UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152017
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-54884
CHINA UNITED INSURANCE SERVICE, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation) | 30-0826400 | |
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7F, No. 311 Section 3
Nan-King East Road
Taipei City, Taiwan
(Address of principal executive offices, with zip code)
+8862-87126958
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | None |
Securities registered under Section 12(g) of the Act:
| Title of each class | Common Stock, par value of $0.00001 | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes¨No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer¨ | Accelerated filer | x | |
| Non-accelerated filer¨ | |||
| Smaller reporting company ¨ | |||
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, asbased upon the closing sale price of the registrant’s common stock on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter was $263,538,928.$120,755,943.
As of March 24, 2016,14, 2018, there were 29,452,669 shares of common stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.
TABLE OF CONTENTS
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EXPLANATORY NOTE REGARDING RESTATEMENT
On January 23, 2018, the Audit Committee of the Board of Directors of China United Insurance Service, Inc., based on the recommendations of the company’s management and after consultation with, Simon & Edward LLP, our independent registered public accounting firm, concluded that our consolidated financial statements as of and for the years ended December 31, 2016 and 2015, and as of and for each of the interim periods ended March 31, 2017, June 30, 2017 and September 31, 2017 should no longer be relied upon.
Within this report, we have included restated audited results as of and for the years ended December 31, 2016 and 2015, as well as restated unaudited condensed consolidated financial information for the quarterly periods as of and for the interim periods ended March 31, 2017, June 30, 2017 and September 31, 2017, which we refer to as the Restatement. Our consolidated financial statements as of and for the years ended December 31, 2016 and 2015 included in this Annual Report on Form 10-K (the “Restated Audited Financial Statements”) have been restated from the consolidated financial statements included on our Annual Report on Form 10-K for the year ended December 31, 2016 and for the year ended December 31, 2015 (the “Original Audited Financial Statements”).
The Restatement corrects a material error related to the accounting for the acquisition of Genius Holdings Financial Limited (the “GHFL Acquisition”) in 2015 The GHFL Acquisition has been accounted for as the acquisition of a business but, upon further analysis, we have come to the conclusion that it would be more accurately accounted for as an asset acquisition. Our independent registered accounting firm has concurred with this revised approach.
The Company has determined that this change in accounting for the GHFL Acquisition had the impact set forth below as of and for the years ended December 31, 2015 and 2016 and for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 (the “Restated Periods”) on the following key balance sheet and income statement line items included in the financial statements for each of the Restated Periods, which the Company believes are of particular significance for investors. Please note that the Key Balance Sheet Items in each of the Restated periods set forth below changed as a result of the restatement, while Key Statement of Operations and Other Comprehensive Income (Loss) Items were affected by the Restatement only with respect to 2015 results, all subsequent Restated Periods remaining unchanged.
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Key Balance Sheet Items
Goodwill:Reported Goodwill as of the end of each annual and interim reporting period (December 31, 2015 and 2016 and March 31, 2017, June 30, 2017 and September 30, 2017) of $2,071,491 has been restated to total $31,651 as at each such date, representing a reduction of $2,039840 (or 98.5%).
Total Assets: Reported Total Assets as of December 31, 2015 of $39,401,816 has been restated to total $37,361,976 as at such date, representing a reduction of $2,039,840 (or 5.2%); while reported Total Assets as of December 31, 2016 of $51,407,543 has been restated to total $49,367,703 as at such date, representing a reduction of $2,039,840 (or 4.0%). Reported Total Assets as of March 31, 2017 of $49,227,142 has been restated to total $47,187,302 as at such date, representing a reduction of $2,039,840 (or 4.1%), reported Total Assets as of June 30, 2017 of $48,983,681 has been restated to total $46,943,841 as at such date, representing a reduction of $2,039,840 (or 4.2%); and reported Total Assets as of September 30, 2017 of $51,132,862 has been restated to total $49,093,022 as at such date, representing a reduction of $2,039,840 (or 4.0%).
Retained Earnings: Reported Retained Earnings as of December 31, 2015 of $1,808,665 has been restated to total $(231,175) as at such date, representing a reduction of $2,039,840 (or 112.8%); while reported Retained Earnings as of December 31, 2016 of $3,286,562 has been restated to total $1,246,722 as at such date, representing a reduction of $2,039,840 (or 61.2%). Reported Retained Earnings as of March 31, 2017 of $4,152,250 has been restated to total $2,112,410 as at such date, representing a reduction of $2,039,840 (or 49.1%), reported Retained Earnings as of June 30, 2017 of $5,804,053 has been restated to total $3,764,213 as at such date, representing a reduction of $2,039,840 (or 35.1%); and reported Retained Earnings as of September 30, 2017 of $6,663,807 has been restated to total $4,623,967 as at such date, representing a reduction of $2,039,840 (or 30.6%).
Stockholders’ Equity Attributable to Parent’s Shareholders: Reported Stockholders’ Equity Attributable to Parent’s Shareholders as of December 31, 2015 of $11,671,676 has been restated to total $9,631,836 as at such date, representing a reduction of $2,039,840 (or 17.5%); while reported Stockholders’ Equity Attributable to Parent’s Shareholders as of December 31, 2016 of $14,575,988 has been restated to total $12,536,148 as at such date, representing a reduction of $2,039,840 (or 14.0%). Reported Stockholders’ Equity Attributable to Parent’s Shareholders as of March 31, 2017 of $16,701,244 has been restated to total $14,661,404 as at such date, representing a reduction of $2,039,840 (or 12.2%), reported Stockholders’ Equity Attributable to Parent’s Shareholders as of June 30, 2017 of $18,721,318 has been restated to total $16,681,478 as at such date, representing a reduction of $2,039,840 (or 10.9%); and reported Stockholders’ Equity Attributable to Parent’s Shareholders as of September 30, 2017 of $20,077,289 has been restated to total $18,037,449 as at such date, representing a reduction of $2,039,840 (or 10.2%).
Key Statement of Operations and Other Comprehensive Income (Loss) Items
General and Administrative Expense: Reported General and Administrative Expense for the year ended December 31, 2015 of $12,675,171 has been restated to total $14,715,011, representing an increase of $2,039,840 (or 16.1%); while reported General and Administrative Expense or the year ended December 31, 2016 of $13,852,277 as restated remained unchanged as at such date. Reported General and Administrative Expense for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $3,352,440, $7,006,304 and $10,714,341, respectively, as restated each remained unchanged as at such date.
Net Income (Loss): Reported Net Income for the year ended December 31, 2015 of $2,701,125 has been restated to total $661,285, representing a reduction of $2,039,840 (or 75.5%); while reported Net Income for the year ended December 31, 2016 of $5,019,583 as restated remained unchanged. Reported Net Income for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $2,020,799, $4,509,827 and $6,486,964, respectively, as restated each remained unchanged as at such date.
Net Income (Loss) Attributable to Parent’s Shareholders: Reported Net Income (Loss) Attributable to Parent’s Shareholders for the year ended December 31, 2015 of $1,077,927 has been restated to total $(961,913), representing a reduction of $2,039,840 (or 189.2%); while reported Net Income for the year ended December 31, 2016 of $2,892,155 as restated remained unchanged. Reported Net Income Attributable to Parent’s Shareholders for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $1,336,345, $3,324,733 and $4,632,380, respectively, as restated each remained unchanged as at such date.
Earnings per Share: Reported Earnings per Share (Basic) for the year ended December 31, 2015 of $0.037 has been restated to $(0.033); while reported Earnings per Share (Basic) for the year ended December 31, 2016 of $0.098 as restated remained unchanged as at such date. Reported Earnings per Share (Diluted) for the year ended December 31, 2015 of $0.035 has been restated to $(0.033); while reported Earnings per Share (Basic) for the year ended December 31, 2016 of $0.095 as restated remained unchanged as at such date. Reported Earnings per Share (Basic) and reported Earnings per Share (Diluted) for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $0.045 and $0.044, $0.113 and 0.109, and 0.157 and $0.152, respectively, as restated each remained unchanged as at such date.
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All applicable amounts relating to this Restatement have been reflected in the consolidated financial statements and disclosed in the notes to the consolidated financial statements in this 2017 Form 10-K. For discussion of the restatement adjustments, see Item 8 of Part II, “Financial Statements and Supplementary Data—Note 27—Restatement” and “Note 28—Quarterly Financial Data (Unaudited)”. Additionally, see Item 1A of Part I, “Risk Factors”, Item 6 of Part II, “Selected Financial Data”, and Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
In addition, we have identified material weaknesses related to our internal control over financial reporting for the year ended December 31, 2017. Disclosure related to these matters are included in Part II, Item 9A of this Form 10-K.
We believe that presenting all of this information regarding the Restated Periods in this Annual Report allows investors to review all pertinent data in a single presentation. We have not filed amendments to (i) our Quarterly Reports on Form 10-Q for the three interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 or for the comparable interim periods in 2015 or 2016, or (ii) our Annual Report on Form 10-K for the years ended December 31, 2015 or 2016 (collectively, the “Affected Reports”). Accordingly, investors should rely only on the financial information and other disclosures regarding the Restated Periods in this Annual Report on Form 10-K, and not on the Affected Reports or any reports, earnings releases or similar communications relating to those periods.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward- looking statements. These risks and uncertainties include, but are not limited to, the factors described under Item 1 “Description of Business,” Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward- looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. In addition, you are invited to pay particular attention to the effect of the Restatement of our previously issued financial statements for the years ended December 31, 2015 and 2016 and each of the interim periods of 2017, as described in Item 8 of Part II, “Financial Statements and Supplementary Data—Note 27—Restatement” and “Note 28—Quarterly Financial Data (Unaudited)” to the restated financial statements, and any claims, investigations, or proceedings arising as a result; and well as our ability to remediate the material weaknesses in our internal controls over financial reporting described in Item 9A of this Annual Report and our ability to maintain effective internal controls and procedures in the future.
Forward-looking statements represent our estimates and assumptions only as of the date of this annual report. You should read this annual report and the documents that we reference in this annual report, or that we filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
OTHER PERTINENT INFORMATION
References in this annual report to “we,” “us,” “our” and the “Company” and words of like import refer to China United Insurance Service, Inc., its subsidiaries and variable interest entities.
References to China or the PRC refer to the People’s Republic of China (excluding Hong Kong, Macao and Taiwan). References to Taiwan refer to Republic of China.
Unless context indicates otherwise, reference to the “Company” in this annual report refers to China United Insurance Service, Inc. and its subsidiaries. Reference to “AHFL” refers to the combined operations of Action Holdings Financial Limited and its Taiwan Subsidiaries (defined below). Reference to “Anhou” refers to the combined operations of Law Anhou Insurance Agency Co., Ltd. and its subsidiaries.
Our business is conducted in Taiwan and China using New Taiwanese Dollars (“NT$”), the currency of Taiwan, Hong Kong Dollars (“HK$”), the currency of Hong Kong, and RMB, the currency of China, respectively, and our financial statements are presented in United States dollars (“USD”, “US$” or “$”). In this annual report, we refer to assets, obligations, commitments and liabilities in our financial statements in USD. These dollar references are based on the exchange rate of NT$, HK$ and RMB to USD, determined as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of USD which may result in an increase or decrease in the amount of our obligations (expressed in USD) and the value of our assets, including accounts receivable (expressed in USD).
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Corporate History and Structure Overview
China United Insurance Service, Inc. (“China United,” “CUIS,” or the “Company”)Our Company is a Delaware corporation organized on June 4, 2010 by Yi Hsiao Mao, a Taiwanese citizen, and iswas quoted on the OverOTCQB® Venture Market (“OTCQB”). We provide our customers life insurance and property and casualty insurance intermediary and related services. We operate our Taiwan business primarily through Law Insurance Broker Co., Ltd. (“Law Broker”) and our PRC business primarily through Law Anhou Insurance Agency Co., Ltd. (“Anhou”).
Law Broker
The history of our Company dates back to 1992, when Law Broker was established on October 9, 1992.
Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares and incorporated under the Counter Bulletin Boardlaws of Taiwan, holds 100% interest in Law Broker, a company limited by shares and incorporated under the laws of Taiwan on October 9, 1992. Law Enterprise used to operateanother two subsidiaries during the past three fiscal years, namely Law Risk Management & Consultant Co., Ltd. (“OTCBB”Law Management”), a company limited by shares and incorporated under the laws of Taiwan on December 5, 1987, and Law Insurance Agent Co., Ltd., a company limited by shares and incorporated under the laws of Taiwan on June 3, 2000 (“Law Agent”, collectively with “Law Enterprise”, “Law Broker” and “Law Management”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”). The Company’s operating companiesAs Law Management and Law Agent are not in Taiwanactive operation, they were dissolved on April 20, 2016 and China. Unless context indicates otherwise, reference to the “Company” throughout this annual report refers to China United and its subsidiaries. Reference to April 12, 2016, respectively.
Acquisition of AHFL
Action Holdings Financial Limited (“AHFL”), refers was incorporated in British Virgin Islands with limited liability on April 30, 2012. AHFL holds 65.95% interest in Law Enterprise and certain of our other subsidiaries as more fully described below.
On August 24, 2012, an acquisition agreement (the “AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the combined operationsAHFL Acquisition Agreement, our Company acquired 100% interest in AHFL and its subsidiaries in Taiwan and our Company agreed to pay NT$15.0 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments. In addition, our Company agreed to (i) issue 8,000,000 shares of common stock of our Company to the shareholders of AHFL; (ii) issue 2,000,000 shares of common stock of our Company to certain employees of Law Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of our Company. Upon closing of the transaction, we acquired 100% interest in AHFL and its subsidiaries in Taiwan.
On March 14, 2013, an Amendment to the AHFL Acquisition Agreement (the “First Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the First Amendment to AHFL Acquisition Agreement, (i) the deadline for cash payment under the AHFL Acquisition Agreement was extended to March 31, 2015; and (ii) in lieu of the 2,000,000 employee stock option pool, our Company agreed to create an employee stock pool consisting of up to 4,000,000 shares of the common stock of our Company, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares shall be granted to employees of affiliated entities of our Company (including Law Broker employees).
On March 13, 2015, a second Amendment to the AHFL Acquisition Agreement (the “Second Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Second Amendment to AHFL Acquisition Agreement, the deadline for cash payment under the AHFL Acquisition Agreement was further extended to March 31, 2016.
On February 17, 2016, a third Amendment to the AHFL Acquisition Agreement (the “Third Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Third Amendment to AHFL Acquisition Agreement, on or prior to June 30, 2016, (i) our Company committed to complete the listing of our Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least $10.0 million; (ii) our Company committed to distribute the cash payment in the amount of NT$22.5 million, on a pro rata basis, to the selling shareholders of AHFL and issue 5,000,000 common shares to its Taiwan Subsidiaries. Referenceselected employees pursuant to Anhou refersits employee stock/option plan, and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of our Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by us and restore the status quo of our Company and the selling shareholders of AHFL as if the said acquisition had never happened.
On August 8, 2016, a fourth Amendment to the combined operationsAHFL Acquisition Agreement (the “Fourth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AnhouAHFL named therein. Pursuant to the Fourth Amendment to AHFL Acquisition Agreement, (i) the Third Amendment to AHFL Acquisition Agreement was terminated with immediate effect on August 8, 2016, and its subsidiaries.(ii) our Company agreed to pay to the selling shareholders of AHFL NT$15.0 million on or prior to March 31, 2017 and NT$4.8 million on July 21, 2016. On July 21, 2016, our Company arranged for the payment of NT$4.8 million to the selling shareholders of AHFL.
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On March 12, 2017, a fifth Amendment to the Acquisition Agreement (the “Fifth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Fifth Amendment to AHFL Acquisition Agreement, our Company agreed to distribute the cash payment in the amount of NT$15 million to the selling shareholders of AHFL named therein on or prior to March 31, 2019.
Acquisition of GHFL
Genius Holdings Financial Limited (“GHFL”) is a wholly owned subsidiary of AHFL. On February 13, 2015, our Company, AHFL and Mr. Chwan Hau Li, being the selling shareholder of GHFL, entered into an acquisition agreement (the “GHFL Acquisition Agreement”). Pursuant to the GHFL Acquisition Agreement, our Company agreed to issue 352,166 fully paid and non-assessable shares of AHFL common stock (the “AHFL Shares”) together with a granted put option for 352,166 shares of common stock of our Company (the “Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the selling shareholder of GHFL would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of our Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a company limited by shares and incorporated under the laws of Taiwan, which in turn holds approximately 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares and incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. Mr. Chwan Hau Li was the sole shareholder of GHFL and he is a director and shareholder of our Company. On March 31, 2015, Mr. Chwan Hau Li exercised the Put Option, pursuant to which, 352,166 shares of AHFL held by Mr. Chwan Hau Li were transferred back to our Company as the consideration for 352,166 shares of common stock of our Company, which were issued to Mr. Chwan Hau Li on April 29, 2015.
On February 17, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into an Amendment 2 to the GHFL Acquisition Agreement (the “Second Amendment to GHFL Acquisition Agreement”), pursuant to which our Company agreed to complete the listing of our Company in a major capital market on or prior to February 28, 2016 where the net proceeds raised through such public offering financing shall be at least $10.0 million.
On August 8, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into an Amendment 3 to the GHFL Acquisition Agreement (the “Third Amendment to GHFL Acquisition Agreement”), pursuant to which, the Second Amendment to GHFL Acquisition Agreement was terminated.
Anhou
On July 12, 2010, ZLI Holdings Limited (“CU Hong Kong”), a wholly owned Hong Kong-based subsidiary of China United,our Company, was originally founded by China United, on July 12, 2010 underestablished in Hong Kong laws.Kong. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Consulting Co., Ltd., a wholly foreign owned enterprise (“CU WFOE”), a wholly owned subsidiary of CU Hong Kong, was established in Henan province of the PRC. On January 16, 2011, our Company issued 20,000,000 shares of common stock to several non-U.S. persons for their investment of $300,000 in CU WFOE. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended.
Law Anhou Insurance Agency Co., Ltd. (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd.), the predecessor entity of Anhou, was founded in Henan province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC. On November 26, 2013, Anhou changed its name into Law Anhou Insurance Agency Co., Ltd. and obtained its new business license. On December 18, 2013, Anhou obtained its new Professional Insurance Agency License from local bureau of China Insurance Regulatory Commission (“CIRC”) which reflects its new name.
On September 26, 2013, several new PRC individual investors, namely Yanyan Wang, Zhaohui Chen, Jing Yue, Weizhe Hou, Yong Zhang, Li Chen (“Anhou New Investors”) and the original shareholders of Anhou, namely, Shuqin Zhu, Qun Wei, Qunlei Fang and Yanxia Chen (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million ($8,165,895), among which, Yanyan Wang would invest RMB10 million ($1,633,179), accounting for 20%, Zhaohui Chen would invest RMB10 million ($1,633,179), accounting for 20%, Jing Yue would invest RMB7.5 million ($1,224,871), accounting for 15%, Weizhe Hou would invest RMB5 million ($816,589), accounting for 10%, Yong Zhang would invest RMB4.5 million ($734,930), accounting for 9%, and Li Chen would invest RMB3 million ($489,949), accounting for 6%, of the registered capital of Anhou.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors,investors. Able Capital Holding Co., Ltd., a limited liability company established and registeredwith limited liability in Hong Kong, delegated four PRC individuals, namely Yanyan Wang, Zhaohui Chen, Weizhe Hou and Yong Zhang, to invest in Anhou on its behalf.
On October 24,September 26, 2013, Yanyan Wang, Zhaohui Chen, Jing Yue, Weizhe Hou, Yong Zhang, Li Chen (“Anhou completedNew Investors”) and Shuqin Zhu, Qun Wei, Qunlei Fang and Yanxia Chen (“Anhou Original Shareholders”) agreed to increase the registration with local Administration Industryregistered capital of Anhou to RMB50 million, among which, (i) Yanyan Wang agreed to invest RMB10 million, accounting for 20% of registered capital in Anhou, (ii) Zhaohui Chen agreed to invest RMB10 million, accounting for 20% of registered capital in Anhou, (iii) Jing Yue agreed to invest RMB7.5 million, accounting for 15% of registered capital in Anhou, (iv) Weizhe Hou agreed to invest RMB5 million, accounting for 10% of registered capital in Anhou, (v) Yong Zhang agreed to invest RMB4.5 million, accounting for 9% of registered capital in Anhou, and Commerce (“AIC”) on the above-mentioned(vi) Li Chen agreed to invest RMB3 million, accounting for 6% of registered capital increase. The new business license was issued toin Anhou, on October 25, 2013.respectively.
The registered capital increase of Anhou was in response to the promulgations of certain regulations by the China Insurance Regulatory Commission (“(“CIRC”). On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8,165,890).million. On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “Notice”“2013 Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million, ($8,165,890), can continue operation of their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million ($1,633,178). The branch offices of Anhou were all in Henan province. To better implement itsthe expansion strategies of our Company, Anhou increased its registered capital to RMB50 million ($8,165,890) to meet the requirement of CIRC so that it canis able set up new branches in any province beyond its current operations in Mainland China.the PRC.
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On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) withtransferred their interests in Anhou to Changrong Hu, a PRC citizen (“Mr. Hu”Hu,” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer priceconsideration of RMB10 million ($1,633,178).million. Mr. Hu is currently the legal representative, General Manager and the sole director of Anhou.
On October 24, 2013,November 17, 2016, Li Chen transferred his interests in Anhou completed the share transfer registration with the local AIC. At the endto Chunyan Lu for an aggregate consideration of October 2013, Anhou completed its filing with local CIRC with respect to its previously-conducted share transfer and capital increase.RMB3 million.
