NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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. Until September 15, 2015 Shenzhen Wonhe was effectively and substantially controlled
by Shengshihe Consulting through a series of captive agreements, and was considered a variable interest entity (“VIE”)
of Shengshihe Consulting, 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. 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 are 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 owns Shenzhen Wonhe, the Company’s 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 THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
1.
|
ORGANIZATION AND BUSINESS (continued)
|
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.
The Company’s current organization
structure is as follows:
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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. Since its formation, Shenzhen
Wonhe has been involved 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 an Advertising Machine, an Andrews Smartphone, a Family Micro-Terminal Server, a Small Computer,
an ARM Personal Table Computer, a Triple Play Integrated Application Platform, and an ARM version of our Smart Media Box. Since
2015, the Company has also marketed Wi-Fi-Routers. Currently Shenzhen Wonhe offers four such routers: YLT-100S, YLT-300J and AV-500
for use by individuals, and YLT-300S for use primarily in shopping malls. Shenzhen Wonhe is located in the Shenzhen, Guangdong
Province in the PRC.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Accounting and Presentation
The accompanying
consolidated financial statements have been prepared on the accrual basis of accounting. The consolidated financial statements
as of and for the three and six months ended June 30, 2017 and 2016 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.
The unaudited
interim consolidated financial statements of the Company as of June 30, 2017 and for the three and six months ended June 30, 2017
and 2016 have been prepared in accordance with accounting principles generally accepted in the United States of America and the
rules and regulations of the SEC which apply to interim financial statements. Accordingly, they do not include all of the information
and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial
statements. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the periods presented. The interim consolidated financial information should
be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K
filed with the SEC. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of
the results to be expected for future quarters or for the year ending December 31, 2017.
All consolidated
financial statements and notes to the consolidated financial statements are presented in United States dollars (“US Dollar”
or “US$” or “$”).
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
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.
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:
|
|
|
June
30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of period’s end
|
|
|
0.1475
|
|
|
|
0.1440
|
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign
Currency Translation
(continued)
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the periods presented
|
|
|
0.1457
|
|
|
|
0.1531
|
|
|
|
0.1454
|
|
|
|
0.1530
|
|
The exchange rates used to translate
amounts in AUD into US dollars for the purposes of preparing the consolidated financial statements are as follows:
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of period’s end
|
|
|
0.7686
|
|
|
|
0.7202
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the periods presented
|
|
|
0.7506
|
|
|
|
0.7456
|
|
|
|
0.7541
|
|
|
|
0.7337
|
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign
Currency Translation
(continued)
For the three and six months ended
June 30, 2017 and 2016, foreign currency translation adjustments of $261,088 and $(2,043,425) respectively, $452,072 and $(1,606,228),
respectively, have been reported as other comprehensive income (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 PRC 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.
Revenue and Cost
Recognition
The Company receives revenues
from the sale of electronic products. The Company’s revenue recognition policies are following 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 THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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 four
Wifi Routers and is responsible for all of its 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 criteria 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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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 June 30, 2017, and December 31, 2016, loan receivable was reported at fair value on a recurring
basis. Carrying values of non-derivative financial instruments, including cash, accounts receivable 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 $109,301 and $114,803, respectively, $218,169 and $229,461, respectively, for the three and six months ended June 30, 2017
and 2016.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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
$653,033 and $106,409, respectively, $1,292,573 and $153,518, respectively, for the three and six months ended June 30, 2017 and
2016.
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 June 30, 2017, and December 31, 2016,
the Company considered all accounts receivable collectable and an allowance for doubtful accounts was not necessary. For the three
and six months ended June 30, 2017 and 2016, 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 THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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
|
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. Prior to January 1, 2017 Shenzhen Wonhe had fully
funded its statutory reserve, and so during the six months ended June 30, 2017, $0 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 THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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 June 30, 2017, and December 31, 2016, 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 three and six months ended June 30, 2017 and 2016.
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 THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, 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 Hong 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.
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.
Net Income Per Share
The Company computes net income
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 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 three and six months period ended June 30, 2017 and 2016.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
3.
|
Recently Issued Accounting Standards
|
In November 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement
of Cash Flows: Restricted Cash”. The amendments address diversity in practice that exists in the classification and presentation
of changes in restricted cash on the statement of cash flows. The amendment is effective for public companies for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not anticipate that this
adoption will have a significant impact on its financial position, results of operations, or cash flows.
In August 2016, the FASB issued
ASU No. 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 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 FASB issued
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.
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. The standard
was effective for the Company beginning after December 15, 2016. This accounting standard did not have a material impact on the
Company’s financial statements.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
3.
|
Recently
Issued Accounting Standards
(continued)
|
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 February 2016, the FASB issued
ASU 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 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 and believe that the guidance will have on the Consolidated
Financial Statements.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
Fixed assets at June 30, 2017
and December 31, 2016 are summarized as follows:
|
|
|
June
30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
224,511
|
|
|
$
|
212,828
|
|
|
Motor vehicles
|
|
|
633,933
|
|
|
|
618,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
858,444
|
|
|
|
831,534
|
|
|
Less: accumulated depreciation
|
|
|
(465,019
|
)
|
|
|
(401,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
393,425
|
|
|
$
|
429,999
|
|
Depreciation expense charged to operations for the
three and six months ended June 30, 2017 and 2016 was $26,595 and $55,171, respectively, $52,843 and $146,750, respectively
Intangible assets at June 30,
2017 and December 31, 2016 are summarized as follows:
|
|
|
June
30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
50,871
|
|
|
$
|
49,649
|
|
|
Less: accumulated amortization
|
|
|
(44,785
|
)
|
|
|
(40,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
6,086
|
|
|
$
|
9,180
|
|
Amortization expense charged
to operations for the three and six months ended June 30, 2017 and 2016 was $1,640 and $1,727, respectively, $3,273 and $11,060,
respectively.
