The consolidated financial statements include
the accounts of Dehaier, and its majority-owned and wholly-owned subsidiaries (collectively, the “Company”). All significant
inter-company transactions and balances are eliminated in consolidation.
A group of shareholders, including the
Chief Executive Officer, originally held more than 50% of the voting ownership interest of Dehaier, BDL and BTL. BTL owns a building
which is pledged as collateral for BDL’s bank loans. In exchange, BDL loans money to BTL to finance its operations. BTL’s
primary operation is to provide repairs and transportation services to BDL’s customers. Because of these arrangements, BDL
is the primary beneficiary of BTL, as the entity that is most closely associated with BTL. BTL is considered a variable interest
entity(“VIE”). Management makes ongoing reassessments of whether BDL is the primary beneficiary of BTL.
The carrying amount and classification
of BTL’s assets and liabilities included in the Consolidated Balance Sheets are as follows:
The accounts of BTL are consolidated in
the accompanying financial statements pursuant to Accounting Standards Codification (“ASC”) 810-10, “Consolidation”.
As a VIE, BTL’s revenues are included in the Company’s service income, and its income from operations is consolidated
with the Company’s. Because of the arrangements, the Company had a pecuniary interest in BTL that requires consolidation
of the Company’s and BTL’s financial statements.
The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant
accounting estimates reflected in the Company’s consolidated financial statements include revenue recognition, allowance
for doubtful accounts, warranty obligation, warrants liability, stock-based compensation and useful lives of intangible assets,
and property and equipment. Actual results could differ from those estimates.
Cash and cash equivalents consist of cash
on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months
or less when purchased. The Company maintains uninsured cash and cash equivalents with various financial institutions mainly in
the PRC and the States.
Accounts receivable are recorded at net
realizable value. Accounts receivable terms typically are net 60-180 days from the end of the month in which the services were
provided, or when goods were delivered. The Company generally does not require collateral or other security to support accounts
receivable. An allowance, if required, is based on a combination of historical experience, aging analysis, and an evaluation of
the collectibility of specific accounts. Management considers that receivables over 1 year to be past due. Management has determined
that an allowance of $865,769 (RMB5,394,874) and $859,509 (RMB5,419,725) was appropriate at December 31, 2012 and 2011, respectively.
Other receivables primarily include advances
to employees and advance to suppliers. Management regularly reviews aging of receivables and changes in payment trends and records
a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off after
exhaustive efforts at collection. Management has determined that an allowance of $598,747 was appropriate at December 31, 2012.
The Company, as is the common practice
in the PRC, often makes advance payments to suppliers for unassembled parts, or receives advance payments from customers. Advances
to suppliers were $4,470,756 and 4,348,847 as of December 31, 2012 and 2011, respectively. Advances from customers were $248,940
and $303,000 as of December 31, 2012 and 2011, respectively.
The carrying amounts reported in the consolidated
financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial
instruments.
The Company follows the provisions of ASC
topic 815, “Derivatives and Hedging”. ASC topic 815 provides a framework for determining whether an instrument is indexed
to an entity's own stock. Warrants are indexed to the Company's stock, which is traded in US dollars. Since the Company's functional
currency is the RMB, such warrants are considered liabilities. The fair value of the warrants liability is measured each reporting
period with the resulting change in fair value recorded in the consolidated statements of income and comprehensive income (see
Note 14).
The accounting standards regarding fair
value of financial instruments and related fair value measurements define fair value, and establish a three-level valuation hierarchy
for disclosures of fair value.
Financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value of
the warrants was determined using the Black Scholes Model, with level 2 inputs.
Inventories are stated at the lower of
cost or market and consist of assembled and unassembled parts relating to medical devices. The Company reviews its inventory annually
for possible obsolete goods and to determine if any reserves are necessary. The reserve for obsolescence was $51,764 (RMB322,556)
for each of 2012 and 2011, and the provision, when necessary, is included in the operating expenses in the consolidated statements
of income and comprehensive income.
