NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
1.
|
ORGANIZATION
AND BUSINESS
|
Wonhe
High-Tech International, Inc. (the “Company” or “Wonhe High-Tech”) was incorporated in the State of Nevada
on August 13, 2007. The Company changed its name from Baby Fox International, Inc. to Wonhe High-Tech International, Inc. on April
20, 2012. On June 27, 2012, the Company acquired all of the outstanding capital stock of World Win International Holding Ltd.
or “World Win” in exchange for 19,128,130 shares of the Company’s common stock (the “Share Exchange”).
As
a result of the acquisition in June 2012, the Company’s consolidated subsidiaries included World Win, the Company’s
wholly-owned subsidiary, which is incorporated under the laws of the British Virgin Island (“BVI”), Kuayu International
Holdings Group Limited (Hong Kong), or “Kuayu,” a wholly-owned subsidiary of World Win which is incorporated under
the laws of Hong Kong, and Shengshihe Management Consulting (Shenzhen) Co., Ltd., or “Shengshihe Consulting,” a wholly-owned
subsidiary of Kuayu which is incorporated under the laws of the People’s Republic of China (“PRC”). The Company
also consolidated the financial position and results of operations of Shenzhen Wonhe Technology Co., Ltd., or “Shenzhen
Wonhe,” a company incorporated under the laws of the PRC which was effectively and substantially controlled by Shengshihe
Consulting through a series of captive agreements. Shenzhen Wonhe was considered a variable interest entity (“VIE”)
of Shengshihe Consulting.
On
May 30, 2012, Shenzhen Wonhe entered into (i) an Exclusive Technical Service and Business Consulting Agreement, (ii) a Proxy Agreement,
(iii) Share Pledge Agreement, and (iv) Call Option Agreement with Shengshihe Consulting. The foregoing agreements are collectively
referred to as the “VIE Agreements.”
Exclusive
Technical Service and Business Consulting Agreement:
Pursuant to the Exclusive Technical Service and Business Consulting Agreement,
Shengshihe Consulting provides technical support, consulting, training, marketing and business consulting services to Shenzhen
Wonhe as related to its business activities. In consideration for such services, Shenzhen Wonhe agreed to pay as an annual service
fee to Shengshihe Consulting, 95% of Shenzhen Wonhe’s annual net income plus an additional monthly payment of approximately
$8,015 (RMB 50,000). The agreement had an unlimited term and could only be terminated by mutual agreement of the parties.
Proxy
Agreement:
Pursuant to the Proxy Agreement, the stockholders of Shenzhen Wonhe agreed to irrevocably entrust Shengshihe Consulting
to designate a qualified person, acceptable under PRC law and foreign investment policies, to vote all of the equity interests
in Shenzhen Wonhe held by each of its stockholders. The Agreement had an unlimited term and could only be terminated by mutual
agreement of the parties.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
1.
|
ORGANIZATION AND BUSINESS (continued)
|
Call
Option Agreement:
Pursuant to the Call Option Agreement, Shengshihe Consulting had an exclusive option to purchase, or to
designate a purchaser for, to the extent permitted by PRC law and foreign investment policies, part or all of the equity interests
in Shenzhen Wonhe held by each of its stockholders. To the extent permitted by PRC laws, the purchase price for the entire equity
interest was approximately $0.16 (RMB1.00) or the minimum amount required by PRC law or government practice.
Share
Pledge Agreement:
Pursuant to the Share Pledge Agreement, the stockholders of Shenzhen Wonhe pledged their shares to Shengshihe
Consulting to secure the obligations of Shenzhen Wonhe under the Exclusive Technical Service and Business Consulting Agreement.
In addition, the stockholders of Shenzhen Wonhe agreed not to transfer, sell, pledge, dispose of or create any encumbrance on
their interests in Shenzhen Wonhe that would affect Shengshihe Consulting’s interests.
Until
September 15, 2015, Shengshihe Management controlled Shenzhen Wonhe through the above contractual agreements, which made Shenzhen
Wonhe a variable interest entity, the effect of which was to cause the balance sheet and operating results of Shenzhen Wonhe to
be consolidated with those of Shengshihe Management in the Company’s financial statements.
On
September 15, 2015, Shengshihe Consulting, exercised its option to purchase all of the registered equity of Shenzhen Wonhe. The
purchase price paid for the equity was RMB10,000 (approximately $1,569). The equity was purchased from Qing Tong, Nanfang Tong,
Youliang Wang and Jingwu Li, who are the members of Wonhe High-Tech’s Board of Directors. As a result of the acquisition by Shengshihe
Consulting of the registered ownership of Shenzhen Wonhe, the balance sheet and operating results of Shenzhen Wonhe will hereafter
continue to be consolidated with those of Shengshihe Consulting as its 100% owned subsidiary.
In
July 2015, World Win, the Company’s wholly-owned subsidiary, organized Wonhe Multimedia Commerce Ltd. (“Australian Wonhe”)
under Australian law. 60% of the capital stock of Australian Wonhe was issued to World Win, 25% was issued to Wonhe International
(Hong Kong), which is wholly owned and controlled by Qing Tong, who is Chairman of the Board of Wonhe High-Tech and the remaining
15% was issued to three non-affiliated financial consultants. On August 5, 2015, World Win sold all of the outstanding capital
stock of Kuayu to Australian Wonhe. In exchange for Kuayu, Australian Wonhe paid World Win $10,000 Hong Kong Dollars (US $1,290).