Anhou’s wholly owned subsidiary
Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”), a wholly owned subsidiary of Anhou, was foundedestablished with limited liability on September 4, 2006 in Sichuan province of the PRC, and it provides insurance agency services in the PRC. On August 23,September 6, 2010, atshareholders of Sichuan Kangzhuang’s general meeting of shareholders, its shareholders voted for transferring all ofKangzhuang transferred their equity interestsinterest in Sichuan Kangzhuang to Anhou for RMB532,622 ($83,444). On September 6, 2010,an aggregate consideration of RMB532,622. For the equity transfer agreements were signed betweenpurpose of procuring certain economic benefits and enabling a centralized control over the business operations in Sichuan province, the Company commenced the dissolution process of Sichuan Kangzhuang, a wholly owned subsidiary of Anhou and each shareholderset up a branch office of Anhou in Sichuan province. Accordingly, Sichuan Kangzhuang had filed a dissolution application to the local Bureau of Administration and Commerce and made a public announcement published in local newspaper in October 2017. On June 22, 2017, the Sichuan Branch of Anhou obtained its business license to conduct insurance agency business. As of this date, Sichuan Kangzhuang is undergoing tax closure procedure, which involves multiple rounds of communication with the relevant tax authorities before obtaining the official approval for tax deregistration.Mr. Wen Yuan Hsu, the general manger of Sichuan Kangzhuang. Anhou has complied with allKangzhuang is the general manager of the applicable laws and regulations with respect to its holding 100% equity interests in Sichuan Kangzhuang.branch office of Anhou.
Jiangsu Law Insurance Brokers Co., Ltd. (“Jiangsu Law” collectively), a wholly owned subsidiary of Anhou, was established with Anhou, Sichuan Kangzhuang, the “Consolidated Affiliated Entities”, each a “Consolidated Affiliated Entity”) was foundedlimited liability on September 19, 2005 in Jiangsu province of the PRC. Jiangsu Law is allowedlicensed to provide insurance brokerage services. On August 12, 2010, at Jiangsu Law’s general meeting of shareholders, its shareholders voted for transferring all of their shareholdings to Anhou for RMB518,000 ($81,153). On September 28, 2010, Anhou and the shareholders of Jiangsu Law entered into an equity transfer agreements were signed between Anhou and each individual shareholder of Jiangsu Law.agreements. Pursuant to Provisions on the Supervision and Administration of Insurance Brokerage Institutions,Institution, effective on October 1, 2009, if an insurance brokerage entity fails to bring its registered capital to no less than RMB10,000,000 ($1,566,661) on or prior to October 1, 2012, the China Insurance Regulatory Commission (“CIRC”)CIRC or its local counterpart, as applicable, may determine not to extend the insurance brokerage license. To meet such minimum registered capital requirement, on February 11, 2011, Anhou invested RMB4.82 million ($755,131) in Jiangsu Law to increase the registered capital to RMB10 million ($1,566,661). Anhou has complied with all of the applicable laws and regulations with respect to its holding 100% equity interests in Jiangsu Law.million.
On January 16, 2011, China United issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non-US persons for their investment of $300,000 in cash in the Company’s subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended. The consideration was paid to the account of CU Hong Kong by May 6, 2011. All $300,000 was contributed into the bank account of CU WFOE as registered capital.Our Consolidated Affiliated Entities
Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, we operate our PRC business primarily through our ConsolidatedAnhou, Sichuan Kangzhuang and Jiangsu Law (collectively, the “Consolidated Affiliated Entities in China.Entities”, each a “Consolidated Affiliated Entity”). We do not hold equity interests in our Consolidated Affiliated Entities. However, through the VIE Agreements (as described in more details(defined as below) with Anhou and its shareholders,, we effectively control, and are able to derive substantially all of thesubstantial economic benefits from, these Consolidated Affiliated Entities. On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, however, how these changes will affect entities currently operating in China, particularly foreign controlled variable interest entities, is not entirely clear. See “Risks Related to Our Corporate Structure in the PRC”.
Our Consolidated Affiliated Entities in China are variable interest entities through which all of our insurance services in China are operated. It is through theThese VIE Agreements that we havegive us effective control of theover our Consolidated Affiliated Entities which allowsin China and allow us to consolidate the financial results of theour Consolidated Affiliated Entities in our financial statements. If Anhou and its shareholders fail to perform their obligations under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that give us effective control. Furthermore, if we are unable to maintain effective control of our Consolidated Affiliated Entities, we would not be able to continue to consolidate the Consolidated Affiliated Entities’ financial results with our financial results. During each of the fiscal years ended June 30, 2011 and 2012, 100% of our revenues in our consolidated financial statements were derived from our Consolidated Affiliated Entities. For the year ended June 30, 2013, the first fiscal year after the acquisition of AHFL together with its Taiwan Subsidiaries, 92.66% and 7.34% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively. During the six months ended December 31, 2013, 93.72% and 6.28% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively. For the year ended December 31, 2014, 93.55% and 6.45% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively. For the year ended December 31, 2015, 88.45% 10.71% and 0.84% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and Prime Financial Asia Ltd., respectively.
On January 17, 2011, CU WFOE, Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executedexercises effective control over Anhou through these contractual arrangements.Anhou. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. Thedate, except that the Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. The VIE Agreements now in effect included:include:
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| a Power of Attorney, |
| an Option Agreement, |
| a Share Pledge Agreement, |
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Please refer to “Item 13. Certain Relationships and Related Transactions, and Director Independence” for further information on the VIE Agreements.
PFAL
Prime Financial Asia Ltd. (“PFAL”) is a re-insurance broker company incorporated in Hong Kong. On April 23, 2014, AHFL and Chun Kwok Wong (“Mr. Wong”) entered into a Capital Increase Agreement, pursuant to which Mr. Wong agreed to increase PFAL’s registered capital from HK$500,000 to HK$1,470,000 and AHFL agreed to contribute HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital increase on April 30, 2014, Mr. Wong and AHFL own 49% and 51% of PFAL’s equity interest, respectively.
On August 7, 2015, Max Key Investment Ltd. (“MKI”) was incorporated with limited liability in the British Virgin Islands. On August 15, 2015, Prime Management Consulting (Nanjing) Co., Ltd. (“PTC Nanjing”) was incorporated with limited liability in Nanjing province of the PRC. On September 3, 2015, Prime Asia Corporation Limited. (“PTC Taiwan”), a company limited by shares, was incorporated in Taiwan. Each of MKI, PTC Nanjing and PTC Taiwan is a wholly owned subsidiary of PFAL.
As a holding company with no business other than holding equity interest of our operating subsidiary, CU WFOE in China and Law Broker in Taiwan, we rely principally on dividends to be paid by CU WFOE in China and Law Broker in Taiwan. CU WFOE, being the exclusive service provider to Anhou, relies on the service fees to which it is entitled from Anhou. Pursuant to the Exclusive Cooperation Agreement (the “Cooperation Agreement”) between CU WFOE and Anhou, CU WFOE has the right to collect 90% of the net profits of Anhou. As Anhou is still operating at a loss, Anhou has not paid anybeen paying service fees according to CU WFOE yet and CU WFOEthe Cooperation Agreement, but has not paid any dividend to usCU WFOE to date. We expectAs of December 31, 2017, Anhou to makewas operating at a profit, beginning inbut since Anhou remains a growing company that requires financial resources to support further expansion, the fiscal year ending December 31, 2016, when it should start to pay service fees to CU WFOE, although there candividend payment will be no assurance that Anhou will become profitable by that time or ever.decided later on depending on the financial circumstances. Our capability to receive dividends from CU WFOE, convert them into USD and make the repatriation out of China is subject to the applicable PRC restrictions on the payment of dividends by PRC companies, laws and regulations on foreign exchange and restrictions on foreign investment. Law Broker, beingFor the only operating entity foryear ended December 31, 2015, 88.45%, 10.71% and 0.84% of our revenues in our consolidated financial statements were derived from our Taiwan business, is primarily focused on lifeSubsidiaries, Consolidated Affiliated Entities and property insurance brokerage and agency business. Through years of operation, Law Broker has become one ofPFAL, respectively. For the leading insurance brokerage firms in Taiwan and has expanded its business across Taiwan, with 26 sales and service outlets (including the headquarters) and 2,329 employees and insurance sales professionals as ofyear ended December 31, 2015.2016, 87.52%, 12.10% and 0.38% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and PFAL, respectively. For the year ended December 31, 2017, 85.31%, 14.37% and 0.32% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and PFAL, respectively. Revenues in our consolidated financial statements are composed of commissions earned from insurance companies according to the terms of each insurance company service agreement, as well as revenues earned in association with the Strategic Alliance Agreement with AIATW.
Reclassification of Shares
On February 26, 2014, Anhou completed the registration of the change of its registered address to Room 1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued by Jiangsu Bureau of CIRC on April 21, 2014. Anhou has completed the registration of the share pledge with local AIC. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
Anhou owns 100% equity interest in both Sichuan Kangzhuang and Jiangsu Law. The shareholders of Anhou are Changrong Hu, Yanyan Wang, Zhaohui Chen, Jing Yue, Weizhe Hou, Yong Zhang and Li Chen. All of these shareholders are PRC citizens and do not hold any shares in the Company. Pursuant to the VIE Agreements, CU WFOE becomes the primary beneficiary of Anhou and only leaves Anhou shareholders nominal value therein.
On January 28, 2011, theour Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock. On July 2, 2012, the Boardour board of Directorsdirectors and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Mr. Yi Hsiao Mao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000 common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification. Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of theour Company; while each holder of Series A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of theour Company.
2017 Long Term Incentive Plan
On August 8, 2014, Mr. Chung Mei Lo (“Mr. Lo”), who had been serving asMay 12, 2017, the Company’s Chief Executive Officer, resigned from his position with the Company. Following the resignation of Mr. Lo, the Company’s Board of Directors appointed Mr. Mao as the Company’s Chief Executive Officer.
On August 24, 2012, the Company, pursuant to an Acquisition Agreement2017 Long Term Incentive Plan (the “AHFL Acquisition Agreement”“2017 Plan”), acquired all of the issued and outstanding shares of AHFL, a limited liability company (“LLC”) incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL becomes a 100% subsidiary of the Company. On July 30, 2013, AHFL, Taiwan Branch (“AHFLTW”) was established with registered capital of NT$100,000.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent” collectively with “Law Enterprise”, “Law Broker” and “Law Agent”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”), a LLC incorporated in Taiwan on June 3, 2000.
Law Enterprise acts as a holding company of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not in active operation. We operate our Taiwan business primarily through Law Broker.
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan Government on November 26, 2014 and on January 13, 2015, respectively. In accordance withshareholders at the law in Taiwan,2017 Annual Meeting of Stockholders of China United Insurance Service, Inc. Up to 10,000,000 shares of our Common Stock may be granted under the liquidator was appointed by the shareholders2017 Plan (the “Share Pool”), provided that 2,000,000 shares of the Law ManagementShare Pool is reserved for issuance to eligible participants providing services to Action Holdings Financial Limited and Law Agentits subsidiaries. Eligibility to participate is open to officers, directors and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Managementemployees of, and Law Agentother individuals (including sales agents who are under the process of liquidation.
Pursuant to the provisions of the AHFL Acquisition Agreement, the Company was to pay NT$15 million (US$468,926) on or prior to March 31, 2013 and NT$7.5 million (approximately US$234,463) subsequent to March 31, 2013 in cash in two installments, subject to certain terms and conditions. In addition the Company agreed to (i) issue 8,000,000 shares of common stockexclusive agents of the Company or its subsidiaries or derive more than 50% of their income from those entities) who provide bona fide services to the shareholdersor for, us or any of AHFL; (ii) issue 2,000,000 shares of common stock of the Company to certain employees of Law Insurance Broker Co., Ltd. (“Law Broker”), a subsidiary of AHFL;our subsidiaries. Given that metrics for evaluating performance goals are rather complex and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of the Company.
On March 14, 2013, the Companyexhaustive, and the selling shareholders of AHFL entered into an Amendment to the AHFL Acquisition Agreement (the “First Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the AHFL Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agreed to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS common stock, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of the Company (including Law Broker employees).
On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the AHFL Acquisition Agreement (the “Second Amendment”), pursuant to which the cash payment deadline as set forth in the Acquisition Agreement was extended from March 31, 2015 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL.
On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the AHFL Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company is committed to complete the listing ofthat the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least US$10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NT$22.5 million (US$685,059), on a pro rata basis, to the selling shareholders of AHFLmanagement and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the Selling Shareholders as if the said acquisition had never happened. If the Company fails to meet either of these criteria and the shareholders of AHFL exercise their right to unwind the Acquisition of AHFL by CUIS, the business and financial prospects of the Company may be severely negatively affected. The Company is doing its best to achieve the targeted milestones as set forth in the third Amendment to the Acquisition Agreement. However, given the tight schedule and harsh general environment, despite every efforts of the Company, it might be really difficult for the Company to do so within the stipulated deadline. Therefore, the Company is actually negotiating with the Selling Shareholders of AHFL to convince them to give up such termination rights in case of failure to comply with the first and second requirements under Third Amendment within the stipulated deadline while continuously using its best efforts to fulfill such obligations.
On January 17, 2014, the Board of Directors are still working to develop a series of reward policies that specify various performance target levels and the size of the Company approved a change in our fiscal year end from June 30award or payout of performance shares with respect to each different target level attained, no awards were granted under the 2017 Plan as of December 31.
On April 23, 2014, AHFL entered into a capital increase agreement (the “Agreement”) with Chun Kwok Wong (“Mr. Wong”), the owner of Prime Financial Asia Ltd. (PFAL) which is a re-insurance broker company residing in Hong Kong. Upon the Agreement, Mr. Wong would increase PFAL’s registered capital from HK$500,000 ($64,424) to HK$1,470,000 ($189,404), and AHFL would contribute HK$1,530,000 ($197,133) to PFAL’s registered capital. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.31, 2017.
AHFL holds 51% of the issued and outstanding shares of PFAL. PFAL incorporated (i) Max Key Investment Ltd. (“MKI”), a company limited by shares incorporated in British Virgin Islands, on August 7, 2015, and (ii) Prime Technology Consulting (Nanjing) Co., Ltd. (“PTC Nanjing”), a company limited by shares incorporated in Nanjing on August 15, 2015.
On September 3, 2015, MKI incorporated Prime Technology Consulting Co., Ltd. (“PTC Taiwan”), a company limited by shares incorporated in Taiwan. MKI is a holding company for its operating subsidiaries in Taiwan. PTC Taiwan primarily engages in insurance platform establishment and related information technology consulting service business across Taiwan.
On February 13, 2015, the Company and AHFL entered into an acquisition agreement with Mr. Chwan Hau Li, the selling shareholder of Genius Holdings Financial Limited (the “Selling Shareholder”), a company with limited liability incorporated under the laws of British Virgin Islands (“GHFL”) (the acquisition agreement hereafter referred to as the “Genius Acquisition Agreement”), to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock (“AHFL Shares”) together with an granted put option for 352,166 shares of common stock of the Company (“Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the Selling Shareholder would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of the Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds approximately 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. The acquisition price may be further adjusted on the fourth anniversary of the closing date of the acquisition and depending on the earnings per share of GHFL during the fiscal years of 2014 through 2017, subject to other terms and conditions therein. Mr. Chwan Hau Li is the sole shareholder of GHFL and a director and shareholder of the Company. On February 13, 2015, the acquisition was completed, the Selling Shareholder transferred 100% shares in GHFL to AHFL. On March 31, 2015, the Selling Shareholder exercised the Put Option, pursuant to which, 704,333 shares of GHFL held by the Selling Shareholder were transferred back to CUIS as the consideration for 352,166 shares of common stock of CUIS, which were issued to the Selling Shareholder on April 29, 2015.
On February 17, 2016, the Company and AHFL entered into an Amendment 2 to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Li, pursuant to which, on or prior to February 28, 2016, (i) the Company is committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least USD 10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised. The right to revoke the Put Option has not been exercised as of March 24, 2016.
Please refer to the chart below for detailed information of the Company’s shareholders who serve as a director or officer of the Company, the Company’s subsidiaries, or the Consolidated Affiliated Entities.
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See “Related Party Transactions” for further information on our contractual arrangements with these parties.
The following flow chart illustrates our Company’s organizational structure:structure as of March 14, 2018:
Products and Services
Law Broker and Anhou market and sell to customers two broad categories of insurance products: life insurance products and property and casualty insurance products, both focused on meeting the particular insurance needs of individuals. The insurance products that Law Broker and Anhou sell are underwritten by some of the leading insurance companies in Taiwan and China, respectively.
Through Anhou’s wholly-owned insurance brokerage firm Jiangsu Law, it also closely interacts with insurance companies and actively locates and introduces the right customers in Anhou’s database matching the insurance products offered by such insurance companies to them.
Law Broker and Anhou are compensated primarily by commissions and fees paid by insurance companies, typically based on a percentage of the premium paid by the insured or a percentage of the amount recovered from insurance companies. Commission and fee rates generally depend on the type of insurance products, the particular insurance company.
Life Insurance Products
Law Broker
The life insurance products Law Broker distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products Law Broker distributes combine features of one or more of the categories listed below. Total net revenues from life insurance products distributed by Law Broker in the 2017 fiscal year was approximately $55.96 million, accounted for 94 %approximately 93.43% of Law Broker’s total net revenues inand approximately 76.81% of our total net revenues for the fiscal year ended December 31, 2015. Total net revenues from life insurance products distributed by Law Broker accounted for 89.8% of CUIS’ total net revenues of life insurance in the fiscal year ended December 31, 2015.2017, respectively.
| · | Individual Whole Life Insurance.The individual whole life insurance products Law Broker distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interest is paid upon the death of the insured. |
| · | Individual Term Life Insurance.The individual term life insurance products Law Broker distributes provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years. Term life insurance policies generally expire without value if the insured survives the coverage period. |
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| · | Individual Health Insurance.The individual health insurance products Law Broker distributes pay the insured amount of reasonable hospitalization cost, or certain death benefit in case of the death of the insured, due to |
| · |
| · |
| · | Foreign Currency |
| · | Travel Accident |
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The life insurance products Law Broker distributed in the fiscal year ending December 31, 20152017 were primarily underwritten by, in alphabetical order, AIA International Limited Taiwan Branch, Farglory Life Insurance Co., Ltd., CTBC Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and AIA International Limited,TransGlobe Life Insurance Inc. Among them, Farglory Life Insurance Co., Ltd., Taiwan Branch.Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc. accounted for approximately 25.41%, 12.45%, and 11.18% of our total net revenues in the fiscal year ending December 31, 2017, respectively.
Anhou
The life insurance products Anhou distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products Anhou distributes combine features of one or more of the categories listed below. Total net revenues from life insurance products in the 2017 fiscal year was approximately 9.67 million, accounted for 91.88%approximately 92.33% of Anhou’s total net revenues inand approximately 13.27% of our total net revenues for the fiscal year ending December 31, 2015.
Total net revenues from life insurance products distributed by Anhou accounted for approximately 10.2% of CUIS’ total net revenues of life insurance products in the fiscal year ending December 31, 2015.2017, respectively.
| · | Individual Whole Life Insurance.The individual whole life insurance products Anhou distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interest is paid upon the death of the insured. |
| · | Individual Term Life |
| · | Individual Endowment Life |
| · | Individual |
| · | Individual Health Insurance.The individual health insurance products Anhou distributes primarily consist of |
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The life insurance products Anhou distributed in the fiscal year ending December 31, 20152017 were primarily underwritten by, Taikangin alphabetical order, Aegon THTF Life Insurance Company, HuaxiaCo., Ltd., AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., AVIVA LifeHuaxia Insurance Co., Ltd., and Aegon THTFTaikang Life Insurance Co., Ltd.Company. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
In addition to the periodic premium payment schedules described above, most of the individual life insurance products we distribute also allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured, a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time. This means that once Anhou or Law Broker sells a life insurance policy with a periodic premium payment schedule, they will be able to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years. Because of this feature and the expected sustainedsustainable growth of life insurance sales in China and Taiwan, we have focused significant resources ever since the incorporationinception of Anhou and Law Broker on developing our capability to distribute individual life insurance products with periodic payment schedules. We expect that sales of life insurance products will continuouslycontinue to be our primary source of revenue in the next several years.
Property and Casualty Insurance Products
Law Broker
Law Broker’s main property and casualty insurance products are automobile insurance, casualty insurance, and liability insurance. Law Broker commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenues from property and casualty insurance products in the 2017 fiscal year was approximately $3.93 million, accounted for 6%approximately 6.57% of Law Broker’s total net revenues and approximately 5.40% of our total net revenues in the fiscal year ending December 31, 2015.2017, respectively.
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Total net revenues from property and casualty insurance products distributed by Law Broker accounted for 80.31% of CUIS’ total net revenues of property and casualty insurance products in the fiscal year ending December 31, 2015.
The property and casualty insurance products Law Broker distributes can be further classified into the following categories:
| · | Automobile Insurance.Law Broker distributes both standard automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies Law Broker sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. Law Broker also sells standard third party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Law Broker distributes cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches. |
| · | Casualty |
| · | Liability Insurance. |
The property and casualty insurance products Law Broker distributed in the fiscal year ending December 31, 20152017 were primarily underwritten by, Zurich Insurance Company,in alphabetical order, Fubon Insurance Co., Ltd., Union Insurance Company, ACE Insurance Company and TaianHotai Insurance Co., Ltd., Shinkong Insurance Co., Ltd., TLG Insurance Co., Ltd. and Union Insurance Company. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
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Anhou
Anhou’s main property and casualty insurance products are automobile insurance and commercial property insurance. Anhou commenced its sale of commercial property insurance in 2009 and had developed its automobile insurance business since 2010. Total net revenues from property and casualty insurance products distributed by Anhou in the 2017 fiscal year was approximately $0.8 million, accounted for 8.12%approximately 7.67% of Anhou’s total net revenues inand approximately 1.10% of our total net revenues for the fiscal year ending December 31, 2015.
Total net revenues from property and casualty insurance products distributed by Anhou accounted for 19.69% of CUIS’ total net revenues of property and casualty insurance products in the fiscal year ending December 31, 2015.2017.
