can be introduced into the market quickly.

Factors Affecting Our Results of Operations

We believe the most significant factors

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

global economic conditions;

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

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

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

new product introductions by us and our competitors;

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

that, on a percentage basis, revenues from sleep respiratory and oxygen therapy 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 sleep respiratory

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

In addition, we launched the new Effective Oxygen Supplement System in 2012.

This system is able to satisfy more demands from

a much more detailed and specific market.

While we strongly believe in the tremendous growth potential of sleep respiratory and

oxygen therapy business in coming years, we are still in the early stage of this business.

In 2013, management will be focusing

on laying solid foundation, such as introducing more advanced products and penetrating the market, for sleep respiratory and oxygen

therapy business, rather than generating considerable revenue from this business.

Operating Costs and Expenses

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Our total operating costs and expenses

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

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

slightly decreased both as a percentage of our total revenues and in absolute amount for the year ended December 31, 2012 compared

to the same period in 2011, primarily due to the decrease in spending in the homecare and oxygen therapy clients and international

market development.

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

to our operating expenses.

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

contributed to our operating expenses.

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

dollar amounts

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

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

For the year ended December 31,

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Cost of revenues

General and administrative expenses

Selling expenses

General and administrative expense

Selling expense

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.

Cost of revenues primarily includes finished

goods, parts for assembly, wages, handling charges, 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.

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

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Year Ended December 31, 2011.

Our total revenues

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

ended December 31, 2011.

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

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

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

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

In 2010, revenue

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

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

total revenues decreased by 1.24% from $21.64 million for the fiscal year ended December 31, 2011 to $21.37 million for the

fiscal year ended December 31, 2012.

In 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.

believes revenues have decreased slightly in traditional device sales due to an increasingly challenging market and new competitors.

Further, our government procurement efforts and homecare business are still at a relatively early stage.

As a result, our overall

revenues are slightly lower than in 2011.

Cost of Revenues

Our cost of revenues increased by 14.36%

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

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

Our gross margin decreased due to the increased cost of the

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

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

cost of revenues decreased by 3.23% from $13.70 million for the fiscal year ended December 31, 2011 to $13.25 million for

the fiscal year ended December 31, 2012.

O ur efforts to manage our inventory and costs allowed us to decrease our

cost of revenues slightly more quickly than our decrease in revenues.

Our gross profit increased from $7.94 million

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

2010 to 36.70% in 2011.

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

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

in 2011 to $8.12 million in 2012, and our gross margin increased slightly from 36.70% in 2011 to 37.98% in 2012.

Management believes

the shift in the Company’s revenue mix away from traditional device sales resulted in increases in gross margin and net

Operating Expenses

Our operating expenses increased by 67.91%

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

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

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

operating expenses decreased by 12.02% from $4.50 million for the fiscal year ended December 31, 2011 to $3.96 million for

the fiscal year ended December 31, 2012.

The expenses decreased more than revenues, largely due to our efforts to reduce

traveling and marketing expenses by leveraging our increasingly mature distribution network and shifting away from in-person marketing

visits when appropriate.

We analyzed our operating expenses by general and administrative expenses and selling expenses

in the following parts.

Operating Expenses—General and Administrative

General and administrative expenses consist

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

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

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

for the fiscal year ended December 31, 2011.

This increase was mainly due to:

Provision for Doubtful Accounts .

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

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

approximately $0.018 million for the

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 0.82% from $2.62 million for the fiscal year ended December 31, 2011 to $2.60 million for the fiscal year ended

December 31, 2012.

We have experienced delays in

payments from our distributors.

Due to increasing competition, the

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

during the years of expansion.

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

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

Our collection policy treats account receivables older

than one year as past due.

As a result, our provision for doubtful

accounts increased.

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

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

Research and Development Expense .

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

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

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

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

Further, we plan to start new research

and developing projects for our homecare medical devices.

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

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

Public Company Expense .

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

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

This decrease was mainly due to a reduction in R&D expenses.

We expect that our general and administration

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

Operating Expenses - Selling Expenses

Our selling expenses increased by 32.39%

expenses will increase in the near future as a result of business expansion..