Kuayu is the sole owner of Shengshihe Consulting, which in turn had the VIE agreements with Shenzhen Wonhe at that time, the Company’s
VIE and operating company. The effect of the sale of Kuayu, therefore, reduced the interest of the Company in its operating company
by 40%.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
1.
|
ORGANIZATION AND BUSINESS (continued)
|
The
33,750,000 shares of Australia Wonhe issued to the chairman of the board’s wholly owned company, Wonhe International (Hong
Kong), and the 20,250,000 shares issued to the financial consultants was recognized as compensation during the quarter ended September
30, 2015. The value of the compensation was determined using the public offering price of $0.13952 US per share for the shares
to be sold in Australia. The total stock compensation recognized was $7,534,080.
On
December 21, 2015, the Company’s 60% owned subsidiary, Australia Wonhe was listed on the ASX and sold 16,951,802 of its
ordinary shares for net proceeds of $1,941,318, leaving the Company with a 53.3% beneficial interest in Australian Wonhe and its
subsidiaries.
The
Company’s current organization structure is as follows:
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
1.
|
ORGANIZATION AND BUSINESS (continued)
|
Shenzhen
Wonhe is a Chinese entity established on November 16, 2010 with registered capital of $7,495,000. It specializes in the research
and development, outsourced-manufacturing and sale of hi-tech products based on x86 (instruction set architecture based on the
Intel 8086 CPU) and ARM (32-bit reduced instruction set architecture). Current products still under research and development include
a Smart Media Box (SMB), Home Smart Server (HSS), Mini PC (MPC), All in One PC (AIO-PC), Business PAD (B-PAD), and Portable PAD
(P-PAD). The Company started to sell its new product HMC 720 in the last quarter of 2014. In addition, the Company started to
sell another new product, a Wi-Fi-Router with model number YLT-100S, during the first quarter of 2015, model number YLT-300S during
the second quarter of 2015, and model number YLT-300J during the fourth quarter of 2016. YLT-100S and YLT-300J are used by individuals,
and YLT-300S is used in shopping malls. Shenzhen Wonhe is located in City of Shenzhen, Guangdong Province in the PRC.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Accounting and Presentation
The
accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”)
which apply to annual financial statements. The consolidated financial statements as of and for the years ended December 31, 2016
and 2015 include Wonhe High-Tech, World Win, Wonhe Multimedia, Kuayu, Shengshihe Consulting and Shenzhen Wonhe. All significant
intercompany accounts and transactions have been eliminated in consolidation.
All
consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US
Dollar” or “US$” or “$”).
Use
of Estimates
The
preparation of financial statements in accordance with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign
Currency Translation
Almost
all of the Company’s assets are located in the PRC. The functional currency for the majority of the operations is the Renminbi
(“RMB”). For Kuayu, the functional currency for the majority of its operations is the Hong Kong Dollar (“HKD”).
For Australian Wonhe, the functional currency is the Australian dollar (“AUD”). The Company uses the US Dollar for
financial reporting purposes. The consolidated financial statements of the Company have been translated into US dollars in accordance
with the Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” section 830,
“Foreign Currency Matters.”
All
asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts
have been translated at their historical exchange rates when the capital transactions occurred. The consolidated statements of
operations and other comprehensive income (loss) amounts have been translated using the average exchange rate for the periods
presented. Adjustments resulting from the translation of the Company’s consolidated financial statements are recorded as
other comprehensive income (loss).
The
exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the consolidated financial statements
are as follows:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of year end
|
|
|
0.1440
|
|
|
|
0.1540
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of operations and the comprehensive income (loss), changes in stockholders’ equity and cash flows
|
|
|
0.1506
|
|
|
|
0.1603
|
|
The
exchange rates used to translate amounts in AUD into US dollars for the purposes of preparing the consolidated financial statements
are as follows:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of year
end
|
|
|
0.7202
|
|
|
|
0.7288
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of operations and the comprehensive income (loss), changes in stockholders’ equity and cash flows
|
|
|
0.7438
|
|
|
|
0.7188
|
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign
Currency Translation (continued)
For
the years ended December 31, 2016 and 2015, foreign currency translation adjustments of $(3,596,114) and $(3,318,614), respectively,
have been reported as other comprehensive loss. Other comprehensive income (loss) of the Company consists solely of foreign currency
translation adjustments. Pursuant to FASB ASC 740-30-25-17,
“Exceptions to Comprehensive Recognition of Deferred Income
Taxes,”
the Company does not recognize deferred U.S. taxes related to the undistributed earnings of its foreign subsidiaries
and, accordingly, recognizes no income tax expense or benefit from foreign currency translation adjustments.
Although
government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain.
Hence, such translations should not be construed as representations that the RMB could be converted into US and Australian dollars
at that rate or any other rate.
The
value of the RMB against the US and Australian dollar may fluctuate and is affected by, among other things, changes in the PRC’s
political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial
condition in terms of US dollar reporting. During year 2016, the PRC devalued its currency by approximately 6.5%.
Revenue
and Cost Recognition
The
Company receives revenues from the sale of electronic products. The Company’s revenue recognition policies are in compliance
with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized when
the products are delivered and when customer acceptance occurs, the price is fixed or determinable, no other significant obligations
of the Company exist and collectability is reasonably assured. Finished goods are delivered from outsourced manufacturers to the
Company. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products
are picked up by the customer at the Company’s location or delivered to the designated locations by Company employees and
accepted by the customer and the previously discussed requirements are met. The customer’s acceptance occurs upon inspection
at the time of pickup or delivery by signing an acceptance form.
