Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and
Supplementary Data.
The Companys 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, 2010 (the Evaluation Date), the Company carried out an evaluation, under the supervision of and with the participation of management, including the Companys chief
executive officer and chief financial officer, of the effectiveness of the design and operation of the Companys 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 companys 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.
Managements Annual Report on Internal Control over Financial Reporting
The Companys 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 Companys 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 Companys 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 Companys assets;
(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 Companys receipts and expenditures are being made only in accordance with the authorization of its management and directors; and
14
Table of Contents
(3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys 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 Companys management assessed the effectiveness of its internal control over financial reporting as of December 31, 2010.
In making this assessment, management used the framework set forth in the report entitled Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on this assessment,
the Companys management believes that, as of the Evaluation Date, its internal control over financing reporting is effective based on the criteria established in the Internal ControlIntegrated Framework issued by COSO.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys 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, 2010 that have materially affected, or are reasonably likely to materially affect, the companys 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:
The section of the Registration Statement
and IPO Prospectus entitled Management is incorporated herein by reference.
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.
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. Jimin (Peter)
15
Table of Contents
Zhuo and Mr. Bin Qiu. Mr. Zhuo qualifies as the audit committee financial expert. The Companys audit committee charter was filed as Exhibit 99.2 to the Companys annual
report for the year ended December
31, 2009 and is available on the Companys website (www.chinadhr.com).
Item 11. Executive
Compensation.
The following table shows the annual compensation paid by us for the years ended December 31, 2009 and
2010 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 Compensation Table
Name and principal position
Year
Salary
Bonus
Option
Awards
All Other
Compensation
Total
Ping Chen,
Principal Executive Officer
2010
2009
$
$
33,200
28,400
$
$
0
$
$
$
$
0
$
$
33,200
28,400
We
did not grant any equity awards in 2010 or 2009.
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 $2,000 per meeting for serving as directors and may receive option grants from our company. In addition, non-employee directors are entitled to receive
compensation for their actual travel expenses for each Board of Directors meeting attended, up to a maximum of $6,000 per meeting or $12,000 per year.
Summary Director Compensation Table FY 2010
Name
Director fees earned or
paid in cash
Total (1)
Ping Chen (2)
$
0
$
0
Zheng (Rita) Liu (2)
$
0
$
0
Yunxiang (Phil) Fan
$
12,000
$
12,000
Jimin (Peter) Zhuo
$
12,000
$
12,000
Bin Qiu
$
12,000
$
12,000
(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 2010.
(2)
Mr. Chen and Ms. Liu received payment 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.
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
0
N/A
450,000
16
Table of Contents
Principal Shareholders
The following table sets forth information with respect to beneficial ownership of our common shares as of March 7, 2011 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.
In addition, we have included the share ownership of each of the individuals subject to the Make-Good Share Escrow described above. See Related Party Transactions Make-Good Shares Subject to
Redemption. The below table assumes no redemption of any shares subject to such Make-Good Share Escrow.
The number and percentage of
common shares beneficially owned before the offering are based on 4,500,000 common shares outstanding as of March 7, 2011. 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 7, 2011 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 908, East Plaza,
15 West 4th Ring North Road, Haidian District, Beijing 100195, Peoples Republic of China. As of the date of this filing, we had eight (8) shareholders of record.
Named Executive Officers and Directors
Amount of Beneficial
Ownership (1)
Percentage
Ownership
Ping Chen, Chief Executive Officer, Director
1,104,742
(3)(4)
24.55
%
Zheng (Rita) Liu, Chief Financial Officer, Director
96,452
(4)
2.14
%
Yunxiang (Phil) Fan, Director
0
*
Jimin (Peter) Zhuo, Director
0
*
Bin Qiu, Director
0
*
Weibing Yang, Vice President of Sales and Marketing
263,471
(4)
5.85
%
Yong Wang, Vice President of Research and Development
40,455
(4)
0.90
All officers and directors as a group (7 persons)
1,505,120
33.44
%
Jian Sun
253,076
(4)
5.62
%
Chen Ping Ltd.
1,104,742
(3)(4)
24.55
%
De-haier Investment Holdings Ltd.
527,693
(5)
11.73
%
Yijen Chen
581,113
12.91
%
*
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.
In addition, the percentage ownership assumes the return to the shareholder of all shares subject to the Make-Good Escrow.
(3)
Ping Chen has the sole power to direct the voting and disposition of the 1,104,742 shares held by Chen Ping Ltd.
(4)
These shares are subject to the Make-Good Escrow.
(5)
Milestone Capital Management Limited, the sole shareholder of De-haier Investment Holdings Ltd., has discretionary authority to vote and dispose of the 527,693 shares
held by De-haier Investment Holdings Ltd. Ms. Yunli Lou and Mr. Liping Qiu in their capacities as managers of Milestone Capital Management Limited, may also be deemed to have investment discretion and voting power over the shares held by
De-haier Investment Holdings Ltd. Ms. Lou and Mr. Qiu disclaim any such beneficial ownership of the shares.
