Newegg Commerce, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market for Our Common Shares Our common shares are traded on the NASDAQ Stock Market under the symbol DHRM. The high and low common stock sales prices per share during the periods indicated were as follows: Quarter Ended Mar. 31 June 30 Sept. 30 Dec. 31 Year Fiscal year 2012 Price per common share: High $ 3.38 $ 3.95 $ 2.99 $ 2.50 $ 3.95 Low $ 1.26 $ 1.59 $ 1.47 $ 1.54 $ 1.26 Fiscal year 2011 Price per common share: High $ 7.74 $ 5.30 $ 3.30 $ 2.08 $ 7.74 Low $ 4.90 $ 2.18 $ 1.95 $ 1.40 $ 1.40 Approximate Number of Holders of Our Common Shares As of the date of this report there are 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 We have never declared or paid any cash dividends on our common shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant. 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. On April 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. (c) None. 14 Item 6. Selected Financial Data. The Company is not required to provide the information required by this Item because the Company is a smaller reporting company. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described herein. Company Overview We are a company in the business of developing and distributing medical devices. We have focused on developing respiratory and oxygen homecare products in particular since 2006. We distribute products designed and manufactured by other companies. We broaden our product portfolio through distribution agreements with international manufacturers, and most of the products we distribute are imported. Our distribution offerings are mostly equipment used in the operating room, the intensive care unit (“ICU”) and the emergency room. Besides distributing medical devices, we also design, develop and market our own proprietary products and medical components. Because we do not run any manufacturing facilities, we contract some of the medical components to outside manufacturers in China. Most of our proprietary products require light assembly by us before distribution. We sell our products primarily through distributors, but we also make direct sales to hospitals, clinics, government health bureaus and 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 In 2011, the Chinese Ministry of Science and Technology announced a medical technology development policy under the “12th Five-Year Plan,” proposing to transfer business focus to the development of new drugs, medical equipment and advanced traditional Chinese medicine, and to the development of the emerging industries of biomedicine. The plan focuses on researching and developing the medium- and high-level diagnostic and curative medical devices which are in high demand and widely used, actively promoting the development of cost-effective medical devices for use in primary health care institutions, enhancing the stability and reliability of medical services and products and researching and developing supplementary medical equipment which can be easily operated for family and self-healthcare. Under the 12th Five-Year Plan, China will proactively promote the reform of healthcare infrastructure system and offer safe, effective, convenient and low-cost medical services to its residents. 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. 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 of China’s home medical equipment market. As residents’ living standards and consumption structure change, the demand for healthcare services and self-care will substantially increase, creating growth opportunities for participants in the market. In summary, as a vital component of China’s current health system reform, the medical device industry has been incorporated into the national strategic development plan. In 2013, we anticipate new opportunities, combined with favorable government policies, will position us for continued growth. New Opportunities in Our Business Chinese government programs are aimed at rebuilding and renovating urban health centers, and building hospitals and medical centers in rural areas. The government is setting up the goal of having one up-to-standard hospital in every county, one government-run medical center in every township and one clinic in every administrative village. Major portion of the domestic large-scale medical equipment procurement is government centralized procurement. For example, China Development Bank launched the “Supporting Health Infrastructure in Rural Areas” Program with a $690 million budget in the three years from 2011 through 2013. 15 Fortune magazine predicted homecare medical equipment to be ranked first among the fastest-growing industries in the 21st century. In western countries with mature and large health care markets, home medical equipment accounts for 40% of the entire medical device output. However, 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 Chinese population over the age of 60 will increase from 167 million in 2010 to 440 million in 2050; hence, the aging population and increasing incidence of respiratory disorders are expected to drive additional growth in respiratory homecare products in the Chinese marketplace. 