The
Company does not provide its customers with the right of return. A 36-month warranty is offered to customers for exchange or repair
of defective products, the cost of which is substantially covered by the outsourced manufacturers’ warranty policies as
specified in the contract between the Company and its outsourced manufacturers. As a result, the Company does not recognize a
warranty liability.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Revenue
and Cost Recognition (continued)
The
Company follows the guidance set forth by FASB ASC 605-45-45 to assess whether the Company acts as the principal or agent in the
transaction. The determination involves judgment and is based on an evaluation of whether the Company has the substantial risks
and rewards of ownership under the terms of the arrangement. Based on the assessment, the Company determined it acts as a principal
in the transaction and reports revenues on the gross basis.
FASB
ASC 605-45-45 sets forth eight criteria that support reporting recognition of gross revenue (i.e. principal sales) and three that
support reporting net revenue (i.e. agent sales). As applied to the relationship between the Company, its manufacturers, and its
customers, the following are the criteria that support reporting gross revenue:
|
●
|
Shenzhen
Wonhe is the primary obligor in each sale, as it is responsible for fulfillment of customer
orders, including the acceptability of the products purchased by the customer.
|
|
●
|
Shenzhen
Wonhe has general inventory risk, as it takes title to a product before that product
is ordered by or delivered to a customer.
|
|
●
|
Shenzhen
Wonhe establishes its own pricing for its products.
|
|
●
|
Shenzhen
Wonhe has discretion in supplier selection.
|
|
●
|
Shenzhen
Wonhe designed the Home Media Center Model 720 (the “HMC720”) and the three
Wifi Routers and is responsible for all of their specifications.
|
|
●
|
Shenzhen
Wonhe has physical inventory loss risk until the product is delivered to the customer.
|
|
●
|
Shenzhen
Wonhe has full credit risk for amounts billed to its customers.
|
The
only criterion supporting recognition of gross revenue that is not satisfied by the relationship between the Company and its manufacturers
is: the entity changes the product or performs part of the service. Moreover, none of the three criteria supporting recognition
of net revenue is present in the Company’s sales transactions. For this reason, the Company records gross revenue with respect
to sales by Shenzhen Wonhe.
During
the last quarter of 2014, the Company started to sell the HMC720, which was developed by the Company and outsourced to others
to produce. During the first quarter of 2015, the Company commenced selling the Wifi-Router YLT-100S. During the second quarter
of 2015, the Company commenced selling the YLT-300S. During the fourth quarter of 2016, the Company commenced selling the YLT-300J.
These routers were developed by the Company and outsourced to others to produce.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Fair
Value of Financial Instruments
FASB
ASC 820 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions
other market participants would use based upon market data obtained from independent sources (observable inputs). In accordance
with ASC 820, the following summarizes the fair value hierarchy:
Level
1 Inputs – Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has
the ability to access.
Level
2 Inputs – Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
Level
3 Inputs – Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair
value measurements.
ASC
820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure
fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is
based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize
the use of observable inputs and minimize the use of unobservable inputs. As of December 31, 2016 and 2015, none of the Company’s
assets and liabilities were required to be reported at fair value on a recurring basis. Carrying values of non-derivative financial
instruments, including cash, accounts receivable and various receivables and payables, approximate their fair values due to the
short term nature of these financial instruments. There were no changes in methods or assumptions during the periods presented.
Advertising
Costs
Advertising
costs are paid to an advertising agency for market analysis and strategic planning and are charged to operations when incurred.
Advertising costs were $451,714 and $341,840 for the years ended December 31, 2016 and 2015, respectively.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Research
and Development Costs
The
Company develops software to be marketed as part of its products, and that is not for internal use. The software is essential
to the functionality of the Company’s tangible products. Therefore, the Company accounts for research and development costs
incurred in development of its software in accordance with FASB ASC 985-20.
Research
and development costs are charged to operations when incurred. Development costs of computer software to be sold, leased, or otherwise
marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending
when a product is available for general release to customers. In most instances, the Company’s products are released soon
after technological feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility
are usually not significant, and generally most software development costs have been expensed as incurred. Research and development
costs were $796,145 and $142,527 for the years ended December 31, 2016 and 2015, respectively.
Cash
and Cash Equivalents
The
Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Accounts
Receivable
Accounts
receivable are stated at cost, net of an allowance for doubtful accounts. Receivables outstanding longer than the payment terms
are considered past due. The Company provides an allowance for doubtful accounts for estimated losses resulting from the failure
of customers to make required payments, when due. The Company reviews the accounts receivable on a periodic basis and makes allowances
where there is doubt as to the collectability of the outstanding balance. In evaluating the collectability of an individual receivable
balance, the Company considers many factors, including the age of the balance, the customer’s payment history, its current
credit-worthiness and current economic trends. As of December 31, 2016 and 2015, the Company considered all accounts receivable
collectable and an allowance for doubtful accounts was not necessary. For the years ended December 31, 2016 and 2015, the Company
did not write off any accounts receivable as bad debts.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Fixed
Assets and Depreciation
Fixed
assets are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire the asset, and any expenditure
that substantially increases the asset’s value or extends the useful life of an existing asset. Leasehold improvements are
amortized over the lesser of the remaining term of the lease or the estimated useful lives of the improvements. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly
extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and
repairs are generally expensed as incurred.
The
estimated useful lives for fixed asset categories are as follows:
|
Office equipment
|
|
5 years
|
|
Motor vehicles
|
|
5 years
|
|
Leasehold improvements
|
|
Shorter of the remaining term of the lease or life of the improvement
|
Impairment
of Long-lived Assets
The
Company applies FASB ASC 360, “Property, Plant and Equipment,” which addresses the financial accounting and reporting
for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds
the future undiscounted cash flows attributable to those assets. No impairment of long-lived assets was recognized for the periods
presented.