17
Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
The sections of the Registration Statement and IPO Prospectus entitled Related Party
Transactions and Management are incorporated herein by reference.
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.
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 2010. Audit services
provided by Friedman LLP for fiscal 2010 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 2010 and 2009, Friedman LLPs fees for the annual audit of our financial statements and the
quarterly reviews of the financial statements were $190,000 and $120,000, respectively.
Audit Related Fees
During fiscal 2010 and 2009, the Company paid Friedman LLP $4,319 and $15,000, respectively, for audit-related
services. These services consisted of assurance and related services that were reasonably related to the performance of the audit and reviews of our financial statements and are not included in Audit Fees above. The services provided by
our accountants within this category consisted of advice relating to SEC matters and the filing of our registration statement and amendments thereto.
Tax Fees
The Company has not paid Friedman LLP for tax services in
fiscal 2010 and 2009.
All Other Fees
The Company has not paid Friedman LLP for any other services in fiscal 2010 and 2009.
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 Companys audit committee. All services rendered by Friedman LLP, Inc. have been so approved.
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)
18
Table of Contents
10.2
Make Good Escrow Agreement (1)
10.3
Translation of lease agreement for Product Center dated September 23, 2008 (1)
10.4
Translation of lease agreement for Principal Executive Office dated December 21, 2009, effective January 1, 2010 (1)
10.5
Distribution agreement with IMD (1)
10.6
Distribution agreement with Timesco (1)
10.7
Translation of distribution agreement with
JMS (1)
10.8
Distribution agreement with ResMed (1)
10.9
Translation of form of independent distributor
agreement (1)
10.1
Translation of letter of credit agreement with
ICBC (1)
10.11
Translation of Executive Officer Employment Agreement for Ping Chen (1)
10.12
Translation of Executive Officer Employment Agreement for Weibing Yang (1)
10.13
Translation of Executive Officer Employment Agreement for Zheng Liu (1)
10.14
Translation of Executive Officer Employment Agreement for Yong Wang (1)
10.15
Translation of Form of Purchase Agreement with Poverty Aid Office (1)
10.16
Translation of Production Agreement with Friend of Health (Chuzhou) Medical Technology Co., Ltd. (1)
10.17
Translation of Guarantee Contract between Ping Chen and ICBC (1)
10.18
Mortgage Contract between ICBC and BTL (1)
10.19
Indemnification and Guarantee Contract between Ping Chen and BTL (1)
10.2
Description of oral loan contract between BTL and
BDL (1)
10.21
Translation of approval dated November 17, 2009 to change ICBC loan repayment schedule (1)
10.22
Loss Absorption Agreement between BDL, BTL and shareholders of BTL (1)
10.23
Translation of approval dated March 18, 2010 to change ICBC loan repayment schedule (1)
21.1
Subsidiaries of the Registrant (1)
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 (2)
32.2
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
99.1
Code of Business Conduct and Ethics (1)
19
Table of Contents
99.2
Audit Committee Charter (3)
(1)
Incorporated by reference to the registrants registration statement on Form S-1, File no. 333-163041, filed on November 12, 2009, as
amended.
(2)
Filed herewith.
(3)
Incorporated by reference to the registrants Form 10-K, File no. 001-34661, filed on March 31, 2010.