Property and Equipment
Property and equipment are recorded at
cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over
the following estimated useful lives:
Leasehold improvements
|
Shorter of the useful lives or the lease term
|
Building and land use rights
|
20-40 years
|
Machinery and equipment
|
10-15 years
|
Furniture and office equipment
|
5 years
|
Motor vehicles
|
5 years
|
Intangible Assets
Intangible assets are recorded at cost
less accumulated amortization. Amortization is calculated on a straight-line basis over the following estimated useful lives:
Leasehold improvements
|
Shorter of the useful lives or the lease term
|
Software copyrights
|
20 years
|
Other software
|
5 years
|
Impairment of Long-Lived Assets
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.
When these events occur, the Company compares the carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from the use of the asset and eventual disposition. If the sum of the expected future cash flows
is less than the carrying amount of the asset, the Company applies a discount rate to the estimated cash flows, and an impairment
loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. Management has determined no
impairment exists at the balance sheet dates.
Revenue Recognition
The Company recognizes revenues when all
the followings conditions have been satisfied:
*Persuasive evidence
of an arrangement exists;
*Delivery and/or installation
has occurred (e.g., risks and rewards of ownership have passed);
*The sales price is
fixed or determinable; and,
*Collectibility is reasonably
assured.
All revenues are based on firm customer
orders with fixed terms and conditions. Because the products are assembled to the customers’ specification, there is no right
of return. The Company does not provide its customers with price protection or cash rebates. For products that include software,
the software is an off-the-shelf package and an integral part of the products being delivered. The Company does not provide any
significant post-sale customer support services and does not provide customers with upgrades. The software is incidental to the
product as a whole. For products that do not require installation, revenues are recognized when the products are delivered. For
products that require installation, revenues are recognized when the installation is completed.
For all service income, the Company recognizes
the revenue upon the completion of the repairs when the equipment has been returned to and accepted by the customers.
In the PRC, value added tax (VAT) of 17%
of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue
of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Cost of Revenues
Cost of revenues primarily includes wages
to assemble parts and the costs of unassembled parts, handling charges, and other expenses associated with the assembly and distribution
of product.
Service income and expense
Service income and expense represents activities
related to repair services provided for the customers by BTL.
Foreign Currency Translation
The accounts of Dehaier, BDL, BTL and Breathcare
are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”).
The accompanying consolidated financial statements are presented in US dollars. Foreign currency transactions are translated into
US dollars using fixed exchange rates in effect at the time of the transaction. Generally, foreign exchange gains and losses resulting
from the settlement of such transactions are recognized in the consolidated statements of income and comprehensive income. The
foreign currency accounts of BDL and BTL are translated in accordance with ASC 830-10, “Foreign Currency Matters”.
Assets and liabilities are translated at current exchange rates quoted by the People’s Bank of China at the balance sheet
dates and revenues and expenses are translated at average exchange rates in effect during the periods. Resulting translation adjustments
are recorded as other comprehensive income (loss) and accumulated as a separate component of equity
Warranty Costs
The Company provides for the estimated
cost of product warranties at the time revenue is recognized. The Company's warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting product failure. Should actual product failure rates,
material usage or service delivery costs differ from the Company's estimates, the Company may revise its estimated product warranty
liability. The term of the product warranty is generally twelve months. The reserve for warranty costs was $338,671 and $334,680
at December 31, 2012 and 2011, respectively. Warranty expense for the years ended December 31, 2012 and 2011 was $97,937 and $18,926,
respectively.
Research and Development Costs
Research and development costs relating
to the development of new products and processes, including significant improvements and refinements to existing products, are
expensed as incurred, Research and development costs were $230,854 and $268,038 for the years ended December 31, 2012 and 2011,
respectively.
Shipping and Handling Expenses
Shipping and handling expenses of $58,078
and $91,017 for the years ended December 31, 2012 and 2011 were included in the operating expenses in the consolidated statements
of income and comprehensive income, respectively.
Advertising Costs
Advertising costs are expensed as incurred,
Advertising costs were $56,656 and $232,400 for the years ended December 31, 2012 and 2011, respectively.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Earnings per Share
The Company follows the provisions of ASC
260-10, “Earnings per Share”. Basic earnings per share is computed by dividing net income attributable to holders of
common shares by the weighted average number of common shares outstanding during the years. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into
common shares. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation
of diluted earnings per share.