Statutory
Reserve Fund
Pursuant
to corporate law of the PRC, Shengshihe Consulting and Shenzhen Wonhe are required to transfer 10% of their net income, as determined
under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of their registered
capital. The statutory reserve fund is non-distributable, other than during liquidation, and can be used to fund prior years’
losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining
reserve balance after such use is not less than 25% of the registered capital. As of December 31, 2016, $424,328 has been transferred
from retained earnings to the statutory reserve fund.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Income
Taxes
The
Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires
the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and
income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized
ASC
740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance
on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
and accounting for interest and penalties associated with these tax positions. As of December 31, 2016 and 2015, the Company did
not have any liabilities for unrecognized tax benefits.
The
income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:
United
States
The
Company is subject to United States tax at graduated rates from 15% to 35%. No provision for income taxes in the United States
has been made as the Company had no U.S. taxable income for the years ended December 31, 2016 and 2015.
BVI
World
Win is incorporated in the BVI and is governed by the income tax laws of the BVI. According to current BVI income tax law, the
applicable income tax rate for the Company is 0%.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Income
Taxes (continued)
Australia
Australian
Wonhe is incorporated in Australia. Pursuant to the income tax laws of Australia, the Company is not subject to tax on non-Australia
source income.
Hong
Kong
Kuayu
International is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on
non Hong Kong source income.
PRC
Shenzhen
Wonhe and Shengshihe Consulting are subject to an Enterprise Income Tax at 25% and each file their own tax returns. Consolidated
tax returns are not permitted in China. On July 23, 2012, the National Tax Bureau, Shenzhen Nanshan Branch declared that Shenzhen
Wonhe is qualified for the preferential tax treatment afforded by the PRC to enterprises engaged in the development of software
or integrated circuits. As a result, starting from its first profitable year, Shenzhen Wonhe had a two-year exemption from the
Enterprise Income Tax and has a 50% exemption for the next three years commencing January 1, 2014. The tax regulations required
that the enterprise pay income tax until its eligibility for the exemption is determined - i.e. until the local tax bureau determines
that the enterprise has recorded its first profitable year. Payments were made of approximately $2,600,000 (RMB 16,107,000) based
upon 2012 income while the local tax bureau reviewed the Company’s financial results. The National Tax Bureau determined
that the Company had realized a profit in 2012. Since the Company was declared exempt from tax with respect to 2012, the payments
that were made will be applied to future income taxes due. The payments have been reflected as prepaid income taxes on the balance
sheet as of December 31, 2016 and 2015. For the year ended December 31, 2015, the Company offset the income tax provision of $1,485,898,
paid income tax of $ 388,412, leaving a balance of prepaid income taxes of $ 1,164,478. For the year ended December 31, 2016,
the Company offset the income tax provision of $1,131,042, and paid income tax of $ 691,454.
Noncontrolling
Interests
The
noncontrolling interest in Wonhe Multimedia not attributable, directly or indirectly to the Company, is measured at its carrying
value in the stockholders’ equity section of the consolidated balance sheets.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Net
Income (Loss) Per Share
The
Company computes net income (loss) per common share in accordance with FASB ASC 260,
“Earnings Per Share”
(“ASC
260”). Under the provisions of ASC 260, basic net income (loss) per common share is computed by dividing the amount available
to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income
per common share is computed by dividing the amount available to common stockholders by the weighted average number of shares
of common stock outstanding plus the effect of any dilutive shares outstanding during the period. Accordingly, the number of weighted
average shares outstanding as well as the amount of net income (loss) per share are presented for basic and diluted per share
calculations for the period reflected in the accompanying consolidated statements of operations and other comprehensive income.
There were no dilutive shares outstanding during the years ended December 31, 2016 and 2015.
3.
|
Recently
Issued Accounting Standards
|
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment
costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from
the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for
fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted.
An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating
the effect this ASU will have on its consolidated statement of cash flows.
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The
new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through
an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company
beginning January 1, 2020, with early application permitted. The Company is evaluating the impact of adopting this new accounting
guidance on its consolidated financial statements.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
3.
|
Recently
Issued Accounting Standards
(continued)
|
In
May, 2016, the FASB issued ASU No. 2016-10, Revenue with Contracts with Customers: Narrow-scope Improvements and Practical Expedients,
which is an amendment to ASU No. 2014-09 that clarifies the objective of the collectability criterion, to allow entities to exclude
amounts collected from customers from all sales taxes from the transaction price, to specify the measurement date for noncash
consideration is contract inception, variable consideration guidance applies only to variability resulting from reasons other
than the form of the consideration, and clarification on contract modifications at transition. The implementation guidelines follow
ASU No. 2014-09.
In
April, 2016, the FASB issued ASU No. 2016-10, Revenue with Contracts with Customers: Identifying Performance Obligations and Licensing,
which is an amendment to ASU No. 2014-09 that clarifies the aspects of identifying performance obligations and the licensing implementing
guidance, while retaining the related principles within those areas. The implementation guidelines follow ASU No. 2014-09.
In
March, 2016, the FASB issued ASU No. 2016-08, Revenue with Contracts with Customers: Principal versus Agent Considerations (Reporting
Revenue Gross versus net), which is an amendment to ASU No. 2014-09 that improved the operability and understandability of implementation
guidance versus agent considerations by clarifying the determination of principal versus agent. The implementation guidelines
follow ASU No. 2014-09.