20
Table of Contents
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 7, 2011
By:
/ S / P ING
C HEN
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 / P ING
C HEN
Ping Chen
Chief Executive Officer and Director
(Principal Executive Officer)
March 7, 2011
/ S / Z HENG (R ITA )
L IU
Zheng (Rita) Liu
Chief Financial Officer (Principal Accounting and Financial Officer) and Director
March 7, 2011
/ S / Y UNXIANG (P HIL )
F AN
Yunxiang (Phil) Fan
Director
March 7, 2011
/ S / J IMIN (P ETER )
Z HAO
Jimin (Peter) Zhuo
Director
March 7, 2011
/ S / B IN
Q IU
Bin Qiu
Director
March 7, 2011
21
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2010 and 2009
F-3
Consolidated Statements of Operations for the Years Ended December 31, 2010 and
2009
F-4
Consolidated Statements of Shareholders Equity for the Years Ended December
31, 2010 and 2009
F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and
2009
F-6
Notes to the Consolidated Financial Statements
F-7
F-1
Table of Contents
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, 2010 and 2009, and the consolidated related statements of operations, cash flows and shareholders equity for the years
then ended. Dehaier Medical Systems Limited and Affiliate 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 Companys 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, 2010 and 2009, 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 7, 2011
1700 BROADWAY, NEW YORK, NY 10019 T 212.842.7000 F 212.842.7001 WWW.FRIEDMANLLP.COM
OFFICES IN NEW YORK LONG ISLAND AND NEW JERSEY AND A MEMBER OF DFK WITH AFFILIATES WORLDWIDE
F-2
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
December 31,
2010
2009
US$
US$
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
5,923,386
1,151,721
Accounts receivable
-less allowance for doubtful accounts of $ 87,555 and $102,939
9,112,077
6,891,291
Other receivables
3,164,423
1,499,111
Prepayment and other current assets
5,300,825
1,691,387
Inventories, net
6,374,363
2,326,126
Tax receivable
3,518,919
1,362,372
Total Current Assets
33,393,993
14,922,008
Property and equipment, net
3,488,947
2,862,625
Total Assets
36,882,940
17,784,633
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES:
Short-term borrowings
1,514,620
1,464,770
Accounts payable
29,318
93,770
Advances from customers
269,189
174,253
Accrued expenses and other current liabilities
330,601
336,412
Tax payable
8,327,708
4,993,387
Warranty obligation
301,464
178,755
Due to officer
2,358
3,861
Total Current Liabilities
10,775,258
7,245,208
OTHER LIABILITIES
Warrants liability
318,109
Total Liabilities
11,093,367
7,245,208
Commitments and Contingency
Shareholders equity
Common stock, $0.002731 par value, 18,307,038 shares authorized, 4,500,000 and 3,000,000 shares issued and outstanding at
December 31, 2010 and 2009, respectively
12,290
8,193
Additional paid in capital
13,137,085
3,196,974
Retained earnings
9,838,452
5,298,742
Accumulated other comprehensive income
1,474,455
773,127
Total Dehaier Medical Systems Limited shareholders equity
24,462,282
9,277,036
Non-controlling interest
1,327,291
1,262,389
Total shareholders equity
25,789,573
10,539,425
Total liabilities and shareholders equity
36,882,940
17,784,633
*
The change in par value of common shares pursuant to the stock split was retroactively adjusted for the year 2009.
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
December 31,
2010
2009
US$
US$
Revenue
19,598,460
12,369,960
Costs of revenue
(11,981,820
)
(7,510,718
)
Gross profit
7,616,640
4,859,242
Service income
339,379
402,851
Service expenses
(148,016
)
(119,455
)
General and administrative expense
(1,257,520
)
(1,091,675
)
Selling expense
(1,421,415
)
(700,175
)
Operating Income
5,129,068
3,350,788
Financial expenses (including interest expense of 70,343 and $85,665)
(125,764
)
(87,435
)
Other income
455,950
Change in fair value of warrants liability
(48,109
)
Income before provision for income taxes and non-controlling interest
5,411,145
3,263,353
Provision for income tax
(850,034
)
(531,461
)
Net income
4,561,111
2,731,892
Non-Controlling interest in income
(21,401
)
(57,921
)
Net income attributable to Dehaier Medical Systems Limited
4,539,710
2,673,971
Earnings per share
-Basic
1.12
1.29
-Diluted
1.09
0.89
Weighted average number of common shares used in computation
-Basic
4,043,836
2,076,608
-Diluted
4,153,438
3,000,000
The accompanying notes
are an integral part of these consolidated financial statements.
F-4
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Dehaier medical Systems Limited
Common stock
Preferred A
(Milestone)
Preferred B
(Crystal East)
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
other
comprehensive
income
Comprehensive
income
Non-controlling
interest
Total
Shares
US$
Shares
US$
Shares
US$
US$
US$
US$
US$
US$
US$
Balance as of January 1, 2009
1,891,930
5,167
120,000
1,200
182,635
1,826
3,196,974
2,624,771
778,766
1,205,232
7,813,936
On October 31, 2009, the Company has converted all preferred shares, 1 to 1 into common Shares
302,635
3,026
(120,000
)
(1,200
)
(182,635
)
(1,826
)
On October 31, 2009, the Company has approved and effectuated a 3.6614-for-1 split of its Common shares
805,435
Foreign currency translation
(5,639
)
(5,639
)
(764
)
(6,403
)
Net income
2,673,971
2,673,971
57,921
2,731,892
Comprehensive income
2,668,332
Balance as of December 31, 2009
3,000,000
8,193
3,196,974
5,298,742
773,127
1,262,389
10,539,425
On April 22, 2010, the Company issued 1,500,000 shares at $8 per share, net of transaction costs
1,500,000
4,097
9,940,111
9,944,208
Foreign currency translation
701,328
701,328
43,501
744,829
Net income
4,539,710
4,539,710
21,401
4,561,111
Comprehensive income
5,241,038
