Item 5. Other Information
Item 5.
Other Information
None.
Item 6.
Exhibits
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)
12
Table of Contents
10.1
Form of Share Option Plan (1)
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)
10.10
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)
10.20
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)
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 annual report on Form 10-K, File no. 001-34661, filed on March 31, 2010.
13
Table of Contents
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DEHAIER MEDICAL SYSTEMS LIMITED
May 3, 2011
By:
/s/ Ping Chen
Ping Chen
Chief Executive Officer
(Principal Executive
Officer)
14
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
INDEX TO FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31,
2010
F-2
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and
2010
F-3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and
2010
F-4
Notes to the Unaudited Condensed Consolidated Financial Statements
F-5
F-1
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31,
2011
December 31,
2010
US$
US$
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
3,372,673
5,923,386
Accounts receivable-less allowance for doubtful accounts of $88,273 and $87,555 at March 31, 2011 and December 31,
2010, respectively
9,864,974
9,112,077
Other receivables
2,996,716
3,164,423
Prepayment and other current assets
8,185,258
5,300,825
Inventories, net
5,890,334
6,374,363
Tax receivable
3,588,088
3,518,919
Total Current Assets
33,898,043
33,393,993
Property and equipment, net
3,416,457
3,488,947
Total Assets
37,314,500
36,882,940
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES:
Short-term borrowings
916,224
1,514,620
Accounts payable
145,935
29,318
Advances from customers
294,437
269,189
Accrued expenses and other current liabilities
313,256
330,601
Tax payable
8,775,326
8,327,708
Warranty obligation
303,936
301,464
Due to officer
2,358
Total Current Liabilities
10,749,114
10,775,258
OTHER LIABILITIES
Warrants liability
308,583
318,109
Total Liabilities
11,057,697
11,093,367
Commitments and Contingency
Shareholders equity
Common stock, $0.002731 par value, 18,307,038 shares authorized, 4,510,000 and 4,500,000 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively
12,317
12,290
Additional paid in capital
13,196,358
13,137,085
Retained earnings
10,043,866
9,838,452
Accumulated other comprehensive income
1,661,735
1,474,455
Total Dehaier Medical Systems Limited shareholders equity
24,914,276
24,462,282
Non-controlling interest
1,342,527
1,327,291
Total shareholders equity
26,256,803
25,789,573
Total liabilities and shareholders equity
37,314,500
36,882,940
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
March 31,
2011
2010
US$
US$
Revenue
2,952,706
2,641,089
Costs of revenue
(1,955,247
)
(1,666,718
)
Gross profit
997,459
974,371
Service income
84,833
93,067
Service expenses
(40,697
)
(28,021
)
General and administrative expense
(503,526
)
(223,385
)
Selling expense
(239,701
)
(167,851
)
Operating Income
298,368
648,181
Financial expenses (including interest expense of $16,177 and $18,828 at March 31, 2011 and December 31, 2010,
respectively)
(15,613
)
(19,326
)
Change in fair value of warrants liability
9,526
Income before provision for income taxes and non-controlling interest
292,281
628,855
Provision for income tax
(82,537
)
(94,883
)
Net income
209,744
533,972
Non-Controlling interest in income
(4,330
)
(13,761
)
Net income attributable to Dehaier Medical Systems Limited
205,414
520,211
Earnings per share
-Basic
0.05
0.17
-Diluted
0.04
0.17
Weighted average number of common shares used in computation
-Basic
4,502,667
3,000,000
-Diluted
4,660,167
3,000,000
The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
F-3
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months
ended
March 31,
2011
2010
US$
US$
Cash flows from operating activities
Net income
209,744
533,972
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Stock-based compensation expense
59,300
Depreciation and amortization
109,373
85,750
Change in fair value of warrants liability
(9,526
)
Changes in assets and liabilities:
Increase in accounts receivable
(752,897
)
(247,601
)
(Increase) Decrease in prepayments and other current assets
(2,884,433
)
298,932
Decrease (Increase) in other receivables
167,707
(125,708
)
Decrease (Increase) in inventories
484,029
(78,717
)
Increase in tax receivable
(69,169
)
(184,590
)
Increase (Decrease) in accounts payable
116,617
(29,537
)
Increase (Decrease) in advances from customers
25,248
(9,298
)
(Decrease) Increase in accrued expenses and other current liabilities
(17,345
)
38,611
Increase in tax payable
447,618
382,174
Net cash provided by (used in) operating activities
(2,113,734
)
663,988
Cash flows from investing activities
Capital expenditures and other additions
(8,274
)
(4,578
)
Advances to related parties
(2,358
)
(3,861
)
Net cash used in investing activities
(10,632
)
(8,439
)
Cash flows from financing activities
Repayment of bank loan
(610,816
)
(585,764
)
Net cash used in financing activities
(610,816
)
(585,764
)
Effect of exchange rate fluctuations on cash and cash equivalents
184,469
1,427
Net (decrease) increase in cash and cash equivalents
(2,550,713
)
71,212
Cash and cash equivalents at beginning of period
5,923,386
1,151,721
Cash and cash equivalents at end of period
3,372,673
1,222,933
Supplemental cash flow information
Income tax paid
4,583
1,616
Interest paid
16,177
18,828
The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
F-4
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED 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
condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).
