NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2016 AND 2015
(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 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 provided 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 THREE AND SIX MONTHS ENDED JUNE 30,
2016 AND 2015
(UNAUDITED, 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 sale of Kuayu, therefore, reduced the interest of the Company in its operating company by 40%.
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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2016 AND 2015
(UNAUDITED, 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 were recognized as compensation during the nine months 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.
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,
2016 AND 2015
(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. 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 and model number YLT-300S
during the second quarter of 2015. YLT-100S is used by individuals, and YLT-300S is used 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, 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.
The
unaudited interim consolidated financial statements of the Company as of June 30, 2016 and for the three and six months ended
June 30, 2016 and 2015, 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, 2016 and 2015 are not necessarily
indicative of the results to be expected for future quarters or for the year ending December 31, 2016.
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,
2016 AND 2015
(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,
2016
|
|
|
December 31,
2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of periods end
|
|
|
0.1505
|
|
|
|
0.1540
|
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2016 AND 2015
(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,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Amounts included in the statements of income and cash flows for the periods
|
|
|
0.1531
|
|
|
|
0.1633
|
|
|
|
0.1530
|
|
|
|
0.1629
|
|
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,
2016
|
|
|
December 31,
2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Balance sheet items, except for stockholders’ equity, as of periods end
|
|
|
0.7441
|
|
|
|
0.7288
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Amounts included in the statements of income and cash flows for the periods
|
|
|
0.7456
|
|
|
|
0.7773
|
|
|
|
0.7337
|
|
|
|
0.7819
|
|
For
the three and six months ended June 30, 2016 and 2015, foreign currency translation adjustments of $(2,043,425) and $6,368 respectively,
$(1,606,228) and $162,125, 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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2016 AND 2015
(UNAUDITED, IN U.S. $)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign
Currency Translation (continued)
For
the three and six months ended June 30, 2016 and 2015, foreign currency translation adjustments of $(2,043,425) and $6,368 respectively,
$(1,606,228) and $162,125, 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
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 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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2016 AND 2015
(UNAUDITED, IN U.S. $)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Revenue
and Cost Recognition (continued)
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.
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 two
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 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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(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, 2016 and December 31, 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 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 $114,803
and $97,980, respectively, $229,461 and $97,740, respectively, for the three and six months ended June 30, 2016 and 2015.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(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 $106,409 and $31,597,
respectively, $153,518 and $55,385, respectively, for the three and six months ended June 30, 2016 and 2015.
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, 2016 and December 31, 2015, 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, 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 THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(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
|
|
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 June 30, 2016, $1,999,640 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, 2016
AND 2015
(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, 2016 and December 31, 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 three and six months ended June 30, 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 THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(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 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 June 30, 2016 and December 31, 2015.
For the three and six months ended June 30, 2015, the Company offset the income tax provision of $390,606 and $739,841, respectively.
For the three and six months ended June 30, 2016, the Company offset the income tax provision of $417,690 and $814,995, respectively,
leaving a balance of prepaid income taxes of $336,159 on June 30, 2016.
Noncontrolling Interests
The noncontrolling interest in Wonhe Multimedia
is 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 THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, 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 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 ended June 30, 2016 and 2015.
|
3.
|
Recently Issued Accounting Standards
|
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.
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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
|
3.
|
Recently Issued Accounting Standards
(continued)
|
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 Statements of Operations or Consolidated Statements of Condition.
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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
|
3.
|
Recently Issued Accounting Standards
(continued)
|
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.
In August 2015, the Financial Accounting Standards
Board ("FASB") issued Accounting Standards Update ("ASU") 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date. The amendment is effective for all entities for fiscal years and interim periods within those
fiscal years, beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact
of this standard on its 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, 2016
AND 2015
(UNAUDITED, IN U.S. $)
Fixed
assets at June 30, 2016 and December 31, 2015 are summarized as follows:
|
|
|
June 30,
2016
|
|
|
December 31, 2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
222,419
|
|
|
$
|
211,897
|
|
|
Motor vehicles
|
|
|
646,587
|
|
|
|
661,703
|
|
|
Production equipment
|
|
|
-
|
|
|
|
1,287,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869,006
|
|
|
|
2,161,102
|
|
|
Less: accumulated depreciation
|
|
|
(362,961
|
)
|
|
|
(416,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
506,045
|
|
|
$
|
1,744,581
|
|
Depreciation
expense charged to operations for the three and six months ended June 30, 2016 and 2015 was $55,171 and $20,443, respectively,
$146,750 and $42,951, respectively.