Balance as of December 31, 2010
4,500,000
12,290
13,137,085
9,838,452
1,474,455
1,327,291
25,789,573
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
2010
2009
US$
US$
Operating Activities
Net income
4,561,111
2,731,892
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization
365,336
286,395
Recovery of doubtful accounts
(18,311
)
(45,588
)
(Recovery of) Provision for inventory obsolescence
(5,756
)
52,989
Change in fair value of warrants liability
318,109
Gain on sale of equipment
(3,894
)
Provision for warranty reserve
122,709
20,690
Changes in assets and liabilities:
Increase in accounts receivable
(2,202,475
)
(1,429,001
)
Decrease (Increase) in prepayments and other current assets
(3,609,438
)
107,500
Increase in other receivables
(1,665,312
)
(311,751
)
Increase in inventories
(4,042,481
)
(803,887
)
Increase in tax receivable
(2,156,547
)
(809,404
)
(Decrease) Increase in accounts payable
(64,452
)
19,450
(Decrease) Increase in advances from customers
94,936
(56,141
)
(Decrease) Increase in accrued expenses and other current liabilities
(5,811
)
85,573
Increase in tax payable
3,334,321
1,941,250
Net cash provided by (used in) operating activities
(4,977,955
)
1,789,967
Investing Activities
Proceeds from sale of equipment
10,342
Capital expenditures and other additions
(887,541
)
(917,419
)
Proceeds from (advances to) related parties
(1,503
)
2,892
Net cash used in investing activities
(878,702
)
(914,527
)
Financing Activities
Net proceeds from issuance of common stock
9,944,207
Net cash provided by financing activities
9,944,207
Effect of exchange rate fluctuations on cash and cash equivalents
684,115
(6,322
)
Net increase in cash and cash equivalents
4,771,665
869,118
Cash and cash equivalents at beginning of year
1,151,721
282,603
Cash and cash equivalents at end of year
5,923,386
1,151,721
Supplemental cash flow information
Income tax paid
24,813
12,767
Interest paid
70,343
85,665
The accompanying notes
are an integral part of these consolidated financial statements.
F-6
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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 October 23, 2003, Dehaier established a wholly-owned subsidiary in Hong Kong, De-haier Medical System (Hong Kong) Limited (DHK), (collectively, the Company). Both BDL and BTL were incorporated in
the Peoples Republic of China (PRC). The Company distributes branded, proprietary medical equipment, such as sleep apnea machines, patient monitors, air compressors, and oxygen generators; moreover, standard product registration,
product certification and quality management system have been established in the Company. 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 Presentation
The accompanying
consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).
Basis of Consolidation
The consolidated financial statements include the accounts of
Dehaier, BDL, its majority-owned subsidiary, and its wholly-owned subsidiary, DHK as well as BTL. 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, and BDL is the
primary beneficiary. BTL owns a building which is pledged as collateral for BDLs bank loans. In exchange, BDL loans money to BTL to finance its operations. BTLs primary operation is to provide repairs and transportation services to
BDLs customers. Because of these arrangements, BDL is the primary beneficiary of BTL, as the entity that is most closely associated with BTL. Dehaier has included BTL in its consolidated financial statements through the consolidation with BDL
since December 31, 2006. Dehaier, BDL and BTL were under common control until October 31, 2009, when each share of preferred share was converted into a common share (see Note 12). Because the Chief Executive Officer held more than 50% of
the voting ownership interest of each of Dehaier, BDL, BTL and DHK at December 31, 2006, the Company initially measured the assets, liabilities and non-controlling interest of the variable interest entity at the amounts at which they were
carried in the accounts of the reporting entity that controls the variable interest entity pursuant to FASB ASC 810-10.
F-7
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of Consolidation - Continued
On October 31, 2009, BDL reconsidered whether it is the primary beneficiary of BTL when Dehaiers preferred stock was
converted into common shares. While such conversion dilutes the Chief Executive Officers interest in BDL such that BDL and BTL are not under common control after October 31, 2009, BDL still has the obligation to absorb the expected losses
of BTL. BTL is still a variable interest entity because all of its activities either involve or are conducted on behalf of the reporting enterprise and its related parties. BDL is BTLs only customer referral source. On March 3rd, 2010,
BDL entered into a Loss Absorption Agreement memorializing the understanding that BDL would continue to loan money to BTL as needed to fund its working capital such that BDL would absorb BTLs losses.
The carrying amount and classification of BTLs assets and liabilities included in the Consolidated Balance Sheets are as follows:
December 31,
2010
2009
US$
US$
Total current assets
497,732
240,195
Total assets
1,562,554
1,330,139
Total current liabilities
235,263
67,750
Total liabilities
235,263
67,750
The accounts of BTL are consolidated
in the accompanying financial statements pursuant to Accounting Standards Codification (ASC) 810-10, Consolidation. As a VIE, BTLs revenues are included in the Companys service income, and its income from
operations is consolidated with the Companys. Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation of the Companys and BTLs financial statements.