In the opinion of the Companys management, the unaudited condensed consolidated financial statements include all adjustments necessary to present fairly the condensed consolidated financial
position, results of operations and cash flows of the Company for the periods presented. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of operating results expected for the full year or
future interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010, filed on March 7, 2011 (the Annual Report).
Basis of Consolidation
The condensed 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 condensed 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 9). 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-5
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Officer's interest in BDL such that BDL and BTL are not under common control after October 31, 2009, BDL still has the obligation
to absorb the expected losses of BTL. BTL is still a 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 3, 2010, BDL entered into a Loss Absorption Agreement memorializing the understanding that BDL would continue to loan money to BTL as needed to fund its working capital such that BDL would absorb BTLs losses.
The carrying amount and classification of BTLs assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
March 31,
2011
December 31,
2010
US$
US$
Total current assets
383,040
497,732
Total assets
1,434,632
1,562,554
Total current liabilities
92,105
235,263
Total liabilities
92,105
235,263
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.
Use of Estimates
The preparation of the
condensed 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 condensed 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 condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory obsolescence, warranty obligation, warrants liability, stock-based compensation and useful lives of property and
equipment. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable are recorded at net realizable value. Accounts receivable terms typically are 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 $88,273 and $87,555 was
required at March 31, 2011 and December 31, 2010, respectively.
F-6
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $7,410,756 and $4,515,737 at March 31, 2011 and December 31, 2010, respectively, which were included in prepayment and other current assets. Advances from customers were $294,437 and $269,189 as of
March 31, 2011 and December 31, 2010, respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the condensed 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 Entity's Own Stock. ASC topic 815 provides a framework for determining whether an instrument is indexed to an entity's own stock. ASC topic 815 became
effective for the Company when warrants were issued in connection with the Company's initial public offering. Such warrants are indexed to the Company's stock, which is traded in US dollars. Since the Company's functional currency is the RMB, such
warrants are considered liabilities. The fair value of the warrants liability is measured each reporting period with the resulting change in fair value recorded in the statement of operations (see Note 9).
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.
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 (see note 10).
F-7
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $49,256 and $48,855 for March 31, 2011 and December 31, 2010, respectively, and the provision is included in the operating expenses in the condensed 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.
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.
F-8
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition-Continued
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.
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 condensed 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 condensed 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 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 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 $303,936 and $301,464
at March 31, 2011 and December 31, 2010, respectively. Warranty expense for the three months ended March 31, 2011 and 2010 was $29,527 and $25,020, respectively.
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.
The following table
sets forth computation of basic and diluted weighted average share information:
For the three months ended
March 31,
2011
2010
Weighted average number of common shares outstanding
4,502,667
3,000,000
Dilutive effect of warrants
157,500
Weighted average number of common shares outstanding, assuming dilution
4,660,167
3,000,000
F-9
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Value Added Tax
The Company reports revenues net of PRCs value added tax for all the periods presented in the condensed consolidated statements of operations.
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 March 31, 2011 and December 31, 2010 respectively, 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
previous years 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 condensed 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 March 31, 2011 and December 31, 2010 respectively, 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 three months ended March 31, 2011 and 2010 respectively, 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-10
Table of Contents
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.
PREPAYMENT AND OTHER CURRENT ASSETS
Prepayment and other current assets consist of the following:
March 31,
2011
December 31,
2010
US$
US$
Advances to suppliers
859,725
1,071,101
Prepayment for equipment purchase
6,551,031
3,444,636
Other prepaid expenses
774,502
785,088
8,185,258
5,300,825
4.