Operating Expenses—Selling Expense

Our selling expenses decreased by 27.66%

from $1.88 million for the fiscal year ended December 31, 2011 to $1.36 million for the fiscal year ended December 31,

Our selling expenses consist primarily of

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

advertising and other marketing activities.

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

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

our oxygen therapy service initiative).

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

These selling expense decreases are a result

of operating efficiency improvements related to more focused marketing efforts that reduced travel expenses when appropriate.

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

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an operating income of approximately $4.39 million in 2012, compared to approximately $3.61 million in 2011.

Operating income decreased

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

Operating income

increased by 21.46% largely due to the decrease in selling expenses.

Our income tax expense was approximately

$0.86 million in 2012, compared to approximately $0.66 million in 2011.

Our taxable income decreased primarily due to the decrease

Our taxable income increased primarily due to the increase

in net income.

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interest in income, net income attributable to Dehaier was approximately $3.21 million and $3.10 million in 2012 and 2011, respectively.

Make-Good Escrow

On March 22, 2010, our founders placed an

aggregate of 600,000 common shares into escrow.

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

public offering (“IPO”).

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

Commission for the year ended December 31, 2010.

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

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

To the extent our earnings per share for

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

At December 31, 2010,

our earnings per share were $1.09.

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

The shares were returned to our

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

consolidated financial statements.

Liquidity and Capital Resources

Cash Flows and Working Capital

In 2010, we financed our operations primarily

from proceeds of common stock issuances.

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

December 31, 2011, we had approximately $3.69 million in cash and cash equivalents.

As a result of the total cash activities,

net cash decreased from $5,923,386 at December 31, 2010 to $3,694,486 at December 31, 2011.

We believe that our currently

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

sustain our current operations for at least 12 months.

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

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

As of December 31, 2012, we had $3,505,330

in cash and cash equivalents.

As a result of decreased cash flow associated with intellectual property investment, partially offset

by increased cash flow from operating activities, net cash decreased from $3,694,486 at December 31, 2011.

We believe that

our currently available working capital of $28,852,500, 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 in the future, we may need

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

Operating Activities

Net cash used in operating activities was

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

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

Our net income decreased primarily because of the increase of

operating costs and expenses in 2011.

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

The decrease in prepayment is attributable to the change to

our cooperating strategy with our suppliers.

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

The decrease in other receivables is mainly because

we collected refundable deposits from suppliers.

cash provided by operating activities was $1,704,876 for the year ended December 31, 2012 as compared to $3,161,752 used

in operating activities for the same period in 2011.

The reasons for this change are mainly as follows:

(i) Accounts receivable decreased by $344,341 in 2012, compared

with an increase of $3,797,045 in 2011.

The aggregate decrease

in accounts receivable from the beginning of 2011 through the

end of 2012 of $4,141,386 is attributable to better aging management,

which reduced accounts receivable amounts.

(ii) Prepayments and other current assets increased by $1,730,704

in 2012, while in 2011, it increased by $1,413,176.

The aggregate

increase of $3,143,880 in prepayments and other current assets

from the beginning of 2011 through the end of 2012 is due to

the Company’s decision to lock in supply costs by prepaying

certain amounts in order to avoid increases in raw material prices.

(iii) Other receivables increased by $1,617,781 in 2012,

while in 2011, other receivables decreased by $642,287.

This increase of $2,260,068 in other receivables from the beginning

of 2011 through the end of 2012 represents contract and contract

bid deposits to participate in large contracts, which typically

have a longer turnover than smaller contracts due to increased

completion time.

(iv) Inventories decreased by $931,844 in 2012, while in the 2011,

inventories decreased by $842,052.

The aggregate decrease

in inventories of $1,773,896 from the beginning of 2011 through

the end of 2012 is mainly because the Company improved its inventory

management by better matching production cycles with customer

Investing Activities

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

The increase in 2012

was mainly because the Company completed software copyright registrations for which it had previously invested in research and

Financing Activities

We received $2.4 million in proceeds from

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

The cash provided by financing activities for the year ended

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

a short-term bank loan in 2012, which was fully paid during the year, as compared to $1.5 million in 2011.