On January 1, 2009, the Company adopted the transition rules within ASC 810-10-65, regarding accounting and reporting standards for the
non-controlling interest in a subsidiary.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP 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 Companys consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants liability and useful
lives of property and equipment. Actual results could differ from those estimates.
F-8
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Hong Kong.
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. Receivables are considered past due after 3 years and written off. In accordance with the accounting policies, management has determined that an allowance of
$87,555 and $102,939 was required at December 31, 2010 and 2009, respectively.
Advances to Suppliers and Advances from Customers
The Company, as is the common practice in the PRC, will often pay advance payments to suppliers for unassembled parts, or receive advance
payments from customers. Advances to suppliers were $4,515,737 and $1,511,540 as of December 31, 2010 and 2009, respectively, which were included in prepaid expenses and other current assets. Advances from customers were $269,189 and $174,253
as of December 31, 2010 and 2009, respectively.
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 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 Entitys Own Stock. ASC topic 815 provides a framework for determining whether an instrument is indexed to an entitys own stock. ASC topic 815
became effective for the Company when warrants were issued in connection with the Companys initial public offering. Such warrants are indexed to the Companys stock, which is traded in US dollars. Since the Companys 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 statement of operations (see Note 13).
The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level
valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.
The three levels
are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Warrants liabilities qualify as financial instruments.
F-9
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments - Continued
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, as level 2 inputs, and recorded the change in earnings. As a result, the derivative liability is carried on the balance sheet at its fair value.
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, 2010.
Carrying Value at
December 31, 2010
Fair Value Measurement at
December 31, 2010
Level 1
Level 2
Level 3
Warrants liability
$
318,109
$
$
318,109
$
The following is a reconciliation of
the beginning and ending balances of warrants liability measured at fair value on a recurring basis using significant observable inputs (Level 2) as of December 31, 2010:
Beginning balance
$
0
Warrants issued for the year ended December 31, 2010
318,109
Ending balance
$
318,109
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 $48,855 and $52,989 for 2010 and 2009, respectively, and the provision is included in the operating expenses in the
consolidated statements of operations.
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
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no
longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the asset and eventual
disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset, is recognized. Management has determined
no impairment exists at the balance sheet dates.
F-10
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
F-11
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Service income and expense
Service income and expense represents activities related to repair and transportation service provided for the customers by BTL.
Foreign Currency Translation
The accounts of Dehaier, BDL, BTL and DHK 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 operations. The foreign
currency accounts of DHK, 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 Peoples 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 in
non-controlling interest.
Warranty Costs
The Company provides for the estimated cost of product warranties at the time revenue is recognized. Warranty costs are included in general and administrative expenses. The Companys 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 Companys
estimates, the Company may be required to revise its estimated product warranty liability. The term of the product warranty is generally twelve months. The reserve for warranty costs was $301,464, $178,755 at December 31, 2010 and 2009,
respectively. Warranty expense for the years ended December 31, 2010 and 2009 was $107,794 and $120,587, 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 $82,553 and $82,164 for the years ended December 31, 2010 and 2009, respectively.
Shipping and Handling Expenses
Shipping
and handling expenses of $109,386 and $62,566 for the years ended December 31, 2010 and 2009 were included in the operating expenses in the consolidated statements of operations, respectively.
Advertising Costs
Advertising costs are
expensed as incurred. Advertising costs were $112,441 and $19,962 for the years ended December 31, 2010 and 2009, respectively.
F-12
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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.
Convertible preferred shares are included in the computation of diluted earnings per share on an if converted basis, when the impact is dilutive.
The following table sets forth computation of basic and diluted weighted average share information:
December 31,
2010
2009 *
Weighted average number of common shares outstanding
4,043,836
2,076,608
Dilutive effect of convertible preferred shares
923,392
Dilutive effect of warrants
109,602
Weighted average number of common shares outstanding, assuming dilution
4,153,438
3,000,000
*
Restated to reflect the dilutive effect of convertible preferred shares at December 31, 2009.The weighted average number of common shares outstanding, assuming
dilution originally reported at December 31, 2009 was understated by 923,392 shares. Diluted earnings per share for the year ended December 31, 2009 as originally reported was overstated by $0.40 per share.
On December 10, 2010, the Company filed an amended Annual Report on Form 10-K/A for the year ended December 31, 2009, to correct the error
described above.
Value Added Tax
The Company reports revenues net of PRCs value added tax for all the periods presented in the consolidated statements of operations.
Stock-Based Compensation
The Company follows the provisions of ASC 718-10,
Share-Based Payment Arrangement. On December 7, 2009, the Companys Board of Directors and shareholders have approved the creation of a share incentive plan. The plan 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 will fair value share-based awards to be granted under the plan. Accordingly,
compensation will be measured on the grant date using appropriate valuation models. As of December 31, 2010, no options were issued under this plan.
