Newegg Commerce, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. The Company’s financial statements and the related notes, together with the report of Friedman LLP are set forth following the signature pages of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A/9A(T). Controls and Procedures. Evaluation of Disclosure Controls and Procedures As of December 31, 2012 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision of and with the participation of management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on the foregoing, the chief executive officer and chief financial officer concluded that as of the Evaluation Date the company’s disclosure controls and procedures were effective and designed to ensure that all material information required to be included in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decision regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the recording of transactions of the Company’s assets; 24 (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements, Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2012. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on this assessment, the Company’s management believes that, as of the Evaluation Date, its internal control over financing reporting is effective based on the criteria established in the Internal Control—Integrated Framework issued by COSO. Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three or twelve months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting. Item 9B. Other Information. None. PART III Item 10. Directors, Executive Officers and Corporate Governance. Regulation S-K Item 401: Executive Officers and Directors The following table sets forth our executive officers and directors, their ages and the positions held by them: Name Age Position Held Ping Chen (1)(2) 48 Chief Executive Officer and Chairman and Director Jingli (Charles) Li (1) 27 Chief Financial Officer Weibing Yang (1)(3) 45 Director Yunxiang (Phil) Fan (1)(3)(4)(5)(6) 45 Independent Director Genhui Chen (1)(4)(5)(6)(7) 48 Independent Director Mingwei Zhang (1)(4)(5)(6)(7) 59 Independent Director (1) The individual’s business address is c/o Suite 501, Jiuzhou Plaza, 83 Fuxing Road, Haidian District, Beijing 100856 China. (2) Class III director whose term expires in 2015. (3) Class II director whose term expires in 2014. (4) Member of audit committee. (5) Member of compensation committee. (6) Member of nominating committee. (7) Class I director whose term expires in 2013. Ping Chen. Mr. Chen is our Chief Executive Officer. Prior to his service as our Chief Executive Officer, from 1993-2000, Mr. Chen served as the CEO of Beijing Chengcheng Medical Electronic Equipment Co. Prior to 1993, Mr. Chen served as an engineer at the No. 2 Academy, Ministry of Aeronautics and Astronautics from 1987 to 1991 and moved up to the Head of the Civilian Products Division there from 1991-1993. Mr. Chen founded BTL in 2001 and has served as CEO since that time. Mr. Chen received his bachelor’s degree in 1984 from the National University of Defense Technology and his master’s degree in 1987 from the Ministry of Aeronautics and Astronautics. Mr. Chen has been chosen as a director because he is our CEO, the leader of our Company and a key experienced member of management. 25 Jingli (Charles) Li . Mr. Li is our Chief Financial Officer and is familiar with US GAAP, China GAAP and the Sarbanes-Oxley Act. Mr. Li has supported Dehaier with the establishment of its internal control system and procedures since November 2010. He previously worked as a senior auditor in KPMG Huazhen Beijing from September 2008 through November 2010. Mr. Li earned his bachelor degree in Economics at Beijing University of Technology in 2008 and is a member of the Internal Control Institute as a Certified Internal Control Specialist. Weibing Yang. Dr. Yang has served as the Registrant’s vice president of sales and marketing since 2003. Dr. Yang was a sales director at Beijing Dehaier Technology Company Limited from 2001 through 2003. From 1996 to 1997, Dr. Yang was a product manager at Amtronix Inc., a medical equipment company. From 1993 to 1996, Dr. Yang served as a sales manager at Planmeca Medical Equipment Co. From 1989 to 1992, Dr. Yang was a doctor at the Affiliated Hospital of Shipbuilding Industry Group. Dr. Yang graduated from the Medical School of SooChow University in 1989. Dr. Yang was chosen as a director because of his extensive experience in sales and marketing of medical equipment. Yunxiang (Phil) Fan. Mr. Fan is a director of our company. In 2003, Mr. Fan co-founded Tri-Tech Holding Inc., a company operating in the water pollution remediation, software and engineering industry in China (“Tri-Tech”). He currently serves as the President and a director of Tri-Tech. Prior to founding Tri-Tech, Mr. Fan provided technical, engineering and management services in several U.S. engineering firms, including Black and Beatch, Parsons Brinckerhoff, Inc., and Chastain-Skillman, Inc. From 2003 through 2005, Mr. Fan was the Asia Regional Sales Manager for Met-Pro Corporation. Mr. Fan earned his bachelor’s and master’s degrees in environmental engineering from Hunan University and a master’s degree in civil engineering from Louisiana State University. Mr. Fan has been a registered professional engineer in the United States since 2001. Mr. Fan was chosen as a director because we believe we can benefit from the guidance of the president of a Chinese company publicly traded in the U.S. Genhui Chen. Dr. Chen is president of Beijing Wenfeng Medical Technology Ltd. (“BWMT”), a privately-held pharmaceutical research and development company focusing on novel cancer and dermatological products. Dr. Chen has over 15 years of experience, from1993 to 2008, in the pharmaceutical industry in the areas of clinical research, regulatory compliance, corporate development and management, for a variety of companies ranging from start-ups to public companies, both in Canada and in China. Prior to joining BWMT in 2010, Dr. Chen was a founder, president and chief executive officer of Welichem Biotech Inc., a Canadian pharmaceutical company listed on the TSX Venture Exchange since 2008. From 1999 until he founded Welichem, Dr. Chen was a senior scientist at Terragen Discovery Inc., a subsidiary of Cubist Pharmaceuticals. Dr. Chen received his M.Sc. and Ph.D. degrees in biology from Simon Fraser University in Vancouver, Canada in 1988 and 1991, respectively. Dr. Chen was chosen as a director because of his extensive experience in research and development, regulatory compliance, corporate development and management. Mingwei Zhang . Mr. Zhang has extensive knowledge and experience in accounting from the perspective as an academic and a practicing accountant. Since September 2007, Mr. Zhang has served as Chief Financial Officer and a Director of Sino-Global Shipping America, Ltd. (NasdaqCM: SINO). From May 2001 until December 2007, Mr. Zhang was a partner in Baker Tilly China, an international public accounting firm. From July 1994 to June 2003, he served as a Lecturer at Monash University in Australia. Mr. Zhang received a Bachelor’s degree and a Master’s degree in Accounting from Tianjin University of Finance and Economics. He also received a Master’s degree in Commerce from the University of Newcastle. Mr. Zhang is a Certified Management Accountant in Australia. Mr. Zhang was chosen as a director because of his financial experience. Employment Agreements Under Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one month prior to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty to our company, where the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect to us. Our employment agreements with our executive officers generally provide for a term of three (3) years and a salary to be paid monthly. The agreements also provide that executive officers are to work an average of forty hours per week and are entitled to all legal holidays as well as other paid leave in accordance with PRC laws and regulations and our internal work policies. Under such agreements, our executive officers can be terminated for cause without further compensation. The employment agreements also provide that we will pay for all mandatory social security programs for our executive officers in accordance with PRC regulations. During the agreement and for one (1) year afterward, our executive officers are subject to keep trade secrets confidential. 