The property and casualty insurance products Anhou distributes can be further classified into the following categories:
| · | Automobile Insurance.Automobile insurance is the largest segment of property and casualty insurance in the PRC in terms of gross written premiums. Anhou distributes both standard automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies Anhou sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. Anhou also sells standard third party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Anhou distributes cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches. |
| · | Commercial Property Insurance.The commercial property insurance products Anhou distributes include basic, comprehensive and all risk policies. Basic commercial property insurance policies generally cover damage to the insured property caused by fire, explosion and thunder and lightning. Comprehensive commercial property insurance policies generally cover damage to the insured property caused by fire, explosion and certain natural disasters. All risk commercial property insurance policies cover all causes of damage to the insured property not specifically excluded from the policies. |
The property and casualty insurance products Anhou distributed in the fiscal year ending December 31, 20152017 were primarily underwritten by, in alphabetical order, China Life Property and Casualty Insurance Co., Ltd., China Pacific (Group) Co., Ltd., Huatai P&C Insurance Co., Ltd., PICC Property and Casualty Co., Ltd., China Pacific Insurance (Group) Co., Ltd., Cathayand Tianan Property Insurance Co., Ltd., China Life Property &Casualty Insurance Co., Ltd. and Fubon Property& Casualty Insurance Co., Ltd. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
Strategic Alliance with AIATW
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”). The, the purpose of the Alliance Agreementwhich is to promote life insurance products provided by AIATW within the territory ofin Taiwan by insurance agency companies or insurance brokerage companies affiliated with AHFL or CUIS. The original term of the Alliance Agreement iswas from April 15,June 1, 2013 to AugustMay 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW shallwas required to pay AHFL an execution fee of $8,367,947$8,326,700 (NT$ 250,000,000). The fee will to be recorded as revenue upon fulfilling sales target over the next five years. As of September 23, 2013, AHFL hashad received $8,367,947$8,326,700 (NT$250,000,000) from AIATW under the Alliance Agreement. Pursuant to the Alliance Agreement, AHFL iswas entitled to the payment of the execution fee, subject to certain terms and conditions therein, including the satisfaction of the performance targets and the threshold 13-month persistency ratio. The execution fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFL entered into an Amendment to Strategic Alliance Agreement (the “Amendment”“First Amendment to Alliance Agreement”) with AIATW.
Pursuant to the First Amendment to Alliance Agreement, the expiration date of the Strategic Alliance Agreement has beenwas extended from May 31, 2018 to December 31, 2020. In addition, both AHFL and AIATW agreeagreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, including the downward adjustment of the performance targets as well as the mechanism and formula calculating the execution fee to be refunded, if any.
On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”“Second Amendment to Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”)AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW.
Pursuant to the Second Amendment No. 2,to Alliance Agreement, the expiration date of the Strategic Alliance Agreement has beenwas extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 has beenwas suspended. In addition, both AHFL and AIATW agree to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of execution fees. On March 15, 2016, AHFL unilaterally issued a confirmation letter to AIATW (the “2016 Letter”), where it emphasized its commitment to achieve certain sales targets within a specific time frame and covenanted to refund a certain portion of Execution Feesexecution fees calculated based on the formula therein upon failure to achieve such sales target, as applicable.
On June 14, 2017, AHFL entered into an Amendment 3 (the “Third Amendment”) to the Alliance Agreement with AIATW to further revise certain provisions in the Alliance Agreement and the previous amendments to the Alliance Agreement entered into by and between AHFL and AIATW.
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Pursuant to the Third Amendment, except for the first contract year (April 15, 2013 to September 30, 2014), the sales targets for the remaining contract term under the Alliance Agreement shall be changed by reference to (i) the amount of the value of new business (“VONB”) and (ii) the 13-month persistency ratio as set forth therein, provided that to the extent any underlying insurance contract is revoked, invalid or terminated and premiums is refunded to such policyholder, the amount of the related VONB shall be correspondingly reduced. Both AHFL and AIATW agreed to calculate the business promotion fees (equivalent to the “execution fee” referred above) to be returned in case of failure to achieve the sales targets or the fees to be increased in case of exceeding the sales targets, as the case may be, based on two formulas specified in the Third Amendment. The primary factor under formula one focuses on the annual and/or accumulated achievement rate(s), while the primary factor under formula two focuses on the 13-month persistency ratio(s), subject to terms and conditions therein. The expanded scope of services to be provided by AHFL to AIATW as set forth in Section 4 of New Second Amendment is removed under the Third Amendment as well.
On June 14, 2017, with AIATW's consent, the 2016 Letter was revoked in order to conform to the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in the Third Amendment.
Online Business
In recent years, the online insurance business has experienced rapid growth. Many insurance companies, portal websites and professional insurance intermediaries have begun launching its e-commerce platforms, providing real-time information to consumers and allowing consumers to directly complete transactions online. Law Broker began developing its online platform in 2016, and became the first brokerage company to receive formal approval from the Financial Supervisory Commission of Taiwan (“FSC”) to commence online business on May 9, 2016. The platform, SARAcares (website: https://www.saracares.com.tw), was launched on January 26, 2017. It offers a broad range of insurance products underwritten by multiple insurance companies, policy comparison features, and post-sale services that are backed by our online service staffs and nationwide sales network. As required by the relevant laws and regulations regarding e-commerce provided by the FSC, Law Broker obtained the ISO 27001 certification of Information Security Management System (ISMS) and BS 10012 certification of Personal Information Management System on June 20, 2017. Our online business in Taiwan is still at a nascent stage with the majority of the sales still being completed by off-line agents.
Unified Operating Platform
Law Broker has its own self-developedself-constructed a Unified Operating Platform.Platform, an information technology infrastructure that serves to enhance operational, sales processes, and administrative efficiency. Since Law Broker’s establishment in 1992, it has successfully implemented the following components of its operating platform across its branch offices in Taiwan through a hub center located in Taipei:
| · | A centralized |
| · | A centralized client relations management system, that manages and analyzes client interactions to drive sales growth; |
| · | An integrated administrative and information system, that increases the management efficiency among the subsidiaries, branches and sales departments; |
| · | A centralized and computerized accounting and financial management system, that |
| · | A human resources management and |
| · | An |
Through years of operation, the
The Unified Operating Platform has proved to be an efficient and streamlined operating system which contributeshas contribute to the successful expansion and growth of Law Broker into one of the leading insurance brokerage companies in Taiwan, with 2630 sales and service outlets (including the headquarter)headquarters) across Taiwan and 2,3292,609 employees and insurance sales professionals as of December 31, 2015.2017.
In accordance with our growth strategy in China, Anhou has made significant effort to adapt the Unified Operating Platform utilized by Law Broker to better meet the operational need in China. Since September 2010, Anhou has successfully implemented the tailored operating platform across the PRC subsidiaries through a hub center located in Nantong, Jiangsu province. We expect that this tailored operating platform will make selling easier for sales agents in China, facilitate standardized business and financial management, enhance risk control and increase operational efficiency for the PRC subsidiaries.
Anhou has tailored and refined the platform on the basis of Law Broker’s well-developed operating platform in Taiwan and believes that it is difficult for our competitors in China, particularly new market entrants, to reproduce a similar platform without substantial financial resources, time and operating experience.
Because the various systems, policies and procedures under both of operating platforms utilized by Law Broker and Anhou can be rolled out quickly as we enter new regions or make acquisitions, we believe we can expand our distribution network rapidly and efficiently while maintaining the quality of our services.
Distribution and Service Network and Marketing
Since Law Broker’s establishment in 1991,1992, it has devoted substantial resources into building up its distribution and service network. Law Broker currently has 2630 sales and service outlets spread across Taiwan (including the headquarters), among which, 610 are located in the northern region, 1413 are located in the central region, 35 are located in the southern region and 2 are located in the eastern region. As of December 31, 2015,2017, Law Broker had 2,1692,414 sales professionals and 160195 administrative staff members.
The following table sets forth some additional information of Law Broker’s distribution and service network by region as of December 31, 2015, broken down by the four regions:2017:
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| Number of | ||||||||
| Province | Number of Sales and Service Outlets | Sales Professionals | ||||||
| Northern region | 7 | 527 | ||||||
| Southern region | 3 | 343 | ||||||
| Central region | 14 | 1,256 | ||||||
| Eastern region | 2 | 53 | ||||||
| Total | 26 | 2,169 | ||||||
| Region | Number of Sales and Service Outlets | Number of Sales Professionals | ||||||
| Northern region (including the headquarter) | 10 | 703 | ||||||
| Southern region | 5 | 507 | ||||||
| Central region | 13 | 1,162 | ||||||
| Eastern region | 2 | 42 | ||||||
| Total | 30 | 2414 | ||||||
Law Broker markets and sells life insurance products, property and casualty insurance products directly to the targeted customers through the sales professionals, who are independent contractors, not its employees.
Since Anhou’s establishment in 2003, it has devoted substantial resources in building up its distribution and service network. Anhou has targeted its distribution and service network in provinces with most population in China, such as Henan, Jiangsu, and Sichuan,. Fujian, Guangdong, Yunnan. As of December 31, 2015,2017, Anhou hashad two insurance agencies and one insurance brokerage firm, with 4,7112,715 sales professionals and 140116 administrative staff members operating across 3643 cities within these threesix provinces.
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The following table sets forth some additional information of Anhou’s distribution and service network by province as of December 31, 2015, broken down by provinces:2017:
| Province | Number of Sales and Service Outlets | Number of Sales Agents | Number of Sales and Service Outlets | Number of Sales Agents | ||||||||||||
| Henan | 37 | 4,496 | 30 | 1,536 | ||||||||||||
| Sichuan | 5 | 206 | 7 | 572 | ||||||||||||
| Jiangsu | 1 | 9 | 3 | 392 | ||||||||||||
| Fujian | 1 | 203 | ||||||||||||||
| Guangdong | 1 | 12 | ||||||||||||||
| Yunnan | 1 | - | ||||||||||||||
| Total | 43 | 4,711 | 43 | 2,715 | ||||||||||||
Anhou markets and sells life insurance products, property and casualty insurance products directly to the targeted customers through the sales agents, who are independent contractors, not its employees.
Customers
As of December 31, 2015,2017, Law Broker had approximately 451,422545,292 customers, among which approximately 83%81.6% purchased life insurance products and approximately 17%18.4% purchased property and casualty insurance products from Law Broker.
Due to its extensive line of insurance products underwritten by the insurance companies in Taiwan, Law Broker managed to offer a variety of insurance products to customers of different ages or professions. However, as an aging population in Taiwan has gradually become a more recognized social issue, despite relatively healthy government-sponsored retirement and medical programs, more and more Taiwanese, especially those with stable financial means and aiming for high-end retirement and medical treatment, have been focusing on endowment and medical type of commercial insurance products, while the investment type of insurance products have been playing a less significant role since the economic downturn.
In addition, from time to time, Law Broker has been, either voluntarily or upon request of insurance companies, advising insurance companies or providing feedback on particular types of insurance products before they are put on the market. This interaction with insurance companies has not only enhanced the close cooperation between Law Broker and the insurance companies, but also gives it an edge in understanding the in-depth features of such insurance products for marketing and distribution purposes.
Law Broker sells automobile insurance and casualty insurance primarily to individual customers. Law Broker sells liability insurance to institutional customers.
As of December 31, 2015,2017, Anhou had 31,20747,257 customers, among which 30,99799% purchased life insurance products and 2101% purchased property and casualty insurance products from Anhou.
Anhou sells automobile insurance and individual accident insurance primarily to individual customers. Anhou sells commercial property insurance to institutional customers.
Anhou targeted middle class individuals and family members under 50 years age to be its priority clients, which represents 86.3% of its client base. The revenues of Anhou are primarily generated from the sale of life insurance products and we expect the continuous growth in this regard, as more and more customers in China realized the insufficiency of the mandatory social insurance coverage and the necessity to supplement it with commercial insurance. With the implementation of the national one-child policy through the past decades in China, approximately 35% of the insurance policies distributed by Anhou have designated children under 14 years age as the beneficiary of such policies, Anhou expects the continuous growth of insurance market of these factors in the near future.
In the fiscal year ended December 31, 2015, no single customer accounted for more than 3% of the net revenues of CUIS, Law Broker or Anhou.
Insurance Company Partners
We are selective in terms of choosing insurance companies as our partners. We take into consideration a variety of factors, such as the reputation and integrity of the insurance company, the quality and competitiveness of insurance products offered, the prudence and health of the financial standing of the insurance company as well as the complexity and efficiency of claim adjustment and settlement. During years of operation, both Law Broker and Anhou have formed strategic relationships with numerous insurance companies in Taiwan and China, respectively, as of December 31, 2015,2017, Law Broker had established business relationships with 1923 insurance companies in Taiwan and Anhou had established business relationships with 34insurance34 insurance companies in China.
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On June 10, 2013, AHFL entered into an Alliance Agreement with AIATW. The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan by insurance agency companies or insurance brokerage companies affiliated with AHFL or CUIS. The term of the Alliance Agreement is from April 15, 2013 to August 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW shall pay AHFL an execution fee of $8,367,947(NT$ 250,000,000). The fee will be recorded as revenue upon fulfilling sales target over the next five years. As the date of September 23, 2013, AHFL has received $8,367,947 (NT$250,000,000) from AIATW. Pursuant to the Alliance Agreement, AHFL is entitled to the payment of the execution fee, subject to certain terms and conditions therein, including the satisfaction of the performance targets and the threshold 13-month persistency ratio. The execution fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFL entered into an Amendment to Strategic Alliance Agreement (the “Amendment”) with AIATW. Pursuant to the Amendment, the expiration date of the Strategic Alliance Agreement has been extended from May 31, 2018 to December 31, 2020. In addition, both AHFL and AIATW agree to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, including the downward adjustment of the performance targets as well as the mechanism and formula calculating the execution fee to be refunded, if any.
On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW.
Pursuant to the Amendment No. 2, the expiration date of the Strategic Alliance Agreement has been extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 has been suspended. In addition, both AHFL and AIATW agree to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of execution fees. On March 15, 2016, AHFL unilaterally issued a confirmation letter to AIATW, where it emphasized its commitment to achieve certain sales targets within a specific time frame and covenanted to refund a certain portion of Execution Fees calculated based on the formula therein upon failure to achieve such sales target, as applicable.
In the fiscal year ended December 31, 2015,2017, Law Broker’s top fivemajor insurance company partners, after aggregating the business conducted between Law Broker and the various local branches of the insurance companies were AIATW, Farglory Life Insurance Co., Ltd., CTBC Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., TransGlobalShin Kong Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd., and AIA International Limited, Taiwan Branch.TransGlobe Life Insurance Inc., arranged in alphabetical order. Among them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc., accounted for 81.79%approximately 25.41%, 12.45% and 11.18% of Law Broker’sthe Company’s total net revenues from commissions and fees infor the fiscal year endingended December 31, 2015.2017, respectively.
In the fiscal year ended December 31, 2015,2017, Anhou’s top fivemajor insurance company partners, after aggregating the business conducted between Anhou and the various local branches of the insurance companies were TaikangAegon THTF Life Insurance Co., Ltd., HuaxiaAVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., AVIVA LifeHuaxia Insurance Co., Ltd., and Aegon THTF Life Insurance Co., Ltd.. Among them, Taikang Life Insurance Co., Ltd., arranged in alphabetical order. None of these insurance company partners accounted for 13.91%more than 10% of Anhou’sour total net revenues from commissions and fees infor the fiscal year endingended December 31, 2015.2017.
Competition
A number of industry players are involved in the distribution of insurance products in Taiwan and PRC. We compete for customers on the basis of product offerings, customer services and reputation. Because we primarily distribute individual insurance products, our principal competitors include:
| · | Professional insurance intermediaries.Life insurance is our core business and has a strong regional feature. Through years of business development, we believe that we can compete effectively with other insurance intermediary companies as we have a longer operational history and over the years have assembled a strong and stable team of managers and sales professionals. With the implementation of our unified operating platform, we believe that we could strengthen our lead in our developed local regions and expand our operation to our newly selected areas. However, with increasing consolidation expected in the insurance intermediary sector in the coming years, we expect competition within this sector to intensify. |
| · | Insurance companies.The distribution of individual life insurance products in Taiwan and China historically has been dominated by insurance companies, which usually use both in-house sales force and exclusive sales agents to distribute their own products. We believe that we can compete effectively with insurance companies because we focus only on distribution and offer our customers a broad range of insurance products underwritten by multiple insurance companies. |
| · | Other business entities.In recent years, business entities that distribute insurance products as an ancillary business, primarily commercial banks and postal offices have been playing an increasingly important role in the distribution of insurance products, especially life insurance products. However, the insurance products distributed by these entities are usually confined to those related to their main lines of business, such as investment-related life insurance products. We believe that we can compete effectively with these business entities because we offer our customers a broader variety of products. |
Law Broker is one of the leading insurance brokerage firms in Taiwan. During the past two decades, Law Broker has expanded its business across Taiwan, with 2630 sales and service outlets (including the headquarters) and 2,1692,414 sales professionals and 160195 administrative staff members spread over the four regions of Taiwan as of December 31, 2015.2017. Other than insurance companies and commercial banks, Law Broker’s primary competitors are Taiwan insurance brokerage companies of relatively large size, such as Everpro Insurance Brokers Co., Ltd.
Awards and Recognitions
Through years of operation, Law Broker has won numerous awards frombeen recognized by various Taiwanorganizations and government authoritiesentities for its excellencebest practices in the insurance brokerage industry. Among which, from year 2005 to year 2008, Law Broker has wonEspecially noteworthy is the “Taiwan Insurance Excellence Award - Talent Training” for four consecutive years,Award”, the “Taiwan Insurance Excellence Award - E-commerce”highest acclaim in 2009, the "Taiwan Insurance Excellence Award - Customer Service and Personal Training” in 2011, the “Taiwan Insurance Excellence Award - Golden Medal for Information Application, Silver Medal for Personnel Training and Silver Medal for Customer Service” in 2013, the “Insurance Dragon and Phoenix Award” in 2012 and 2013 as well as the Most Desirable Insurance Brokerage Company of Finance Insurance Graduates in 2013. In 2015, Law Broker won the “Insurance Dragon and Phoenix Award” and the “Taiwan Insurance Excellence Award - Silver Medal for Personnel Training and Silver Medal for Customer Service”. The “Taiwan Insurance Excellence Award" is one of most prestigious as well as well-participatedTaiwan insurance events in Taiwan,industry, co-sponsored by the Taiwan Insurance Institute, Taiwan Financial Supervisory CommitteeFSC and Taiwan Consumer Protection Committee, to encourage the insurance industry participants to actively enhance insurance service quality as well as to improve customer services.Committee.
| Year of Award | Award/Recognition |
| 2017…………. | Seventh Taiwan Insurance Excellence Award Excellence in Talent Training Award–Gold Medal Excellence in Corporate Social Responsibility Award–Silver Medal Excellence in Digital Application Award–Silver Medal Excellence in Customer Service–Silver Medal |
| 2015…………. | Sixth Taiwan Insurance Excellence Award Excellence in Talent Training Award–Silver Medal Excellence in Customer Service–Silver Medal |
| 2013…………. | Fifth Taiwan Insurance Excellence Award Excellence in Digital Application Award–Gold Medal Excellence in Talent Training Award–Silver Medal Excellence in Customer Service–Silver Medal |
| 2011…………. | Fourth Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in Customer Service |
| 2009…………. | Third Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in E-Commerce Excellence in Customer Service–Nomination |
| 2007…………. | Second Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in Corporate Social Responsibility–Merit Award |
| 2005…………. | First Taiwan Insurance Excellence Award Talent Training Excellence Award |
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During the past 1214 years, Anhou has expanded its business across 3643 cities within Henan, Sichuan, Jiangsu, Fujian, Guangdong and JiangsuYunnan provinces with 4,7112,715 sales professionals and 140116 administrative staff members. Based on the insurance products Anhou is offering and the geographic areas of its branch offices, Anhou’s primary competitors are small-sized and middle-sized insurance agency companies. Anhou is relatively larger in terms of the number of salesmen as well as the sales revenue comparing to those competing insurance agency companies. On April 20, 2012, Anhou obtained the nationwide license from CIRC, pursuant to which Anhou may set up its branch office across the PRC to carry out the insurance agency business with no further approval requirement from CIRC other than filing with the local CIRC at the provincial level.
On March 26, 2012, CIRC issued the Notice on Suspension of Market Entry Approval of Regional Insurance Agencies and Certain Part-time Insurance Agencies (“2012 Notice”). Pursuant to the 2012 Notice, CIRC and its local counterparts will suspend granting any new license to full-time insurance agencies operating on a regional basis (“Regional Insurance Agencies”) as well as to branch offices of existing Regional Insurance Agencies. In addition, no new license for part-time insurance agency businesses will be granted unless such applicant is a financial institution or a China Post office. However, CIRC emphasized in the 2012 Notice that its local counterparts shall continue to support the establishment of insurance intermediary groups and full-time insurance agencies operating on a nationwide basis, as well as continue to support their respective branch offices.
As indicated in the 2012 Notice, it appears that CIRC is aiming to increase the entry thresholds of Regional Insurance Agencies and part-time insurance agencies with a view to reducing the number, as well as, enhancing the quality of insurance agencies in the market. CIRC has also indicated in the 2012 Notice that it intends to further amend related rules and regulations to improve the market entry and exit mechanism for insurance agencies, and promote the professionalism as well as enhance the quality of insurance agencies in the market.
On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).million.
On May 16, 2013, CIRC issued the 2013 Notice, for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million, ($8.1 million), can continuously operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
With the promulgation and implementation of the above-mentioned regulations, we expect a better regulated insurance agency market in China with orderly competition and pursuit for professional excellence, which will accentuate our competitive advantage due to our continuous commitment to quality service. On October 24, 2013, Anhou has increased its registered capital to RMB50 million ($8,165,890). As of the date of filing of this Annual Report on Form 10-K, Anhou is one of the approximately 100 insurance agencies with a PRC nationwide license.million. We believe that we will be in a better position to obtain the full support expressly provided in the 20122013 Notice from the local CIRC on our expansion strategy nationwide.
Intellectual Property
To protect our intellectual property, we rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees, sales agents, contractors and others.