Intangible
assets at June 30, 2016 and December 31, 2015 are summarized as follows:
|
|
|
June 30,
2016
|
|
|
December 31, 2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
51,886
|
|
|
$
|
45,432
|
|
|
Less: accumulated amortization
|
|
|
(38,907
|
)
|
|
|
(28,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
12,979
|
|
|
$
|
16,749
|
|
Amortization
expense charged to op
erations for the three and six months ended June 30, 2016 and 2015 was $1,727 and $2,790, respectively
$11,060 and $4,955, respectively.
Leases
On September 30, 2013, the Company entered
into a lease agreement with an unrelated party at a monthly rental of $9,075 per month. The lease expired on August 31, 2014. On
September 1, 2014, the Company renewed the lease agreement at the same rent for twelve months. The lease was terminated in May
2015 without incurring any penalties.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
|
6.
|
commitments (
continued)
|
Leases (continued)
In May 2015, the Company entered into a new
lease agreement with an unrelated party at a monthly rent of $11,360 for one year, expiring in May 2016. In May 2016, the Company
renewed this lease at the same monthly rent to May 2017.
Rent expenses for the three and six months
ended June 30, 2016 and 2015 was $34,081 and $39,696, respectively, $68,119 and $71,716, respectively.
In order to research and develop a new project,
the Company leased a laboratory from an unrelated party. The lease has a three year term, from May 6, 2015 to May 5, 2018. The
lease fee the laboratory for the three months ended March 31, 2016 is $58,962.
Employment Agreements
Shenzhen Wonhe, our operating subsidiary,
has employment agreements with our officers Nanfang Tong and Qing Tong:
Nanfang Tong’s employment agreement,
as the chief executive officer, provides for a monthly salary of RMB 8,000 (approximately US $1,224) and expires on October 31,
2016. 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
an officer provides for a monthly salary of RMB 10,000 (approximately US $1,530) and expires on October 31, 2016. 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.
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 THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
|
6.
|
commitments
(continued)
|
Strategic Cooperation Agreement
In April 2015, the Company entered into a
distribution 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 three years. Under the agreement, YLT shall
purchase 662,000 commercial routers from Shenzhen WONHE, with 200,000 purchased during the first year, 220,000 during the second
year and 242,000 during the third year, for a total purchase price of RMB 926,800,000 (US $148,566,040). Any change in share ownership
of YLT shall be approved by Shenzhen Wonhe. In addition, Shenzhen Wonhe obtained an 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. YLT agreed not to sell any equity or issue any debt during the 3 years. The price of the acquisition shall
be established by an independent appraiser.
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 $354,913 and $335,655 at June 30, 2016 and December 31, 2015, respectively.
The proceeds of the loans were principally
used to pay professional and legal fees incurred in the U.S. and other operating expenses for Wonhe High-Tech and Shengshihe Consulting
incurred since their inception. The balance is reflected as loan from stockholder.
In April 2015, Wonhe High-Tech International,
Inc. sold 20,130,000 shares of common stock to 21 unrelated individuals, three individuals who were shareholders of Shenzhen Wonhe
at the time, and three 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 were residents of the People’s Republic of China.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, 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 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 sales price of $0.77 was more representative of the fair value per share than the ORCQB price of $3.07. As a
result, management believes that the $0.77 per share was a fair price and recorded no compensation related to the share sold to
the officer and directors 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 Registrant'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 of the purchasers were residents of the People’s Republic
of China.
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, 2016 and 2015:
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
417,690
|
|
|
$
|
390,606
|
|
|
$
|
814,995
|
|
|
$
|
739,841
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
417,690
|
|
|
$
|
390,606
|
|
|
$
|
814,995
|
|
|
$
|
739,841
|
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
9.
|
Income taxes
(continued)
|
The following is a reconciliation of the statutory
rate with the effective income tax rate for the three and six months ended June 30, 2016 and 2015.