Value Added Tax
The Company reports revenues net of PRC’s
value added tax for all the periods presented in the consolidated statements of income and comprehensive income.
Stock-Based Compensation
The Company follows the provisions of ASC
718-10, “Compensation-Stock Compensation”. The Company has a share incentive plan which authorizes the issuance of
up to 10% of the number of shares outstanding. Pursuant to the plan, the Company may issue options to purchase its common shares
to employees and directors of the Company and its affiliates. The Company fair values share-based awards granted under the plan.
Accordingly, compensation is measured on the grant date using appropriate valuation models.
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.” Under this method,
income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax
consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements
or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation
allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company recorded a deferred
tax asset for the temporary differences arising from allowance for doubtful accounts and certain accrued expenses. The Company
believes it can utilize the deferred tax asset to offset future taxable income. Therefore, no valuation allowance has been provided
as of December 31, 2012 and 2011.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Income Taxes (Continued)
ASC 740-10 prescribes a recognition threshold
and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return.
Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more
likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying
position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon
ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest
and penalties, if applicable) is established in the financial statements to the extent a current benefit has been recognized on
a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties,
if any, are included as components of income tax expense and income taxes payable. The Company had filed its 2008 and 2009 Value
Added Tax (“VAT”) returns for some of its customers during the year ended December 31, 2011 and 2012. All the potential
VAT liabilities on these VAT returns occurred in current period were also accrued as incurred and included in the accompanying
consolidated financial statements.
The implementation of ASC 740-10 resulted
in no material liability for unrecognized tax benefits. The Company recognizes interest and penalties, if any, related to unrecognized
tax benefits as income tax expense in the statements of income and comprehensive income. During the years ended December 31, 2012
and 2011, the Company did not incur any interest or penalties.
Income tax returns for the year prior to
2010 are no longer subject to examination by tax authorities.
Reclassification
Certain reclassifications have been made
to the prior year financial statements to conform to the current year presentation.
Recently Issued Accounting Standards
The FASB has issued Accounting Standards
Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses
that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated
other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net
income or other comprehensive income in financial statements. All of the information that this ASU requires already is required
to be disclosed elsewhere in the financial statements under U.S. GAAP. The amendments are effective for reporting periods beginning
after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private
companies. Early adoption is permitted. The adoption will not have any material impact on the Company’s consolidated financial
statements.
The FASB has issued Accounting Standards
Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.
The main objective in developing this Update is to address implementation issues about the scope of Accounting Standards Update
No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The objective of this Update is to
clarify the scope of the offsetting disclosures and address any unintended consequences. The amendments clarify that the scope
of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated
embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending
transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master
netting arrangement or similar agreement. The amendments in this Update affect entities that have derivatives accounted for in
accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements,
and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section
815-10-45 or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial
assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments
make them no longer subject to the disclosure requirements in Update 2011-11. An entity is required to apply the amendments for
fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this accounting
standard will not have any material impact on the Company’s consolidated financial statements.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
3.
|
OTHER RECEIVABLES, NET
|
Other receivables consist of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Due from suppliers
|
|
|
1,101,866
|
|
|
|
350,679
|
|
Employee advances
|
|
|
53,516
|
|
|
|
60,515
|
|
|
|
|
1,155,382
|
|
|
|
411,194
|
|
Allowance for doubtful accounts
|
|
|
(598,747
|
)
|
|
|
-
|
|
|
|
|
556,635
|
|
|
|
411,194
|
|
|
4.
|
PREPAYMENT AND OTHER CURRENT ASSETS
|
Prepayment
and other current assets consist of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Prepayment for equipment purchase
|
|
|
3,808,938
|
|
|
|
2,300,415
|
|
Other prepaid expenses
|
|
|
261,037
|
|
|
|
64,739
|
|
|
|
|
4,069,975
|
|
|
|
2,365,154
|
|
|
5.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consist of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Buildings
|
|
|
1,365,717
|
|
|
|
1,349,624
|
|
Land use rights
|
|
|
311,973
|
|
|
|
308,297
|
|
Plant and machinery
|
|
|
2,980,087
|
|
|
|
2,973,593
|
|
Automobiles
|
|
|
43,706
|
|
|
|
43,869
|
|
Office and computer equipment
|
|
|
524,154
|
|
|
|
503,833
|
|
|
|
|
5,225,637
|
|
|
|
5,179,216
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,330,114
|
)
|
|
|
(1,830,683
|
)
|
Property and equipment, net
|
|
|
2,895,523
|
|
|
|
3,348,533
|
|
At December 31, 2012 and 2011, BTL’s
building was pledged to a bank as collateral for short-term borrowings of RMB15,000,000 (US$2,407,200) and RMB10,000,000(US$1,585,890),
respectively (see Note 8).