Law Enterprise Law Broker and Law AgentBroker jointly own the following registered trademarks in Taiwan:
the Service Mark of Law Insurance Broker Co., Ltd. under the registration number 01462327, with a 10-year validity from June 16, 2011 to June 15, 2021;
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the logo of Law Insurance Broker Co., Ltd. under the registration number 01604254, with a 10-year validity from October 16, 2013 to October 15, 2023;
the logo of Blue Magpie (藍鵲), under the registration number 01462329, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (定律(錠嵂) under the registration number 01462328, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (定律(錠嵂) under the registration number 01611772, with a 10-year validity from December 1, 2013 to November 30, 2023;
the logo of Bao Xian Tong and INS under the registration number 01580261 , with a 10-year validity from May 16, 2013 to May 15, 2023; and
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the logo of Magpie Baby under the registration number 01518573 , with a 10-year validity from May 16, 2012 to May 15, 2022.
the logo of Magpie Baby 2.0 under the registration number 01763557, with a 10 year validity from April 1, 2016 to March 31, 2026; and
the logo of SARACARES under the registration number 01876419 , with a 10 year validity from October 16, 2017 to October 15, 2027
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Law Broker has the following registered trademarks in Taiwan:Taiwan. All of the trademarks will be renewed for another 10-year before their respective expiry:
the logo of Blue Magpie Cycling Team Fleet, under the registration number 01340567, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Insurance Broker under the registration 01340565 , , with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Blue Magpie under the registration number 01340566, with a 10-year validity from December 1, 2008 to November 30, 2018; 
the logo of Symbiosis, Co-cultivation Co-Prosperity and Law Blue Magpie Picture under the registration number 01317020, with a 10-year validity from July 1, 2008 to June 30, 2018;
the logo of Education Training Blue Magpie under the registration number 01313467, with a 10-year validity from June 1, 2008 to May 31, 2018;
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the logo of Cartoon Blue Magpie under the registration number 01313464, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Little Blue Magpie under the registration number 01313468, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Triumph Blue Magpie under the registration number 01313465, with a 10-year validity from June 1, 2008 to May 31, 2018;
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the logo of Blue Magpie Fleet Picture under the registration number 01310350 , with a 10-year validity from May 1, 2008 to April 30, 2018; and
the logo of Fighting Blue Magpie under the registration number 01313466, with a 10-year validity from June 1, 2008 to May 31, 2018.
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Jiangsu Law has one registered trademark in China, the logo of Jiangsu Law:
Segments
The Company currently operates as three reporting segments. Revenues, net income and total assets can be found in Item 8 of Part II, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Employees
As of December 31, 2015,2017, Law Broker has a total of 160195 full-time employees and Anhou has 140116 full-time employees. Our employees are not represented by any collective bargaining agreement. We believe that we have good relations with our employees and we have never experienced a work stoppage.
Regulation
Taiwan Regulations of the Insurance Industry
The insurance industry in Taiwan is highly regulated. Financial Supervisory Committee of Republic of China, theThe FSC, is the regulatory authority responsible for the supervision of the insurance industry in Taiwan. Insurance activities undertaken within Taiwan are primarily governed by the Insurance Law and the related rules and regulations.
Insurance Law
The current principal regulation governing insurance in Taiwan is the Insurance Law, latestmost recently amended on January 8, 201431, 2018 by Legislative Yuan, which provided the initialbasic framework for regulating the insurance industry.
The Insurance Law defines several subjects ofparticipants in the insurance industry, such as insurer, insurance agency, insurance brokerage and insurance adjustor. It established requirements for form of organization, and qualifications and procedures to establish an insurance organization as well as separation of property insurance businesses and life insurance businesses. The Insurance Law distinguishes insurance between fire disaster, marine, land and air, liability, surety, and other casualty and property insurance businesses on the one hand, and life insurance, health insurance, casualty insurance and annuity businesses on the other. Unless permitted by the FSC, insurance companies are not allowed to engage in both types of insurance businesses.
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The insurers, insurance agencies, insurance brokerages and insurance adjustors must join the related industry associations, or they are prohibited from conducting business operation.
FSC
The FSC is in charge of the financial market and financial service industries, among the insurance industry and has the power to control the following items:
| 1. | Financial system and supervision policy. |
| 2. | The preparation, amendment and abolishment of financial laws and regulations. |
| 3. | Supervision and management of the financial institutions, include its establishment, revocation, abolishment, change, merger, dissolution, and business scope. |
| 4. | Development, supervision and management of financial market. |
| 5. | Inspection of financial institution. |
| 6. | Inspection on public listing company related to their securities market-related matters. |
| 7. | Foreign financial matters. |
| 8. | Protection of financial customers. |
| 9. | Dealing and penalizing the violation of related laws and regulations of finance. |
| 10. | Collection of and analysis on relevant statistic data related to financial supervision, management and inspection. |
| 11. | Other matters related to financial supervision, management and inspection. |
Regulation of Insurance Agents and Agencies
The current principal regulation governing insurance agents and agencies is the Regulations Governing Insurance Agents latest amended on June 18, 2015 by Insurance Bureau of FSC (the “Agent Rule”). An insurance agent stipulated under the Insurance Law refers to a person who is on behalf of the insurer to conduct agency business pursuant to the agency contract or the power of attorney and charges fees from the insurer. Depending on their focused insurance areas, i.e. property insurance and life insurance, insurance agents can be divided into property insurance agents and life insurance agents. No matter what insurance industry an insurance agent is engaged in, it must have one of the following qualifications: (1) having passed the insurance agency examination for professional and technical staff; (2) having passed the insurance agency qualification test; or (3) having obtained the agency practitioner certificate and practiced the same business. Those who have agent qualifications required by the Agent Rule may conduct business after they obtain the practitioner certificates under the name of themselves or the company they work for. An agency company must hire more than one agent to act as signatory(ies), and registered with the administrative authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If necessary, the administrative authority may, in its discretion, require the company to add more signatories. An insurance agent may only work for one insurance agency company as signatory at one time.
There are special requirements for agency companies, such as the name of an agent company must contain the words "insurance agency", and when an agency company applies to operate agency business, the minimum registered capital must be at least NT$5 million ($157,953) fully paid up in cash, according to which, insurance agency companies with business license obtained prior to the implementation of this latest Agent Rule shall adjust their registered capital within five years upon the its implementation.
The Practitioner Certificate
The practitioner certificate has a duration of five years, and must be renewed before expiration. In case an agent has the qualifications for both of property and life insurance, unless otherwise approved by the administrative authority, only one kind of insurance agency practitioner certificate may be obtained upon his selection.
Education and Training
There are two types of education and training for an insurance agent, pre-vocational and on-the-job education and training. An insurance agent must attend in pre-vocational education and training for at least 32 hours during the one year before applying for practicing insurance agency business and on-the-job education and training for at least 16 hours with law courses for no less than 8 hours per year, commencing after one year from the issuance of this latest Agent Rule.
Management of Insurance Agencies
The rules describing how to conduct insurance agency business concentrate on the concept that the agencies must take care of customers' matters in good faith. To ensure this concept is properly carried out, the rules require insurance agency companies must have legal compliance officers with one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories; (2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) having graduated from departments related to insurance or law departments of colleges and universities with more than three years working experience in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance Brokers and Brokerage Companies
The current principal regulation governing insurance brokers and brokerage companies is the Regulations Governing Insurance Brokers last amended on June 18, 201527, 2017 by Insurance Bureau of FSC (the “Broker Rule”). An insurance broker stipulated under the Insurance Law refers to a person who negotiates to conclude an insurance contract on behalf of the insured and charges fees from the insured. Depending on their focused insurance areas, i.e. property or life insurance, insurance brokers can be divided into property insurance brokers and life insurance brokers. No matter what insurance industry an insurance broker is engaged in, it must have one of the following qualifications: (1) have passed the insurance brokerage examination for professional and technical staff; (2) have passed the insurance brokerage qualification test; or (3) have obtained the insurance brokerage practitioner certificate and practiced the same business.
Those who have brokerage qualifications required by the Broker Rule may conduct business after they obtain the practitioner certificates under their own name or the company they work for. A brokerage company must hire more than one broker to act as signatory(ies), and registered with the administrative authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If necessary, the administrative authority may, in its discretion, require the company to add signatories. An insurance broker may only work for one insurance brokerage company as signatory at one time.
There are special requirements for brokerage companies, such as the name of an brokerage company must contain the words "insurance broker"“insurance broker”; when an brokerage company applies to operate brokerage business, the minimum registered capital must be at least NT$5 million ($157,953) fully paid up in cash, according to which, insurance brokerage companies with business license obtained prior to the implementation of this latest Broker Rule shall adjust their registered capital within five years upon the its implementation.
The Practitioner Certificate
The insurance broker practitioner certificate has a validation duration of five years, and must be renewed before expiration. In case a broker has the qualifications for both property insurance and life insurance, he may obtain both insurance brokerage practitioner certificates.
Education and Training
There are two types of education and training for an insurance broker, pre-vocational and on-the-job education and training. An insurance broker must attend pre-vocational education and training for at least 32 hours during the one year before applying for practicing insurance broker business and on-the-job education and training for at least 16 hours with law courses for no less than 8 hours per year, commencing after one year from the issuance of this latest Broker Rule.
Management of Insurance Brokerages
The rules describing how to conduct brokerage business concentrate on the concept that the brokerages must take care of customers' matters in good faith. To ensure that this concept is properly carried out, the rules require insurance brokerage companies must have legal compliance officers who have one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories; (2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) have graduated from college and university departments related to insurance or law with more than three years working experience in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance Salespersons
The current principal regulation governing individual insurance salespersons is the Rules on the Administration of Insurance Salespersons latest amended on September 14, 2010April 6, 2017 by Insurance Bureau of FSC (the “Salesperson Rule”). An insurance salesperson falling under the Insurance Law refers to a person who is engaged in attracting insurance business for insurance companies, insurance brokerage companies and insurance agency companies. A salesperson is not allowed to attract business for the company he belongs to unless he has completed the registration in accordance with the Salesperson Rules and has obtained the registration certificate. In order to obtain the registration certificate, an insurance salesperson must be at least 20 years old and has at least graduated from a senior high school or a senior vocational school or have an equivalent educational background. In addition, the salesperson must meet one of the following requirements: (1) passed the salesperson qualification examination held by relevant associations; or (2) have a valid the registration certificate. Once the salespersons passed the qualification examination, the relevant association will notify the company where the salesperson works, then the company will issue a registration certificate for the salesperson and file such registration certificate with the relevant authorities. The registration certificate is valid for five years and must be renewed before expiration. The salesperson must present the registration certificate before they start attracting insurance business. Unless approved by the company, the salesperson may not work for any other insurance company, insurance brokerage company or insurance agency company. The company supervises the work of the salesperson and is joint and severally liable for any damage caused by its salesperson.
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Education and Training
Salespersons must attend in education and training held by their companies every year, or the companies shall revoke the registration certificates of those who fail to attend such education and training.
The Salesperson Rule also stipulates the proper ways and manners to be followed by the salespersons in conducting their businesses and specifies the penalties in case of their violation of the Salesperson Rule.
Taiwan Regulations on Foreign Exchange
Foreign exchange regulation in Taiwan is primarily governed by the Ordinance of Foreign Exchange Administration, latest amended on April 29, 2009 (the “Foreign Exchange Ordinance”). Under the Foreign Exchange Ordinance, foreign exchange refers to foreign currency, bills and marketable securities. The authority managing the administration of foreign exchange is Ministry of Finance of Republic of China, while the authority managing the practical operation of foreign exchange business is Central Bank of Republic of China. The Foreign Exchange Ordinance also specifies the allocated power of Ministry of Finance and Central Bank, respectively. To the extent that any foreign exchange receipts, payments or transactions reach the threshold of NT$500,000 ($16,653) or equivalent in foreign currency, it must be reported to the Central Bank or its designated authorities. Upon incurrence of any of the following events, the State Council of Republic of China may determine and announce that for a period of time, to close the foreign exchange market, suspend or restrict all or partial foreign exchange payment, order a mandatory sale or deposit of all or partial foreign exchange into a designed bank, or dispose in any other manner as it deems necessary:
| · | the disorder in domestic or international economy to the detriment of the stability of Taiwan’s economy; or |
| · | Taiwan suffers serious trade deficit. |
Taiwan Regulation on Foreign Investment
The current principal regulation governing foreign investment is Statute For Investment By Foreign Investment RegulationNationals latest amended on November 19, 1997 (the “Investment Regulation”Statute”). Under the Investment Regulation,Statute, investment refers to any activities involving (1) holding share capital of a company incorporated in Taiwan; (2) establishing branches, wholly-owned or partnership enterprises in Taiwan; or (3) providing more than one-year term loan to the above-mentioned investee enterprises. The authority in charge of foreign investment is Ministry of Economic Affairs of Republic of China. The industries in Taiwan are categorized into permitted, restricted and prohibited foreign investment areas. Investors may apply for settlement of exchange in accordance with the annual yield of their investment or the allocation of surplus.
Eminent Domain
When the investment made by an investor constitutes less than 45% of the total amount of capital of the investee enterprise, and the investee enterprise has been expropriated or acquired by the government for the purpose of national defense, reasonable government compensation shall be paid to the investors. However, if the capital contribution made by the investor constitutes at least 45% of the total amount of capital of the investee enterprise and continues remaining above 45% for two decades since its establishment, then the government may not exercise its eminent domain power over such investee enterprise.
Taiwan Regulations on Tax
The current principal regulations governing tax in Taiwan include the following:
| · | Income Tax Law, latest amended on |
| · | The Implementation Rules of Income Tax Law, latest amended on September 30, 2014; |
| · | Value-Added and Non-Value-Added Business Tax Law, latest amended on |
| · | The Enforcement Rules of Value-Added And Non-Value-Added Business Tax Law, latest amended on |
Under the Income Tax Law, there are two kinds of income tax, comprehensive income tax for individuals and income tax for enterprises operating for profit, respectively.
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Individuals who have income with a source within Taiwan must pay comprehensive income tax on their income sourced within Taiwan; while non-resident individuals having income with a source within Taiwan, except otherwise provided in the Income Tax Law, shall pay tax based on the amount attributable to the sources of their income.
The enterprise with head office located in Taiwan shall pay profit-seeking income tax on its global income both within and outside Taiwan; while the enterprises with head office outside Taiwan shall only pay profit-seeking income tax on its business income sourced from within Taiwan.
Rate of Income Tax
The individual comprehensive income tax exemption threshold is NT$79,000 ($2,470)60,000 per person per year. Any income beyond such exemption threshold is subject to a progressive tax rate ranging from 5% to 40%.
With respect to enterprises operating for profit, the exemption threshold is NT$120,000 ($3,997).120,000. Any income beyond such exemption threshold is subject to 17%20% tax rate on its taxable income.
Sale of goods or service, import of goods in Taiwan are subject to a Value-Added or Non-Value-Added Business Tax. The Rate of business tax, except as otherwise stipulated in the relevant tax law, ranges from 2%5% to 10% as determined by the State Council of Taiwan.
PRC Regulations of the Insurance Industry
The insurance industry in the PRC is highly regulated. CIRC is the regulatory authority responsible for the supervision of the Chinese insurance industry. Insurance activities undertaken within the PRC are primarily governed by the Insurance Law and the related rules and regulations.
Initial Development of Regulatory Framework
The Chinese Insurance Law was enacted in 1995. This original insurance law, which we refer to as the 1995 Insurance Law, provided the initial framework for regulating the domestic insurance industry. Among the steps taken under the 1995 Insurance Law were the following:
| (a) | Licensing of insurance companies and insurance intermediaries, such as agencies and brokerages. The 1995 Insurance Law established requirements for minimum registered capital levels, form of organization, qualification of senior management and adequacy of the information systems for insurance companies, insurance agencies and brokerages. |
| (b) | Separation of property and casualty insurance and life insurance businesses. The 1995 Insurance Law distinguished insurance between property, casualty, liability and credit insurance businesses, on the one hand, and life, accident and health insurance businesses on the other, and prohibited insurance companies from engaging in both types of businesses. |
| (c) | Regulation of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and other unlawful conduct by insurance companies, agencies and brokerages. |
| (d) | Substantive regulation of insurance products. The 1995 Insurance Law gave insurance regulators the authority to approve the policy terms and premium rates for certain insurance products. |
| (e) | Financial condition and performance of insurance companies. The 1995 Insurance Law established reserve and solvency standards for insurance companies, imposed restrictions on investment powers and established mandatory reinsurance requirements, and put in place a reporting regime to facilitate monitoring by insurance regulators. |
| (f) | Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory authority, then the People’s Bank of China, was given broad powers under the 1995 Insurance Law to regulate the insurance industry. |
Establishment of the CIRC and 2002 Amendments to the Insurance Law
China’s insurance regulatory regime was further strengthened with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement reform in the insurance industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was amended in 2002 and the amended insurance law, which we refer to as the 2002 Insurance Law, became effective on January 1, 2003. The major amendments to the 1995 Insurance Law include:
| (a) | Authorizing the CIRC to be the insurance supervisory and regulatory body nationwide. The 2002 Insurance Law expressly grants the CIRC the authority to supervise and administer the insurance industry nationwide. |
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| (b) | Expanding the permitted scope of business of property and casualty insurers. Under the 2002 Insurance Law, property and casualty insurance companies may engage in the short-term health insurance and accident insurance businesses upon the CIRC’s approval. |
| (c) | Providing additional guidelines for the relationship between insurance companies and insurance agents. The 2002 Insurance Law requires an insurance company to enter into an agent agreement with each insurance agent that will act as an agent for such insurance company. The agent agreement sets forth the rights and obligations of the parties to the agreement as well as other matters pursuant to law. An insurance company is responsible for the acts of its agents when the acts are within the scope authorized by the insurance company. |
| (d) | Relaxing restrictions on the use of funds by insurance companies. Under the 2002 Insurance Law, an insurance company may use its funds to make equity investments in insurance-related enterprises, such as asset management companies. |
| (e) | Allowing greater freedom for insurance companies to develop insurance products. The 2002 Insurance Law allowed insurance companies to set their own policy terms and premium rates, subject to the approval of, or a filing with, the CIRC. |
2009 Amendments to the Insurance Law
The 2002 Insurance Law was amended again in 2009 and the amended insurance law, which we refer to as the 2009 Insurance Law, became effective on October 1, 2009. The major amendments to the 2002Insurance2002 Insurance Law include:
| (a) | Strengthening protection of the insured’s interests. The 2009 Insurance Law added a variety of clauses such as incontestable clause, abstained and estoppel clause, common disaster clause and amending immunity clause, claims-settlement prescription clause, reasons for claims rejection and contract modification clause. |
| (b) | Strengthening supervision on the qualification of the shareholders of the insurance companies and setting forth specific qualification requirements for the major shareholders, directors, supervisors and senior managers of insurance companies. |
| (c) | Expanding the business scope of insurers and further relaxing restriction on the use of fund by insurers. |
| (d) | Strengthening supervision on solvency of insurers with stricter measures. |
| (e) | Tightening regulations governing the administration of insurance intermediary companies, especially those relating to behaviors of insurance agents. |
According to the 2009 Insurance Law, the minimum registered capital required to establish an insurance agency or insurance brokerage as a company must comply with the PRC Company Law. The registered capital or the capital contribution of insurance agencies or insurance brokerages must be paid-up capital in cash. The 2009 Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage practitioners. The senior managers of insurance agencies or insurance brokerages must meet specific qualification requirements, and their appointments are subject to approval of the CIRC. Personnel of an insurance agency or insurance brokerage engaging in the sales of insurance products must meet the qualification requirements set by the CIRC and obtain a qualification certificate issued by the CIRC. Under the 2009 Insurance Law, the parties to an insurance transaction may engage insurance adjusting firms or other independent appraisal firms that are established in accordance with applicable laws, or persons who possess the requisite professional expertise, to conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance Law specifies additional legal obligations for insurance agencies and brokerages.
The 2009 Insurance Law was revised again on April 24, 2015, the 2015 Insurance Law, with an aim to further eliminate various administrative approvals as well as grant more market discretion to participants, among which, (i) the requirement of prior approval by CIRC to establish an insurance agency or an insurance brokerage; (ii) the requirement on personnel or senior managers of an insurance agency or an insurance brokerage to obtain certain relevant qualification certificate; or (iii) the requirement of prior approval for split, merger or change of organizational form of an insurance agency company or an insurance brokerage company.
On October 14, 2015, Legislative Affairs Office of the State Council circulated the Provisions on Amendment to Insurance Law (Draft) (the “2015 Draft Insurance Law”)for public opinion until November 14, 2015, with an aim to further grant market discretion to participants while strengthen supervision afterwards, among which, (i) allows insured funds to be invested in equity, insurance assets management products as well as financial derivative products for the purposes of risk management, (ii) allows pension insurance products to be provided, (iii) eliminate the limit on self-reserved insurance premiums of property insurance company, (iv) perfect the relevant rules and regulations, especially those on insurance solvency supervision, (v) strengthen the crackdown of illegal insurance activities, including substantially increased penalty fines, and (vi) impose certain measures for the protection of the insured, including a mandatory requirement of at least 20-day hesitation period for any life insurance with a term over one year and prohibition of any illegal disclosure, sale or otherwise provision of the insured’s personal information by insurance companies and intermediaries.