Contractual Obligations and Commercial Commitments

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Short-term borrowings represent short-term

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

loans from two banks, which are due in May 2013 and March 2014.

Capital Expenditures

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$2.73 million and $0.15 million in 2012 and 2011, respectively, representing 12.73% and 0.69% of our total revenues, respectively.

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

Our capital expenditures were used to purchase machinery for our assembly line and obtain software copyrights.

As of December

31, 2012, we had no capital expenditure obligations.

Off-Balance Sheet Commitments and Arrangements

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

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

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

We do not have any variable interest in any unconsolidated entity

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

services with us.

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

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

We do not have any variable interest in any unconsolidated

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

development services with us.

Tax Matters Applicable to Our Company

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

DHK is subject to Hong Kong

profits tax rate.

Our company pays PRC enterprise income taxes,

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

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

PRC enterprise income tax is calculated based

on taxable income determined under PRC accounting principles.

In accordance with the Enterprise Income Tax Law (the “EIT

Law”), a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested

enterprises and foreign-invested enterprises.

Enterprises established prior to March 16, 2007 eligible for preferential tax

treatment in accordance with the currently prevailing tax laws and administrative regulations shall, under the regulations of the

State Council, gradually become subject to the EIT Law rate over a five-year transition period starting from the date of effectiveness

of the EIT Law.

The details of the transitional arrangement for the five-year period from January 1, 2008 to December 31,

2012 applicable to enterprises approved for establishment prior to March 16, 2007, such as our company, were adopted in January

PRC enterprise income tax is calculated

based on taxable income determined under PRC accounting principles.

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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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.

In addition, entities that qualify as “high

and new technology enterprises”

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

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.

Under the current PRC laws, PRC government

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ended December 31, 2012 and 2011.

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

In 2012, the Company renewed the high technology company status to maintain its 15% income tax

The current preferential rate is scheduled to expire unless renewed in 2015.The income tax rate for BTL was 25% in 2011

PRC Value Added Tax

Pursuant to the Provisional Regulation of

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

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

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

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

of services that have generated the gross sales proceeds.

All entities and individuals that are engaged

in the businesses of sales of goods, provision of repair and placement services and importation of goods into China are generally

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

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

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

PRC Business Tax

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United States Tax

As of December 31, 2011, Breathcare LLC was

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

federal income tax

at the entity level.

As of December 31, 2012, Breathcare LLC

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

federal income tax at

the entity level.

Moreover, to date, Breathcare LLC has not generated any revenues.

Critical Accounting Policies

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the entity that is most closely associated with BTL.

Dehaier has included BTL in its consolidated financial statements through

the consolidation with BDL since December 31, 2006.

Dehaier, BDL and BTL were under common control until October 31,

2009, when each share of preferred share was converted into a common share.

Because the Chief Executive Officer held more than

50% of the voting ownership interest of each of Dehaier, BDL and BTL at December 31, 2006, the Company initially measured

the assets, liabilities and non-controlling interest of the VIE at the amounts at which they were carried in the accounts of the

reporting entity that controls the VIE.

On October 31, 2009, BDL reconsidered whether

it is the primary beneficiary of BTL when Dehaier’s preferred stock was converted into common shares.

While such conversion

dilutes the Chief Executive Officer’s interest in BDL such that BDL and BTL are not under common control after October 31,

2009, BDL still has the obligation to absorb the expected losses of BTL.

BTL is still a VIE because all of its activities either

involve or are conducted on behalf of the reporting enterprise and its related parties.

BDL is BTL’s only customer referral

On March 3, 2010, BDL entered into a Loss Absorption Agreement memorializing the understanding that BDL would continue

to loan money to BTL as needed to fund its working capital such that BDL would absorb BTL’s losses.

Management makes ongoing

reassessments of whether BDL is the primary beneficiary of BTL.

Management makes ongoing reassessments of whether BDL is the primary beneficiary

Use of Estimates

The preparation

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

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

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

are adjusted to reflect actual experience when necessary.