26 Share Option Pool In connection with our initial public offering, we established a pool for share options for our employees. This pool contains options to purchase up to 450,000 of our common shares. The options will vest at a rate of 20% per year for five years and have an exercise price of the market price of our shares on the date the options are granted. As of the date of this report, we have issued all 450,000 options out of our employee share option pool. Board of Directors and Board Committees Our board of directors currently consists of 5 directors. There are no family relationships between any of our executive officers and directors. The directors are divided into three classes. Class I directors shall face re-election at our annual general meeting of shareholders in 2013 and every three years thereafter. Class II directors shall face re-election at our annual general meeting of shareholders in 2014 and every three years thereafter. Class III directors shall face re-election at our annual general meeting of shareholders in 2015 and every three years thereafter. A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion. There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). Messrs. Fan, Zhang and Genhui Chen are our independent directors. Mr. Ping Chen currently holds both the positions of Chief Executive Officer and Chairman of the Board. These two positions have not been consolidated into one position; Mr. Chen simply holds both positions at this time. We do not have a lead independent director because of the foregoing reason and also because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a smaller reporting company in the process of listing on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr. Chen as both our principal executive officer and Chairman of the Board. Board Committees Currently, three committees have been established under the board: the audit committee, the compensation committee and the nominating committee. The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements of our company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those plans). The nominating committee of the board of directors is responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience when nominating directors. Duties of Directors Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our third amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached. The functions and powers of our board of directors include, among others: • appointing officers and determining the term of office of the officers; 27 • authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable; • exercising the borrowing powers of the company and mortgaging the property of the company; • executing checks, promissory notes and other negotiable instruments on behalf of the company; and • maintaining or registering a register of mortgages, charges or other encumbrances of the company. Limitation of Director and Officer Liability British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Under our third amended and restated memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law. Involvement in Certain Legal Proceedings To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities or commodities laws, any laws respecting financial institutions or insurance companies, any law or regulation prohibiting mail or wire fraud in connection with any business entity or been subject to any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization, except for matters that were dismissed without sanction or settlement. Regulation S-K Item 405: Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under 17 CFR 240.16a-3(e) during its most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and any written representation referred to in paragraph (b)(1) of this section, the Company is not aware of any director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company registered pursuant to Section 12 that failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) during the most recent fiscal year or prior years. Regulation S-K Item 406: The Company has adopted a Code of Ethics and has filed a copy of the Code of Ethics with the Commission as an exhibit to the Registration Statement. Regulation S-K Item 407(c)(3): None. 28 Regulation S-K Item 407(d)(4) and (5): The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). The Company has an audit committee, consisting solely of independent directors of the Company, Mr. Yunxiang (Phil) Fan, Mr. Genhui Chen and Mr. Mingwei Zhang. Mr. Zhang qualifies as the audit committee financial expert. The Company’s audit committee charter was filed as Exhibit 99.2 to the Company’s annual report for the year ended December 31, 2009 and is available on the Company’s website (www.dehaier.com.cn). Item 11. Executive Compensation. Executive Compensation The following table shows the annual compensation paid by us for the years ended December 31, 2011 and 2012 to Ping Chen, our principal executive officer. No other officer had a salary during either of the previous two years of more than $100,000. Summary Executive Compensation Table Name and principal position Year Salary Bonus Option Awards All Other Compensation Total Ping Chen, 2012 $ 36,520 $ 0 $ 0 $ 0 $ 36,520 Principal Executive Officer 2011 $ 35,656 $ 0 $ 183,000 (1) $ 0 $ 218,656 (1) On December 29, 2011, 150,000 share options were awarded to Mr. Chen, which options vest over a period of five years, the first 20% of which vested on December 29, 2012. The grant date fair value of the options is $1.22. Director Compensation All directors hold office until the next annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been duly elected and qualified. There are no family relationships among our directors or executive officers. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services. Non-employee directors are entitled to receive payment for serving as directors and may receive option grants from our company. For service on our Board of Directors, Mr. Zhang receives $4,000 per year, and Mr. Fan and Mr. Genhui Chen receive $2,000 per meeting attended. Summary Director Compensation Table Name Fees earned or paid in cash Option awards Total (1) Ping Chen (2) $ 36,520 $ 0 $ 36,520 Yunxiang (Phil) Fan $ 4,000 $ 0 $ 4,000 Jimin (Peter) Zhuo(3) $ 4,000 $ 0 $ 4,000 Genhui Chen $ 0 $ 0 $ 0 Weibing Yang (2) $ 21,600 $ 0 $ 21,600 Mingwei Zhang (4) $ 4,000 $ 0 $ 4,000 (1) None of the directors received any common share awards, option awards, nonqualified deferred compensation earnings or non-equity incentive plan compensation in fiscal year 2012. (2) Mr. Ping Chen and Mr. Yang received compensation in their capacity as officers of our company and/or subsidiaries/affiliates but did not receive any compensation for serving as directors of our company. (3) Mr. Zhuo ceased to be a director of our company on March 1, 2012. (7) Mr. Zhang became a director of our company on March 1, 2012. 