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The CIRC
The CIRC has extensive authority to supervise insurance companies and insurance intermediaries operating in the PRC, including the power to:
| (a) | promulgate regulations applicable to the Chinese insurance industry; |
| (b) | investigate insurance companies and insurance intermediaries; |
| (c) | establish investment regulations; |
| (d) | approve policy terms and premium rates for certain insurance products; |
| (e) | set the standards for measuring the financial soundness of insurance companies and insurance intermediaries; |
| (f) | require insurance companies and insurance intermediaries to submit reports concerning their business operations and condition of assets; order the suspension of all or part of an insurance company or an insurance intermediary’s business; |
| (g) | approve the establishment, change and dissolution of an insurance company, an insurance intermediary or their branches; |
| (h) | review and approve the appointment of senior managers of an insurance company, an insurance intermediary or their branches; and |
| (i) | punish improper behaviors or misconducts of an insurance company or an insurance intermediary. |
Regulation of Insurance Agencies
The principal regulation governing insurance agencies is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. According to the Agency Provisions, the establishment of an insurance agency is subject to minimum registered capital requirement and other requirements and the approval of the CIRC. The term “insurance agency” refers to an entity that engages in insurance agency business within the authorization of, and collects commissions from, insurance companies, including the professional insurance agency companies and their branches. The insurance agency shall meet the qualification requirements specified by the CIRC, obtain the license to conduct an insurance agency business with the approval of the CIRC. An insurance agency may take any of the following forms: (i) a LLC;limited liability company; or (ii) a joint stock limited company. An insurance agency must have a registered capital of at least RMB2 million ($313,332). Where it is established as a nationwide company, its registered capital must be at least RMB10 million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions (the “2013 Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million). On October 19, 2015, CIRC issued the Decision on Revising Eight Regulations including Provisions on Insurance Companies Setting up Offshore Insurance Organizations, which made certain revisions to the 2013 Agency Provisions (the “2015 Agency Provisions”), among which, (i) eliminate the requirement of prior approval by CIRC to establish an insurance agency; (ii) eliminate the requirement on personnel or senior managers of an insurance agency to obtain certain relevant qualification certificate; or (iii) eliminate the requirement of prior approval by CIRC on split, merger or change of organizational form of an insurance agency company.
On May 16, 2013, CIRC issued the 2013 Notice, for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agency established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
On September 17, 2015, CIRC issued Opinions on Deepening the Reformation of Insurance Intermediary Market (the “Reformation Opinions”), pursuant to which, CIRC will take further actions to simplify unnecessary administrative procedures, among which, the elimination of 8 administrative approvals, including the cancellation of previously required qualification certificate for insurance salesperson, the previously required approval for the split, merger, organizational change, set-up of branch office and exit of insurance agency and brokerage company. CIRC will also focus on (i) improving management over entry into and exit from insurance intermediary market and setting up a multilayered service system; (ii)encouraging and pushing forward reformation and innovation to improve intermediary service; (iii)strengthening self-management and supervision and promoting the improvement of industrial quality; (iv) placing stronger supervision and management and improving the comprehensive administrative efficiency; (v)focusing more on organizational construction and industrial self-control; and (vi) consummating information disclosure system and making better use of social supervision.
On September 29, 2016, CIRC circulated the Notice on Issuance of Business License to Insurance Intermediaries. In order to promote the sound and steady development of insurance intermediary market, CIRC instructed its local counterparts to focus on the followings factors while managing the business licenses of insurance intermediaries: (i) capital contributions to be self-owned, genuine and legal; (ii) registered capital to be deposited into an escrow account set up with qualified commercial bank; (iii) to maintain sufficient and valid professional liability insurance; (iv) reasonable and viable business model; (v) established corporate governance; and (vi) to undergo mandatorily required risk assessment.
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An insurance agency may engage in the following insurance agency businesses:
| (a) | selling insurance products on behalf of the insurer principal; |
| (b) | collecting insurance premiums on behalf of the insurer principal; and |
| (c) | conducting loss surveys and handling claims of insurance businesses on behalf of the insurer principal; and other business activities specified by the CIRC. |
The name of an insurance agency must contain the words “insurance agency” or “insurance sales.” The license of an insurance agency company is valid for a period of three years and may be renewed with due application 30 days prior to its expiration. An insurance agency must report to the CIRC when it (i) changes its registered name or the name of its branches; (ii) changes its registered address or the operating address of its branches; (iii) the sponsors or major shareholders change their respective name; (iv) changes its major shareholders; (v) changes its registered capital; (vi) materially changes its equity structure; (vii)changes its organizational form; (viii) split, merger; (ix) amends its articles of association; or (x) sets up or closes its branches. The senior managers of an insurance agency including its branches must meet specific qualification requirements set forth in the Agency Provisions. The appointment of the senior managers of an insurance agency including its branches is subject to review and approval of the CIRC.
Regulation of Insurance Brokerages
The principal regulation governing insurance brokerages is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. According to this Brokerage Provisions, the establishment of an insurance brokerage is subject to the approval of the CIRC. The term “insurance brokerage” refers to an entity provides brokerages service on the execution of the insurance contract between the insured and the insurance company based on the interests of the insured and collects commission as agreed, including the insurance brokerage companies and their branches, The insurance brokerage shall meet the qualification requirements specified by the CIRC and obtain the license to operate an insurance brokering business with the approval of the CIRC. Insurance brokering business includes both direct insurance brokering, which refers to brokering activities on behalf of insurance applicants or the insured in their dealings with the insurance companies, and reinsurance brokering, which refers to brokering activities on behalf of insurance companies in their dealings with reinsurance companies. An insurance brokerage may take any of the following forms: (i) a LLC;limited liability company; or (ii) a joint stock limited company. An insurance brokerage company must have a registered capital or capital contribution of at least RMB10 million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Brokerage Provisions (the “2013 Brokerage Provisions”), pursuant to which, CIRC has mandated any insurance brokerage established subsequent to the 2013Brokerage2013 Brokerage Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).On October 19, 2015, CIRC issued the Decision on Revising Eight Regulations including Provisions on Insurance Companies Setting up Offshore Insurance Organizations, which made certain revisions to the 2013 Agency Provisions (the “2015 Brokerage Provisions”), among which, (i) eliminate the requirement of prior approval by CIRC to establish an insurance brokerage company; (ii) eliminate the requirement on personnel or senior managers of an insurance brokerage company to obtain certain relevant qualification certificate; or (iii) eliminate the requirement of prior approval by CIRC on split, merger or change of organizational form of an insurance brokerage company.
On May 16, 2013, CIRC issued the 2013 Notice, for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance brokerage established prior to the issuance of the Decision on Revising the Brokerage Provisions, with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
On September 17, 2015, CIRC issued Opinions on Deepening the Reformation of Insurance Intermediary Market (the “Reformation Opinions”), pursuant to which, the following targets were erected for future reformation of insurance intermediary market: (i) improve management over entry into and exit from insurance intermediary market and set up a multilayered service system; (ii) encourage and push forward reformation and innovation and improve intermediary service; (iii) strengthen self-management and supervision and promote the improvement of industrial quality; (iv) place stronger supervision and management and improve the comprehensive administrative efficiency; (v) pay more attention to organizational construction and industrial self-control; and (vi) consummate information disclosure system and make better use of social supervision. The Reformation Opinions will be beneficial to both the improvement of reformation and development conducted by insurance intermediaries on their own and transformation and upgrading of the insurance intermediary market.
An insurance brokerage may conduct the following insurance brokering businesses:
| (a) | making insurance proposals, selecting insurance companies and handling the insurance application procedures for the insurance applicants; |
| (b) | assisting the insured or the beneficiary to claim compensation; |
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| (c) | reinsurance brokering business; and |
| (d) | providing consulting services to clients with respect to disaster and damage prevention, risk assessment and risk management; and other business activities specified by the CIRC. |
The name of an insurance brokerage must contain the words “insurance brokerage.” The license of an insurance brokerage company is valid for three years and may be renewed with due application 30 days prior to its expiration. An insurance brokerage must report to the CIRC when it (i) changes its registered name or the name of its branches; (ii) change its registered address or the operating address of its branches; (iii) the sponsors or the major shareholders change their respective name; (iv) changes its major shareholders; (v) changes its registered capital; (vi) materially changes its equity structure; (vii)changes its organizational form; (viii) split, merger; (ix) amends its articles of association; or (x) sets up or closes its branches. The senior managers of an insurance brokerage including its branches must meet specific qualification requirements set forth in the Brokerage Provisions. Appointment of the senior managers of an insurance brokerage including its branches is subject to review and approval by the CIRC.
On February 9, 2018, the CIRC issued the Provisions on the Regulation of Insurance Brokers (the “Provisions”), effective as of May 1, 2018. With a total of 109 articles in eight chapters, the Provisions highlight the improved market access and exit, the effective management of matters no long requiring licensing, the promotion of specialized and well-regulated operations, and the increased protection of consumers’ rights and interests. In particular, the Provisions make adjustments to optimize licensing procedures for insurance brokerage and tighten examination of shareholders of insurance brokerage firms; also, the Provisions set forth explicit requirements in respect of the source of capital contributed by shareholders, custodian of the registered capital, corporate governance and internal control, and information system, and standardize the requirements on qualifications of senior executives in brokerage firms.
Regulation of Insurance Salespersons
The principal regulation governing individual insurance salespersons is the Measures on the Supervision of Insurance Salespersons issued by the CIRC on January 6, 2013 and effective on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons promulgated on April 6, 2006 and effective on July 1, 2006. Under this regulation, the term “insurance salesperson” refers to an individual who sells insurance products for an insurance company, including those who are engaged by insurance companies or by insurance agencies. To engage in insurance sales activities as an insurance salesperson, a person first must pass the qualification examination for the insurance agency practitioners organized by the CIRC to obtain a “Qualification Certificate of Insurance Agency Practitioners”. The person must have a junior high school education or above to be qualified for the examination. In addition to the qualification certificate, a person must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Salespersons” issued by the insurance company or insurance agency to which he or she belongs in order to conduct insurance sales activities. On August 3, 2015, CIRC issued the Notice on Relevant Issues to Management of Insurance Intermediary Practitioners (the “2015 Notice”), pursuant to which, the qualification certificate is no more a pre-requisite condition for insurance intermediary practitioners to practice, instead, the insurance intermediary companies where such practitioners work shall complete the practitioners registration for them and conduct professional training. CIRC branches shall not accept any application for qualification approval of insurance salesperson (including insurance agency practitioners) any more.
Regulation of Insurance Brokerage Practitioner and Insurance Adjustment Practitioners
The principal regulation governing insurance brokerage practitioners and insurance adjustment practitioners is the Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners issued by the CIRC on January 6, 2013 and effective on July 1, 2013. To engage in the insurance brokerage activities as an insurance brokerage practitioner, or in the insurance adjustment activities as an insurance adjustment practitioner, a person first must pass the qualification examination organized by the CIRC for the insurance brokerage practitioners or for the insurance adjustment practitioners to obtain a “Qualification Certificate of Insurance Brokerage Practitioners” or a “Qualification Certificate of Insurance Adjustment Practitioners”. The person must have a tertiary education or above to be qualified for the examination. In addition to the qualification certificate, a person also must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Brokerage Practitioners” or “Practice Certificate of Insurance Adjustment Practitioners” issued by the insurance brokerage firm or insurance claims adjusting company to which he or she belongs in order to conduct insurance brokerage or claims adjustment activities. An insurance brokerage practitioner is not allowed to conduct insurance brokerage activities on behalf of himself or herself. On August 3, 2015, CIRC issued the 2015 Notice, on Relevant Issues to Management of Insurance Intermediary Practitioners (the “2015 Notice”), pursuant to which, the qualification certificate is no more a pre-requisite condition for insurance intermediary practitioners (including insurance adjustment practitioners) to practice, instead, the insurance intermediary companies where such practitioners work shall complete the practitioners registration for them and conduct professional training. CIRC branches shall not accept any application for qualification approval of insurance brokerage practitioners any more.
Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO
According to the Circular of the CIRC on Distributing the Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO, for the life insurance sector, within three years of China’s accession to the WTO on December 11, 2001, geographical restrictions were to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity services to Chinese citizens and foreign citizens, and no other restrictions allowed except those on the proportion of foreign investment (no more than 50%) and establishment conditions. For the non-life insurance sector, within three years of China’s accession, the geographical restrictions were to be lifted and no restrictions allowed other than establishment conditions. For the insurance brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded subsidiary companies was to be allowed, and no restrictions allowed other than establishment conditions and restrictions on business scope.
According to the latest Catalogue of Industries for Guiding Foreign Investment (2015 Revision) issued by Ministry of Commerce on March 10, 2015 with effective date on April 10, 2015, both the insurance agency and insurance brokerage do not fall into the prohibited or restricted category any more. On January 12, 2017, the State Council issued the Notice on Certain Measures to Strengthen Opening up and Utilization of Foreign Investment, pursuant to which, restrictions on foreign investors entry into the industry of insurance institutions and insurance intermediaries within China will be further relaxed. However, as these regulations are still relatively new, local CIRC counterparts may have different interpretations. Based on the consultation by the Company with the relevant local counterparts of CIRC, they are of the view that the proportion of foreign investment in insurance intermediaries shall not exceed 24.9%.
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PRC Regulations on Foreign Exchange
Foreign Currency Exchange
Foreign exchange regulation in China is primarily governed by the following rules:
| · | Foreign Currency Administration Rules (2008 Revision), as amended or revised, or the Exchange Rules; and |
| · | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), as amended or revised, or the Administration Rules. |
Under the Exchange Rules, the RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE or relevant authorities.
Under the Administration Rules, foreign-invested enterprises may only buy, sell or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Development and Reform Commission.
On June 9, 2016, SAFE issued the Notice on Reforming and Regulating Management Policies of Settlement of Foreign Exchange under Capital Accounts, pursuant to which, the domestic entity may, depending on its actual operation need, settle its revenue in foreign currency with the bank, provided such revenue falls into those under capital accounts with explicit policy on settlement by willingness; while for those revenue under capital accounts still subject to restrictive regulations, such applicable policies shall prevail.
On January 26, 2017, SAFE issued the Notice on Further Promoting the Reform of Foreign Exchange Management and Strengthening Verification on Authenticity and Legality, pursuant to which, banks are mandated to strengthen verification on authenticity and legality on foreign exchange conversion and remittance offshore.
PRC Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned companies include:
| · | Wholly Foreign-Owned Enterprise Law |
| · | Wholly Foreign-Owned Enterprise Law Implementing Rules |
Under these regulations, wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards. In addition, these wholly foreign-owned companies are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital. These reserve funds are not distributable as cash dividends. On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”)MOFCOM published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, including the Foreign-Invested Enterprise Law.
PRC Regulations on Tax
PRC Enterprise Income Tax
The PRC EIT is calculated based on the taxable income determined under the PRC accounting standards and regulations, as well as the EIT law. On March 16, 2007, the National People’s Congress of China enacted the EIT Law, a new EIT law which became effective on January 1, 2008. On December 6, 2007, the State Council promulgated the Implementation Rules which also became effective on January 1, 2008. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, or the Transition Preferential Policy Circular, which became effective simultaneously with the EIT Law. The EIT Law imposes a uniform EIT rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain exceptions. Under the EIT Law, as further clarified by the Implementation Rules, the Transition Preferential Policy Circular and other related regulations, enterprises that were established and already enjoyed preferential tax treatments before March 16, 2007 will continue to enjoy them in the following manners: (i) in the case of preferential tax rates, for a five-year period starting from January 1, 2008, during which the tax rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a specified term, until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet because of its failure to make a profit, its term for preferential treatment will be deemed to start from 2008.
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PRC Business Tax and Implementation of VAT
Taxpayers providing taxable services in China arewere required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided. According to the Announcement on the VAT Reform Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State Tax Bureau in July 2012, the transportation and some selected modern service sectors, including research and development and technical services, information technology services, cultural creative services, logistics support services, tangible personal property leasing services, and assurance and consulting service sectors, should pay value-added tax instead of business tax based on a predetermined timetable (hereinafter referred to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and October 1, 2012 for entities in Jiangsu. In March 2016, the PRC State Council further expanded the application of VAT to several other key sectors, including real estate, construction, financial services and lifestyle services, effective May 1, 2016.
As of December 31, 2015, none2017, all of our Consolidated Affiliated Entities hashave been requested to convert into the VAT system.
Dividend Withholding Tax
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises are exempt from PRC withholding tax. Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are under a 5% withholding tax subject to PRC laws and regulations, provided that we are determined by the relevant PRC tax authorities to be a “non-resident enterprise” under the EIT Law.
PRC regulations relatingAVAILABLE INFORMATION
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and other filings made with the Securities and Exchange Commission, are available free of charge through our Web site (http://cuis.asia/cuis_en, under the Investor Relations section) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the establishmentSecurities and Exchange Commission. The inclusion of offshore SPVsour Web site address in this report does not include or incorporate by PRC residents
SAFE has promulgated several regulations, including the Noticereference into this report any information contained on, Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November 1, 2005. On July 4, 2014, SAFE promulgated the Notice on Issues Relating to Administration of Foreign Exchange in Offshore Investment & Fund-Raising and Round-trip Investment by Domestic Residents Utilizing Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 14, 2014, which replaced Circular 75. On February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving Management Policies of Foreign Exchange in Direct Investment, or SAFE Circular No. 13, which will be effective on June 1, 2015. According to SAFE Circular No. 13, foreign exchange registrations for both domestic and foreign direct investment shall be undertaken by banks, while SAFE and its branches execute indirect supervision on foreign exchange registration of direct investment via banks. The regulation requires PRC residents and PRC corporate entities to register with local banks or local branches (for the supplementary registration) of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
Under these foreign exchange regulations, PRC residents who will make investments in Special Purpose Vehicles or SPVs are required to register those investments with the bank where the domestic company incorporated, and the PRC residents who have previously made, prior to the implementation of the SAFE Circular No. 37, direct or indirect investments in SPVs are required to register those investments with local SAFE for the supplementary registration. In addition, any PRC resident who is a direct or indirect shareholder of a SPV, is required to update the previously filed registration with the local banks, with respect to that SPV, to reflect any material change. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liabilities foraccessible through, such PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions. Furthermore, the persons-in-charge and other persons at such PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.Web sites.
These foreign exchange regulations provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China.
You should carefully consider the risks described below together with all of the other information included in this Form 10-K. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.” If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.
Risks Relating to Our Business
The former shareholdersWe have restated our prior consolidated financial statements, which may lead to additional risks and uncertainties.
This Annual Report on Form 10-K of Action Holdings Financial Limited, the holding company through which the Company conducts allfor the fiscal year ended December 31, 2017, includes restatement of its Taiwan operations (“AHFL”), may inour previously filed consolidated financial statements and the near future have the right to require the Company to unwind the acquisition of AHFL and return the ownership of AHFL to such shareholders, in which case our business prospects and future resultsrelated consolidated statements of operations, would be severely adversely affected.shareholders' equity and cash flows as of and for the fiscal years ended December 31, 2016 and 2017, as well as restated unaudited condensed consolidated financial information as of and for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017. The determination to restate these financial statements was made by our Audit Committee upon management's recommendation. As a result of these events, we have become subject to a number of additional risks and uncertainties, including substantial unanticipated costs for accounting and legal fees in connection with or related to the restatement. Likewise, such events might cause a diversion of our management's time and attention.
The Company conducts all
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial conditions and results of its Taiwanese operations indirectly through its subsidiary AHFLin a timely and accurate manner, result in material misstatements in our financial statements and cause current and potential shareholders to lose confidence in our financial reporting, which in turn could adversely affect the revenues from such Taiwanese operations represented approximately 90%trading price of our total revenuescommon stocks.
We have concluded that there are material weaknesses in our internal control over financial reporting, such as 1) the process to hire qualified employees who have proficient knowledge of US GAAP, and can identify unusual transactions timely and appropriately assessed for financial report impact was not maintained, 2) the structure, authority, and responsibilities to ensure the objective of internal control over financial reporting were adequately achieved was not maintained, and 3) the design of our internal control did not include a precise review of the completeness of the bonus revenue at the period end. These material weaknesses resulted in material misstatements of our historical financial statements, which necessitated a restatement of our consolidated financial statements for the yearyears ended December 31, 2015 and 2016 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2017. Disclosure related to the restatement adjustment are included in Part II, Item 8, Note 27 and 28 of this From 10-K.
Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such operations were also the source of allthat there is a reasonable possibility that a material misstatement of our profits in 2015.On February 17, 2016, the Companyannual or interim financial statements will not be prevented or detected and the selling shareholders of AHFL entered into a third Amendment to the AHFL Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company is committed to complete the listing of the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least US$10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NT$22.5 million (US$312,617),corrected on a pro rata basis, to the selling shareholderstimely basis. The existence of AHFL andthis issue 5 million common shares to its selected employees pursuant to its employee stock/option plan,could adversely affect us, our reputation or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete eitherinvestor perceptions of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the Selling Shareholders as if the said acquisition had never happened. It appears quite unlikely that the Company will be able to list its shares in a major capital market with proceeds of at least US$10,000,000 prior to June 30, 2016. As a result, it appears likely that the former shareholders of AHFL willus. We have the right to unwind the acquisition of AHFL by the Company, in which case the Company would lose all of its Taiwan operations, which are currently the source of nearly all of its revenues and profits. If the Company fails to meet any of the criteria stated above and reach new agreement with such former shareholders of AHFL, and the shareholders of AHFL exercise their right to unwind the Acquisition of AHFL by CUIS, the business and financial prospects of the Company will be severely negatively affected.
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The recent global macroeconomic events could cause disruptions to our customers and their demand for insurance services. Demand for our products has been, and will continue to be, adversely affected by overall macroeconomic conditions.take additional measures to remediate the underlying causes of the material weaknesses noted above. As we continue to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address the control deficiencies. Also, see Item 9A in Part II of this Form 10-K. We expect to incur additional costs remediating these material weaknesses.
The recent global macroeconomic eventsAlthough we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our measure may not prove to be successful in remediating these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occurred in the future, our consolidated financial statements may contain material misstatements and we could have a negative impact on businesses around the world. For example, on August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAAbe required to AA+.restate our financial results. In addition, the European sovereign debt crisis that started in 2009 has also had a negative impact on the credit ratings of several European countriesif we are unable to successfully remediate these material weaknesses and general market sentiment. Furthermore, from May 2013, emerging markets in Asiaif we are facing a capital flight as funds flow back into Europeunable to produce accurate and the United States. Emerging markets from Thailand to India plunged into the red amid a heavy sell-off, as investors reassessed the implications of another shift in the global economy. In 2015, the development of global economy is still in a slow pace and the recovery are still subject to various obstacles and difficulties, among which, the globaltimely financial market is still in fluctuation,statements, our stock price of bulk commodity remains in doldrums and trade protection and currency competition are suffering higher risk. These downgrades could have material adverse impacts on financial markets and economic conditions throughout the world. In general, the continuous bad economic situation will cause weak consumer confidence and diminish consumer and business spending, which will have a negative impact on the general market demand for insurance services around the world.may be adversely affected.
