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Dehaier Medical Systems Ltd. (NASDAQ:DHRM)

Q4 2013 Earnings Conference Call

March 31, 2014 9:00 p.m. ET

Executives

Ping Chen – Chairman and CEO

Tina He – Secretary to the Board of Directors

Charles Li – CFO

Analysts

Unidentified Analyst

Unidentified Company Representative

Ladies and gentlemen, welcome to the Dehaier Medical Systems' 2013 full year financial results, earnings results, which is being held at 9:00 p.m. Eastern Time on March 31, 2014.

Throughout today's recorded presentation, participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. If anybody participant has difficulty hearing the presentation, please press star followed by the zero on your telephone for operator assistance.

Again thank you for attending the earnings call for Dehaier Medical Systems' 2013 full year financial results. This is Le Mo [ph], IR specialist for Dehaier Medical.

Joining me today are Mr. Ping Chen, Chairman and CEO of Dehaier; Mr. Charles Li, Chief Financial Officer; Mr. Hunli Li [ph], Finance Manager; and Ms. Tina He, Secretary to the Board of Directors.

We have our presentation by the company's management. Tina will summarize our business overview for 2013 and Charles Li will introduce the financial review of 2013. We'll then have a brief question-and-answer period, during which management will be available to questions -- to answer questions concerning the company's 2013 financial results.

Before we begin, I would like to remind you that this call may contain various forward-looking statements within the meaning of Section 27A of Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 [indiscernible] company's expectations or beliefs concerning future events of the company's financial and operational performance. These forward-looking statements are further qualified by important factors that could cause results to differ materially from those in the forward-looking statements. These factors include but are not limited to market conditions in China, the financial and political environment for medical equipment in China, and numerous other potential factors. Results actually achieved may differ materially from the expected results included in the statements.

With that said, it's now my pleasure to turn the call over to Dehaier Medical's Chairman and CEO, Mr. Ping Chen, to conduct a brief presentation. Mr. Chen, go ahead please.

Ping Chen

Thank you, and welcome everyone to our 2013 full year financial results earnings call. We are pleased to have this opportunity to speak with you and to discuss our operation and financial results for full year 2013.

2013 was a year of strategic restructure of our business focuses and product offerings. We have maintained our growth in major government healthcare procurement businesses, gained more reputation and market exposure through aggressive marketing efforts, expanded our IP by obtaining CFDA approval, and launched numerous new products for sleep respiratory segment.

In 2013, the company reduced our efforts in traditional medical equipment businesses, and invested more resources in the business of sleep respiratory. As we strongly believe in the huge growth potential of sleep respiratory market in China, the management has been focusing on laying solid foundation of this business which will take off in coming years. In 2014, we will devote much of our efforts to the booming sleep respiratory markets, and expect this will deliver more diverse and robust revenue stream to the company.

I will now turn the call over to Tina He to address our business overview.

Tina He

Thank you, Mr. Chen.

Turning to the overall business, we contributed much of our efforts on expanding the sleep respiratory business by offering comprehensive solutions to the disease of sleep -- obstructive sleep apnea, to meet the increasing demand from China. Our newly developed, efficient sleep respiratory system provides a revolutionary solution to sleep diagnosis. And we explored a unique business model to cater to China's sleep disorder and diagnosis market.

The system is a cost-effective portable home sleep diagnostic and monitoring solution. This enables the diagnosis of sleep disorders using a standard Ox meter recording plethysmograph signal. By collecting and recording of physiological data from patients who wear the watch-sized device at home, the advanced automatic sleep scoring software generates accurate and reliable sleep study diagnosis, including apnea hypopnea index, sleep/wake time, and Cheyne/Stokes breathing patterns.

You can regard the system as a comprehensive platform that manages a cost-effective sleep service operation, including patient's electronic medical records, sleep diagnostic outcomes and complete workflow management. The web-based automatic scoring and data management facilitates operational efficiency and maximize growth potential by giving users valuable and timely clinical information to improve patient's treatment. The system has passed the FDA and CE certificate and is ready to receive CFDA approval shortly.