29 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 450,000 $ 1.45 0 Principal Shareholders The following table sets forth information with respect to beneficial ownership of our common shares as of March 18, 2013 by: • Each person who is known by us to beneficially own more than 5% of our outstanding common shares; • Each of our directors and named executive officers; and • All directors and named executive officers as a group. The number and percentage of common shares beneficially owned are based on 4,620,000 common shares outstanding as of March 18, 2013. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of common shares beneficially owned by a person listed below and the percentage ownership of such person, common shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of March 18, 2013 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all common shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of BDL, Room 501, Jiuzhou Plaza, 83 Fuxing Road, Haidian District, Beijing 100856, People’s Republic of China. As of the date of this filing, we have ten (10) shareholders of record. Named Executive Officers and Directors Amount of Beneficial Ownership (1) Percentage Ownership (2) Ping Chen, CEO, Director 1,134,742 (3) 24.56 % Weibing Yang, VP of Sales and Marketing, Director 273,471 (4) 5.91 % Yunxiang (Phil) Fan 8,000 (5) * Genhui Chen 4,000 (5) * Mingwei Zhang 0 (5) * All officers and directors as a group 1,368,213 29.97 % Chen Ping Ltd. 1,104,742 (3) 24.20 % * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common shares. (2) The number of our common shares outstanding used in calculating the percentage for each listed person excludes the common shares underlying options held by such person. (3) Ping Chen has the sole power to direct the voting and disposition of the 1,104,742 shares held by Chen Ping Ltd. The number also includes 30,000 shares underlying options, which will have vested within 60 days hereof. (4) The number also includes 10,000 shares underlying options, which will have vested within 60 days hereof. (5) The number represents shares underlying options, which will have vested within 60 days hereof. Item 13. Certain Relationships and Related Transactions, and Director Independence. Since the beginning of Dehaier’s last fiscal year, there have been no related party transactions required to be disclosed pursuant to Item 404(d) of Regulation S-K. 30 Promoters and Certain Control Persons We did not have any promoters at any time during the past five fiscal years. Except as set forth in our discussion above, none of our directors or officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC. Director Independence The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). Messrs. Fan, Zhang and Genhui Chen are our independent directors. Item 14. Principal Accountant Fees and Services. Friedman LLP was appointed by the Company to serve as its independent registered public accounting firm for fiscal 2011. Audit services provided by Friedman LLP for fiscal 2011 included the examination of the consolidated financial statements of the Company; and services related to periodic filings made with the SEC. Fees Paid To Independent Registered Public Accounting Firm Audit Fees During fiscal 2012 and 2011, Friedman LLP’s fees for the annual audit of our financial statements and the quarterly reviews of the financial statements were $181,000 and $175,000, respectively. Audit Related Fees The Company has not paid Friedman LLP for audit-related services in fiscal 2012 and 2011. Tax Fees The Company has not paid Friedman LLP for tax services in fiscal 2012 and 2011. All Other Fees The Company has not paid Friedman LLP for any other services in fiscal 2012 and 2011. Audit Committee Pre-Approval Policies Before Friedman LLP was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s audit committee. All services rendered by Friedman LLP have been so approved. Percentage of Hours The percentage of hours expended on the principal accountants’ engagement to audit our consolidated financial statements for 2012 that were attributed to work performed by persons other than Friedman LLP’s full-time permanent employees was 75%. 31 Item 15. Exhibits, Financial Statement Schedules. The following documents are filed herewith: Exhibit Number Document 3(i).1 Third Amended and Restated Articles of Association of the Registrant (1) 3(ii).1 Third Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (1) 10.1 Form of Share Option Plan (1) 10.2 Translation of lease agreement for Product Center dated September 23, 2008 (1) 10.3 Translation of Production Agreement with Friend of Health (Chuzhou) Medical Technology Co., Ltd. (1) 10.4 Mortgage Contract between ICBC and BTL (1) 10.5 Indemnification and Guarantee Contract between Ping Chen and BTL (1) 10.6 Description of oral loan contract between BTL and BDL (1) 10.7 Loss Absorption Agreement between BDL, BTL and shareholders of BTL (1) 21.1 Subsidiaries of the Registrant (2) 23.1 Consent of Friedman LLP, independent registered public accounting firm (2) 31.1 Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) 31.2 Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3) 32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3) 99.1 Code of Business Conduct and Ethics (1) 99.2 Audit Committee Charter (4) 99.3 Press release dated March 18, 2013, titled “Dehaier Medical Announces 2012 Fourth Quarter and Year End Financial Results.” 101.INS XBRL Instance Document (3) 101.SCH XBRL Taxonomy Extension Schema Document (3) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (3) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (3) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (3) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (3) (1) Incorporated by reference to the registrant’s registration statement on Form S-1, File no. 333-163041, filed on November 12, 2009, as amended. (2) Filed herewith. (3) Furnished herewith. (4) Incorporated by reference to the registrant’s Form 10-K, File no. 001-34661, filed on March 31, 2010. 