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Volatility in the financial markets and overall economic uncertainty increases the risk of substantial quarterly and annual fluctuations in our earnings. Given the current economic environment, we remain cautious and we expect our customers to be cautious as well, which could affect our future results. If the economic recovery slows down or dissipates, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
If we are unable to obtain and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely affected.
We operate our businesses with approvals and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial condition and results of operations, as well as our prospects, will suffer.
On February 9, 2018, the CIRC issued the Provisions on the Regulation of Insurance Brokers (the “Provisions”), effective as of May 1, 2018. As an insurance broker, Jiangsu Law, may potentially be impacted by the Provisions, given that the Provisions grant regulatory authorities greater discretionary power over approval of license renewal request, which may increase the risk of non-renewal.
We face substantial political risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between Taiwan and the People’s Republic of China, which could adversely affect our financial condition and results of operations.
Law Broker’s executive office and substantial assets are located in Taiwan and most of our revenues are derived from our operations in Taiwan currently. Accordingly, our business, financial condition and results of operations and the market price of our common shares may be affected by changes in Taiwan governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The PRC claims it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established between Taiwan and the PRC, such as the engagement of Economic Cooperation Framework Agreement (“ECFA”) in 2010 and Cross-strait Investment Protection and Promotion Agreement in 2012, relations may become strained again. On June 21, 2013, Association for Relations Across the Taiwan Straits of the PRC and Straits Exchange Foundation of Taiwan entered into the Cross-Strait Agreement on Trade in Services, with the aim of smoothing and extending the cooperation between Mainland Chinathe PRC and Taiwan accordingly. However, as of the date of this Annual Report on Form 10-K, the Taiwan government has not approved Cross-Strait Agreement on Trade in Services. The PRC government has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations between the Taiwan and the PRC have on occasion depressed the market prices of the securities of companies in Taiwan. Relations between the Taiwan and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship between the Taiwan and PRC require companies involved in cross-strait business operations to carefully monitor its actions and manage its relationships with both Taiwan and PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the Taiwan and PRC governments for our cross-strait business operations, which could have an adverse effect on our ability to expand our business and conduct cross-strait business operations.
Any future outbreakSales of contagious diseases may materiallyour products are concentrated in a few select markets. Adverse developments in these markets could have a material and adversely affect our business and operations, as well as our financial condition and results of operations.disproportionate impact on us.
Any future outbreakOur revenues are highly concentrated in a few select markets, including Taiwan and PRC. Net revenues generated from sales to customers in Taiwan and PRC, in the aggregate, accounted for approximately 100% of contagious diseases, such as severe acute respiratory syndrome or avian influenza, may disrupt our ability to adequately staff our businessthe Company’s net revenues for the years ended December 31, 2017 and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be required to quarantine such employees and the affected areas of our premises.2016, respectively. As a result we may have to temporarily suspend part or allof the concentration of our operations. Furthermore, any future outbreak may restrict the level ofrevenues in these markets, economic activitydownturns, changes in affected regions, which may adversely affect our businessgovernmental policies and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would notincreased competition in these markets could have a material adverse effectand disproportionate impact on our financial conditionrevenues, operating results, business and results of operations.prospects.
If we fail to attract and retain productive sales professionals or agents, our business could suffer.
Our entire sales of life, property and casualty insurance products are conducted through our individual sales professionals or agents, who are independent contractors, not our employees. Some of these sales professionals or sales agents are significantly more productive than others in generating sales. If we are unable to attract and retain the core group of highly productive sales professionals or sales agents, our business could be materially and adversely affected. Competition for sales personnel from insurance companies and other insurance intermediaries may also force us to increase the compensation of our sales professionals or sales agents, which would increase operating costs and reduce our profitability.
Our business and prospects could be materially and adversely affected if we are not able to manage our growth successfully.
Law Broker commenced its insurance intermediary business in 1992. During the past two decades, Law Broker has expanded its distribution and service networks across Taiwan, with 2630 sales and service outlets (including the headquarters) and 2,3292,609 employees and sales professionals as of December 31, 2015.2017. Anhou commenced its insurance intermediary business in 2003 and has expanded its operations substantially in recent years. Anhou’s distribution and service networks expanded from one company in one province to two insurance agencies and one brokerage in 3six provinces and 3643 service outlets as of December 31, 2015.2017. Meanwhile, we broadened our service offerings from the distribution of only life insurance products to cover a wide variety of property and casualty insurance and automobile insurance products. We anticipate continued growth in the future through multiple means. Our expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. To manage and support our continued growth, we must continue to improve our operational, administrative, financial and technological systems, procedures and controls, and expand, train and manage our growing employee and agent base. Furthermore, our management will be required to maintain and expand our relationships with insurance companies, other insurance intermediaries, regulators and other third parties. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to effectively and efficiently manage our expansion could materially and adversely affect our ability to capitalize on new business opportunities, which in turn could have a material adverse effect on our results of operations.
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We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.
We expect our future growth to come from acquisitions of high-quality independent insurance agencies and brokerages as well as establishment of new insurance agencies and brokerages. There is no assurance we can successfully identify suitable acquisition candidates, especially in those areas where we do not yet have a presence. Even if we identify suitable candidates, we may not be able to complete an acquisition on terms that are commercially acceptable to us. In addition, we compete with other entities to acquire high-quality independent insurance agencies and brokerages. Many of our competitors may have substantially greater financial resources than we do and may be able to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth strategy may be impeded and our earnings or revenue growth may be negatively affected.
If we fail to integrate acquired companies efficiently, or if the acquired companies do not perform to our expectations, our business and results of operations may be adversely affected.
Even if we succeed in acquiring other insurance agencies and brokerages, our ability to integrate an acquired entity and its operations is subject to a number of factors. These factors include difficulties in the integration of acquired operations and retention of personnel, especially the sales professionals and sales agents who are not employees of the acquired company, entry into unfamiliar markets, unanticipated problems or legal liabilities, and tax and accounting issues. The need to address these factors may divert management’s attention from other aspects of our business and materially and adversely affect our business prospects. In addition, costs associated with integrating newly acquired companies could negatively affect our operating margins.
Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the insurance products in which a company specializes, the loss of key clients after the acquisition closes, general economic factors that impact a company in a direct way and the cultural incompatibility of an acquired company’s management team with us. If an acquired company cannot be operated at the same profitability level as our existing operations, the acquisition would have a negative impact on our operating margin. Our inability to successfully integrate an acquired entity or its failure to perform to our expectations may materially and adversely affect our business, prospects, results of operations and financial condition.
Because the commission and fee revenue we earn on the sale of insurance products is based on premiums and commission and fee rates set by insurance companies, any decrease in these premiums or commission and fee rates may have an adverse effect on our results of operations.
We are engaged in the insurance agency and brokerage business and derive revenues primarily from commissions and fees paid by the insurance companies whose policies our customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation-related and competitive factors that affect insurance companies. These factors, which are not within our control, include the ability of insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of alternative insurance products such as government benefits and self-insurance plans, as well as the tax deductibility of commissions and fees and the consumers themselves. In addition, premium rates for certain insurance products, such as the mandatory automobile liability insurance that each automobile owner in Taiwan and the PRC is legally required to purchase, are tightly regulated by Insurance Bureau of Financial Supervisory Commission, Republic of China, or the FSC in Taiwan and China Insurance Regulatory Commission, or the CIRC in China.PRC.
Because we do not determine, and cannot predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes may have on our operations. Intense competition among insurance companies has led to a gradual decline in premium rate levels of some property and casualty insurance products. Although such decline may stimulate demand for insurance products and increase our total sales volume, it also reduces the commissions and fees we earn on each policy sold. Any decrease in premiums or commission and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital expenditures and other expenditures may be disrupted by unexpected decreases in revenues caused by decreases in premiums or commission and fee rates, thereby adversely affecting our operations.
Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.
The insurance intermediary industry in Taiwan and China is highly competitive, and we expect competition to persist and intensify. In insurance product distribution, we face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their products, and from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal offices and automobile dealerships, as well as from other professional insurance intermediaries. We sell insurance products through our exclusive sales professionals and sales agents pursuant to agency contracts entered into with our subsidiaries or Consolidated Affiliated Entities in Taiwan and China, as applicable. The term of these agency contracts with Law Broker generally is for three years and will be re-signed upon expiration, while the term of these agency contracts with Anhou generally is for one year with automatic extension in case neither party objects at the end of the term. These sales professionals and sales agents are not our employees and we cannot assure you that they will continue their services subsequent to the expiration of such agency contracts. We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial results may be negatively affected.
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Quarterly and annual variations in our commission and fee revenue may have unexpected impacts on our results of operations.
Our commission and fee revenue is subject to both quarterly and annual fluctuations as a result of the seasonality of its business, the timing of policy renewals and the net effect of new and lost business. Historically, Law Broker’s commission and fee revenue, particularly revenue derived from distribution of life insurance products, for the second and fourth quarters of any given year have been higher than the first and third quarters. Anhou’s commission and fee revenue, particularly revenue derived from distribution of life insurance products, for the fourth quarter of any given year has been the highest among all four quarters, while Anhou’s commission and fee revenue for the first quarter of any given year has been the lowest among all four quarters. The factors that cause the quarterly and annual variations are not within our control. Specifically, consumer demand for insurance products can influence the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations. As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future performance.
If our contracts with insurance companies are terminated or changed, our business and operating results could be adversely affected.
We primarily act as agents for insurance companies in distributing their products to retail customers. Our relationships with the insurance companies are governed by agreements between Law Broker or Anhou and the insurance companies. See “Corporate History and Structure - Insurance Company Partners.” These contracts establish, among other things, the scope of authority, the pricing of the insurance products we distributes and its fee rates. These contracts typically have a term of one year and will be automatically extended for successive one-year term unless terminated earlier with at least 30 days or 60 days advance notice prior to its expiration.
In the fiscal year ended December 31, 2015,2017, Law Broker’s top fivemajor insurance company partners, after aggregating the business conducted between Law Broker and the various local branches of the insurance companies were AIATW, Farglory Life Insurance Co., Ltd., CTBC Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., TransGlobalShin Kong Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and AIA International Limited, Taiwan Branch.TransGlobe Life Insurance Inc., arranged in alphabetical order. Among them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc. accounted for 81.79%approximately 25.41%, 12.45%, and 11.18% of Law Broker’sour total net revenues from commissions and fees in the fiscal year ending December 31, 2015. 2017, respectively.
In the fiscal year ended December 31, 2015,2017, Anhou’s top fivemajor insurance company partners, after aggregating the business conducted between Anhou and the various local branches of the insurance companies, were TaikangAegon THTF Life Insurance Co., Ltd. Huaxia, AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., AVIVA LifeHuaxia Insurance Co., Ltd., and Aegon THTF Life Insurance Co., Ltd. Among them, Taikang Life Insurance Co., Ltd., arranged in alphabetical order. None of these insurance company partners accounted for 13.91%more than 10% of Anhou’sour total net revenues from commissions and feesfor the fiscal year endingended December 31, 2015. 2017.
The termination of our contracts with insurance companies that in aggregate account for a significant portion of our business, or changes to material terms of these contracts, could adversely affect our business and operating results.
Our future success depends on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior management team and other key personnel, in particular Mr. Yi Hsiao Mao, the Chief Executive Officer, Ms. Yung Chi Chuang, the Chief Financial Officer, Mr. Wen Yuan Hsu, the Chief Marketing Officer, Mr. Tung Chi Hsieh, the Chief Operating Officer, and Mr. Te-Yun Chiang, the Chief Technology Officer. If one or more of our senior executives or other key personnel, are unable or unwilling to continue in their present positions, we may not be able to replace them easily, or at all. As such, our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and key personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. As is customary in the PRC and Taiwan, we do not have insurance coverage for the loss of our senior management team or other key personnel.
In addition, if any member of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive trade information and key professionals and staff members. Most of our executive officers and key employees have entered into an employment agreement with our subsidiaries or Consolidated Affiliated Entities, respectively. If any disputes arise between any of our senior executives or key personnel and us, we cannot assure you of the extent to which any of these agreements may be enforced.
Sales professionals or sales agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs.
Sales professionals or sales agent and employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:
| · | making misrepresentation when marketing or selling insurance products to customers; |
| · | hindering insurance applicants from making full and accurate mandatory disclosures or inducing applicants into making misrepresentations; |
| · | hiding or falsifying material information in relation to the insurance contracts; |
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| · | fabricating or altering insurance contracts without authorization from relevant parties, selling false policies, or providing false documents on behalf of the applicants; |
| · | falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions; |
| · | colluding with applicants, insured, or beneficiaries to obtain insurance benefits; |
| · | engaging in false claims; or |
| · | otherwise not complying with laws and regulations or our control policies or procedures. |
We cannot always deter sales professionals or sales agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective in all cases. We cannot assure you, therefore, that sales professionals or sales agent or employee misconduct will not lead to a material adverse effect on our business, results of operations or financial condition.
All of our personnel engaging in insurance agency or brokering are required under relevant regulations to have a qualification certificate issued by the relevant government authorities in Taiwan. If these qualification requirements are strictly enforced in the future, our business may be materially and adversely affected.
All of Law Broker’s personnel who engage in insurance agency and brokering are required under relevant Taiwan regulations to obtain a registration certificate. To obtain the registration certificate, the sale professionals have to pass the insurance sales professionals qualification test sponsored by the Life Insurance Association of the Republic of China or Property Insurance Association of the Republic of China (collectively the “Associations”, each a “Association”). Once the applicants passed such test, the Associations will notify Law Broker of those applicants who passed the test and Law Broker is obligated to issue the registration certificate to them. The registration certificate is valid for five years and the holder shall renew the registration certificate prior to its expiration date. See “Corporate History and Structure —Regulation.” As of December 31, 2015,2017, all of Law Broker’s sales professionals had received and held a valid registration certificate.
If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
As a public company, we are subject to reporting obligations under U.S. securities laws. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, every public company is required to include a management report on the Company’s internal controls over financial reporting (“ICFR”) in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting.
While we believe our ICFR is currently effective, there is no assurance we will be able to maintain effective ICFR in the future. If we fail to do so, we may not be able to produce reliable financial reports and prevent fraud. Moreover, if we were not able to conclude we have effective ICFR, investors may lose confidence in the reliability of our financial statements, which would negatively impact the trading price of our shares. Our reporting obligations as a public company, including our efforts to comply with Section 404 of the Sarbanes-Oxley Act, will continue to place a significant strain on our management, operational and financial resources and systems for the foreseeable future.
Any significant failure in our information technology systems could have a material adverse effect on our business and profitability.
Our business is highly dependent on the ability of our information technology systems to timely process a large number of transactions across different markets and products at a time when transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. The proper functioning of our financial control, accounting, customer database, customer service and other data processing systems, together with the communication systems of our Taiwan Subsidiaries and Consolidated Affiliated Entities and our main offices in Taiwan and Jiangsu are critical to our business and to our ability to compete effectively. We cannot assure you that our business activities would not be materially disrupted in the event of a partial or complete failure of any of these primary information technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks or conversion errors due to system upgrading. In addition, a prolonged failure of our information technology system could damage our reputation and materially and adversely affect our future prospects and profitability.
If we are unable to respond in a timely and cost-effective manner to rapid technological change in the insurance intermediary industry, there may be a resulting adverse effect on business and operating results.
The insurance industry is increasingly influenced by rapid technological change, frequent new product and service introductions and evolving industry standards. For example, the insurance intermediary industry has increased use of the Internet to communicate benefits and related information to consumers and to facilitate information exchange and transactions. We believe that our future success will depend on our ability to continue to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a timely and cost-effective basis. There is a risk that we may not successfully identify new product and service opportunities or develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities that our competitors develop or introduce may render our products and services uncompetitive. As a result, we can give no assurances that technological changes that may affect our industry in the future will not have a material adverse effect on our business and results of operations.
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TheOur Company’s affiliates have significant control over matters requiring approval by shareholders.
The affiliates to theof our Company hold 100% of theour Company’s outstanding preferred shares, 43.79%approximately 31.4% of theour Company’s outstanding common shares, and 58.03%approximately 44.6% of the voting power of theour Company as of March 24, 201614, 2017 (calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended). As a result, theour Company’s affiliates, in view of their ownership percentage of our common stock and voting power, have significant control over matters requiring approval by our shareholders, including the selection of our Boardboard of Directors,directors, approval or rejection of mergers, sales or licenses of all or substantially all of our assets, or other business combination transactions. The interests of theour Company’s affiliates may not always coincide with the interests of our other shareholders and as such theour Company may take action in advancement of its affiliates’ interests to the detriment of our other shareholders, including you. Accordingly, you may not be able to influence any action we take or consider taking, even if it requires a shareholder vote.
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The change in value of the RMB against the U.S. dollar, the Euro and other currencies is affected by changes in China's political and economic conditions, among other things. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against certain foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. As a portion of our costs and expenses is denominated in RMB, the revaluation in July 2005 and potential future revaluation has and could further increase our costs. In addition, any significant revaluation of the RMB may have a material adverse effect on our financial condition. For example, to the extent that we need to convert U.S. dollars we receive from financings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
We are a holding company and depend upon the earnings of our subsidiaries.
We are a holding company and conduct all our operations through our subsidiaries. All of our operating income is generated by our operating subsidiaries. We primarily rely on dividends and other advances and transfers of funds from our subsidiaries, to provide the funds necessary to meet our debt service obligations or to pay dividends. Although we are the majority stockholder, directly or indirectly, of each of our operating subsidiaries and therefore able to control their respective declaration of dividends, applicable laws may prevent our operating subsidiaries from being able to pay such dividends. In addition, such payments may be restricted by claims against our subsidiaries by their creditors, such as suppliers, vendors, lessors, and employees, and by any applicable bankruptcy, reorganization, or similar laws applicable to our operating subsidiaries. The availability of funds, and therefore the availability of our operating subsidiaries to pay dividends or make other payments or advances to us, will depend upon their operating results.
Risks Related to Our Corporate Structure in the PRC
If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in insurance agencies and brokerages business, especially those on qualifications as well as capital requirement of the investors. We conduct our operations in China principally through contractual arrangements among our wholly-owned PRC subsidiary, CU WFOE and our operating company in the PRC, namely, Anhou and its shareholders, where Anhou directly holds 100% equity interests in one PRC insurance agency, namely Sichuan Kangzhuang and one insurance brokerage, namely Jiangsu Law. Anhou, Sichuan Kangzhuang and Jiangsu Law hold the licenses and permits necessary to conduct our insurance intermediary business and related businesses in China.
Our contractual arrangements with Anhou and its shareholders enable us to:
| · | exercise effective control over Anhou and its subsidiaries; |
| · | receive a substantial portion of the economic benefits of Anhou and its subsidiaries in consideration for the services provided by our wholly- owned subsidiary in China; and |
| · | have an exclusive option to purchase all or part of the equity interests in Anhou when and to the extent permitted by PRC law. |
Because of these contractual arrangements, we are the primary beneficiary of Anhou and its subsidiaries and have consolidated them into our consolidated financial statements. Although we believe that these agreements are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future, such as the Draft Foreign Investment Law described below.
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On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”)MOFCOM published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. This Draft Foreign Investment Law, once promulgated, will replace and integrate the three existing laws over foreign investment, the Law of the PRC on Chinese-Foreign Equity Joint Ventures, the Wholly Foreign-owned Enterprise Law and the Law of the PRC on Sino-foreign Cooperative Enterprises. The Draft Foreign Investment Law was formulated with a view to opening wider to the outside, promoting and regulating foreign investment, protecting the legitimate rights and interests of foreign investors, safeguarding national security and public interests, and facilitating the healthy development of the socialist market economy. MOFCOM has requested comments from the public on the draft Law by February 17, 2015.
Some of the more significant concepts in the Foreign Investment Law include the following:
Effective Control
The proposed law has adopted the concept of effective control in the foreign investment area. The Draft Foreign Investment Law notesstipulates that a company established in China but controlled by foreign investors shall be deemed a foreign investor and foreign entities controlled by Chinese investors can, inunder some circumstances, be deemed Chinese domestic investors. According to Draft Foreign Investment Law, “control” refers to several circumstances including the contractual control by imposingexercising decisive influences on the operation, finance, personnel or technology of the enterprise by contract, trust or other means.
Negative List Management
Most foreign investments will not need pre-approval as was previously required. It means that the Chinese market could be more open and efficient in some sectors to set up foreign invested companies. However, the Draft Foreign Investment Law sets out a Negative List, or Catalogue of Prohibitions. Foreign investors are not allowed to invest in any sector set out in the Catalogue of Prohibitions. Further, a Catalogue of Restrictions will noteset forth those sectors with restrictions imposed on foreign investors. The use of Negative lists represents a method of management or administration of foreign investments.
How domestic VIEs, potentially deemed to be foreign enterprises under the Draft Foreign Investment Law and currently operating in Negative List sectors, will be treated is unclear.
National Security Reviews
The Draft Foreign Investment Law also establishes a united foreign investment national security review system which will conduct examinations on the foreign investments that endangers or may endanger the national security.
Information Reporting System
The Draft Foreign Investment Law establishes a foreign investment information reporting system. The new rules include submission of a foreign investment report (such as when setting up a company), a report of any Changes of Foreign Investment (any adjustments of investment) and an annual report. Generally, reporting obligations arise when a foreign investor purchases not less than 10% of the stock of a domestic entity, or less than 10% but the purchase results in a change of control of the domestic entity.
Supervision and Inspection
The Draft Foreign Investment Law establishes a mechanism for the supervision and inspection of foreign investors and foreign invested enterprises from industrial and commercial, taxation, foreign exchange, auditing and other administrative departments. The government’s eyefocus on foreign investments and foreign investment management has shifted from the approval prior to a foreign invested company being established to the supervision and inspection after it is set up.
PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that our contractual arrangements do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.
If the PRC government finds that we, our PRC subsidiary and Consolidated Affiliated Entities do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
If we, our Consolidated Affiliated Entity, Anhou or any of the existing and future subsidiaries of Anhou are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the CIRC, will have broad discretion in dealing with such violations, including:
| · | revoking the business and operating licenses of our PRC subsidiary and Consolidated Affiliated Entities; |
| · | restricting or prohibiting any related-party transactions among our PRC subsidiary and Consolidated Affiliated Entities; |
| · | imposing fines or other requirements with which we, our PRC subsidiary or our Consolidated Affiliated Entities may not be able to comply; |
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| · | requiring us, our PRC subsidiary or our Consolidated Affiliated Entities to restructure the relevant ownership structure or operations; or |
| · | restricting or prohibiting us from providing additional funding for our business and operations in China. |
The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business in the PRC.
We rely on contractual arrangements with Anhou and its shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.
We have relied and expect to continue to rely on contractual arrangements with our PRC Consolidated Affiliated Entity, Anhou, and its shareholders to operate our business in China. For a description of these contractual arrangements, see “Corporate History and Structure”. These contractual arrangements may not be as effective in providing us with control over Anhou and its subsidiaries as direct ownership. We have no direct or indirect equity interests in Anhou or any of its subsidiaries.
Since PRC laws restrictThough subsequent to PRC’s accession to WTO, the restrictions on foreign equity ownership in companies engagedinvestment in insurance agencies and brokerages businesses in China, especiallyintermediaries have been relaxed, except those on qualifications as well as capital requirement of the investors, wethe interpretations of local counterparts of CIRC have not been clear and consistent, especially on the proportion of foreign investment. We rely on contractual arrangements with Anhou to operate our business in China. If we had direct ownership of Anhou and its subsidiaries, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Anhou and its subsidiaries, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on Anhou and its shareholders’ performance of their contractual obligations to exercise effective control. In addition, our contractual arrangements generally have a term of ten-year with an automatic extension of another ten-year term unless our PRC subsidiary, CU WFOE, determines otherwise. Though neither Anhou nor its shareholders has any right under these agreements to terminate such agreements prior to the expiration date, we may not be able to strictly enforce these agreements in case they choose to do so, due to the uncertainty associated with PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable outside PRC. Certain affiliates of theour Company are also directors and executive officers of our Consolidated Affiliated Entities.InEntities.In addition, though Anhou is under the effective control of CU WFOE through these contractual arrangements, the shareholders and officers of Anhou may not act in the best interests of our company or may not perform their obligations under these agreements, including the obligation to renew these agreements when their initial ten-year term expires. Furthermore, as all of Anhou’s assets are located in China, if Anhou or its shareholders determine to terminate the VIE agreements,Agreements, the unaffiliated investors will have little or no recourse against them. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with Anhou. Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control over these Consolidated Affiliated Entities.
If Anhou and its shareholders fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs and other resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders and officers of Anhou were to refuse to transfer their equity interest in Anhou to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual obligations. However, due to the uncertainty associated with PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable against Anhou outside PRC, we may not be able to effectively enforce our right under these agreements.
All of our contractual arrangements with Anhou and shareholders are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our Consolidated Affiliated Entities, and our ability to conduct our business in the PRC may be negatively affected.
Contractual arrangements we have entered into with Anhou may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Since both of CU WFOE and Anhou are under our common control, either under direct ownership or through contractual arrangements, and certain our officers and directors used to be and are currently the employees of Anhou and its subsidiaries, (for example, Tung Chi Hsieh and Te Yun Chiang, our Chief Operating Officer and Chief Technology Officer, also act as Division Chief of Management and Manager of Jiangsu Law respectively, and Wen Yuan Hus, our Chief Marketing Officer, also acts as the General Manager of Sichuan Kangzhuang), the VIE Agreements are likely to be deemed as arrangements between related parties. In addition, CU WFOE has been granted substantial unilateral right under the VIE Agreements. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our PRC subsidiary and Anhou are not on an arm’s-length basis and adjust the income of Anhou in the form of a transfer pricing adjustment, where the relevant PRC tax authorities may, in their discretion, disregard the tax filing of Anhou and impose a different tax amount payable by Anhou. A transfer pricing adjustment could among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by Anhou, which could in turn increase their respective tax liabilities. Moreover, the PRC tax authorities may impose interest and other penalties on Anhou for underpayment of taxes. Though we have not encountered any challenge or transfer pricing adjustment by the PRC tax authorities so far, we could not assure you that the PRC tax authorities will not do so in the future. Our consolidated net income may be materially and adversely affected by the occurrence of any of the foregoing.
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PRC regulation of direct investment by offshore holding companies to PRC entities may delay or prevent us from making additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC subsidiary and Consolidated Affiliated Entities. In order to provide additional funding to our PRC subsidiary and Consolidated Affiliated Entities, we may make additional capital contributions to our PRC subsidiary.
Any capital contributionscontribution we make to our PRC subsidiary, mustshall be approved byfiled with the PRC Ministry of Commerce or its local counterparts which usually takes approximately 30 days or longer,and settled with banks where we have opened capital account and registered with the SAFE or its local counterparts. Such applicationsfilings and registrations couldsettlement shall depend on the efficiency the relevant government authority and banks and might be time consuming andwhile their outcomes would be uncertain. The registered capital of CU WFOE is $300,000 and has been contributed.
We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
It may be difficult to effect service of process and enforcement of legal judgments upon us and our officers and directors because they reside outside the United States.
To better operate our business, some of our directors and officers reside in the PRC or Taiwan, our service of process on such directors and officers may be difficult to effect within the United States. Also, with respect to the assets for overseas operation, any judgment obtained in the United States against us may not be enforceable outside the United States.
Risks Related to Doing Business in Taiwan
Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.
Subsequent to our acquisition of AHFL on August 24, 2012, we operate our insurance agency and brokerage business in Taiwan through our operating entity Law Broker. As an insurance agency and brokerage service provider in Taiwan, Law Broker is subject to extensive regulation. See “Item 1.Business—Regulation” for a discussion of the regulatory environment applicable to Law Broker. As revenue generated by Law Broker constitutes a substantial part of our revenue, any changes in the regulatory environment applicable to Law Broker may adversely affect our business, financial condition and results of operations.
Currently, Law Broker’s principal regulator is the Financial Supervisory Committee of Republic of China, or the FSC, which was formed on July 1, 2004 in accordance with the Financial Supervisory Organization Act, which was intended to grant regulatory authority over the Taiwan insurance industry to the FSC.
Our operations and financial results could be severely harmed by natural disasters.
Law Broker’s executive office is located in Taiwan, which suffered a severe earthquake during fiscal year of 2000. We did not experience significant disruption to our operations as a result of that earthquake. Taiwan is also exposed to typhoons and tsunamis. If a major earthquake, typhoon, tsunami or other natural disaster were to affect our operations, our business would suffer serious harm.
Stockholders may have more difficulty protecting their interests under the laws of the Taiwan than they would under the laws of the United States.
Our corporate affairs are governed by our articles of incorporation, the Company Law, and by the laws governing corporations incorporated in Taiwan. In addition, our corporate affairs may remain governed by the Statute of Law Broker. The rights of stockholders and the responsibilities of management and the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated in the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority stockholders. As a result, holders of our common shares may have more difficulty in protecting their interests in connection with actions taken by our management or members of our board of directors than they would as public stockholders of a United States corporation.
Fluctuation in the value of the New Taiwanese Dollar may have a material adverse effect on your investment.
The value of the New Taiwanese Dollar (“NTD” or “NT$”) against the US dollar (“USD”US$”) and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. As of December 31, 2015,2017, the exchange rate of NT$ to the USDUS$ was 1NT$=0.03045USD.NT$1=US$0.03372.
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In Taiwan, our revenues and costs are denominated in the NT$, and a significant portion of our financial assets are also denominated in NT$. We rely substantially on dividends and other fees paid to us by our Taiwan Subsidiary. Any significant appreciation or depreciation of the NT$ against the USD may affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our shares in USD. For example, a further appreciation of the NT$ against the USD would make any new NT$-denominated investments or expenditures more costly to us, to the extent that we need to convert USD into the NT$ for such purposes. An appreciation of the NT$ against the USD would also result in foreign currency translation losses for financial reporting purposes when we translate our USD denominated financial assets into the NT$, as the NT$ is our reporting currency in Taiwan. Conversely, a significant depreciation of the NT$ against the USD may significantly reduce the USD equivalent of our reported earnings, and may adversely affect the price of our shares.
Sensitivity analysis
The following table indicates the instantaneous change in theour Company's (loss) / profit after tax (and accumulated losses) that would arise if foreign exchange rates at the reporting date had changed at that date, assuming all other risk variables remained constant.
| For the year ended December 31, 2015 | ||||||||||||
| Depreciation in NTD | Decrease in net income | Decrease in retained earnings | ||||||||||
| 3 | % | $ | 132,265 | $ | 132,265 | |||||||
| For the year ended December 31, 2017 | ||||||||||
| Depreciation in NTD | Decrease in net income | Decrease in retained earnings | ||||||||
| 3 | % | $ | 309,438 | $ | 163,542 | |||||
The weakening of the US Dollar against the above currencies by the same percentages would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by theour Company which expose theour Company to foreign currency risk at the reporting date. The analysis excludes differences that would result from the translation of the financial statements of foreign operations into theour Company's presentation currency.
Risks Related to Doing Business in China
Our limited operating history in China, especially our limited experience in distributing property and casualty insurance products may not provide an adequate basis to judge our future prospects and results of operations.
We have a limited operating history in China. Anhou commenced our insurance intermediary business in 2003 by distributing life insurance products and expanded our offerings to other types of property and casualty insurance products in 2009. Anhou started distributing automobile insurance business in 2010. Life insurance products distributed by Anhou accounted for 91.88%approximately 92.33% of Anhou’s total net revenues in the fiscal year ending December 31, 2015.2017. Property and casualty insurance products distributed by Anhou accounted for 8.12%approximately 7.67% of Anhou’s total net revenues in the fiscal year ending December 31, 2015.2017. While life insurance and property and casualty insurance distribution are two major areas of our future growth strategy in China, we cannot assure you that our efforts to further develop these businesses will be successful. If Anhou’s life insurance distribution and property and casualty insurance distribution fail to grow, our future growth in China will be significantly affected. In addition, our limited operating history in China, especially our limited experience in selling property and casualty insurance products, may not provide a meaningful basis for you to evaluate our business, financial performance and prospects.
PRC regulations relating to the establishment of offshore SPVs by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE has promulgated several regulations, including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November 1, 2005. The regulation requires PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. On July 4, 2014, SAFE promulgated the Notice on Issues Relating to Administration of Foreign Exchange in Offshore Investment & Fund-Raising and Round-trip Investment by Domestic Residents Utilizing Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 14, 2014, which replaced Circular 75. On February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving Management Policies of Foreign Exchange in Direct Investment, or SAFE Circular No. 13, which becomes effective on June 1, 2015. According to SAFE Circular No. 13, foreign exchange registrations for both domestic and foreign direct investment shall be undertaken by banks, while SAFE and its branches execute indirect supervision on foreign exchange registration of direct investment via banks. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
Under these foreign exchange regulations, PRC residents who will make investments in Special Purpose Vehicles or SPVs are required to register those investments with the bank where the domestic company is incorporated, and the PRC residents who have previously made, prior to the implementation of the SAFE Circular No. 37, investments in SPVs are required to register those investments with local SAFE for the supplementary registration. In addition, any PRC resident who is a direct or indirect shareholder of a SPV is required to update the previously filed registration with the bank where the domestic company is incorporated, with respect to that SPV, to reflect any material change. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from distributing its profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions, including (i) the requirement by SAFE to return the foreign exchange remitted overseas within a period specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have been evasive and (ii) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at such PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.
These foreign exchange regulations provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China.
Fu Chang Li, Chung Mei Lo, Tung Chi Hsieh and Te Yun Chiang, our shareholders, who do not directly hold any interests in the Consolidated Affiliated Entities, are permanent residents of Taiwan, stay in Mainland China for over 183 days per annum. However, as a result of our inquiries with the local branch of SAFE responsible for our PRC subsidiary’s foreign exchange registrations, we were informed that, given the lack of any publicly-available implementing rules or official interpretations issued by the SAFE regarding the issue of whether the registration and amendment filing requirements under SAFE Circular No. 37 and related rules should apply to non-PRC citizens, and whether Fu Chang Li, Chung Mei Lo, Tung Chi Hsieh and Te Yun Chiang should not be deemed a PRC resident for these purposes, any attempt to submit an application to such local SAFE branch with respect to Fu Chang Li, Chung Mei Lo, Tung Chi Hsieh and Te Yun Chiang’s investment and shareholdings in our offshore SPV will not be officially accepted or examined.
However, we cannot conclude the SAFE or the local branch responsible for our PRC subsidiary’s foreign exchange registrations will not later alter its position on and interpretation of the applicability of these foreign exchange regulations to Mr. Fu Chang Li, Chung Mei Lo, Tung Chi Hsieh and Te Yun Chiang. If the registration procedures set forth in these foreign exchange regulations become applicable to Mr. Fu Chang Li, Chung Mei Lo, Tung Chi Hsieh and Te Yun Chiang, we will urge these individuals to, and believe they will, file necessary registrations and amendments as required under SAFE Circular No. 37 and related rules. However, as SAFE regulations and policies have been evolving rapidly in the past few years, we cannot assure that all of these individuals can successfully make or update any applicable registration or obtain the necessary approval required by these foreign exchange regulations as these individuals may not be able to fully satisfy the new requirements or interpretations that SAFE or its local branch may impose or adopt from time to time. The failure or inability of such individuals to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, the Company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to our stockholders could be materially and adversely affected.
Furthermore, as these foreign exchange regulations are still relatively new and there is uncertainty concerning the reconciliation of the new regulations with the approval requirements under other existing PRC laws and regulations, such as tax laws, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
Our businesses in China are highly regulated, and the administration, interpretation and enforcement of the laws and regulations currently applicable to us involve uncertainties, which could materially and adversely affect our business and results of operations.
Anhou operates in a highly regulated industry. The CIRC has authority to supervise and regulate the insurance industry in China. In exercising its authority, the CIRC has wide discretion, and the administration, interpretation and enforcement of the laws and regulations applicable to us involve uncertainties that could materially and adversely affect our business and results of operations. Although we have not had any material violations to date, we cannot assure you that our operations will always be consistent with the interpretation and enforcement of the laws and regulations by the CIRC from time to time.
The principal regulation governing insurance agencies in China is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009 (restated on October 19, 2015), which replaced the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. The Agency Provisions have not only set forth the market entrance standards for applicants to establish an insurance agency, but also stipulate the qualification criteria of senior management for such insurance agency. The Agency Provisions have also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. The principal regulation governing insurance brokerages in China is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009 (restated on October 19, 2015), which replaced the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. The Brokerage Provisions have not only set forth the market entrance standards for applicants to establish a brokerage firm, but also stipulate the qualification criteria of senior management for such brokerage firm. The Brokerage Provisions have also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. On January 6, 2013, CIRC issued Measures on the Supervision of Insurance Salespersons and Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, which sets forth a higher academic requirement for candidates to take the qualification examination for the insurance agency and brokerage practitioners organized by the CIRC. On August 3, 2015, CIRC issued the 2015 Notice, on Relevant Issues to Management of Insurance Intermediary Practitioners (the “2015 Notice”), pursuant to which, in lieu of the qualification examination/test previously required for insurance salesperson, insurance agency practitioners and insurance brokerage practitioners, CIRC only requires their companies to complete such practitioner registrations on their behalves and conduct professional training on them. The enactment of any new laws and regulations in replacement of the above-mentioned laws or the change of interpretations of any such current laws and regulations may have a significant impact on the operation and financial results of theour Company.
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For an expanded discussion of the material regulations affecting theour Company, please review the discussion located under the “Regulation” heading in the “Corporate History and Structure” section of this annual report.
Further development of regulations in China may impose additional costs and restrictions on our activities.
China’s insurance regulatory regime is undergoing significant changes. Some of these changes and the further development of regulations applicable to us may result in additional restrictions on our activities or more intensive competition in this industry. For example, under the provisions for administration of professional insurance agencies and brokerages promulgated on September 25, 2009, insurance agencies and brokerage companies are required to increase their guaranty deposit, which generally cannot be withdrawn without the CIRC’s approval, when they open any new branches. Furthermore, pursuant to the provisions, the minimum registered capital requirements for insurance agencies and brokerages were increased substantially. Under the provisions for administration of professional insurance agencies and brokerages promulgated on October 19, 2015, CIRC now allows professional insurance agency companies and insurance brokerage companies to more freely use their guaranty deposit under the following circumstances, among which, to:which: (i) reduction in their registered capital; (ii) cancellation of their licenses; (iii) purchase of qualified professional liability insurance; or (iv) other circumstances as set forth by CIRC, provided that a written report be submitted within 5 days of such use. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions and Decision on Revising the Brokerage Provisions, pursuant to which, CIRC has mandated any insurance agency and insurance brokerage established subsequent to the Decisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million). On May 16, 2013, CIRC issued the 2013 Notice, for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agencies and insurance brokerages established prior to the issuance of the above Decisions, with registered capital less than RMB50 million($8.1 million), can continuously operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office. See “Corporate History and Structure - Regulation.” Such increase would reduce the amount of cash available for other business purposes. In addition, the CIRC issued an Opinion of CIRC on Reforming and Improving the Management System of Insurance Salespersons in September 2010 (the “Reforming Opinion”), which requires the insurance companies and insurance intermediaries to build up a clear legal relationship with the insurance salespersons, improve the fundamental protection rights of the insurance salespersons, and encourage the insurance companies and insurance intermediaries to actively explore new models and marketing channels for insurance sales system. On September 14, 2012, CIRC issued another opinion to reiterate and push forward the Reforming Opinion above.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
We conduct our business in China primarily through our PRC subsidiary and Consolidated Affiliated Entities. Accordingly, our results of operations, financial condition and prospects in China are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 3040 years or so, growth has been uneven across different regions and among various economic sectors of China and has been slowed down during the past few years. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, the PRC government still owns a substantial portion of productive assets in China. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Actions and policies of the PRC government could materially affect our ability to operate our business.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business in China primarily through our PRC subsidiary and Consolidated Affiliated Entities. The business conducted by our PRC subsidiary and Consolidated Affiliated Entities in China are governed by PRC laws and regulations. Our PRC subsidiary is generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
Although, since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
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Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. But approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.transactions, and the recent drop in foreign exchange reserve of PRC has made it more likely to impose tighter control on foreign currency conversion and remittance offshore. Under our current corporate structure in the PRC, the primary source of our income at the holding company level from our PRC operations is dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary and our Consolidated Affiliated Entities to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange control system in China prevents us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be able to pay dividends in foreign currencies to our shareholders.
We rely principally on dividends and other distributions on equity paid by our subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and in the PRC we rely principally on dividends from our PRC subsidiary in China and service, license and other fees paid to our PRC subsidiary by our Consolidated Affiliated Entities for our cash requirements, including any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profits each year as reported in its PRC statutory financial statements, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and our PRC subsidiary that is considered foreign-invested enterprises is required to further set aside a portion of its after-tax profits as reported in its PRC statutory financial statements to fund the employee welfare fund at the discretion of the board. These reserves are not distributable as cash dividends. However, according to the Draft Foreign Investment Law, which may replace the Wholly Foreign-owned Enterprise Law once promulgated, no such reserve is required. Furthermore, if our PRC subsidiary and Consolidated Affiliated Entities in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our PRC subsidiary’s ability to pay dividends and other distributions to us.
The PRC subsidiary has not made any profits to date and as a result has no accumulated profits available for the purposes of dividend distribution. Even though we expect the PRC subsidiary to become profitable in 2016,2017, we intend to use any profits to fund our business operations or expansion of our business.
Any limitation on the ability of our subsidiary and Consolidated Affiliated Entities to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
The PRC Labor Contract Law and its implementing rules may adversely affect our business and results of operations.
On June 29, 2007, the Standing Committee of the National People’s Congress of China promulgated the Labor Contract Law, which became effective on January 1, 2008 and revised in 2012. On September 18, 2008, the State Council promulgated the implementing rules for the Labor Contract Law, which became effective upon adoption. This new labor law and its implementing rules have reinforced the protection for employees, who, under the existing PRC Labor Law, already have certain rights, such as the right to have written labor contracts, the right to enter into labor contracts with indefinite terms under specific circumstances, the right to receive overtime wages when working overtime, and the right to terminate in the labor contracts. In addition, the Labor Contract Law and its implementing rules have made some amendments to the existing PRC Labor Law and added some clauses that could increase cost of labor to employers. In the event that we decide to significantly reduce our workforce, the Labor Contract Law and its implementing rules could adversely affect our ability to effect these changes cost-effectively or in the manner we desire, which could lead to a negative impact on our business and results of operations in the PRC.
We may have difficulty establishing adequate management, legal and financial controls in the People’s Republic of China.PRC.
The PRC historically has been deficient in Westernwestern style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. Currently, we do not have any employees that are formally trained in US GAAP or in ICFR in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Westernwestern standards.
It may be difficult to effect service of process and enforcement of legal judgments upon us and our officers and directors because they reside outside the United States.
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To better operate our business in PRC, some of our directors and officers reside in PRC, our service of process on such directors and officers may be difficult to effect within the United States. Also, with respect to the assets for PRC operation located in PRC, any judgment obtained in the United States against us may not be enforceable outside the United States.
The PRC legal system contains uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Our PRC subsidiary is subject to laws and regulations applicable to foreign investment in China. In addition, our PRC subsidiary and Consolidated Affiliated Entities are incorporated in China and subject to all applicable PRC laws and regulations. Because of the relatively short period for enacting such a comprehensive legal system, it is possible that the laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and our stockholders, and may lead to penalties imposed on us because of the different understanding between the relevant authority and us. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
We may have limited legal recourse under the PRC laws if disputes arise under our contracts with parties in China.