F-13
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 entitys 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. As of December 31, 2010 and 2009, the Company was not required to record any deferred tax assets or liabilities.
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.
The implementation of ASC 740-10 resulted in no material liability for unrecognized tax benefits and no material change to the beginning retained
earnings of the Company. As of December 31, 2010 and 2009, the Company did not have a liability for any unrecognized tax benefits. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense
in the statement of operations. During the years ended December 31, 2010 and 2009, the Company did not incur any interest or penalties.
Income tax returns for the year prior to 2008 are no longer subject to examination by tax authorities.
F-14
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassification
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
Recently Issued Accounting Standards
On Jan. 21, 2010, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. The ASU reports on new disclosure requirements and clarifications of existing requirements
under Accounting Standards Codification (ASC) Subtopic 820-10 (originally issued as FAS 157). The new disclosure requirements apply to interim and annual reporting periods beginning after Dec. 15, 2009, with one exception: The new rules regarding
purchases, sales, issuances and settlements associated with Level 3 measurements will be effective for fiscal years beginning after Dec. 15, 2010, and for interim periods within those fiscal years. The adoption of this accounting standard did not
have a material effect on the Companys consolidated financial statements.
F-15
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3.
OTHER RECEIVABLES
Other receivables
consist of the following:
December 31,
2010
December 31,
2009
US$
US$
Due from suppliers
690,380
111,489
Deposits for ongoing contracts
2,311,741
1,352,056
Staff advance
162,302
35,566
3,164,423
1,499,111
4.
PREPAYMENT AND OTHER CURRENT ASSETS
Prepayment and other current assets consist of the following:
December 31,
2010
December 31,
2009
US$
US$
Advances to suppliers
1,071,101
358,607
Prepayment for equipment purchase
3,444,636
1,152,933
Initial public offering expenses
102,500
Other prepaid expenses
785,088
77,347
5,300,825
1,691,387
F-16
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5.
PROPERTY AND EQUIPMENT, NET
Property and
equipment consist of the following:
December 31,
2010
December 31,
2009
US$
US$
Buildings
1,288,972
1,215,349
Land use rights
294,442
284,751
Plant and machinery
2,782,706
1,947,512
Automobiles
41,897
56,142
Office and computer equipment
388,416
290,183
4,796,433
3,793,937
Less: Accumulated depreciation and amortization
(1,307,486
)
(931,312
)
Property and equipment, net
3,488,947
2,862,625
At December 31, 2010 and 2009, BTLs building was pledged to a bank as collateral for short-term borrowings of
RMB10,000,000 (US$1,514,620), RMB10,000,000(US$1,464,770), respectively (see Note 7).
Depreciation and amortization expense was $365,336 and
$249,871, for the years ended December 31, 2010 and 2009, respectively.
Land Use Rights
There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The
Companys land use rights are reported at the purchase price (RMB1,944,000 in 2002).
F-17
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6.
TAX RECEIVABLE
Tax receivable consists
of the following:
December 31,
2010
December 31,
2009
US$
US$
Value added tax receivable
3,518,919
1,362,372
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 Companys 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, 2010 and 2009 represents VAT
credit on the purchased products. These amounts can be used to offset the VAT due on sales of the finished product.
7.
SHORT-TERM BORROWINGS
The Company has a
line of credit for 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 on May 18th. Average interest rates for the years ended December 31,
2010 and 2009 were 5.84% and 5.58%, respectively. Pursuant to the terms of the agreement, the line of credit is secured by BTLs building (see note 5) and guaranteed by BDL and an officer of the Company.
On June 14, 2010, the bank renewed the Companys credit line that bears interest at a variable rate with payments due on January 19, 2011
and June 14, 2011 for RMB4,000,000 and RMB6,000,000, respectively. On January 20, 2011, RMB 4,000,000 was paid.
F-18
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other payables consist of the following:
December 31,
2010
December 31,
2009
US$
US$
Accrued salaries and social welfare
222,666
167,684
Accrued expenses
13,732
19,042
Other payables, non-trade vendors
2,036
49,686
Deposit from customer
92,167
100,000
330,601
336,412
9.
TAXES PAYABLE
Taxes payable consists of
the following:
December 31,
2010
December 31,
2009
US$
US$
Value added tax
6,416,750
3,966,007
Enterprise income tax
1,903,863
1,023,058
Employee withholding taxes
5,035
3,226
Business tax
838
943
City construction tax
1,222
153
8,327,708
4,993,387
10.
NON-CONTROLLING INTEREST
Non-controlling
interest consists of the following:
December 31,
2010
December 31,
2009
US$
US$
Original paid-in capital
384,211
384,211
Retained Earnings
722,262
700,861
Accumulated other comprehensive income
220,818
177,317
1,327,291
1,262,389
F-19
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11.