32 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DEHAIER MEDICAL SYSTEMS LIMITED March 18, 2013 By: /s/ PING CHEN Ping Chen Chief Executive Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Act of 1933, as amended, this report has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ PING CHEN Chief Executive Officer and Director March 18, 2013 Ping Chen (Principal Executive Officer) /s/ JINGLI (CHARLES) LI Chief Financial Officer (Principal Accounting and Financial Officer) March 18, 2013 Jingli (Charles) Li /s/ WEIBING YANG Director March 18, 2013 Weibing Yang /s/ GENHUI CHEN Director March 18, 2013 Genhui Chen /s/ PHIL FAN Director March 18, 2013 Phil Fan /s/ MINGWEI ZHANG Director March 18, 2013 Mingwei Zhang DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE INDEX TO FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2012 and 2011 F-3 Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2012 and 2011 F-4 Consolidated Statements of Equity for the Years Ended December 31, 2012 and 2011 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011 F-6 Notes to the Consolidated Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Dehaier Medical Systems Limited We have audited the accompanying consolidated balance sheets of Dehaier Medical Systems Limited and Affiliate as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, cash flows and equity for the years then ended. Dehaier Medical Systems Limited and Affiliate’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dehaier Medical Systems Limited and Affiliate as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Friedman LLP New York, New York March 18, 2013 F- 2 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE CONSOLIDATED BALANCE SHEETS December 31, 2012 2011 US$ US$ ASSETS CURRENT ASSETS: Cash and cash equivalents 3,505,330 3,694,486 Accounts receivable -less allowance for doubtful accounts of $865,769 and $859,509 11,960,193 12,159,842 Contract Deposits 3,027,616 2,110,942 Other receivables, net 556,635 411,194 Advances to Suppliers 4,470,756 4,348,847 Prepayment and other current assets 4,069,975 2,365,154 Inventories, net 4,654,827 5,532,311 Tax receivable 328,208 888,452 Deferred tax asset 119,437 118,030 Total Current Assets 32,692,977 31,629,258 Property and equipment, net 2,895,523 3,348,533 Intangible assets, net 2,694,439 - Total Assets 38,282,939 34,977,791 LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term borrowings 2,407,200 1,585,890 Accounts payable 37,640 32,925 Advances from customers 248,940 303,000 Accrued expenses and other current liabilities 406,452 349,158 Taxes payable 401,574 2,042,048 Warranty obligation 338,671 334,680 Total Current Liabilities 3,840,477 4,647,701 OTHER LIABILITIES Warrants liability 374,166 96,469 Total Liabilities 4,214,643 4,744,170 Commitments and Contingency Equity Common shares, $0.002731 par value, 18,307,038 shares authorized, 4,620,000 and 4,560,000 shares issued and outstanding at December 31, 2012 and 2011, respectively 12,618 12,454 Additional paid in capital 13,500,847 13,281,374 Retained earnings 16,147,723 12,941,572 Accumulated other comprehensive income 2,967,202 2,585,488 Total Dehaier Medical Systems Limited shareholders' equity 32,628,390 28,820,888 Non-controlling interest 1,439,906 1,412,733 Total equity 34,068,296 30,233,621 Total liabilities and equity 38,282,939 34,977,791 The accompanying notes are an integral part of these consolidated financial statements. F- 3 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the years ended December 31, 2012 2011 US$ US$ Revenue 21,370,325 21,639,283 Costs of revenue (13,254,587 ) (13,696,743 ) Gross profit 8,115,738 7,942,540 Service income 300,338 281,656 Service expenses (71,376 ) (113,861 ) General and administrative expense (2,599,368 ) (2,620,845 ) Selling expense (1,357,972 ) (1,877,303 ) Operating Income 4,387,360 3,612,187 Financial expenses ( including interest expense of $149,488 and $82,136) (151,720 ) (86,712 ) Other income 23,872 34,965 Other expense (173 ) (232 ) Change in fair value of warrants liability (180,192 ) 221,640 Income before provision for income tax and non-controlling interest 4,079,147 3,781,848 Provision for income tax (862,795 ) (656,297 ) Net income 3,216,352 3,125,551 Non-Controlling interest in income (10,201 ) (22,431 ) Net income attributable to Dehaier Medical Systems Limited 3,206,151 3,103,120 Net income 3,216,352 3,125,551 Other comprehensive income Foreign currency translation adjustments 398,686 1,174,044 Comprehensive Income 3,615,038 4,299,595 Comprehensive income attributable to the non-controlling interest (27,173 ) (85,442 ) Comprehensive income attributable to Dehaier Medical Systems Limited 3,587,865 4,214,153 Earnings per share -Basic 0.70 0.69 -Diluted 0.70 0.69 Weighted average number of common shares used in computation -Basic 4,578,151 4,514,329 -Diluted 4,601,907 4,514,329 The accompanying notes are an integral part of these consolidated financial statements. F- 4 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE CONSOLIDATED STATEMENTS OF EQUITY Dehaier Medical Systems Limited Common stock Additional Paid-in Capital Retained Earnings Accumulated other comprehensive income Non-controlling interest Total Shares US$ US$ US$ US$ US$ US$ Balance as of January 1, 2011 4,500,000 12,290 13,137,085 9,838,452 1,474,455 1,327,291 25,789,573 Issuance of 10,000 shares to non-employees. 10,000 27 59,273 - - - 59,300 Issuance of 50,000 shares to non-employees. 50,000 137 84,113 - - - 84,250 Issuance of 450,000 options to employees, officers and directors - - 903 - - - 903 Foreign currency translation - - - - 1,111,033 63,011 1,174,044 Net income - - - 3,103,120 - 22,431 3,125,551 Balance as of December 31, 2011 4,560,000 12,454 13,281,374 12,941,572 2,585,488 1,412,733 30,233,621 Issuance of 5,000 shares to non-employee 5,000 14 11,086 11,100 Issuance of 5,000 shares to non-employee 5,000 14 12,361 12,375 Issuance of 20,000 shares to non-employee 20,000 55 31,945 32,000 Issuance of 20,000 shares to non-employee 20,000 54 35,945 35,999 Issuance of 10,000 shares to non-employee 10,000 27 17,973 18,000 Stock based Compensation - - 110,163 110,163 Foreign currency translation 381,714 16,972 398,686 Net income 3,206,151 10,201 3,216,352 Balance as of December 31, 2012 4,620,000 12,618 13,500,847 16,147,723 2,967,202 1,439,906 34,068,296 The accompanying notes are an integral part of these consolidated financial statements. F- 5 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2012 2011 US$ US$ Cash flows from operating activities Net income 3,216,352 3,125,551 Adjustments to reconcile net income to net cash provided by (used in) operating activities Stock-based compensation expense 314,479 144,453 Depreciation and amortization 552,086 450,518 Change in fair value of warrants liability 180,192 (221,640 ) (Recovery of) Provision for doubtful accounts (3,939 ) 749,280 Provision for doubtful accounts - other receivables 598,747 - Provision for warranty reserve - 37,303 Deferred tax benefit - (118,030 ) Changes in assets and liabilities: Decrease (Increase) in accounts receivable 344,341 (3,797,045 ) Increase in prepayments and other current assets (1,730,704 ) (1,413,176 ) Decrease (Increase) in other receivables (1,617,781 ) 642,287 Decrease in inventories 931,844 842,052 Decrease in tax receivable 563,816 2,630,467 Increase in accounts payable 4,271 3,607 (Decrease)Increase in advances from customers (56,965 ) 33,811 Increase in accrued expenses and other current liabilities 52,482 14,470 Decrease in taxes payable (1,644,345 ) (6,285,660 ) Net cash provided by (used in) operating activities 1,704,876 (3,161,752 ) Cash flows from investing activities Capital expenditures and other additions (11,054 ) (153,061 ) Software Copyrights (2,715,453 ) - Advances to related parties - (2,358 ) Net cash used in investing activities (2,726,507 ) (155,419 ) Cash flows from financing activities Proceeds from bank loan 2,373,145 1,542,680 Repayment of bank loan (1,580,436 ) (1,533,604 ) Net cash provided by financing activities 792,709 9,076 Effect of exchange rate fluctuations on cash and cash equivalents 39,766 1,079,195 Net decrease in cash and cash equivalents (189,156 ) (2,228,900 ) Cash