In
March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, Derivatives and Hedging (Topic
815). ASU 2016-06 clarifies that determining whether the economic characteristics of a put or call are clearly and closely related
to its debt host requires only an assessment of the four-step decision sequence outlined in FASB ASC paragraph 815-15-25-24. Additionally,
entities are not required to separately assess whether the contingency itself is clearly and closely related. The standard is
effective for public business entities in interim and annual periods in fiscal years beginning after December 15, 2016. Early
adoption is permitted in any interim period for which the entity’s financial statements have not been issued, but would
be retroactively applied to the beginning of the year that includes the interim period. The standard requires a modified retrospective
transition approach, with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. For instruments
that are eligible for the fair value option, an entity has a one-time option to irrevocably elect to measure the debt instrument
affected by the standard in its entirety at fair value with changes in fair value recognized in earnings. The Company does not
expect the application of this guidance to have a material impact on the Company’s consolidated financial statements.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
3.
|
Recently
Issued Accounting Standards
(continued)
|
In
March 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition
to the Equity Method of Accounting. This new guidance effectively removes the retroactive application imposed in current guidance
when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree
of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the
investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of
the date the investment becomes qualified for equity method accounting. The new standard becomes effective for the Company on
January 1, 2017. Early adoption is permissible. The Company does not anticipate the adoption of ASU 2015-11 to have a material
impact on the consolidated financial statements and related disclosures.
In
March 2016, the FASB Issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification
in the statement of cash flows. The standard will be effective for the Company beginning January 1, 2017, with early application
permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. This accounting standard update is not expected to have a material impact
on the Company’s financial statements.
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which
includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard is
effective for the Company beginning June 1, 2018. The Company is currently evaluating the effect the guidance will have on the
Consolidated Financial Statements.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
Fixed
assets at December 31, 2016 and 2015 are summarized as follows:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Office
equipment
|
|
$
|
212,828
|
|
|
$
|
211,897
|
|
|
Motor
vehicles
|
|
|
618,706
|
|
|
|
661,703
|
|
|
Production
equipment
|
|
|
-
|
|
|
|
1,287,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
831,534
|
|
|
|
2,161,102
|
|
|
Less:
accumulated depreciation
|
|
|
(401,535
|
)
|
|
|
(416,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
$
|
429,999
|
|
|
$
|
1,744,581
|
|
Depreciation
expense charged to operations for the years ended December 31, 2016 and 2015 was $201,146 and $194,789, respectively.
Intangible
assets at December 31, 2016 and 2015 are summarized as follows:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
49,649
|
|
|
$
|
45,432
|
|
|
Less: accumulated amortization
|
|
|
(40,469
|
)
|
|
|
(28,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
9,180
|
|
|
$
|
16,749
|
|
Amortization
expense charged to operations for the years ended December 31, 2016 and 2015 was $6,776 and $12,757 respectively.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
In
May 2015, the Company entered into a lease agreement with an unrelated party at a monthly rent of $11,175 for one year, expiring
in May 2016. In May 2016, the Company renewed this lease at the same monthly rent to May 2017. Rent expense for the year ended
December 31, 2016 and 2015 was $147,707 and $135,657, respectively.
On
May 5 2016, the Company entered into an agreement to lease a laboratory office from an unrelated party with the fee to be determined
based on usage. The lease has a two-year term, which expires on May 5, 2018. The lease fee of the laboratory for the year ended
December 31, 2016 was $315,887.
Employment
Agreements
Shenzhen
Wonhe, our operating subsidiary, entered into employment agreements with our officers Nanfang Tong and Qing Tong on November 1,
2016:
|
●
|
Nanfang
Tong’s employment agreement, as the chief executive officer, provides for a monthly
salary of RMB 13,000 (approximately US $1,872) and expires on October 31, 2019. Mr. Tong
is eligible for a bonus which is determined by, and at the discretion of, the Board of
Directors of the Company, based on a review of Mr. Tong’s performance.
|
|
●
|
Qing
Tong’s employment agreement as chairman of Board of Directors provides for a monthly
salary of RMB 15,000 (approximately US $2,160) and expires on October 31, 2019. Mr. Tong
is eligible for a bonus which is determined by, and at the discretion of, the Board of
Directors of the Company, based on a review of Mr. Tong’s performance.
|
At
December 31, 2016, the future commitments under these agreements was approximately $137,082.
Other
than the salary and necessary social benefits required by the government, which are defined in the employment agreements, we currently
do not provide other benefits to the officers at this time. Other than government severance payments, our executive officers are
not entitled to severance payments upon the termination of their employment agreements or following a change in control.
PRC
employment law requires an employee be paid severance pay based on the number of years worked with the employer at the rate of
one month’s wage for each full year worked. Any period of more than six months but less than one year shall be counted as
one year. The severance pay payable to an employee for any period of less than six months shall be one-half of his monthly wages.
The monthly salary mentioned above is defined as the average salary of 12 months before revocation or termination of the employment
contract.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
6.
|
commitments
(continued)
|
Strategic
Cooperation Agreement
In
April 2015, Shenzhen Wonhe entered into a strategic cooperation agreement with Shenzhen Yunlutong Technology Co., Ltd (the “YLT”),
which is owned by one of the Company’s directors, who owns 4.87% of the Company’s common stock. The agreement expires
in 3 years. Under the agreement, as amended and restated, YLT and Shenzhen Wonhe agreed to engage in mutual cooperation aimed
at the sale of routers by Shenzhen Wonhe to YLT. The Company produced approximately $18,211,683 in sales with YLT for the year
ended December 31, 2016.