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 in Beijing. Based on the data shown above, both from a market and a government perspective, we are leveraging our broad sales network in order to introduce additional products from leading international brands into the Chinese market and participating in government healthcare projects. At the same time, we will also increase our investment in R&D, continue marketing penetration for our proprietary products, expand coverage for home oxygen therapy service and focus on broadening international markets. We believe that the favorable market conditions will support growth in sales and that our market expansion strategy will benefit our business growth in the future. Growth Strategy We 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 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. We also 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 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 Overview 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. 16 Factors Affecting Our Results of Operations – Generally We believe the most significant factors that directly or indirectly affect our sales revenues and net income are: • 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; and • global economic conditions. Revenues Our total revenues are derived from our medical devices and our respiratory and oxygen homecare products and services. 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 We derive revenues in our medical devices product line from the sale of C-arm X-ray systems, anesthesia machines, medical ventilators, general hospital products and related supporting products (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. 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. 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, 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 Our operating costs and expenses consist of cost of revenues, general and administrative expenses, selling expenses and other expenses. Our total operating costs and expenses 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. 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. 17 For the year ended December 31, 2012 2011 Change USD (‘000) % USD (‘000) % USD (‘000) % Revenues 21,370 100.00 21,639 100.00 (269 ) -1.24 % Costs and expenses Cost of revenues 13,255 62.03 13,697 63.30 (442 ) -3.23 General and administrative expense 2,599 12.16 2,621 12.11 (22 ) -0.84 Selling expense 1,358 6.35 1,877 8.67 (519 ) -27.65 Total costs and expenses 17,212 80.54 18,195 84.08 (983 ) -5.40 Net Income 3,216 15.05 3,126 14.45 90 2.88 Cost of Revenues 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 General and administrative expenses consist primarily of salaries and benefits and related costs for our administrative personnel and management, fees and expenses of our outside advisers, including legal, audit and valuation expenses, expenses associated with our administrative offices and the depreciation of equipment used for administrative purposes. We expect that our general and administrative expenses will increase, both on an absolute basis and as a percentage of revenue, as we hire additional personnel and incur costs related to the anticipated growth of our business. In addition, we expect to continue to incur significant general and administrative expenses as a public company. Selling Expenses Selling expenses consist primarily of compensation and benefits for our sales and marketing staff, expenses for promotional, advertising, travel and entertainment activities, lease payments for our sales offices, and depreciation expenses related to equipment used for sales and marketing activities. Going forward, we expect our selling expenses to increase, both on an absolute basis and as a percentage of revenue, as we increase our efforts to promote our products, especially our new respiratory and oxygen homecare products. Results of Operations We believe that period-to-period comparisons of operating results should not be relied upon as indicative of future performance. Fiscal Year Ended December 31, 2012 Compared to Fiscal Year Ended December 31, 2011. Revenues Our 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. Management 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. 18 Cost of Revenues Our 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. Gross Profit Our gross profit increased from $7.94 million 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 income. Operating Expenses Our 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 Expenses General and administrative expenses consist primarily of salaries and benefits and related costs for our administrative personnel and management, and expenses associated with our research and development, registration of patent and intellectual property rights in China and abroad. Our general and administration expenses 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. 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.. 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, 2012. 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 As a result of the foregoing, we generated an operating income of approximately $4.39 million in 2012, compared to approximately $3.61 million in 2011. Operating income increased by 21.46% largely due to the decrease in selling expenses. Taxation Our income tax expense was approximately $0.86 million in 2012, compared to approximately $0.66 million in 2011. Our taxable income increased primarily due to the increase in net income. Net Income As a result of the foregoing, we had net income of approximately $3.22 million in 2012, compared to approximately $3.13 million in 2011. After deduction of non-controlling interest in income, net income attributable to Dehaier was approximately $3.21 million and $3.10 million in 2012 and 2011, respectively. 