|
|
|
For the Three Months Ended
June 30, 2016
|
|
|
For the Six Months Ended
June 30, 2016
|
|
|
|
|
Tax
Provision
|
|
|
Rate
of Tax
|
|
|
Tax
Provision
|
|
|
Rate
of Tax
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at PRC statutory rate
|
|
$
|
809,464
|
|
|
|
25.0
|
%
|
|
$
|
1,577,353
|
|
|
|
25.0
|
%
|
|
Subsidiaries/VIE tax holiday
|
|
|
(391,774
|
)
|
|
|
(12.1
|
)
|
|
|
(762,358
|
)
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
417,690
|
|
|
|
12.9
|
%
|
|
$
|
814,995
|
|
|
|
12.9
|
%
|
|
|
|
For the Three Months Ended
June 30, 2015
|
|
|
For the Six Months Ended
June 30, 2015
|
|
|
|
|
Tax
Provision
|
|
|
Rate
of Tax
|
|
|
Tax
Provision
|
|
|
Rate
of Tax
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at PRC statutory rate
|
|
$
|
779,014
|
|
|
|
25.0
|
%
|
|
$
|
1,475,542
|
|
|
|
25.0
|
%
|
|
VIE tax holiday
|
|
|
(388,408
|
)
|
|
|
(12.5
|
)
|
|
|
(735,701
|
)
|
|
|
(12.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
390,606
|
|
|
|
12.5
|
%
|
|
$
|
739,841
|
|
|
|
12.5
|
%
|
The
following presents the aggregate dollar and per share effects of the Company’s subsidiaries/VIE tax holidays:
|
|
|
Three Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
dollar effect of tax holiday
|
|
$
|
444,411
|
|
|
$
|
388,408
|
|
|
$
|
814,995
|
|
|
$
|
735,701
|
|
|
Per share effect, basic and diluted
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
The Company’s PRC tax filings for the
tax years ended December 31, 2014 and 2013 were examined by the tax authorities. The examinations were completed and resulted in
no adjustments.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
9.
|
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 year ended June 30, 2012, the six month period ended December 31, 2012, a short year income tax return required to be
filed as a result of the change in the fiscal year and the 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, 2015. 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 year ended June 30, 2012, six-month tax period ended December
31, 2012, and the tax years ended December 31, 2015, 2014 and 2013 remain open to examination by the IRS.
All of the Company’s operations are
conducted in the PRC. At June 30, 2016, the Company’s unremitted foreign earnings of its PRC subsidiaries totaled approximately
$19.2 million and the Company held approximately $46.2 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.
As disclosed in Note 9, 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.
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
10.
|
CONTINGENCIES
(continued)
|
The Company did not file the information reports
for the years ended December 31, 2015, 2014, 2013 and 2012, 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.
11.
|
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 the Australian
government up to AUD 250,000.
Major customers
Two customers accounted for approximately
49% of total sales for the three months ended June 30, 2016 and one customer accounted for approximately 10% of total sales for
the three months ended June 30, 2015. One customer accounted for approximately 37% of total sales for the six months ended June
30, 2016 and the same customer accounted approximately 11% of total sales for the six months ended June 30, 2015. Four customers
accounted for approximately 87% of accounts receivable as of June 30, 2016, the largest being approximately 49%. Four customers
accounted for approximately 94% of accounts receivable as of December 31, 2015, the largest being 34%.
12.
|
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
|
%*
|
WONHE HIGH-TECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
AND 2015
(UNAUDITED, IN U.S. $)
12.
|
CONTRIBUTIONS TO MULTI-EMPLOYER WELFARE PROGRAMS (
continued)
|
* 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 three and six months ended June 30, 2016 and 2015 were as follow:
|
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Total contributions
|
|
$
|
8,992
|
|
|
$
|
4,217
|
|
|
$
|
20,715
|
|
|
$
|
14,512
|
|
13.
|
INVESTMENT IN PROJECT
|
On January 12, 2016 the Company's operating
subsidiary, Shenzhen Wonhe Technology Co., Ltd. ("Shenzhen Wonhe"), entered into an agreement titled "Wireless Network
Coverage Project in Beijing Area" with Guangdong Kesheng Enterprise Co., Ltd. ("Guangdong Kesheng"). The agreement
contemplates that the two parties will work together to develop a wireless network in certain designated areas of Beijing. The
commercial purpose of the network will be to serve as a vehicle for advertising and marketing, with the revenue to be shared between
Shenzhen Wonhe and Guangdong Kesheng.
Shenzhen Wonhe has committed in the
agreement to provide 382,990,000 RMB (USD $58.25 million, USD$17,780,799 of which was expended as of June 30, 2016) to the
project, including 226,010,000 RMB (USD $34.37 million) in cash and 118,980,000 RMB (USD $18.09 million) in routers and other
equipment. Shenzhen Wonhe will also contribute the network that it recently developed in the Tongzhou District of Beijing as
a pilot project, at a cost of 38,000,000 RMB (USD $5.78 million). Shenzhen Wonhe's cash contribution will be paid over three
years: 104,498,990 RMB in 2016, 84,636,558 RMB in 2017 and 36,871,412 RMB in 2018. Shenzhen Wonhe has also committed to
develop the data systems that will be used by the network. Guangdong Kesheng has committed to supervise the engineering and
construction, coordinate relationships with local government, and manage the network's operations.
Prior to the signing of the official investment
contract, the Company invested RMB38,000,000 (USD $5.78 million) to develop a network station in one of the contracted “Wireless
Network Coverage Project” locations, the TongZhou District of Beijing, as a pilot project. As of June 30, 2016, total payments
for the pilot project were included in “investment in project” in the consolidated balance sheet.