and cash equivalents at beginning of year 3,694,486 5,923,386 Cash and cash equivalents at end of year 3,505,330 3,694,486 Supplemental cash flow information Income tax paid 1,416,958 1,906,763 Interest paid 149,488 82,136 The accompanying notes are an integral part of these consolidated financial statements. F- 6 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Dehaier Medical Systems Limited (“Dehaier”) was incorporated in the British Virgin Islands in 2003 as a limited liability company. Dehaier distributes and provides after-sale services for medical equipment in China mainly through its majority-owned subsidiary Beijing Dehaier Medical Technology Co. Limited (“BDL”) and its affiliate Beijing Dehaier Technology Limited (“BTL”). On November 9, 2011, Dehaier established a wholly-owned subsidiary in the United States, Breathcare LLC (“Breathcare”). Both BDL and BTL were incorporated in the People’s Republic of China (“PRC”). Dehaier, through its subsidiaries and affiliate, distributes branded, proprietary medical equipment, such as sleep apnea machines, ventilator air compressors, and oxygen generators. Standard product registration, product certification and quality management system have been established; ISO13485 industry standard has also already been passed. It also has the distribution rights for a number of international medical equipment suppliers for products including anesthesia equipment, patient monitors, mobile C-arm X-ray machines and other medical equipment accessories. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of 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 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. BTL is considered a variable interest entity(“VIE”). Management makes ongoing reassessments of whether BDL is the primary beneficiary of BTL. The carrying amount and classification of BTL’s assets and liabilities included in the Consolidated Balance Sheets are as follows: December 31, 2012 2011 US$ US$ Total current assets 240,420 425,464 Total assets 1,457,986 1,448,432 Total current liabilities 18,080 35,699 Total liabilities 18,080 35,699 The accounts of BTL are consolidated in the accompanying financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10, “Consolidation”. As a VIE, BTL’s revenues are included in the Company’s service income, and its income from operations is consolidated with the Company’s. Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation of the Company’s and BTL’s financial statements. F- 7 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 intangible assets, and property and equipment. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased. The Company maintains uninsured cash and cash equivalents with various financial institutions mainly in the PRC and the States. Accounts Receivable Accounts receivable are recorded at net realizable value. Accounts receivable terms typically are net 60-180 days from the end of the month in which the services were provided, or when goods were delivered. The Company generally does not require collateral or other security to support accounts receivable. An allowance, if required, is based on a combination of historical experience, aging analysis, and an evaluation of the collectibility of specific accounts. Management considers that receivables over 1 year to be past due. Management has determined that an allowance of $865,769 (RMB5,394,874) and $859,509 (RMB5,419,725) was appropriate at December 31, 2012 and 2011, respectively. Other Receivables, Net Other receivables primarily include advances to employees and advance to suppliers. Management regularly reviews aging of receivables and changes in payment trends and records a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off after exhaustive efforts at collection. Management has determined that an allowance of $598,747 was appropriate at December 31, 2012. Advances to Suppliers and Advances from Customers The Company, as is the common practice in the PRC, often makes advance payments to suppliers for unassembled parts, or receives advance payments from customers. Advances to suppliers were $4,470,756 and 4,348,847 as of December 31, 2012 and 2011, respectively. Advances from customers were $248,940 and $303,000 as of December 31, 2012 and 2011, respectively. F- 8 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 topic 815, “Derivatives and Hedging”. ASC topic 815 provides a framework for determining whether an instrument is indexed to an entity's own stock. 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 statements of income and comprehensive income (see Note 14). The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, and establish a three-level valuation hierarchy for disclosures of fair value. 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. 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. Inventories Inventories are stated at the lower of cost or market and consist of assembled and unassembled parts relating to medical devices. The Company reviews its inventory annually for possible obsolete goods and to determine if any reserves are necessary. The reserve for obsolescence was $51,764 (RMB322,556) for each of 2012 and 2011, and the provision, when necessary, is included in the operating expenses in the consolidated statements of income and comprehensive income. F- 9 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives: Leasehold improvements Shorter of the useful lives or the lease term Building and land use rights 20-40 years Machinery and equipment 10-15 years Furniture and office equipment 5 years Motor vehicles 5 years Intangible Assets Intangible assets are recorded at cost less accumulated amortization. Amortization is calculated on a straight-line basis over the following estimated useful lives: Leasehold improvements Shorter of the useful lives or the lease term Software copyrights 20 years Other software 5 years Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company compares 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, the Company applies a discount rate to the estimated cash flows, and an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. Management has determined no impairment exists at the balance sheet dates. Revenue Recognition The Company recognizes revenues when all the followings conditions have been satisfied: *Persuasive evidence of an arrangement exists; *Delivery and/or installation has occurred (e.g., risks and rewards of ownership have 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 that include software, the software is an off-the-shelf package and an integral part of the products being delivered. The Company does not provide any significant post-sale customer support services and does not provide customers with upgrades. The software is incidental to the product as a whole. For products that do not require installation, revenues are recognized when the products are delivered. For products that require installation, revenues are recognized when the installation is completed. For all service income, the Company recognizes the revenue upon the completion of the repairs when the equipment has been returned to and accepted by the customers. In the PRC, value added tax (VAT) of 17% of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities. F- 10 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cost of Revenues Cost of revenues primarily includes wages to assemble