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. In January 2017, the Company signed an early termination agreement
to cease the agreement without penalty and entered into another lease agreement with an unrelated party at a monthly rent of $7,234
for one year, expiring in February 2018. Rent expenses for the three and six months ended June 30, 2017 and 2016 was $ 21,746
and $34,081, respectively, $59,955 and $68,119, respectively.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
6.
|
commitments
(continued)
|
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 three and six months ended June 30,
2017 was $135,160 and $270,855, respectively.
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 $1,918) 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 $2,213) 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 June 30, 2017, the future
commitments under these agreements was approximately $115,669.
Other than the salary and social
benefits required by the government, which are defined in the employment agreements, we currently do not provide benefits to the
officers. 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 that
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.
Strategic Cooperation Agreement
In April 2015, Shenzhen Wonhe
entered into a strategic cooperation agreement with Shenzhen Yunlutong Technology Co., Ltd (“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 $17,513,873 in sales with YLT for the six months period
ended June 30, 2017.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
6.
|
commitments
(continued)
|
Strategic Cooperation Agreement
(continued)
In addition, Shenzhen Wonhe obtained
the exclusive right to acquire YLT if its gross annual revenues reach RMB150,000,000 (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 of 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 $395,786 and $434,324 at June 30, 2017 and December 31, 2016, 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 Company’s Chief
Executive Officer and Qing Tong, the Chairman of the Board, are brothers.
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).
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 the purchasers were residents of the People’s
Republic of China.
9.
|
sale of Preferred stock
|
On April 21, 2017, the Company
sold a total of 100,000 shares of Series A Preferred Stock to Beijing Yi Yu Culture Media Co., Ltd., an unaffiliated entity. The
purchase price for the shares was US$20.00 per share, or a total of US$2,000,000. The balance is included in the stock subscription
receivable in the accompanying financial statements.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
On March 1, 2017, 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 $0.005882 per share, for a total dividend of AUD$894,000 (approximately USD$683,463). The Company directed that Wonhe Multimedia
pay the Company’s portion of that dividend to a director and shareholder of the Company in partial repayment of the related party
loans described in Note 7 above.
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.
The provision for (benefit from)
income taxes consists of the following for the three and six months ended June 30, 2017 and 2016:
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,234,731
|
|
|
$
|
417,690
|
|
|
$
|
2,320,448
|
|
|
$
|
814,995
|
|
|
Deferred
|
|
|
14,892
|
|
|
|
-
|
|
|
|
28,542
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,249,623
|
|
|
$
|
417,690
|
|
|
$
|
2,348,990
|
|
|
$
|
814,995
|
|
The following is a reconciliation
of the statutory rate with the effective income tax rate for the three and six months ended June 30, 2017 and 2016.
|
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at PRC statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
VIE tax holiday
|
|
|
-
|
|
|
|
(12.5
|
)
|
|
|
-
|
|
|
|
(12.5
|
)
|
|
Other
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
25.4
|
%
|
|
|
12.9
|
%
|
|
|
25.4
|
%
|
|
|
12.9
|
%
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
11.
|
Income taxes
(continued)
|
The following presents the aggregate
dollar and per share effects of the Company’s subsidiaries’ tax holidays:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate dollar effect of tax holiday
|
|
$
|
-
|
|
|
$
|
444,411
|
|
|
$
|
-
|
|
|
$
|
1,448,924
|
|
|
Per share effect, basic and diluted
|
|
$
|
-
|
|
|
$
|
0.01
|
|
|
$
|
-
|
|
|
$
|
0.03
|
|
During the quarter ended June
30, 2017, the Company filed its U.S. federal income tax returns, including 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, 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, 2015, 2014 and 2013 remain
open to examination by the IRS.
All the
Company’s operations are conducted in the PRC. At June 30, 2017, the Company’s unremitted foreign earnings of its PRC
subsidiaries totaled approximately $32.9 million and the Company held approximately $33.8 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 THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
As disclosed in Note 10, the
Company was delinquent in filing certain tax returns with the U.S. Internal Revenue Service and the 2015, 2014 and 2013 tax years
are open and subject to examination by the tax authorities. 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.
13.
|
Concentration of Credit Risk
|
Cash and cash equivalents
Substantially all 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
Three customers accounted for
approximately 49% of total sales for the three months ended June 30, 2017 and two customers accounted for approximately 49% of
total sales for the three months ended June 30, 2016. Three customers accounted for approximately 51% of total sales for the six
months ended June 30, 2017 and one customer accounted for approximately 37% of total sales for the six months ended June 30, 2016.
Five customers accounted for approximately 77% of accounts receivable as of June 30, 2017, the largest being approximately 36%.
Four customers accounted for approximately 87% of accounts receivable as of June 30, 2016, the largest being approximately 49%.
14.
|
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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)
14.
|
CONTRIBUTIONS TO MULTI-EMPLOYER WELFARE PROGRAMS
(continued)
|
Total contributions to employee
welfare programs for the three and six months ended June 30, 2017 and 2016 were as follow:
|
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contributions
|
|
$
|
15,110
|
|
|
$
|
8,992
|
|
|
$
|
29,813
|
|
|
$
|
20,715
|
|
On January 12, 2016 the Company’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 $56.5 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 ($266) 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$25.93 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 the require payment when due. As of the six months ended June 30, 2017, the discounted balance was approximately
$2 million.
WONHE HIGH-TECH INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2017 AND 2016
(UNAUDITED, IN U.S. $)