In
addition, Shenzhen Wonhe obtained the exclusive right to acquire YLT if its gross annual revenues reach RMB 150,000,000 (US $24,480,000)
and net annual profit reaches RMB 12,500,000 (US $2,040,000) during the term of the agreement. The price of the acquisition shall
be established by an independent appraiser. YLT agreed not to sell any equity or issue any debt during the 3 years, and any change
in ownership of YLT must be approved by Shenzhen Wonhe.
7.
|
RELATED PARTY TRANSACTIONS
|
From
time to time, a stockholder/officer loans money to the Company, primarily to meet the non-RMB cash requirements of the parent
and its subsidiaries. The loans are non-interest bearing, and the balance due was $434,324 and $335,655 at December 31, 2016 and
2015, respectively.
The
loans principally represent professional and legal fees incurred in the U.S. paid by the stockholder and operating expenses for
Wonhe High-Tech and Shengshihe Consulting since their inception. The balance is reflected as loan from stockholder.
Nanfang
Tong, the chief executive officer and Qing Tong, the director, are brothers.
In
April 2015, Wonhe High-Tech International, Inc. sold 20,130,000 shares of common stock to 21 unrelated individuals, 3 major shareholders
of Shenzhen Wonhe at the time, and 3 unrelated companies in a private offering in the PRC. The purchase price for the shares was
approximately RMB 4.72 (US $0.77) per share, or a total of RMB 93,000,600 (US $15,196,298). The shares were sold to accredited
investors for their own accounts. The offering was exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) and Section 4(5) of the Securities Act. The offering was also sold in compliance with the exemption from registration provided
by Regulation S, as all of the purchasers are residents of the People’s Republic of China.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
8
.
|
sale of Common stock
(continued)
|
Of
the 20,130,000 shares sold, 4,600,000 (22.7%) were sold to two directors and one officer /director of the Company. On the date
of sale, the Company’s common stock was quoted on the OTCQB at $3.07 per share. Since over 75% of the shares in this offering
were sold to unrelated parties at $0.77 per share, and since no shares of the Company’s common stock were traded on the
OTCQB from January 1, 2015 to April 22, 2015, the Company believes that the price of $.77 per share was more representative of
the fair value than $3.07. As a result, management recorded no compensation related to the share sold to the officer director
of the Company.
On
April 19, 2016 the Company sold a total of 15,000,000 shares of common stock to two investors in a private offering. Qing Tong,
a member of the Company’s board of directors, purchased 3,000,000 shares. The remaining 12,000,000 shares were purchased by an
unaffiliated entity. The purchase price for the shares was 0.52 Renminbi (approx. $.08) per share, or a total of 7,800,000 Renminbi
(approx. $1,200,000), which exceeded the market price on that date.
The
shares were sold to investors who are accredited investors and were purchasing for their own accounts. The offering, therefore,
was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) and Section 4(5) of the Securities Act.
The offering was also sold in compliance with the exemption from registration provided by Regulation S, as all of the purchasers
were residents of the People’s Republic of China.
On
September 30, 2016, the Board of Directors of Wonhe Multimedia Commerce Ltd., in which Wonhe High-Tech indirectly owns a 53.3%
interest, declared a cash dividend of AUD $0.004857 per share, for a total dividend of AUD$637,190 (approximately USD$486,000).
The dividend payment was made to the shareholders of Wonhe Multimedia Commerce Ltd. subsequent to the third quarter.
On
October 31 2016, Wonhe Multimedia Commerce Ltd., the Company’s 53.3%-owned Australian subsidiary, paid the dividend of AUD
$637,190 (approximately USD$486,000) declared on September 30, 2016.
The
Company is required to file income tax returns in both the United States and the PRC. Its operations in the United States have
been insignificant and income taxes have not been accrued. In the PRC, the Company files tax returns for Shenzhen Wonhe and Shengshihe
Consulting.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
10.
|
Income taxes
(continued)
|
The
provision for (benefit from) income taxes consists of the following for the years ended December 31, 2016 and 2015:
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
$
|
1,795,044
|
|
|
$
|
1,489,251
|
|
|
Deferred
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,795,044
|
|
|
$
|
1,489,251
|
|
The
following is a reconciliation of the statutory rate with the effective income tax rate for the year ended December 31, 2016 and
2015.
|
|
|
Year
Ended
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Tax at PRC statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
VIE tax holiday
|
|
|
(13.0
|
)
|
|
|
(12.5
|
)
|
|
Effect of unusable parent tax loss
|
|
|
-
|
|
|
|
22.6
|
|
|
Other
|
|
|
0.9
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
12.9
|
%
|
|
|
35.3
|
%
|
The
following presents the aggregate dollar and per share effects of the Company’s subsidiaries’ tax holidays:
|
|
|
Years Ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Aggregate dollar effect of tax holiday
|
|
$
|
1,795,044
|
|
|
$
|
1,448,924
|
|
|
Per share effect, basic and diluted
|
|
|
0.03
|
|
|
|
0.03
|
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
10.
|
Income taxes
(continued)
|
The
Company did not file its U.S. federal income tax returns, including, without limitation, information returns on Internal Revenue
Service (“IRS”) Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”
for the fiscal years ended December 31, 2016, 2015, 2014 and 2013. Failure to furnish any income tax and information returns with
respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to civil penalties.
Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial
statements.
Because
the Company did not generate any income in the United States or otherwise have any U.S. taxable income, the Company does not believe
that it has any U.S. federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries
may have engaged in through December 31, 2016. However, there can be no assurance that the IRS will agree with this position,
and therefore the Company ultimately could be liable for U.S. federal income taxes, interest and penalties. The tax years ended
December 31, 2016, 2015, 2014 and 2013 remain open to examination by the IRS.