Depreciation and amortization expense was
$471,727 and $450,518, for the years ended December 31, 2012 and 2011
,
respectively.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Land Use Rights
There is no private ownership of land in
China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land
use rights are reported at the purchase price (RMB1,944,000 in 2002).
|
6.
|
INTANGIBLE ASSETS, NET
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Software Copyright
|
|
|
2,733,062
|
|
|
|
-
|
|
Others
|
|
|
42,736
|
|
|
|
-
|
|
|
|
|
2,775,798
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated and amortization
|
|
|
(81,359
|
)
|
|
|
-
|
|
Intangible assets, net
|
|
|
2,694,439
|
|
|
|
-
|
|
Amortization expense for the years ended
December 31, 2012 and 2011 was $80,359 and $0, respectively. Annual future amortization expense at December 31, for each of the
next five years is $265,000 and $1,369,000 thereafter.
Tax receivable consists of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Value added tax receivable
|
|
|
328,208
|
|
|
|
888,452
|
|
Enterprises or individuals, who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a VAT in accordance with Chinese laws. The
standard VAT is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of unassembled medical components
of the Company’s product used in contract and production can be used to offset the VAT due on sales of the product.
The tax receivable as of December 31, 2012
and 2011 represents VAT credit on the purchased products. These amounts can be used to offset the VAT due on sales of the finished
product.
The Company has a line of credit for $1,604,800
(RMB10,000,000) with a commercial bank in China to finance its working capital. The credit line bears interest at a variable rate
and is renewed annually. Average interest rates for the year ended December 31, 2012 and 2011 were 6.60% and 5.78%, respectively.
Pursuant to the terms of the agreement, the line of credit is secured by BTL’s building (see note 5) and guaranteed by BDL
and an officer of the Company.
On May 14, 2012, the bank renewed the Company's
credit line that bears interest at a variable rate with payments due on March 14, 2013 and May 14, 2013 for RMB3,000,000 and RMB7,000,000,
respectively.
On February 2, 2012, the Company entered
into a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $802,400 (RMB5,000,000) with floating
interest rate which was approximately 8.2% per year, due on January 30, 2013 (See note 19). Pursuant to the terms of the agreement,
the line of credit is guaranteed by an officer of the Company.
Interest expense on short-borrowings for
the years ended December 31, 2012 and 2011 amounted to $149,488 and 82,136, respectively.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other payables consist
of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Accrued salaries and social welfare
|
|
|
259,774
|
|
|
|
247,973
|
|
Accrued expenses
|
|
|
60,542
|
|
|
|
34,689
|
|
Other payables, non-trade vendors
|
|
|
51,591
|
|
|
|
14,195
|
|
Deposit from customer
|
|
|
34,545
|
|
|
|
52,301
|
|
|
|
|
406,452
|
|
|
|
349,158
|
|
Taxes payable consist of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Value added tax
|
|
|
144,845
|
|
|
|
1,196,630
|
|
Enterprise income tax
|
|
|
229,854
|
|
|
|
781,599
|
|
Employee withholding taxes
|
|
|
2,533
|
|
|
|
2,014
|
|
Business tax
|
|
|
161
|
|
|
|
771
|
|
City construction tax
|
|
|
24,181
|
|
|
|
61,034
|
|
|
|
|
401,574
|
|
|
|
2,042,048
|
|
|
11.
|
NON-CONTROLLING INTEREST
|
Non-controlling interest consists of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Original paid-in capital
|
|
|
384,211
|
|
|
|
384,211
|
|
Retained Earnings
|
|
|
754,894
|
|
|
|
744,693
|
|
Accumulated other comprehensive income
|
|
|
300,801
|
|
|
|
283,829
|
|
|
|
|
1,439,906
|
|
|
|
1,412,733
|
|
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
COMMITMENTS AND CONTINGENCY
|
Leases
The lease commitments are for office premises
and a warehouse facility, all of which are classified as operating leases. These non-cancelable leases have lease terms expiring
through December 2014. Approximate future minimum lease payments under these leases at December 31, 2012, are $97,589 for the twelve
months ending December 31, 2013 and $46,862 for the twelve months ending December 31, 2014.