Furthermore, company completed research and development for its new DHR998 sleep diagnostic device which is a technological upgrade based on original high-efficiency sleep diagnostic and monitoring product. And in early 2014 we received CFDA approval for its new generation DHR998 sleep diagnostic device, from the Chinese State Food and Drug Administration. Dehaier has now formed a comprehensive solution to address the market demands of sleep diagnosis, sleep apnea treatment and CPAP treatment evaluation.

We believe China's sleep diagnosis market offers significant growth opportunities, but the absence of a comprehensive production solution provider has caused the slow acceptance from Chinese consumers and healthcare providers. We believe that our introduction of the Morpheus Ox will promote the close relationship among patients, doctors and hospitals, and we facilitated the establishment of a sustainable market. We are confident that the state-of-the-art system can be a leader in China's domestic sleep diagnosis market going forward. And we expect to share news about Morpheus Ox system widely to increase our market leadership [ph].

Speaking of the medical device system business, we have enhanced the input in several state-level medical procurement, including the cooperation with Mindray to win the bid of 79 units of color Dopper ultrasound machines, and securing a couple of China Development Bank's rural medical and healthcare infrastructure projects to offering high quality with best price ratio medical devices to parts of China's rural and remote areas and provinces.

In 2013, company also put more focus on the marketing activities and participated in leading international exhibitions like Germany MEDICA 2013 and 2013 Moscow healthcare exhibition to seek international presence and worldwide distributors.

By displaying and demonstrating our newly-developed sleep respiratory diagnosis system at several Chinese Sleep Medicine Congress, we have gained very positive comments and appraisal regarding the system from the professionals and doctors from the Chinese renowned hospitals. We strongly believe the favorable market trends and huge potential for our rapid growth.

I will now turn the call over to our CFO, Charles Li, to review the financial results for the full year 2013 and to provide further commentary on our operation and outlook for 2014.

Charles Li

Thank you, Tina. I will start with a review of our financial results of 2013 and business outlook, before opening the line to the questions.

Financial review. Revenues. Our total revenues are derived from our medical devices and our sleep respiratory and oxygen homecare products and services. In 2013, our total revenues decreased by 21.11%, mainly due to the influence of increasingly challenging markets and new competitors. Along with the development of the company's business shifting strategy, the company invested more resources in the research and development of sleep respiratory business, and adjusted the sales strategy of traditional medical devices business.

Gross profit. Our gross profit decreased from $8.12 million in 2012 to $6.41 million in 2013, but our gross margin increased from 37.98% in 2012 to 38.03% in 2013. The trends of gross margin reflect our business shifting strategy and market strategy that we focused on higher margin products sales to face the more intense competition in medical device market. Management believes the shift in the company's revenue mix away from traditional device sales resulted in increases in gross margin.

Income from operations. As a result of the foregoing, we generated an operating income of approximately $3.51 million in 2013, compared to approximately $4.39 million in 2012. Operating income decreased by 20.11%, mainly due to the decrease of revenue.

Net income. We had a net income of approximately $2 million in 2013, compared to approximately $3.22 million in 2012. After deduction of non-controlling interest in income, net income attributable to Dehaier was approximately $2 million and $3.21 million in 2013 and 2012, respectively.

Liquidity and capital resources. As of December 31, 2013, we had around $2. 6 million in cash and cash equivalents. We believe that our currently available working capital of around $32.6 million, along with $6.1 million net proceed from our recent capital raising, can meet our anticipated cash needs and sustain our current operations for at least 12 months.

Outlook for 2014. Looking ahead to 2014, the company will carry through its growth strategy of becoming a leading player in sleep respiratory products and services in China. We expect the sleep respiratory business will generate robust revenue and become the highlight growth for us in 2014.

This concludes our prepared remarks. With that, Mr. Chen and I will happy to take your questions. Operator, please open the call to questions. Thank you.