All
of the Company’s operations are conducted in the PRC. At December 31, 2016, the Company’s unremitted foreign earnings
of its PRC subsidiaries totaled approximately $21.3 million and the Company held approximately $27.7 million of cash and cash
equivalents in the PRC. These unremitted earnings are planned to be reinvested indefinitely into the operations of the Company
in the PRC. While repatriation of cash held in the PRC may be restricted by local PRC laws, most of the Company’s foreign
cash balances could be repatriated to the United States but, under current U.S. income tax laws, would be subject to U.S. federal
income taxes less applicable foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability
on the unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation, and as
the Company does not plan to repatriate any cash in the PRC to the United States during the foreseeable future, no deferred tax
liability has been accrued.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
As
disclosed in Note 10, the Company was delinquent in filing certain tax returns with the U.S. Internal Revenue Service. The Company
is unable to determine the amount of penalties, if any, that may be assessed at this time. Management is of the opinion that penalties,
if any, that may be assessed would not be material to the consolidated financial statements.
The
Company did not file the information reports for the years ended December 31, 2016, 2015, 2014, and 2013, concerning its interest
in foreign bank accounts on form TDF 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBAR”).
Not complying with the FBAR reporting and recordkeeping requirements will subject the Company to civil penalties up to $10,000
for each of its foreign bank accounts. The Company has not determined the amount of any penalties that may be assessed at this
time and believes that penalties, if any, that may be assessed would not be material to the consolidated financial statements.
12.
|
Concentration
of Credit Risk
|
Cash
and cash equivalents
Substantially
all of the Company’s bank accounts are in banks located in the People’s Republic of China and are not covered by protection
similar to that provided by the FDIC on funds held in United States banks. The Company’s bank account in Australia is protected
by Australian government up to AUD 250,000.
Major
customers
One
customer accounted for approximately 37% of total sales for the year ended December 31, 2016. Three customer accounted for
approximately 36% of total sales for the year ended December 31, 2015. Two customers accounted for approximately 61% of
accounts receivable as of December 31, 2016, the largest being 34%. Four customers accounted for approximately 94% of
accounts receivable as of December, 2015, the largest being 34%.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
13.
|
CONTRIBUTIONS TO MULTI-EMPLOYER
WELFARE PROGRAMS
|
Shenzhen
Wonhe is required to make contributions to PRC multi-employer welfare programs by government regulations sometimes identified
as the Mainland China Contribution Plan. Specifically, the following regulations require that the Company pay a percentage of
employee salaries into the specified plans:
|
Regulation
|
|
Plan
|
|
% of Salary
|
|
|
|
|
|
|
|
|
|
Shenzhen Special Economic Zone Social Retirement Insurance Regulations
|
|
Pension
|
|
|
13
|
%
|
|
Shenzhen Work-Related Injury Insurance Regulations
|
|
Workers Comp.
|
|
|
0.4
|
%
|
|
Guangdong Unemployment Insurance Regulations
|
|
Unemployment
|
|
|
2
|
%
|
|
Housing Provident Fund Management Regulations
|
|
Housing
|
|
|
5
|
%
|
|
Shenzhen Social Medical Insurance Measures
|
|
Medical
|
|
|
6.5%
or 0.6
|
%*
|
|
Guangdong Employees Maternity Insurance
|
|
Maternity
|
|
|
0.5%
or 0.2
|
%*
|
*
Depending on their position in the Company, employees receive either hospitalization, medical and maternity insurance or comprehensive
medical and maternity insurance, which is a lower premium.
Total
contributions to employee welfare programs for the year ended December 31, 2016 and 2015 were as follow:
|
|
|
Year Ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contributions
|
|
$
|
43,805
|
|
|
$
|
29,981
|
|
On
January 12, 2016 the Registrant’s operating subsidiary, Shenzhen Wonhe Technology Co., Ltd. (“Shenzhen Wonhe”), entered
into an agreement titled “Cooperative Agreement on Wireless Network Coverage Project in Beijing Area” with Guangdong
Kesheng Enterprise Co., Ltd. (“Guangdong Kesheng”). The agreement contemplated that the two parties would work together
to develop a wireless network in certain designated areas of Beijing. The commercial purpose of the network was to serve as a
vehicle for advertising and marketing, with the income to be shared between Shenzhen Wonhe and Guangdong Kesheng. Shenzhen Wonhe
committed in the agreement to make a capital contribution of RMB 382,990,000 (USD $55.63 million) to the project. Shenzhen Wonhe
also committed to develop the data systems that will be used by the network. Guangdong Kesheng committed to supervise the engineering
and construction, coordinate relationships with local government, and manage the network’s operations.
On
November 30, 2016 Shenzhen Wonhe and Guangdong Kesheng signed an amendment to the January agreement, titled “Cooperative
Agreement on Wireless Network Coverage Project in Beijing Area”, which terminates the participation of Shenzhen Wonhe in
the construction and operation of the wireless network, and also terminates the commitment of Shenzhen Wonhe to develop the data
systems used by the network. Shenzhen Wonhe has no further obligation to contribute capital to the project, and will receive no
distribution of income from the project. Shenzhen Wonhe will, however, supply 36,300 routers for the project prior to the end
of 2017, and Guangdong Kesheng will pay Shenzhen Wonhe RMB 1,800 ($261) for each router.