Rent expense for the year ended December
31, 2012 and 2011 was $124,373 and $161,362, respectively.
Employment Contracts
Under the PRC labor law, all employees
have signed employment contracts with the Company. Management employees have employment contracts with terms up to three years
and non-management employees have a one year employment contract renewable on an annual basis.
Contingency
The Labor Contract Law of the People’s
Republic of China, requires employers to assure the liability of the severance payments if employees are terminated and have been
working for the employers for at least two years prior to January 1, 2008. The Company has estimated its possible severance payments
of approximately $269,656 and $235,000 as of December 31, 2012 and 2011, respectively, which have not been reflected in its consolidated
financial statements, because it is more likely than not that this will not be paid or incurred.
Common Shares
On March 8, 2011, Dehaier issued 10,000
unregistered common shares to an investment relations firm in connection with the investment advice rendered for the Company. The
fair value of the shares on the grant date based on the closing price was $59,300.
On November 16, 2011, Dehaier issued 50,000
unregistered common shares to a consulting firm in connection with the financial advisory services rendered for the Company. The
fair value of the shares on the grant date based on the closing price was $84,250.
During 2012, Dehaier issued 60,000 restrict
unregistered common shares to independent consultants in connection with investment counseling and financial advisory services
rendered for the Company. The fair value of the shares on the grant date based on the closing price was approximately $109,000.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Statutory Surplus Reserves
A PRC company is required to make appropriations
to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles
of the PRC (“
PRC GAAP
”). Appropriations to the statutory surplus reserve is required to be at least 10% of the
after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s’ registered
capital.
The statutory surplus reserve fund is non-distributable
other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion
or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing
the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue
is not less than 25% of the registered capital.
Since Dehaier is a British Virgin Islands’
company, it will not be subject to the statutory surplus reserve provisions. BDL is a joint-venture company and the statutory surplus
reserve provisions will be determined by its board of directors. As of March 18, 2013, BDL’s board of directors has not yet
made such determination. Therefore, no amount was allocated to the statutory surplus reserve account.
BTL appropriated 10% of its net profits
as statutory surplus reserve, which is included as part of the non-controlling interest in the equity section. For the years ended
December 31, 2012 and 2011, statutory surplus reserve activity was as follows:
|
|
December 31,
|
|
|
|
2012
US$
|
|
|
2011
US$
|
|
|
|
|
|
|
|
|
Balance – beginning of year
|
|
|
74,469
|
|
|
|
72,226
|
|
Addition to statutory reserves
|
|
|
1,020
|
|
|
|
2,243
|
|
Balance –end of year
|
|
|
75,489
|
|
|
|
74,469
|
|
Stock Option Plan
Under the employee stock option plan, the
Company’s stock options expire five years from the date of grant. On December 29, 2011, the Company entered into five-year
agreements with its employees and directors. In connection with their services, the Company issued an aggregate of 450,000 options
to acquire the Company’s common shares at an exercise price of $1.45 per share. The options vest in equal annual installments
over the five years of the agreements ending December 31, 2016. As of December 31, 2012, 360,000 options have not been vested.