parts and the costs of unassembled parts, handling charges, and other expenses associated with the assembly and distribution of product. Service income and expense Service income and expense represents activities related to repair services provided for the customers by BTL. Foreign Currency Translation The accounts of Dehaier, BDL, BTL and Breathcare are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The accompanying consolidated financial statements are presented in US dollars. Foreign currency transactions are translated into US dollars using fixed exchange rates in effect at the time of the transaction. Generally, foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated statements of income and comprehensive income. The foreign currency accounts of BDL and BTL are translated in accordance with ASC 830-10, “Foreign Currency Matters”. Assets and liabilities are translated at current exchange rates quoted by the People’s Bank of China at the balance sheet dates and revenues and expenses are translated at average exchange rates in effect during the periods. Resulting translation adjustments are recorded as other comprehensive income (loss) and accumulated as a separate component of equity Warranty Costs The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company's estimates, the Company may revise its estimated product warranty liability. The term of the product warranty is generally twelve months. The reserve for warranty costs was $338,671 and $334,680 at December 31, 2012 and 2011, respectively. Warranty expense for the years ended December 31, 2012 and 2011 was $97,937 and $18,926, respectively. Research and Development Costs Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred, Research and development costs were $230,854 and $268,038 for the years ended December 31, 2012 and 2011, respectively. Shipping and Handling Expenses Shipping and handling expenses of $58,078 and $91,017 for the years ended December 31, 2012 and 2011 were included in the operating expenses in the consolidated statements of income and comprehensive income, respectively. Advertising Costs Advertising costs are expensed as incurred, Advertising costs were $56,656 and $232,400 for the years ended December 31, 2012 and 2011, respectively. F- 11 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings per Share The Company follows the provisions of ASC 260-10, “Earnings per Share”. Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the years. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share. Value Added Tax The Company reports revenues net of PRC’s value added tax for all the periods presented in the consolidated statements of income and comprehensive income. Stock-Based Compensation The Company follows the provisions of ASC 718-10, “Compensation-Stock Compensation”. The Company has a share incentive plan which authorizes the issuance of up to 10% of the number of shares outstanding. Pursuant to the plan, the Company may issue options to purchase its common shares to employees and directors of the Company and its affiliates. The Company fair values share-based awards granted under the plan. Accordingly, compensation is measured on the grant date using appropriate valuation models. 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. The Company recorded a deferred tax asset for the temporary differences arising from allowance for doubtful accounts and certain accrued expenses. The Company believes it can utilize the deferred tax asset to offset future taxable income. Therefore, no valuation allowance has been provided as of December 31, 2012 and 2011. F- 12 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes (Continued) ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties, if any, are included as components of income tax expense and income taxes payable. The Company had filed its 2008 and 2009 Value Added Tax (“VAT”) returns for some of its customers during the year ended December 31, 2011 and 2012. All the potential VAT liabilities on these VAT returns occurred in current period were also accrued as incurred and included in the accompanying consolidated financial statements. The implementation of ASC 740-10 resulted in no material liability for unrecognized tax benefits. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statements of income and comprehensive income. During the years ended December 31, 2012 and 2011, the Company did not incur any interest or penalties. Income tax returns for the year prior to 2010 are no longer subject to examination by tax authorities. Reclassification Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Recently Issued Accounting Standards The FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The amendments are effective for reporting periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private companies. Early adoption is permitted. The adoption will not have any material impact on the Company’s consolidated financial statements. The FASB has issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The main objective in developing this Update is to address implementation issues about the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The objective of this Update is to clarify the scope of the offsetting disclosures and address any unintended consequences. The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments in this Update affect entities that have derivatives accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in Update 2011-11. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this accounting standard will not have any material impact on the Company’s consolidated financial statements. F- 13 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. OTHER RECEIVABLES, NET Other receivables consist of the following: December 31, 2012 2011 US$ US$ Due from suppliers 1,101,866 350,679 Employee advances 53,516 60,515 1,155,382 411,194 Allowance for doubtful accounts (598,747 ) - 556,635 411,194 4. PREPAYMENT AND OTHER CURRENT ASSETS Prepayment and other current assets consist of the following: December 31, 2012 2011 US$ US$ Prepayment for equipment purchase 3,808,938 2,300,415 Other prepaid expenses 261,037 64,739 4,069,975 2,365,154 5. PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following: December 31, 2012 2011 US$ US$ Buildings 1,365,717 1,349,624 Land use rights 311,973 308,297 Plant and machinery 2,980,087 2,973,593 Automobiles 43,706 43,869 Office and computer equipment 524,154 503,833 5,225,637 5,179,216 Less: Accumulated depreciation and amortization (2,330,114 ) (1,830,683 ) Property and equipment, net 2,895,523 3,348,533 At December 31, 2012 and 2011, BTL’s building was pledged to a bank as collateral for short-term borrowings of RMB15,000,000 (US$2,407,200) and RMB10,000,000(US$1,585,890), respectively (see Note 8). Depreciation and amortization expense was $471,727 and $450,518, for the years ended December 31, 2012 and 2011 , respectively. F- 14 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Land Use Rights There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights are reported at the purchase price (RMB1,944,000 in 2002). 6. INTANGIBLE ASSETS, NET December 31, December 31, 2012 2011 US$ US$ Software Copyright 2,733,062 - Others 42,736 - 2,775,798 - Less: Accumulated and amortization (81,359 ) - Intangible assets, net 2,694,439 - Amortization expense for the years ended December 31, 2012 and 2011 was $80,359 and $0, respectively. Annual future amortization expense at December 31, for each of the next five years is $265,000 and $1,369,000 thereafter. 