19 Liquidity and Capital Resources Cash Flows and Working Capital 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 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 orders. Investing Activities Net cash used in investing activities for the year ended December 31, 2012 was $2,726,507, compared to $155,419 for the same period of 2011. The cash used in investing 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 development. Financing Activities We received $2.4 million in proceeds from 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 The following table sets forth our contractual obligations as of December 31, 2012: Payments due by period Contractual obligations Total Less than 1 year 1-3 years More than 3 years Operating Lease Obligations $ 144,451 $ 97,589 $ 46,862 - Short-term borrowings $ 2,407,200 $ 2,407,200 - - Total $ 2,551,651 $ 2,504,789 $ 46,862 - The leased properties are principally located in the PRC, and we use such properties for administration and warehouse facilities. The leases are renewable subject to negotiation. Short-term borrowings represent short-term loans from two banks, which are due in May 2013 and March 2014. 20 Capital Expenditures We made capital expenditures of approximately $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 and obtain software copyrights. As of December 31, 2012, we had no capital expenditure obligations. Off-Balance Sheet Commitments and Arrangements We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. Tax Matters Applicable to Our Company Generally Dehaier is a tax-exempt company incorporated in the British Virgin Islands. BDL and BTL were incorporated in the PRC and are governed by PRC laws. The Company pays PRC enterprise income taxes, value added taxes and business taxes in China for revenues from BDL, and is governed by British Virgin Islands tax laws as to Dehaier. British Virgin Islands Tax We are exempt from all provisions of the Income Tax Act of the British Virgin Islands, including with respect to all dividends, interests, rents, royalties, compensation and other amounts payable by or to persons who are not resident in the British Virgin Islands. Capital gains realized with respect to any of our shares, debt obligations or other securities by persons who are not resident in the British Virgin Islands are also exempt from all provisions of the Income Tax Act of the British Virgin Islands. No estate, inheritance tax succession or gift tax rate, duty, levy or other charge is payable by persons who are not resident in the British Virgin Islands with respect to any of our shares, debt obligations, or other securities. No stamp duty is payable in the British Virgin Islands in relation to a transfer of shares in a British Virgin Islands Business Company. PRC Enterprise Income Taxes 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 31, 2012. Furthermore, under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global income. If the PRC tax authorities subsequently determine that we or any of our non-PRC subsidiaries should be classified as a PRC resident enterprise, then such entity’s global income will be subject to PRC income tax at a tax rate of 25%. In addition, under the EIT Law, payments from BDL to us may be subject to a withholding tax. The EIT Law currently provides for a withholding tax rate of 20%. If Dehaier is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 10% on any dividends paid by its Chinese subsidiaries to Dehaier. In practice, the tax authorities typically impose the withholding tax rate of 10% rate, as prescribed in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance is provided by relevant government authorities. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact. 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. 21 Under the current PRC laws, PRC government grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the period of validity for the certification of high technology companies is three years. In 2009, BDL renewed its certification for “high technology” company, and qualified for the 15% income tax rate to calculate the income tax expense for the periods ended December 31, 2012 and 2011. In 2012, the Company renewed the high technology company status to maintain its 15% income tax rate. The current preferential rate is scheduled to expire unless renewed in 2015.The income tax rate for BTL was 25% in 2011 and 2012. PRC Value Added Tax All entities and individuals that are engaged in the businesses of sales of goods, provision of repair and placement services and importation of goods into China are generally subject to a VAT at a rate of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross sales proceeds received, less any VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in the production of goods or provisions of services that have generated the gross sales proceeds. PRC Business Tax Companies in China are generally subject to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20% on revenue generated from providing services and revenue generated from the transfer of intangibles. United States Tax 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 Basis of Consolidation The consolidated financial statements include the accounts of Dehaier, and its majority-owned and wholly-owned subsidiaries (collectively, the “Company”). All significant inter-company transactions and balances are eliminated in consolidation. A group of shareholders, including the Chief Executive Officer, originally held more than 50% of the voting ownership interest of Dehaier, BDL and BTL. BTL is a variable interest entity (“VIE”), and BDL is the primary beneficiary. BTL owns a building which is pledged as collateral for BDL’s bank loans. In exchange, BDL loans money to BTL to finance its operations. BTL’s primary operation is to provide repairs and transportation services to BDL’s customers. Because of these arrangements, BDL is the primary beneficiary of BTL, as the entity that is most closely associated with BTL. Management makes ongoing reassessments of whether BDL is the primary beneficiary of BTL. 