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 April 2012 for one year. Approximate future minimum lease payments under these leases at December 31, 2010, are as follows:
Year Ending December 31,
US$
2011
187,000
2012
32,000
Total minimum lease payments
219,000
Rent expense for the year ended
December 31, 2010 and 2009 was $143,840 and $56,788, respectively.
Rent expense paid to the spouse of the Chief Executive Officer for
the years ended December 31, 2010 and 2009 was $10,047 and $27,375, respectively. The company and Chief Executive Officer agreed to terminate the lease agreement by April 30, 2010. The Company received an overpayment of rent of $1,591 from
the Chief Executive Officer after the termination agreement was signed.
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 Peoples 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 $188,000 and $124,000 as of December 31, 2010 and 2009,
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.
F-20
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12.
SHAREHOLDERS EQUITY
Common
Shares
At December 31, 2008, the Companys Memorandum and Articles of Association authorized share capital of US $50,000
comprised of 4,500,000 common shares and 500,000 Preferred Shares (120,000 shares of Series A Preferred Shares and 380,000 shares of Series B Preferred Shares) with US$0.01 par value.
On October 31, 2009, the board of directors approved a 3.6614-for-1 stock split of the Companys common shares. Accordingly, all common share and per share information in the accompanying
consolidated financial statements give retroactive effect to the stock split. Prior to the stock split, there were 516,722 common shares issued and outstanding at December 31, 2008. The authorized share capital remains at US$50,000.
On March 22, 2010, the founders of the Company placed an aggregate of 600,000 common shares of the Company into escrow. Such shares equaled 40% of
the maximum number of shares which were sold in the initial public offering (IPO). The shares will remain in escrow until the Company files its Form 10-K with the Securities and Exchange Commission for the year ended December 31,
2010. The shares in escrow (Make-Good Shares) are accounted for as an element in the IPO and the Company will not recognize any compensation expense upon the return of such Make-Good Shares to the holders. To the extent the Companys
earnings per share for the year ended December 31, 2010 are less than $.80, the Company shall redeem, pro rata, such shares. Alternatively, if the closing price of the common shares is equal to at least 2.5 times of the IPO offering price for
five trading days in any ten trading day period, then the Make-Good Shares will be returned to the founders. At December 31, 2010, the earnings per share of the company is $1.09. Thus, the Company does not need to redeem or pro rata such
shares. During the period from IPO date to December 31, 2010, there was no such period in which the closing price of the common shares is higher than 2.5 times of the IPO offering. The shares will be returned to the founders 45 days after the
Companys Form 10K for the year ended December 31, 2010 is filed. These shares are included as part of the calculation of the basic and diluted earning per share for all the periods presented in the accompanying consolidated financial
statements.
The Company completed its IPO on April 22, 2010 and is listed on Nasdaq Capital Market. On April 22, 2010, the Company
sold 1,500,000 common shares at $ 8.00 per share for US$ 12,000,000 before the transaction costs.
F-21
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12.
SHAREHOLDERS EQUITY (CONTINUED)
Convertible Preferred Shares
In October 2003, the Company issued 120,000 Series A convertible preferred shares (Series A Preferred Shares) for total proceeds of $1,200,000.
During 2007, the Company issued in aggregate 182,635 Series B convertible preferred shares (Series B Preferred Shares) for total proceeds of
$2,000,000. On October 31, 2009, each share of preferred stock was converted into common shares on a 1-to-1 basis.
Series A Preferred
Shares and Series B Preferred Shares were collectively referred to as the Preferred Shares.
Preferred Shares had priority over
the common stock Ordinary Shares. Certain rights, preferences and privileges of the Preferred Shares are listed below:
The
holders of Preferred Shares were entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue.
Preferred Shares Series A and B had a liquidation preference of $10 and $10.95074 per share, respectively.
The holders of Preferred Shares were entitled to one vote for each share of common stock the Preferred Shares could be converted to.
Preferred Shares were non-redeemable.
On October 31, 2009 all the Preferred Shares in
authorized capital were re-designated as ordinary (common) shares.
F-22
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12.
SHAREHOLDERS 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 entitys 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
December 31, 2010, BDLs 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, statutory
surplus reserve activity was as follows:
December 31,
2010
US$
2009
US$
Balance beginning of year
70,086
64,294
Addition to statutory reserves
2,140
5,792
Balance end of year
72,226
70,086
F-23
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13.
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 Companys investor relations consultancy. The Company had 157,500 warrants outstanding as of December 31, 2010. 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.