7. TAX RECEIVABLE Tax receivable consists of the following: December 31, December 31, 2012 2011 US$ US$ Value added tax receivable 328,208 888,452 Enterprises or individuals, who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a VAT in accordance with Chinese laws. The standard VAT is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of unassembled medical components of the Company’s product used in contract and production can be used to offset the VAT due on sales of the product. The tax receivable as of December 31, 2012 and 2011 represents VAT credit on the purchased products. These amounts can be used to offset the VAT due on sales of the finished product. F- 15 8. SHORT-TERM BORROWINGS The Company has a line of credit for $1,604,800 (RMB10,000,000) with a commercial bank in China to finance its working capital. The credit line bears interest at a variable rate and is renewed annually. Average interest rates for the year ended December 31, 2012 and 2011 were 6.60% and 5.78%, respectively. Pursuant to the terms of the agreement, the line of credit is secured by BTL’s building (see note 5) and guaranteed by BDL and an officer of the Company. On May 14, 2012, the bank renewed the Company's credit line that bears interest at a variable rate with payments due on March 14, 2013 and May 14, 2013 for RMB3,000,000 and RMB7,000,000, respectively. On February 2, 2012, the Company entered into a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $802,400 (RMB5,000,000) with floating interest rate which was approximately 8.2% per year, due on January 30, 2013 (See note 19). Pursuant to the terms of the agreement, the line of credit is guaranteed by an officer of the Company. Interest expense on short-borrowings for the years ended December 31, 2012 and 2011 amounted to $149,488 and 82,136, respectively. F- 16 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other payables consist of the following: December 31, 2012 2011 US$ US$ Accrued salaries and social welfare 259,774 247,973 Accrued expenses 60,542 34,689 Other payables, non-trade vendors 51,591 14,195 Deposit from customer 34,545 52,301 406,452 349,158 10. TAXES PAYABLE Taxes payable consist of the following: December 31, 2012 2011 US$ US$ Value added tax 144,845 1,196,630 Enterprise income tax 229,854 781,599 Employee withholding taxes 2,533 2,014 Business tax 161 771 City construction tax 24,181 61,034 401,574 2,042,048 11. NON-CONTROLLING INTEREST Non-controlling interest consists of the following: December 31, 2012 2011 US$ US$ Original paid-in capital 384,211 384,211 Retained Earnings 754,894 744,693 Accumulated other comprehensive income 300,801 283,829 1,439,906 1,412,733 F- 17 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. COMMITMENTS AND CONTINGENCY Leases The lease commitments are for office premises and a warehouse facility, all of which are classified as operating leases. These non-cancelable leases have lease terms expiring through December 2014. Approximate future minimum lease payments under these leases at December 31, 2012, are $97,589 for the twelve months ending December 31, 2013 and $46,862 for the twelve months ending December 31, 2014. Rent expense for the year ended December 31, 2012 and 2011 was $124,373 and $161,362, respectively. Employment Contracts Under the PRC labor law, all employees have signed employment contracts with the Company. Management employees have employment contracts with terms up to three years and non-management employees have a one year employment contract renewable on an annual basis. Contingency The Labor Contract Law of the People’s Republic of China, requires employers to assure the liability of the severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The Company has estimated its possible severance payments of approximately $269,656 and $235,000 as of December 31, 2012 and 2011, respectively, which have not been reflected in its consolidated financial statements, because it is more likely than not that this will not be paid or incurred. 13. EQUITY Common Shares On March 8, 2011, Dehaier issued 10,000 unregistered common shares to an investment relations firm in connection with the investment advice rendered for the Company. The fair value of the shares on the grant date based on the closing price was $59,300. On November 16, 2011, Dehaier issued 50,000 unregistered common shares to a consulting firm in connection with the financial advisory services rendered for the Company. The fair value of the shares on the grant date based on the closing price was $84,250. During 2012, Dehaier issued 60,000 restrict unregistered common shares to independent consultants in connection with investment counseling and financial advisory services rendered for the Company. The fair value of the shares on the grant date based on the closing price was approximately $109,000. F- 18 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. EQUITY (CONTINUED) Statutory Surplus Reserves A PRC company is required to make appropriations to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“ PRC GAAP ”). Appropriations to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s’ registered capital. The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital. Since Dehaier is a British Virgin Islands’ company, it will not be subject to the statutory surplus reserve provisions. BDL is a joint-venture company and the statutory surplus reserve provisions will be determined by its board of directors. As of March 18, 2013, BDL’s board of directors has not yet made such determination. Therefore, no amount was allocated to the statutory surplus reserve account. BTL appropriated 10% of its net profits as statutory surplus reserve, which is included as part of the non-controlling interest in the equity section. For the years ended December 31, 2012 and 2011, statutory surplus reserve activity was as follows: December 31, 2012 US$ 2011 US$ Balance – beginning of year 74,469 72,226 Addition to statutory reserves 1,020 2,243 Balance –end of year 75,489 74,469 Stock Option Plan Under the employee stock option plan, the Company’s stock options expire five years from the date of grant. On December 29, 2011, the Company entered into five-year agreements with its employees and directors. In connection with their services, the Company issued an aggregate of 450,000 options to acquire the Company’s common shares at an exercise price of $1.45 per share. The options vest in equal annual installments over the five years of the agreements ending December 31, 2016. As of December 31, 2012, 360,000 options have not been vested. The Company valued the stock options using the Black-Scholes model with the following assumptions: Expected Terms (years) Expected Volatility Dividend Yield Risk Free Interest Rate Grant Date Fair Value Employees 5 126 % 0 % 0.83 % 1.22 Directors and officers 5 126 % 0 % 0.83 % 1.22 F- 19 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. EQUITY (CONTINUED) Stock Option Plan (Continued) The following is a summary of the option activity: Stock options Shares Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding as of December 31, 2010 - Granted 450,000 $ Forfeited - Exercised - Outstanding as of December 31, 2011 450,000 $ 1.45 $ - Granted - Forfeited - Exercised - Outstanding as of December 31, 2012 450,000 $ 1.45 $ 400,500 Following is a summary of the status of options outstanding and exercisable at December 31, 2012: Outstanding options Exercisable options Average Exercise price Number Average remaining contractual life (years) Average Exercise price Number Average remaining contractual life (years) $ 1.45 450,000 4 $ 1.45 90,000 4 For the year ended December 31, 2012 and 2011, the Company recognized $110,163 and $903, respectively, as compensation expense under its stock option plan. F- 20 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. WARRANTS On April 21, 2010, the Company issued to Anderson & Strudwick Incorporated (“A&S”) 150,000 warrants, as a portion of the placement commission for the IPO. On the same day, the Company granted a total of 7,500 warrants to Hawk Associates Inc.