The Company valued the stock options using
the Black-Scholes model with the following assumptions:
|
|
Expected
Terms
(years)
|
|
|
Expected
Volatility
|
|
|
Dividend
Yield
|
|
|
Risk Free
Interest Rate
|
|
|
Grant Date
Fair Value
|
|
Employees
|
|
|
5
|
|
|
|
126
|
%
|
|
|
0
|
%
|
|
|
0.83
|
%
|
|
|
1.22
|
|
Directors and officers
|
|
|
5
|
|
|
|
126
|
%
|
|
|
0
|
%
|
|
|
0.83
|
%
|
|
|
1.22
|
|
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plan (Continued)
The following is a summary of the option activity:
Stock options
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding as of December 31, 2010
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
450,000
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2011
|
|
|
450,000
|
|
|
$
|
1.45
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2012
|
|
|
450,000
|
|
|
$
|
1.45
|
|
|
$
|
400,500
|
|
Following is a summary of the status of options
outstanding and exercisable at December 31, 2012:
Outstanding options
|
|
|
Exercisable options
|
|
Average
Exercise
price
|
|
|
Number
|
|
|
Average remaining
contractual life
(years)
|
|
|
Average
Exercise
price
|
|
|
Number
|
|
|
Average remaining
contractual life
(years)
|
|
$
|
1.45
|
|
|
|
450,000
|
|
|
|
4
|
|
|
$
|
1.45
|
|
|
|
90,000
|
|
|
|
4
|
|
For the year ended December 31, 2012 and 2011,
the Company recognized $110,163 and $903, respectively, as compensation expense under its stock option plan.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On April 21, 2010, the Company issued to
Anderson & Strudwick Incorporated (“A&S”) 150,000 warrants, as a portion of the placement commission for
the IPO. On the same day, the Company granted a total of 7,500 warrants to Hawk Associates Inc.(“Hawks”), the Company’s
investor relations consultancy. On January 10, 2012, the Company issued 100,000 warrants to FirsTrust Group, Inc., (“FirsTrust”),
the Company’s investor relations consultancy totaling 257,500
warrants. All the warrants
issued to “A&S” have the right to purchase one share of common stock for an exercise price of $10.00 per share
with a term of 5 years. All the warrants granted to Hawks have the right to purchase one share of common stock for an exercise
price of $9.60 per share with a term of 5 years. All the warrants granted to FirsTrust have the right to purchase one share of
common stock for an exercise price of $4.00 per share with a term of 5 years.
The fair value of the outstanding warrants
at December 31, 2012 was calculated using the Black Scholes Model with the following assumptions:
Market price per share (USD/share)
|
|
1.93
|
Exercise price (USD/share)
|
|
$4.00, $9.60, $10.00
|
Risk free rate
|
|
0.25%, 0.25%, 0.75%
|
Dividend yield
|
|
-
|
Expected term/Contractual life (years)
|
|
2.30, 2.30, 4.02
|
Expected volatility
|
|
187.1%
|
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth by level
within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis
as of December 31, 2012 and 2011.
|
|
Carrying Value at
December 31, 2012
|
|
|
Fair Value Measurement at
December 31, 2012
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrants liability
|
|
$
|
374,166
|
|
|
$
|
-
|
|
|
$
|
374,166
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at
December 31, 2011
|
|
|
Fair Value Measurement at
December 31, 2011
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrants liability
|
|
$
|
96,469
|
|
|
$
|
-
|
|
|
$
|
96,469
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the
beginning and ending balances of warrants liability measured at fair value on a recurring basis using Level 2 inputs:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
US$
|
|
|
US$
|
|
Beginning balance
|
|
|
96,469
|
|
|
|
318,109
|
|
Warrants issued
|
|
|
97,505
|
|
|
|
-
|
|
Fair value change of the issued warrants included in earnings
|
|
|
180,192
|
|
|
|
(221,640
|
)
|
Ending balance
|
|
|
374,166
|
|
|
|
96,469
|
|
Following is a summary of the warrants activity:
|
|
Number
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
Outstanding as of January 1, 2011
|
|
|
157,500
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2011
|
|
|
157,500
|
|
|
$
|
9.98
|
|
|
|
3.31
|
|
Granted
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2012
|
|
|
257,500
|
|
|
$
|
7.66
|
|
|
|
2.97
|
|
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the
basic and diluted earnings per share computation for the years ended December 31, 2012 and 2011:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Net income available to the company’s common shareholders
|
|
$
|
3,206,151
|
|
|
$
|
3,103,120
|
|
Weighted average shares outstanding - Basic
|
|
|
4,578,151
|
|
|
|
4,514,329
|
|
Earnings per share - Basic
|
|
$
|
0.70
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Net income available to the company’s common shareholders
|
|
$
|
3,206,151
|
|
|
$
|
3,103,120
|
|
Weighted average shares outstanding - Basic
|
|
|
4,578,151
|
|
|
|
4,514,329
|
|
Options
|
|
|
23,756
|
|
|
|
-
|
|
Weighted shares outstanding - Diluted
|
|
|
4,601,907
|
|
|
|
4,514,329
|
|
Earnings per share - Diluted
|
|
$
|
0.70
|
|
|
$
|
0.69
|
|
For the year ended December 31, 2012, 23,756
shares of the 450,000 stock options were exercisable and included in the diluted EPS calculation.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
British Virgin Islands
Dehaier is a tax-exempt company incorporated
in the British Virgin Islands. BDL and BTL were incorporated in the PRC and are governed by the PRC laws.