The fair value of the outstanding warrants at December 31, 2010 for A&S was calculated using the Black Scholes Model with the following
assumptions:
Fair value per share (USD/share)
5.94
(1
)
Exercise price (USD/share)
10
(2
)
Risk free rate
2.01
%
(3
)
Dividend yield
(4
)
Expected term/Contractual Life (number of years)
4.33
(5
)
Expected volatility
60.3
%
(6
)
The fair value of the outstanding warrants
at December 31, 2010 for Hawks was calculated using the Black Scholes Model with the following assumptions:
Fair value per share (USD/share)
5.94
(1
)
Exercise price (USD/share)
9.60
(2
)
Risk free rate
2.01
%
(3
)
Dividend yield
(4
)
Expected term/Contractual Life (number of years)
4.33
(5
)
Expected volatility
60.3
%
(6
)
(1) Fair Value of
Underlying Ordinary Shares
The $5.94 is the close price of the Company on December 31, 2010.
(2) Exercise price
The exercise price of the warrants was determined by the Companys board of directors.
(3) Risk-free interest rate
Risk-free interest rate was estimated
based on the yield to maturity of U.S. Treasury notes with a maturity period close to the term of the warrants.
(4)
Dividend yield
Dividend yield of 0% was estimated by management of the Company.
(5) Life to Expiration
Life to expiration was based on contractual term of the warrants.
F-24
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13.
WARRANTS (CONTINUED)
(6) Volatility
The volatility of the underlying ordinary shares during the life of the warrants was estimated based on the historical stock price
volatility of listed comparable companies over a period comparable to the expected term of the warrants.
The fair value of
the each A&S warrant at December 31, 2010 was $2.12. The total fair value of such warrants was $318,109 at December 31, 2010.
The fair value of the warrants for A&S was $270,000 on the date of grant which was recognized as IPO expense. The increase in the fair value of the warrants during the period was recognized as a
change in fair value of warrants liability which was included in statements of operations.
The fair value of each Hawks
warrant at December 31, 2010 was $2.18. The total fair value of such warrants was $16,372, which has not been reflected in the Companys consolidated financial statements due to immateriality. The fair value of the warrants for Hawk at the
grant date was $15,000. The increase in fair value of the warrants resulted in a loss of $1,372, which has not been reflected in the Companys consolidated financial statements due to immateriality.
F-25
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14.
INCOME TAXES
British Virgin Islands
Dehaier is a tax-exempt company incorporated in the British Virgin Islands. BDL and BTL were incorporated in the PRC and are governed by
the PRC laws.
Hong Kong
DHK
is subject to Hong Kong profits tax at a rate of 17.5% on its assessable profits. No Hong Kong profits tax has been provided as the Company did not have any taxable profit that was earned in or derived from Hong Kong during the years presented.
PRC
PRC enterprise income
tax is calculated based on the Enterprise Income Tax Law (the EIT Law). Under the EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and
foreign-invested enterprises.
Under the current PRC laws, PRC government grants a preferential income tax rate of 15% to government-certified
high technology companies, and under the new standard the period of validity for the certification of high technology companies is three years. In 2009, BDL updated its certification for high technology company. Therefore, BDL used a 15%
income tax rate to calculate the income tax expense for the years ended December 31, 2010 and 2009.
The tax rate for BTL is 25% in 2009
and 2010.
A reconciliation of income tax expense and the amount computed by applying the statutory income tax rate to the income before
income tax provision is as follows:
Year Ended December 31
2010
2009
US$
US$
Tax computed at statutory rate
850,034
531,461
Increase in income taxes resulting from temporary differences
Permanent differences
850,034
531,461
F-26
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15.
RELATED PARTY TRANSACTIONS
At
December 31 2009, the amount due to an officer was $3,861 representing expenses paid by an officer of the Company. This amount was repaid in the first six months of 2010.
At December 31 2010, the amount due to an officer was $2,358 representing expenses paid for an officer of the Company. This amount was repaid in the first three months of 2010.
16.
OTHER INCOME
For the year ended
December 31, 2010, the Company received approximately $443,000 (3,000,000 RMB) from the local government in China as a reward for the Company successfully going public and listing on a U.S. exchange.
17.
CONCENTRATIONS
Major Customers
For the year ended December 31, 2010, approximately 8% of the Companys revenues was received from each of two customers. For
the year ended December 31, 2009, approximately 7% of the Companys revenues was received from one customer.
At December 31,
2010 and 2009, receivables from four customers were approximately 12%, 11%, 11%, 9% and 9%, 8%, 8%, 7%, respectively.
Revenues
For the years ended December 31, 2010 and 2009, the Companys three top selling products accounted, in the aggregate, for
approximately 53% and 58%, respectively, of its total net revenues.
The following represents the revenues by products, all derived from
China:
For the years ended
December 31,
2010
2009
Products
US$
US$
Medical Devices
12,084,944
9,426,557
Respiratory and Oxygen Homecare
4,452,003
1,106,800
Technical Service
3,061,513
1,836,603
19,598,460
12,369,960
F-27
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.