PROPERTY AND EQUIPMENT, NET
Property and
equipment consist of the following:
March 31,
2011
December 31,
2010
US$
US$
Buildings
1,299,541
1,288,972
Land use rights
296,857
294,442
Plant and machinery
2,811,840
2,782,706
Automobiles
42,241
41,897
Office and computer equipment
393,559
388,416
4,844,038
4,796,433
Less: Accumulated depreciation and amortization
(1,427,581
)
(1,307,486
)
Property and equipment, net
3,416,457
3,488,947
At March 31, 2011 and December 31, 2010, BTLs building was pledged to a bank as collateral for short-term
borrowings of RMB6,000,000 (US$916,224), RMB10,000,000 (US$1,514,620), respectively (see Note 6).
Depreciation and amortization expense was
$109,373 and $85,750, for the three months ended March 31, 2011 and 2010, respectively.
Land Use Rights
There is no private ownership of land in the PRC. Land is owned by the government and the government grants land use rights for specified terms. The
Companys land use rights are reported at the purchase price (RMB1,944,000 in 2002).
F-11
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5.
TAX RECEIVABLE
Tax receivable consists
of the following:
March 31,
2011
December 31,
2010
US$
US$
Value added tax receivable
3,588,088
3,518,919
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 March 31, 2011 and December 31, 2010
represents VAT credit on the purchased products. These amounts can be used to offset the VAT due on sales of the finished product.
6.
SHORT-TERM BORROWINGS
The Company has a
line of credit for RMB10,000,000 (USD1,574,620 at December 31, 2010) with a commercial bank in the PRC 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 three months ended March 31, 2011 and 2010 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 4) and guaranteed by BDL and an officer of the
Company.
7.
NON-CONTROLLING INTEREST
Non-controlling
interest consists of the following:
March 31,
2011
December 31,
2010
US$
US$
Original paid-in capital
384,211
384,211
Retained Earnings
726,592
722,262
Accumulated other comprehensive income
231,724
220,818
1,342,527
1,327,291
8.
SHAREHOLDERS EQUITY
On March 8,
2011, the Company issued 10,000 shares of its restricted common shares to a former investors relation firm pursuant to an agreement. The total fair value of the common shares issued was $59,300.
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
COMMITMENTS AND CONTINGENCY
Common
Shares
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 would remain in escrow until the Company filed 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 were less than $.80, the Company would 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 $1.09. Thus, the Company does not need to redeem or
pro rata such shares. During the period from IPO date to December 31, 2010, there was no day on which the closing price of the common shares was higher than 2.5 times of the IPO offering. The shares would be returned to the founders 45 days
after the Companys Form 10-K for the year ended December 31, 2010 was filed. At March 31, 2011, the return of these shares was in progress and these shares are included as part of the calculation of the basic and diluted earning per
share for all the periods presented in the accompanying condensed consolidated financial statements.
Leases
The lease commitments are for office premises and a warehouse facility, all of which are classified as operating leases. These non-cancelable leases have
lease terms expiring through December 2012. Approximate future minimum lease payments under these leases at March 31, 2011, are as follows:
Future payment for the twelve months ending March 31, 2011
US$
2011
167,000
2012
2,000
Total minimum lease payments
169,000
Rent expense for the three months
ended March 31, 2011 and 2010 was $17,279 and $13,290, respectively.
Rent expense paid to the spouse of the Chief Executive Officer for
the three months ended March 31, 2011 and 2010 was $0 and $7,472, 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.
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
COMMITMENTS AND CONTINGENCY (CONTINUED)
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 $226,000 and $188,000 as of March 31, 2011 and December 31, 2010, respectively, which have not been reflected in
its condensed consolidated financial statements, because it is more likely than not that this will not be paid or incurred.
10.
WARRANTS LIABILITY
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. (Hawk), the Companys investor relations consultancy. The Company had 157,500 warrants outstanding as of March 31, 2011. 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 Hawk 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 March 31, 2011 for A&S was calculated using the Black Scholes Model with the following
assumptions:
Notes
Fair value per share (USD/share)
5.23
(1)
Exercise price (USD/share)
10
(2)
Risk free rate
2.24
%
(3)
Dividend yield
(4)
Expected term/Contractual Life (number of years)
4.06
(5)
Expected volatility
71.08
%
(6)
The fair value of the outstanding
warrants at March 31, 2011 for Hawk was calculated using the Black Scholes Model with the following assumptions:
Notes
Fair value per share (USD/share)
5.23
(1)
Exercise price (USD/share)
9.60
(2)
Risk free rate
2.24
%
(3)
Dividend yield
(4)
Expected term/Contractual Life (number of years)
4.06
(5)
Expected volatility
71.08
%
(6)
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 March 31, 2011.