(“Hawks”), the Company’s investor relations consultancy. On January 10, 2012, the Company issued 100,000 warrants to FirsTrust Group, Inc., (“FirsTrust”), the Company’s investor relations consultancy totaling 257,500 warrants. All the warrants issued to “A&S” have the right to purchase one share of common stock for an exercise price of $10.00 per share with a term of 5 years. All the warrants granted to Hawks have the right to purchase one share of common stock for an exercise price of $9.60 per share with a term of 5 years. All the warrants granted to FirsTrust have the right to purchase one share of common stock for an exercise price of $4.00 per share with a term of 5 years. The fair value of the outstanding warrants at December 31, 2012 was calculated using the Black Scholes Model with the following assumptions: Market price per share (USD/share) 1.93 Exercise price (USD/share) $4.00, $9.60, $10.00 Risk free rate 0.25%, 0.25%, 0.75% Dividend yield - Expected term/Contractual life (years) 2.30, 2.30, 4.02 Expected volatility 187.1% F- 21 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. WARRANTS (CONTINUED) The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2012 and 2011. Carrying Value at December 31, 2012 Fair Value Measurement at December 31, 2012 Level 1 Level 2 Level 3 Warrants liability $ 374,166 $ - $ 374,166 $ - Carrying Value at December 31, 2011 Fair Value Measurement at December 31, 2011 Level 1 Level 2 Level 3 Warrants liability $ 96,469 $ - $ 96,469 $ - The following is a reconciliation of the beginning and ending balances of warrants liability measured at fair value on a recurring basis using Level 2 inputs: December 31, 2012 December 31, 2011 US$ US$ Beginning balance 96,469 318,109 Warrants issued 97,505 - Fair value change of the issued warrants included in earnings 180,192 (221,640 ) Ending balance 374,166 96,469 Following is a summary of the warrants activity: Number Weighted Average Exercise Price Weighted Average Remaining Contractual Life Outstanding as of January 1, 2011 157,500 $ Granted - Forfeited - Exercised - Outstanding as of December 31, 2011 157,500 $ 9.98 3.31 Granted 100,000 Forfeited - Exercised - Outstanding as of December 31, 2012 257,500 $ 7.66 2.97 F- 22 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. Earnings Per Share The following is a reconciliation of the basic and diluted earnings per share computation for the years ended December 31, 2012 and 2011: Year ended December 31, 2012 2011 Basic earnings per share Net income available to the company’s common shareholders $ 3,206,151 $ 3,103,120 Weighted average shares outstanding - Basic 4,578,151 4,514,329 Earnings per share - Basic $ 0.70 $ 0.69 Diluted earnings per share Net income available to the company’s common shareholders $ 3,206,151 $ 3,103,120 Weighted average shares outstanding - Basic 4,578,151 4,514,329 Options 23,756 - Weighted shares outstanding - Diluted 4,601,907 4,514,329 Earnings per share - Diluted $ 0.70 $ 0.69 For the year ended December 31, 2012, 23,756 shares of the 450,000 stock options were exercisable and included in the diluted EPS calculation. F- 23 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. INCOME TAXES British Virgin Islands Dehaier is a tax-exempt company incorporated in the British Virgin Islands. BDL and BTL were incorporated in the PRC and are governed by the PRC laws. PRC PRC enterprise income tax is calculated based on the Enterprise Income Tax Law (the “EIT Law”). Under the EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises. Under the current PRC laws, PRC government grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the period of validity for the certification of high technology companies is three years. In 2009 and 2012 BD L updated its certification for “high technology” company. Therefore, BDL used a 15% income tax rate to calculate the income tax expense for the years ended December 31 , 2012 and 2011 . The tax rate for BTL is 25% in 2012 and 2011 A reconciliation of income tax expense and the amount computed by applying the statutory income tax rate to the income before income tax provision is as follows: Year Ended December 31 2012 2011 US$ US$ Tax computed at statutory rate 852,640 774,327 Decrease in income taxes resulting from temporary differences - (118,030 ) Others 10,155 - 862,795 656,297 Provision (Benefit) for income taxes consists of: Year Ended December 31 2012 2011 US$ US$ Current provision 862,795 774,327 Deferred provision (benefit) - (118,030 ) Total provision for income taxes 862,795 656,297 United States Breathcare is a limited liability company and, such as, is not subject to federal income tax. Moreover, as of December 31, 2012, Breathcare was inactive and generate no revenue. F- 24 DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17. OTHER INCOME For the years ended December 31, 2012 and 2011, the Company received approximately $23,871 (RMB150,600) and $27,423 (RMB177,200), respectively, from the local government in China as subsidy income. 18. CONCENTRATIONS Major Customers For the years ended December 31, 2012 and 2011, approximately 13% of the Company’s revenues were received from each of two customers. At December 31, 2011, receivables from two customers were approximately 12% and 10%, respectively. No customer represented more than 10% of amounts receivable at December 31, 2012. Major Suppliers At December 31, 2012 and 2011, payables due to three suppliers were approximately 34%, 33%, 19% and 50%, 8%, 6%, respectively. Revenues For the years ended December 31, 2012 and 2011, the Company’s top three selling products accounted, in the aggregate, for approximately 68% and 27%, respectively, of its total net revenues. The following represents the revenues by product line, all derived from China: For the years ended December 31, 2012 2011 US$ US$ Products Line Medical Devices 18,547,635 19,362,673 Respiratory and Oxygen Homecare 2,822,690 2,276,610 21,370,325 21,639,283 19. SUBSEQUENT EVENTS On February 4, 2013, the Company repaid the loan in the amount of $802,400 (RMB5,000,000) with Nanjing Bank Company Limited (Beijing Branch). On March 5, 2013, the Company entered into a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $802,400 (RMB5,000,000) with a floating interest rate which will be approximately 7.5% in 2013. The loan is due on March 4, 2014. Pursuant to the terms of the agreement, the line of credit is guaranteed by an officer of the Company. On March 14, 2013, the Company repaid the credit line in the amount of $481,440 (RMB3,000,000) with a commercial bank in China as documented in Note 8. F- 25