As
of November 30, 2016 Shenzhen Wonhe had contributed to the wireless network project cash, equipment, engineering, and a pilot
project in the Tongzhou District of Beijing. The total contribution of RMB 175,755,641 (USD$25.31 million) will be repaid to Shenzhen
Wonhe in three equal annual installments, and Shenzhen Wonhe will get the first repayment on December 31, 2017; the unpaid portion
of that obligation will accrue interest at 4.75% per annum. The related receivable is recorded at its present value after applying
a discount rate of 20% to reflect the market risk of depending on Guangdong Kesheng’s continuing operations and the related risk
that Guangdong Kesheng will fail to make required payments when due.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
15.
|
CONDENSED
FINANCIAL INFORMATION OF THE PARENT COMPANY
|
The
condensed financial information of the Company’s US parent only balance sheets as of December 31, 2016, and the US parent
company only statements of operations, and cash flows for the years ended December 31, 2016 and 2015 are as follows:
Condensed
Balance Sheets
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash-restricted
|
|
$
|
14,428,459
|
|
|
$
|
14,332,241
|
|
|
Other receivable from subsidiaries
|
|
|
11,116,320
|
|
|
|
9,912,000
|
|
|
Investment in subsidiaries
|
|
|
24,198,950
|
|
|
|
21,093,752
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
49,743,729
|
|
|
$
|
45,337,994
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND stockholders’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from stockholder
|
|
$
|
434,324
|
|
|
$
|
366,040
|
|
|
Accrued liabilities
|
|
|
-
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
434,324
|
|
|
|
371,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value; 10,000,000 shares authorized; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common stock: $0.001 par value; 90,000,000 shares authorized; 73,510,130 and 58,510,130 shares issued and outstanding at December 31, 2016 and 2015, respectively
|
|
|
73,510
|
|
|
|
58,510
|
|
|
Additional paid-in capital
|
|
|
38,791,666
|
|
|
|
37,592,346
|
|
|
Retained earnings
|
|
|
10,444,229
|
|
|
|
7,316,098
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
49,309,405
|
|
|
|
44,966,954
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
49,743,729
|
|
|
$
|
45,337,994
|
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
15.
|
CONDENSED
FINANCIAL INFORMATION OF THE PARENT COMPANY
(continued)
|
Condensed
Statements of Income
|
|
|
Year Ended
December 31,
|
|
|
|
|
2015
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Share of earnings from investment in subsidiaries
|
|
$
|
5,393,835
|
|
|
$
|
5,521,942
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
-
|
|
|
|
7,534,080
|
|
|
General and administrative
|
|
|
110,000
|
|
|
|
104,645
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,283,835
|
|
|
$
|
(2,116,783
|
)
|
Condensed
Statements of Cash Flows
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,283,835
|
|
|
$
|
(2,116,783
|
)
|
|
Adjustments to
reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
Share of earnings from investment in subsidiaries
|
|
|
(5,283,835
|
)
|
|
|
(5,521,942
|
)
|
|
Stock compensation
|
|
|
-
|
|
|
|
7,534,080
|
|
|
(Decrease) increase in accrued liabilities
|
|
|
-
|
|
|
|
(32,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used by) operating activities
|
|
|
-
|
|
|
|
(137,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
15,196,298
|
|
|
Proceeds from stockholders
|
|
|
-
|
|
|
|
137,154
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used by) financing activities
|
|
|
-
|
|
|
|
15,333,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash:
|
|
|
96,218
|
|
|
|
(864,057
|
)
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015
(IN U.S. $)
15.
|
CONDENSED FINANCIAL INFORMATION
OF THE PARENT COMPANY
(continued)
|
Condensed
Statements of Cash Flows (continued)
|
|
|
Year Ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
96,218
|
|
|
|
14,332,241
|
|
|
Cash, beginning of year
|
|
|
14,332,241
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
14,428,459
|
|
|
$
|
14,332,241
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash financing activities:
|
|
|
|
|
|
|
|
|
|
Payment of accrued liabilities by shareholder
|
|
$
|
115,000
|
|
|
$
|
108,003
|
|
Basis
of Presentation
The
Company records its investment in its subsidiaries under the equity method of accounting. Such investment is presented as “Investment
in subsidiaries” in the condensed balance sheets and the U.S. parent’s share of the subsidiaries’ profits are
presented as “Share of earnings from investment in subsidiaries” in the condensed statements of income.
Certain
information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles
generally accepted in the United States of America have been condensed or omitted. The parent only financial information has been
derived from the Company’s consolidated financial statements and should be read in conjunction with the Company’s
consolidated financial statements.
Restricted
Net Assets
Under
PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net
assets to the parent company in the form of dividend payments, loans or advances. The restricted net assets of the Company’s
PRC subsidiaries amounted to $49,309,405 and $44,966,954 as of December 31, 2016 and 2015, respectively.
In
addition, the Company’s operations and revenues are conducted and generated in the PRC; all of the Company’s revenues
being earned and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulations in China,
and, as a result, the Company may be unable to distribute dividends outside of China due to PRC’s foreign exchange control
regulations that restrict the Company’s ability to convert RMB into US Dollars.
Schedule
I of Article 5-04 of Regulation S-X requires the condensed financial information of the parent company to be filed when the restricted
net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed
fiscal year. For purposes of this test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s
proportionate share of net assets of its consolidated subsidiaries (after intercompany eliminations) which as of the end of the
most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without
the consent of a third party. The condensed parent company financial statements have been prepared in accordance with Rule 12-04,
Schedule I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiaries exceed 25% of the consolidated
net assets of the Company.
On
March 31, 2017, the Board of
Australia Wonhe
announced that the Company will pay
an AUD $0.005882 (approximately USD $0.0042) per share unfranked final dividend.