Carrying Value at
March
31, 2011
Fair Value Measurement
at
March 31, 2011
Level 1
Level 2
Level 3
Warrants liability
$
308,583
$
$
308,583
$
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.
WARRANTS LIABILITY (CONTINUED)
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 March 31, 2011:
Beginning balance at December 31, 2010
$
318,109
Warrants issued for the three months ended March 31, 2011
Fair value change of the issued warrants included in earnings
(9,526
)
Ending balance at March 31, 2011
$
308,583
(1) Fair Value of Underlying Ordinary Shares
The $5.23 is the close price of the Company on March 31, 2011.
(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.
(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 March 31, 2011 was $2.06. The total fair value of such warrants was $308,583 at March 31, 2011.
The fair value of the warrants for A&S was $270,000 on the date of grant which was recognized as IPO expense. The decrease 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 Hawk warrant at March 31, 2011 was $2.11. The total fair value of such warrants was $15,806, which has not been reflected in the Companys condensed consolidated financial statements due to immateriality. The fair value
of the warrants for Hawk was $15,000 at the grant date. The decrease in fair value of the warrants resulted in a gain of $806, which has not been reflected in the Companys condensed consolidated financial statements due to immateriality.
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.
STATUTORY SURPLUS RESERVES
A PRC company
is required to make appropriations to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (PRC GAAP). Appropriations to the statutory surplus reserve
is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entitys registered capital.
The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is
not less than 25% of the registered capital.
Since Dehaier is a British Virgin Islands company, it will not be subject to the statutory
surplus reserve provisions. BDL is a joint-venture company and the statutory surplus reserve provisions will be determined by its board of directors. As of March 31, 2011, BDLs board of directors has not yet made such determination.
Therefore, no amount was allocated to the statutory surplus reserve account.
BTL appropriated 10% of its net profits as statutory surplus
reserve, which is included as part of the non-controlling interest in the equity section. For the three months ended March 31, statutory surplus reserve activity was as follows:
For the three months ended
March 31, 2011
US$
Balance at December 31, 2010
72,226
Addition to statutory reserves
433
Balance at March 31, 2011
72,659
12.
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.
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.
INCOME TAXES (CONTINUED)
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 three months ended March 31, 2011 and 2010.
The tax rate for BTL is 25% in 2010 and 2011.
13.
CONCENTRATIONS
Major Customers
For the three months ended March 31, 2011 and 2010, approximately 18% and 17% of the Companys revenues was received from one
customer.
At March 31, 2011 and 2010, receivables from four customers were approximately 12%, 11%, 11%, 10% and 9%, 8%, 8%, 7%,
respectively.
Revenues
For
the three months ended March 31, 2011 and 2010, the Companys three top selling products accounted, in the aggregate, for approximately 90% and 61%, respectively, of its total net revenues.
The following represents the revenues by products, all derived from operations in the PRC:
For the three months ended
March 31,
2011
2010
US$
US$
Products
Medical Devices
2,634,060
1,864,222
Respiratory and Oxygen Homecare
209,005
365,755
Technical Service
109,641
411,112
2,952,706
2,641,089
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DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.
SUBSEQUENT EVENTS
In April 2011, BTL
signed strategic cooperation agreements with Taiyo Nippon Sanso Shenwei (Shanghai) Medical Gas Co., Ltd (Taiyo-Shanghai) and Beijing Orient Medical Gas Co., Ltd (Beijing Orient) to develop oxygen therapy services for the home
use market in Beijing. Leveraging the expertise of each company, these agreements include oxygen production, oxygen filling, selling and providing home service for medical oxygen in Beijing.
On April 29, 2011, BDL signed a cooperation agreement with Beijing Kanglian Medicines Co, Ltd, to develop, operate and implement a new rural healthcare construction project in Hunan and
Anhui provinces. This project is supported by China Development Bank Corp (CDB), one of Chinas three national policy banks. It is aimed at improving the national healthcare system through the development and upgrade of medical
facilities and health centers in nearly 2,900 counties, cities and districts across China. BDL was selected for this project as a result of its broad product portfolio, which includes solutions at a variety of price points, including those
that meet the requirements of cost conscious facilities.
F-18
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.