Unidentified Company Representative

Thank you, Charles.

Question-and-Answer Session

Unidentified Company Representative

Investors, if you would like to raise a question to our management, please press star 1 to proceed.

Now we have received several questions. The first question is -- hello?

Ping Chen

Hello?

Unidentified Participant

Hello.

Tina He

Hi. Is that you? May I have your name?

Unidentified Participant

My name is Allen Lyons [ph].

Tina He

Hello. Yeah. Darren Lyons, right? Sorry?

Unidentified Participant

Yes, Allen Lyons [ph], L-Y-O-N-S.

Tina He

Okay. Thank you for your calling in. Thanks for the question. This is Tina. And now you can ask, and just a hint, that after you have the question, I have to translate to our management team. Okay?

Unidentified Participant

Okay, sure, no problem. I have a few questions, so I'll go slowly.

Tina He

Okay.

Unidentified Participant

First one is regarding 2013.

Tina He

Yes.

Unidentified Participant

What was the non-sleep respiratory revenue for 2013?

Tina He

Okay. You mean the question -- the revenue for the sleep respiratory business, right?

Unidentified Participant

Yeah, the other -- the rest of the business. I know your total revenue that you had for the year was, you know, there separately, total amount, the total revenue was $16.8 million. How much of that was non-respiratory business.

Tina He

Okay, okay. Hold on for a while.

Unidentified Participant

Sure.

Tina He

[Chinese language spoken]

Charles Li

Please let me answer your question in Chinese and I would like Tina to translate in English. Thank you.

[Chinese language spoken]

Tina He

Lyons, firstly, let me translate. The total revenue for 2013 is around $16 million and the percentage of the medical device business takes up nearly 73%.

Charles Li

[Chinese language spoken]

Tina He

The percentage of sleep respiratory business takes up 27.52%.

Unidentified Participant

Okay. All right. That answers that.

So tell me this then, I'm trying to understand, when you came out with your 6-K in February, you projected, and I know it's a projection for purposes of it, but obviously it was very -- a high projection, but doing $22.6 million of sleep respiratory revenue in 2014. So if that's the case, how much revenue are you projecting to do in the medical technology other than sleep respiratory revenue for next year?

Tina He

Okay. Hold on for a while.

[Chinese language spoken]

Unidentified Company Representative

[Chinese language spoken]

Unidentified Company Representative

[Chinese language spoken]

Tina He

Okay. Lyons, he has answered, in 2014, you know, there's a huge growth potential for sleep respiratory business, but you know the business is divided into two parts. The first one is sleep diagnosis, the other one is sleep treatment. We have applied CFDA approval for the sleep diagnosis system, but we expect to get certification by the end of April. And for the CPAP machine, we have already got CFDA. So right now it is still on the process of marketing activities and we expect there will be huge growth for sleep respiratory after June.

Unidentified Participant

Okay. So -- it doesn't answer my -- I understand what you're saying, but it doesn't answer the question. The question says, on your profit forecast that you put together and filed in the Form K in February.

Tina He

Yes.

Unidentified Participant

You had total estimated revenue from anything to do with sleep apnea, the PAP diagnosis, you had a total of $22,602,000, that was your number.

Tina He

Yes, yes.

Unidentified Participant

So what I'm trying to determine is, besides that revenue, what revenue, like you had in 2013, do you expect from other sources?

Tina He

Okay. [Chinese language spoken]

Unidentified Company Representative

[Chinese language spoken]

Unidentified Company Representative

[Chinese language spoken]

Tina He

Okay. He has answered, firstly, you know, we -- the business divides this to two parts. The first one is medical devices, which includes traditional medical device distribution, international business and also the government procurement business. Actually in 2013 the government procurement business had a huge growth compared to the business in 2012. And also in this year, in 2014, we expect a great increase in the government procurement business as well, because in -- we have, right now, we have gained many resources and many requirements for government bid -- tender and biddings from 2013. And so right now we have also [indiscernible] authorization from leading medical device players such as Johnson & Johnson, and we are going to represent Johnson & Johnson to take parts of the bids in the government bidding projections. And we expect this will be also another great generator of revenue in this year.