PRC
PRC enterprise income tax is calculated
based on the Enterprise Income Tax Law (the “EIT Law”). Under the EIT Law, a unified enterprise income tax rate of
25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises.
Under the current PRC laws, PRC government
grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the
period of validity for the certification of high technology companies is three years. In 2009 and 2012 BD
L
updated its certification for “high technology” company. Therefore, BDL used a 15% income tax rate to calculate the
income tax expense for the years ended
December 31
, 2012 and 2011
.
The tax rate
for BTL is 25%
in 2012 and 2011
A reconciliation of income tax expense
and the amount computed by applying the statutory income tax rate to the income before income tax provision is as follows:
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Tax computed at statutory rate
|
|
|
852,640
|
|
|
|
774,327
|
|
Decrease in income taxes resulting from temporary differences
|
|
|
-
|
|
|
|
(118,030
|
)
|
Others
|
|
|
10,155
|
|
|
|
-
|
|
|
|
|
862,795
|
|
|
|
656,297
|
|
Provision (Benefit) for income taxes consists
of:
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Current provision
|
|
|
862,795
|
|
|
|
774,327
|
|
Deferred provision (benefit)
|
|
|
-
|
|
|
|
(118,030
|
)
|
Total provision for income taxes
|
|
|
862,795
|
|
|
|
656,297
|
|
United States
Breathcare is a limited liability company
and, such as, is not subject to federal income tax. Moreover, as of December 31, 2012, Breathcare was inactive and generate no
revenue.
DEHAIER MEDICAL SYSTEMS LIMITED AND AFFILIATE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and
2011, the Company received approximately $23,871 (RMB150,600) and $27,423 (RMB177,200), respectively, from the local government
in China as subsidy income.
Major Customers
For the years ended December 31, 2012 and
2011, approximately 13% of the Company’s revenues were received from each of two customers.
At December 31, 2011, receivables from
two customers were approximately 12% and 10%, respectively. No customer represented more than 10% of amounts receivable at December
31, 2012.
Major Suppliers
At December 31, 2012 and 2011, payables
due to three suppliers were approximately 34%, 33%, 19% and 50%, 8%, 6%, respectively.
Revenues
For the years ended December 31, 2012 and
2011, the Company’s top three selling products accounted, in the aggregate, for approximately 68% and 27%, respectively,
of its total net revenues.
The following represents the revenues by
product line, all derived from China:
|
|
For the years ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
US$
|
|
|
US$
|
|
Products Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Devices
|
|
|
18,547,635
|
|
|
|
19,362,673
|
|
Respiratory and Oxygen Homecare
|
|
|
2,822,690
|
|
|
|
2,276,610
|
|
|
|
|
21,370,325
|
|
|
|
21,639,283
|
|
On February
4, 2013, the Company repaid the loan in the amount of $802,400
(RMB5,000,000) with Nanjing Bank Company Limited (Beijing
Branch).
On March 5, 2013, the Company entered into
a new loan agreement with Nanjing Bank Company Limited (Beijing Branch) in the amount of $802,400 (RMB5,000,000) with a floating
interest rate which will be approximately 7.5% in 2013. The loan is due on March 4, 2014. Pursuant to the terms of the agreement,
the line of credit is guaranteed by an officer of the Company.
On March 14, 2013, the Company repaid the
credit line in the amount of $481,440 (RMB3,000,000) with a commercial bank in China as documented in Note 8.