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. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company's consolidated financial statements include revenue recognition, allowance for doubtful accounts, warranty obligation, warrants liability, stock-based compensation and useful lives of property and equipment. Actual results could differ from those estimates. Accounts Receivable Accounts receivable are recorded at net realizable value. Accounts receivable terms typically are 60-180 days from the end of the month in which services are provided or goods are delivered. Our typical trade receivable terms vary based on the type of customer. We general require 100% prepayment before delivering our products to individual clients. Our contract terms general require 10%-30% prepayment for our hospital and healthcare center clients, and the trade receivable term in contracts for those clients is generally between 60 and 90 days. Our contract terms general require 10% prepayment from our distributor clients, and the trade receivable term in contracts for those clients is generally between 60 and 180 days. With the exception of the prepayments we require in some cases, 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. 22 Fair Value of Financial Instruments The carrying amounts reported in the consolidated financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial instruments. The Company follows the provisions of ASC 820-10, “Fair Value Measurements and Disclosures,” which establishes a single authoritative definition of fair value and a framework for measuring fair value and expands disclosure of fair value measurements for both financial and nonfinancial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows) and the cost approach (cost to replace the service capacity of an asset or replacement cost). For purposes of ASC 820-10-15, nonfinancial assets and nonfinancial liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in ASC 820-10-15-15-1A. The Company adopted the provisions of ASC Topic 815 (formerly Emerging Issue Task Force 07-5), “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock.” ASC Topic 815 provides a framework for determining whether an instrument is indexed to an entity’s own stock. ASC Topic 815 became effective for the Company this period when warrants were issued in connection with the Company’s initial public offering (“IPO”). Such warrants are indexed to the Company’s common shares, which is traded in US dollars. Since the Company’s functional currency is the RMB, such warrants are considered liabilities. The fair value of the warrant liabilities is measured each reporting period with the resulting change in fair value recorded in the statement of operations. 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 The Company recognizes revenues when all the followings conditions have been satisfied: · Persuasive evidence of an arrangement exists; · Delivery and/or installation has occurred (e.g., risks and rewards of ownership has passed); · The sales price is fixed or determinable; and, · Collectibility is reasonably assured. All revenues are based on firm customer orders with fixed terms and conditions. Because the products are assembled to the customers’ specification, there is no right of return. The Company does not provide its customers with price protection or cash rebates. For products which include software, the software is an off-the-shelf package and an integral part of the products being delivered. The Company does not provide any significant post-sale customer support services and does not provide customers with upgrades. The software is incidental to the product as a whole. For products that do not require installation, revenues are recognized when the products are delivered. For products that require installation, revenues are recognized when the installation is completed. Income Taxes The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. 23 ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties, if any, are included as components of income tax expense and income taxes payable. The Company is awaiting resolution of certain complex tax issues and has not yet filed its 2008 and 2009 Value Added Tax (“VAT”) returns for some of its customers. However, all the potential VAT liabilities on these VAT returns were accrued and included in the accompanying consolidated financial statements. Stock-Based Compensation The Company follows the provisions of ASC 718-10, “Compensation-Stock Compensation.” The Company has a share incentive plan which authorizes the issuance of up to 10% of the number of shares outstanding. Pursuant to the plan, the Company may issue options to purchase its common shares to employees and directors of the Company and its affiliates. The Company fair values share-based awards granted under the plan. Accordingly, compensation is measured on the grant date using appropriate valuation models. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.