Unidentified Participant

Okay, that helps a lot, because I didn't see any of that information on the business plan that you had that you put together, financing initiative.

Tina He

Yes. Looking back to the press release in last year, we have released that six or seven news about the government procurement business.

Unidentified Participant

Right. No, I understand. But when you did the Form 6-K and before you did your road show that you had, you put together a projection on the sleep respiratory business but there was nothing else.

Tina He

Yeah, yeah.

Unidentified Participant

I didn't understand -- I didn't know, I was trying to figure out how much other business you're doing besides what you showed there. Okay?

Tina He

Yeah, yeah. Thank you.

Unidentified Participant

Okay. All right. And I have some other questions, unless you want to have somebody go on first.

Tina He

Okay.

Unidentified Participant

You want me to ask another question?

Okay. Well, here's my other question.

Tina He

Okay. You can have your question please.

Unidentified Participant

You had the decrease in sales, and this is one that I've talked with you people before, you had a decrease in sales of $4.5 million, but your receivables went up $650,000. Why isn't receivables starting to shrink a little bit? And how -- what's the aging of the receivables?

Tina He

Okay. Hold on for a while.

[Chinese language spoken]

Unidentified Company Representative

[Chinese language spoken]

Unidentified Company Representative

The decrease of the revenue is mainly because of influence of increasingly challenging market and new entrants of the industry [ph]. The company adjusted development strategy and its sales strategy of traditional medical devices business focused on government procurement [ph] and emergent [ph] sleep respiratory business. At the same time, the medical device business is facing more serious market competition. So the sales income fell slightly. Last important reason, due to the transition of government, the government procurement business in 2013 moved to 2014 and will be completed in 2014.

The second reason, the increase of accounts receivables and proportion accounted for [ph] income in 2013 is mainly because our regular business [indiscernible] in the second half of 2013. Also the increased accounts receivable is highly related to our business model, which is mainly for agents and direct sales. As for now, agent [indiscernible] business, as our company's traditional business, has a high percentage of contribution to the revenue. According to China's national condition, it takes a long time to get [indiscernible]. In 2013, the payment period of government procurement is generally more than a year and a half. Those factors resulted in the increase of accounts receivable in 2013.

Unidentified Participant

Okay. I think I understand what you're saying.

The last question I had is, when did you file -- because you don't file a 10-K, when is your annual filing have to be done? Is that June or is it sometime before then?

Unidentified Company Representative

A new filing you mean?

Unidentified Participant

Yes.

Unidentified Company Representative

Actually we have filed with the SEC today, but I think some of the problem, they didn't appear on the website. But I believe you can check with SEC website tomorrow morning.

Unidentified Participant

Okay. So you are filing now, it's not -- you don't have a different type -- because you stopped filing Q's, you just file in June and then December, correct, now?

Unidentified Company Representative

Yes, yes. Last year we transferred to the 20F filer [ph] because we --

Unidentified Participant

20F, right. So with the 20F, it's due now, is that correct?

Unidentified Company Representative

Yes, we have filed today.

Unidentified Participant

Okay. So I'll look for it. I didn't see it.

Unidentified Company Representative

Yes, you can check tomorrow morning.

Unidentified Participant

I will. I will check that.

Unidentified Company Representative

Okay.

Unidentified Participant

Well, thank you for answering the questions. You've been helpful.

Unidentified Company Representative

Thank you. Thank you.

Tina He

Okay, we have no more questions at this time. So we now conclude our meeting.

Thank you once again for joining us on today's call. If anyone has any further questions, please don't hesitate to contact our IR department.

On behalf of Mr. Chen and the management team, I would like to thank you all for your continued support. We look forward to updating you on our continued progress as we move forward. Thank you.

Unidentified Company Representative

Thank you.

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