Significant accounting estimates reflected in the Company’s consolidated

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

compensation and useful lives of property and equipment.

Actual results could differ from those estimates.

The preparation of the consolidated financial

statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and

disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts

of revenues and expenses during the reporting periods.

Estimates are adjusted to reflect actual experience when necessary.

accounting estimates reflected in the Company's consolidated financial statements include revenue recognition, allowance for doubtful

accounts, warranty obligation, warrants liability, stock-based compensation and useful lives of property and equipment.

results could differ from those estimates.

Accounts Receivable

Accounts receivable are recorded at net realizable

Accounts receivable terms typically are net 60-180 days from the end of the month in which the services were provided, or

when goods were delivered.

The company generally does not require collateral or other security to support accounts receivable.

An allowance, if required, is based on a combination of historical experience, aging analysis, and an evaluation of the collectibility

of specific accounts.

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

In 2011, after assessing the distributors’

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

Accounts receivable are recorded at net

realizable value.

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

or goods are delivered.

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

We general require 100% prepayment

before delivering our products to individual clients.

Our contract terms general require 10%-30% prepayment for our hospital and

healthcare center clients, and the trade receivable term in contracts for those clients is generally between 60 and 90 days.

contract terms general require 10% prepayment from our distributor clients, and the trade receivable term in contracts for those

clients is generally between 60 and 180 days.

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

not require collateral or other security to support accounts receivable.

An allowance, if required, is based on a combination

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

Fair Value of Financial Instruments

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

The Company follows the provisions of ASC

820-10, “Fair Value Measurements and Disclosures,”

which establishes a single authoritative definition of fair value

and a framework for measuring fair value and expands disclosure of fair value measurements for both financial and nonfinancial

assets and liabilities.

This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures.

This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach

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

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

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

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

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

The Company adopted the provisions of ASC

topic 815, “Derivatives and Hedging.”

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

to an entity’s own stock.

ASC topic 815 became effective for the Company when warrants were issued in connection with the

Company’s initial public offering.

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

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

The fair value of the warrants

liability is measured each reporting period with the resulting change in fair value recorded in the consolidated statement of income

and comprehensive income.

The accounting standards regarding fair value

of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for

disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

The three levels are defined as follows:

Level 1 inputs to the valuation

methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation

methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the

asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation

methodology are unobservable and significant to the fair value measurement.

Warrants liabilities qualify as financial instruments,

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

Financial assets and liabilities are classified

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

The fair value of

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

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

Impairment of Long-Lived Assets

The Company reviews its long-lived assets

for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.

When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated

undiscounted future cash flows expected to result from the use of the asset and eventual disposition.

If the sum of the expected

future cash flows is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount

over the fair value of the asset, is recognized.

Topic 815 (formerly Emerging Issue Task Force 07-5), “Determining Whether an Instrument (or an Embedded Feature) is Indexed

to an Entity’s Own Stock.”

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

an entity’s own stock.

ASC Topic 815 became effective for the Company 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 due to a change in fair value would decrease net

income and earnings per share.

A decrease in warrants liability due to a change in fair value would increase net income and earnings

per share of the Company.

Revenue Recognition

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is reasonably assured.

All revenues are based on firm customer orders

with fixed terms and conditions.

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

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 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.

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

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

The Company uses the asset and liability

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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.

As of December 31, 2011, the

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

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

allowance against our deferred tax asset.

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

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 2008 and 2009 Value Added Tax (“VAT”) returns for some of its customers.

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

The implementation of ASC 740-10 resulted

in no material liability for unrecognized tax benefits.

As of December 31, 2011 and 2010, the Company did not have a liability

for any unrecognized tax benefits.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits

as income tax expense in the statement of operations.

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

any interest or penalties.

The tax benefit of a

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

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

A liability (including

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

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

Related interest and

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

The Company is awaiting resolution

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

its customers.

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

financial statements.

Stock-Based Compensation

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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-K

Item 5. Market for Registrant’s Common Equity