The Chinese government has enacted significant laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. TheOur Company faces the risk that the parties to contracts may seek ways to terminate the transactions. For example, management of our Consolidated Affiliated Entities may hinder or prevent us from accessing important information regarding the financial and business operations of the Consolidated Affiliated Entities or refuse to pay us contractual consideration due under the VIE Agreements. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under the PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Although legislation in China over the past 3040 years or so has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and our stockholders. The inability to enforce or obtain a remedy under any of our existing or future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our operations.
Certain affiliates of ours are also directors and executive officers of our Consolidated Affiliated Entities. PRC laws provide that a director or certain members of senior management owes a fiduciary duty to the company he/she directs or manages. These individuals must therefore act in good faith and in the best interests of the relevant PRC company pursuant PRC laws and must not use their respective positions for personal gains. These laws do not require them to consider our best interests when making decisions as a director or member of management of the relevant PRC company. For example, it may be possible for management of Anhou to breach the VIE agreements and while their actions may be in violation of US laws they could be legal in the PRC. Any judgment for violation of fiduciary duty under USU.S. law may not be enforceable outside the United States. It may not be possible to effect service of process within the United States or elsewhere outside China upon certain our directors or senior executive officers residing in China, irrespective of matters arising under U.S. federal securities laws or applicable state securities laws. Any court judgment of United States for violation of fiduciary duty under USU.S. law may not be enforceable in the PRC due to the lack of bilateral treaties between PRC and the United States providing for the reciprocal recognition and enforcement of civil judgment of courts.
Risks Relating to Ownership of Our Shares
You may not be able to liquidate your investment since there is no assurance that a public market will develop for our common stock or that our common stock will ever be approved for trading on a recognized exchange.
There is no established public trading market for our securities. Though we have engaged a market maker to apply for a quotation on the OTCBBOTCQB in the United States and obtained the approval for trading, our shares are not and have not been listed on any recognized exchange. We cannot assure you that a regular trading market will develop or that if developed, will be sustained. In the absence of a regular trading market, you may be unable to liquidate its investment, which will result in the loss of your investment.
We have no plans to declare any dividends to shareholders in the near future.
We currently intend to retain our future earnings, if any, to support our operations and to finance expansion. The declaration, and amount of any future dividends will be made at the discretion of the Boardboard of Directors (“BOD”),directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the BODour board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. If you require dividend income, you should not rely on an investment in theour Company. Income received from an investment in theour Company will only come from a rise in the market price in theour Company’s stock, which is uncertain and unpredictable.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
Facilities
Law Enterprise and Law Broker shared the same address as their registered address, whichBroker’s headquarter is located at 5th Floor, No. 311 3rd Section, Nanjing East Road, Taipei City, Taiwan, with approximately 753.29 square meters of office space. The lease wasis between Pon-Chen Co., Ltd. and Law Broker, for two years commencing from June 1, 20132017 to May 31, 20152019 and with a monthly rent of $12,432 (NT$373,251)NT $373,251 ($12,279). The lease was renewed for another two years commencing from June 1, 2015 to May 31, 2017 with the same monthly rent. Law Broker has also entered into 3438 leases for each of its sales and service outlets and training centers (excluding its headquarters)headquarter), with an aggregate office size of 17,84519,291 square meters for an aggregate monthly fee of $117,673 (NT$3,713,584)NT$4,159,470 ($136,832).
Anhou’s current registered address is located at Room 1906-1910, No. 215 Jiangzhong Middle Road, Jianye District, Nanjing, Jiangsu Province, China, with 6,458 square feet (600 square meters) of office space. The lease agreement is between Qing Tian and Anhou. The term is from February 1, 2014 to January 31, 2019 with rent of first year being $120,578 (RMB750,000)RMB $750,000 ($110,996), second year being $125,592 (RMB795,000)RMB 795,000 ($117,656), third year being $135,482 (RMB842,700)RMB 842,700 ($124,715), the fourth year being $143,611 (RMB893,262)RMB $893,262 ($132,198), and the fifth year being $152,227 (RMB946,857)RMB 946,857 ($140,130).
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Sichuan Kangzhuang’s office is located at A and B areas, 14th Floor Renbao Building, No.57No. 57 Dongyu Street, Jinjiang District, Chengdu City, Sichuan province, China, with 8,353 square feet (776 square meters) of office space. The lease was between People's Insurance Company of China, Sichuan Branch and Sichuan Kangzhuang. The current lease term is from September 1, 20062017 to August 31, 20112020, for fourthree years, with rent of approximately $4,862 (RMB31,040)RMB $41,606 ($6,157) per month, to be increased by 8%5% per annum commencing from September 1, 2008, payable every three months. Upon the expiration of the above lease, Sichuan Kangzhuang entered into a new lease with People's Insurance Company of China, Sichuan Branch, which is located at B area, 14th Floor Renbao Building, No.57 Dongyu Street, Chengdu City, Sichuan province, China, with 6,672 square feet (612 square meters) of office space. The lease term is from September 1, 2011 to August 31, 2014 for three years, with rent of $5,313 (RMB33,652 ) per month in the first year commencing from September 1, 2011, $5,844 (RMB37,017) per month in the second year commencing from September 1, 2012, $6,429 (RMB40,719) per month in the third year commencing from September 1, 2013, payable every three months. On August 8, 2014, the lease was renewed and the term was extended to August 31, 2017 for three (3) years, with rent of $6,643(RMB41,606) per month2018, payable every three months.
Jiangsu Law’s office is located at No. 888 Jintong Road, Xingren County, Tongzhou District, Nantong City, Jiangsu province, China, with 10,76421,527 square feet (1,000(2,000 square meters) of office space. The lease was between Xiangriya Industrial (Nantong) Co., Ltd., which is an affiliate of Mao Yi Hsiao. The lease term is from January 1, 20132014 to December 31, 20172019 for five years, with rent of approximately $1,122 (RMB 7,083)RMB $85,000 ($12,580) per month,year, payable every year.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe have or will have a material adverse effect on our business, financial condition or operating results.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock has been quoted on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “CUII” since August 1, 2012.2012 and further uplisted from OTCBB to OTCQB in October 2016. The latest available closing price of our common stock prior to March 25, 201614, 2017 was $11.90. US$4.90.
The following table sets forth for the respective periods indicated the high and low closing prices for theour common stock, as reported by the OTCBB.stock. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
| Fiscal Year Ended December 31, 2015 | ||||||||
| Low | High | |||||||
| First Quarter ended March 31, 2015 | $ | 12.23 | $ | 13.28 | ||||
| Second Quarter ended June 30, 2015 | $ | 9.86 | $ | 13.06 | ||||
| Third Quarter ended September 30, 2015 | $ | 4.88 | $ | 11.63 | ||||
| Fourth Quarter ended December 31, 2015 | $ | 5.29 | $ | 10.00 | ||||
| Fiscal Year Ended December 31, 2017 | ||||||||
| Low | High | |||||||
| First Quarter ended March 31, 2017 | $ | 4.55 | $ | 6.79 | ||||
| Second Quarter ended June 30, 2017 | $ | 4.10 | $ | 5.20 | ||||
| Third Quarter ended September 30, 2017 | $ | 2.10 | $ | 5.04 | ||||
| Fourth Quarter ended December 31, 2017 | $ | 3.52 | $ | 5.10 | ||||
Shareholders
As of December 11, 2015,31, 2017, there were 121641 record owners of our common stock and one record owner of our preferred stock.
Transfer Agent
Our transfer agent is Island Stock Transfer, at the address of 15500 Roosevelt Blvd., Suite 301, Clearwater, FL33760.
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Dividends
We have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain our future earnings, if any, to support operations and to finance future growth and expansion and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Pursuant to the provisions of the AHFL Acquisition Agreement dated August 24, 2012 and its amendments on March 14, 2013, March 13, 2015, and February 17, 2016 and August 8, 2016, in lieu of the 2 million employee stock option pool (the “ESOP”) described in the AHFL Acquisition Agreement, theour Company is committed to create an employee stock pool or similar plan consisting of up to 5 million shares of CUIS common stock to be granted to employees of affiliated entities of theour Company (including Law Broker employees). Law Broker, being the only actively operated subsidiary in Taiwan, primarily engages in insurance brokerage and insurance agency service business across Taiwan. Upon satisfaction of respective performance criteria of Law Broker employees, the Boardboard of Directorsdirectors of Law Broker may submit its recommendation to theour Company for its approval and issuance of such options under the ESOP. Details of terms and conditions on the said ESOP shall be set forth in separate ESOP documents duly approved by our Company.
On May 12, 2017, the Company. AsCompany’s 2017 Long Term Incentive Plan (the “2017 Plan”) was approved by the shareholders at the 2017 Annual Meeting of March 24, 2016,Stockholders of China United Insurance Service, Inc. Up to 10,000,000 shares of our Common Stock may be granted under the 2017 Plan (the “Share Pool”) is equal to 10,000,000, provided that 2,000,000 shares of the Share Pool is reserved for issuance to eligible participants providing services to Action Holdings Financial Limited and its subsidiaries. Eligibility to participate is open to officers, directors and employees of, and other individuals (including sales agents who are exclusive agents of the Company has not yet set upor its subsidiaries or derive more than 50% of their income from those entities) who provide bona fide services to or for, us or any of our subsidiaries. Given that metrics for evaluating performance goals are rather complex and exhaustive, and that the ESOP. Company’s management and Board of Directors are still working to develop a series of reward policies that specify various performance target levels and the size of the award or payout of performance shares with respect to each different target level attained, no awards were granted under the 2017 Plan as of December 31, 2017.
Options and Warrants
As of March 24, 2016,14, 2018, we had no outstanding options or warrants.warrants exercisable for shares of our Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated statement of operations data for the years ended December 31, 2015, 2014, the six months ended December 31, 2013,2017, 2016 and the years ended June 30, 20132015 and the selected consolidated balance sheet data as of December 31, 20152017, 2016 and 20142015 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K.
On January 17 2014,As described in “Explanatory Note Regarding Restatement” above and in Item 8 of Part II, “Financial Statements and Supplementary Data—Note 27—Restatement”, the Company’s BoardCompany has restated its consolidated financial statements as of Directors approved a change in our fiscal year end to December 31 from June 30. As China United acquired AHFL and its Taiwan subsidiaries on August 24, 2012, AHFL’s operating results from September 1, 2012 are included in the consolidated statements of operations. The consolidated statements of operations for the years ended December 31, 2016 and 2015 to correct errors related the accounting for the GHFL Acquisition. The Company also restated the unaudited interim financial data as of and for each of the interim periods ended March 31, 2017, June 30, 20122017 and 2011 doesn’t includeSeptember 30 2017. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 28—Quarterly Financial Data (Unaudited).” The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the operating resultperiods affected by the Restatement. Historical results, including those that have been restated, are not necessarily indicative of AHFL and its subsidiaries.the results to be expected in future periods.
Our historical results, including those that have been restated, are not necessarily indicative of the results that may be expected in the future. You should read the following selected financial data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements, related notes, and other financial information included elsewhere in this Form 10-K.
The following selected consolidated financial and other data is as of and for the years ended December 31 and is derived in part from, and should be read in conjunction with the Company’s Consolidated Financial Statements and related notes. Amounts as of and for years ending December 31, 2015 and 2016 have been restated from previously reported results to correct for material and certain other errors from prior periods. Refer to Item 8 of Part II, “Financial Statements and Supplementary Data—Note 27—Restatement” for further detail. The following table presents the selected financial data as of and for the year ended December 31, 2017 and adjustments implemented to produce the restated selected financial data as of and for years ending December 31, 2015 and 2016:
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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
| Year Ended December 31, | Six Months Ended | Year Ended | ||||||||||||||
| 2015 | 2014 | December 31, 2013 | June 30, 2013 | |||||||||||||
| Revenues | $ | 55,023,766 | $ | 47,449,962 | 23,689,110 | $ | 37,842,246 | |||||||||
| Cost of revenue | 35,423,762 | 30,408,118 | 16,040,303 | 24,309,716 | ||||||||||||
| Gross profit | 19,600,004 | 17,041,844 | 7,648,807 | 13,532,530 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 3,084,408 | 4,034,409 | 2,010,744 | 962,958 | ||||||||||||
| General and administrative | 12,675,171 | 11,971,863 | 5,948,516 | 9,062,828 | ||||||||||||
| Impairment loss of goodwill | - | - | 122,250 | - | ||||||||||||
| Total operating expense | 15,759,579 | 16,006,272 | 8,081,510 | 10,025,786 | ||||||||||||
| Income (loss) from operations | 3,840,425 | 1,035,572 | (432,703 | ) | 3,506,744 | |||||||||||
| Other income: | ||||||||||||||||
| Interest income | 229,855 | 229,317 | 108,654 | 83,682 | ||||||||||||
| Bargain gain on purchase of subsidiaries | - | - | - | 5,280,042 | ||||||||||||
| Other - net | 150,071 | 365,225 | (652,079 | ) | 432,064 | |||||||||||
| Total other income | 379,926 | 594,542 | (543,425 | ) | 5,795,788 | |||||||||||
| Income before income taxes | 4,220,351 | 1,630,114 | (976,128 | ) | 9,302,532 | |||||||||||
| Income tax expense | 1,519,226 | 1,672,840 | 143,660 | 698,508 | ||||||||||||
| Net income (loss) | 2,701,125 | (42,726 | ) | (1,119,788 | ) | 8,604,024 | ||||||||||
| Net income attributable to the noncontrolling interests | 1,623,198 | 865,406 | 32,190 | 1,386,556 | ||||||||||||
| Net income (loss) attributable to parent's shareholders | 1,077,927 | (908,132 | ) | (1,151,978 | ) | 7,217,468 | ||||||||||
| Other comprehensive items | ||||||||||||||||
| Foreign currency translation gain (loss) | (329,562 | ) | (268,695 | ) | (38,218 | ) | 13,195 | |||||||||
| Other comprehensive income (loss) | 310 | (6,298 | ) | 4,001 | 384 | |||||||||||
| attributable to parent's shareholder | (329,252 | ) | (274,993 | ) | (34,217 | ) | 13,579 | |||||||||
| Other comprehensive items | ||||||||||||||||
| attributable to noncontrolling interest | (477,738 | ) | (346,783 | ) | (16,557 | ) | (1,630 | ) | ||||||||
| Comprehensive income (loss) attributable to parent's shareholders | $ | 748,675 | $ | (1,183,125 | ) | (1,186,195 | ) | $ | 7,231,047 | |||||||
| Comprehensive (income) loss attributable to noncontrolling interest | $ | (1,145,460 | ) | $ | (518,623 | ) | (15,633 | ) | $ | (1,388,186 | ) | |||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 29,365,834 | 29,100,503 | 29,100,503 | 27,593,654 | ||||||||||||
| Diluted | 30,365,834 | 29,100,503 | 29,100,503 | 28,588,174 | ||||||||||||
| Income (loss) per share: | ||||||||||||||||
| Basic | $ | 0.037 | $ | (0.031 | ) | 0.040 | $ | 0.262 | ||||||||
| Diluted $ | 0.035 | $ | (0.031 | ) | 0.040 | $ | 0.252 | |||||||||
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Restated) | ||||||||||||
| Revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 55,023,766 | ||||||
| Cost of revenue | 42,801,007 | 46,554,495 | 35,423,762 | |||||||||
| Gross profit | 30,047,437 | 23,379,511 | 19,600,004 | |||||||||
| Operating expenses: | ||||||||||||
| Selling | 2,344,633 | 2,842,744 | 3,084,408 | |||||||||
| General and administrative | 14,959,384 | 13,852,277 | 14,715,011 | |||||||||
| Total operating expense | 17,304,017 | 16,695,021 | 17,799,419 | |||||||||
| Income from operations | 12,743,420 | 6,684,490 | 1,800,585 | |||||||||
| Other income (expenses): | ||||||||||||
| Interest income | 339,169 | 208,665 | 230,509 | |||||||||
| Interest expenses | (35,375 | ) | (19,722 | ) | (654 | ) | ||||||
| Dividend income | 332,302 | 273,873 | - | |||||||||
| Other - net | 312,066 | (8,125 | ) | 150,071 | ||||||||
| Total other income (expenses) | 948,162 | 454,691 | 379,926 | |||||||||
| Income before income tax | 13,691,582 | 7,139,181 | 2,180,511 | |||||||||
| Income tax expense | 3,513,717 | 2,119,598 | 1,519,226 | |||||||||
| Net income | 10,177,865 | 5,019,583 | 661,285 | |||||||||
| Net income attributable to the noncontrolling interests | 3,023,227 | 2,127,428 | 1,623,198 | |||||||||
| Net income attributable to parent's shareholders | 7,154,638 | 2,892,155 | (961,913 | ) | ||||||||
| Other comprehensive items | ||||||||||||
| Foreign currency translation gain | 1,241,081 | (30,045 | ) | (329,562 | ) | |||||||
| Other | 42,914 | 42,202 | 310 | |||||||||
| Other comprehensive income attributable to parent's shareholder | 1,283,995 | 12,157 | (329,252 | ) | ||||||||
| Other comprehensive items attributable to noncontrolling interests | 940,887 | 147,487 | (477,738 | ) | ||||||||
| Comprehensive income attributable to parent's shareholders | $ | 8,438,633 | $ | 2,904,312 | $ | (1,291,165 | ) | |||||
| Comprehensive income attributable to noncontrolling interests | $ | 3,964,114 | $ | 2,274,915 | $ | 1,145,460 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 29,452,669 | 29,452,669 | 29,365,834 | |||||||||
| Diluted | 30,509,552 | 30,462,097 | 29,365,834 | |||||||||
| Net income per share attributable to parent's shareholder: | ||||||||||||
| Basic | $ | 0.243 | $ | 0.098 | (0.033 | ) | ||||||
| Diluted | $ | 0.235 | $ | 0.095 | (0.033 | ) | ||||||
Selected Consolidated Balance Sheet Data
| Selected consolidated balance sheet data | As of December 31, | |||||||||||||||||||
| 2015 | 2014 | As of December 31, | ||||||||||||||||||
| 2017 | 2016 (Restated) | 2015 (Restated) | ||||||||||||||||||
| Total assets | $ | 39,401,816 | $ | 32,336,764 | $ | 59,273,243 | $ | 49,367,703 | $ | 37,361,976 | ||||||||||
| Total current liabilities | 13,560,879 | 11,023,387 | 19,438,643 | 21,289,779 | 13,560,879 | |||||||||||||||
| Total long-term liabilities | 6,594,530 | 7,500,645 | 5,091,226 | 5,770,234 | 6,594,530 | |||||||||||||||
| Total shareholders' equity | 19,246,407 | 13,812,732 | ||||||||||||||||||
| Total shareholders’ equity | 34,743,374 | 22,307,690 | 17,206,567 | |||||||||||||||||
| 50 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
You should read thisThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financialconsolidated financial statements and the accompanying notes thereto included in Item 8 of Part II, “Financial Statements and Related Notes.Supplementary Data” of this Form 10-K Report.
Overview
China United Insurance Service, Inc. (“China United”, ”CUIS” or the “Company”) isWe are a Delaware corporation, organized on June 4, 2010 by Yi-HsiaoMr. Mao a Taiwanese citizen, as a listing vehicleholding company for both ZLI Holdings Limited (“CU Hong Kong”) to beand Action Holdings Financial Limited (“AHFL,” a company incorporated in the British Virgin Islands), which is quoted on the Over the Counter Bulletin Board (the “OTCBB”). CU Hong Kong, a wholly owned Hong Kong-based subsidiary of China United, was founded by China United on July 12, 2010 under Hong Kong laws. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. (“CU WFOE”) in Henan province in the People’s Republic of China (“the PRC”).
On January 16, 2011, China United issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non US persons for $300,000 in cash invested in the Company’s subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended. The consideration was paid as of June 30, 2012. On January 28, 2011, the Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common and 10,000,000 shares of preferred stock.
Law Anhou Insurance Agency Co., Ltd. (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd. or Henan Law Anhou Insurance Agency Co., Ltd.) was founded in Henan province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Yanyan Wang, Zhaohui Chen, Weizhe Hou and Yong Zhang, to invest in Anhou on its behalf. On September 26, 2013, the new PRC individual investors, namely Yanyan Wang, Zhaohui Chen, Jing Yue, Weizhe Hou, Yong Zhang, Li Chen (“Anhou New Investors”) and the original shareholders of Anhou (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million (approximately $8 million). On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with Changrong Hu, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer price of RMB10 million ($1,633,178). Mr. Hu is currently the legal representative and the sole director of Anhou.
On October 24, 2013, Anhou completed the registration with local Administration Industry and Commerce (“AIC”) on the above-mentioned capital increase. The new business license was issued to Anhou on October 25, 2013.
The registered capital increase of Anhou is in response to the promulgations of certain regulations by China Insurance Regulatory Commission (“CIRC”). On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8,165,890). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million ($8,165,890), can continue operation of their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million ($1,633,178). The branch offices of Anhou were all in Henan province. To better implement its expansion strategies, Anhou increased its registered capital to RMB50 million ($8,165,890) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in Mainland China.
On February 26, 2014, Anhou completed the registration of the change of its registered address to Room 1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued by Jiangsu Bureau of CIRC on April 21, 2014. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 2006 in Sichuan province in the PRC and provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Sichuan Kangzhuang. Sichuan Kangzhuang then had net liabilities of RMB219,123 ($32,134). Goodwill of RMB751,745 ($110,452) was therefore recorded. However, Sichuan Kangzhuang suffered loss since the acquisition, indicating the impairment of goodwill.Board. As of December 31, 2014, the carrying value of the goodwill was fully impaired.
Jiangsu Law Insurance Broker Co., Ltd. (“Jiangsu”) was founded on September 19, 2005 in Jiangsu Province in the PRC and provides insurance brokerage services in the PRC. On August 12, 2010, at Jiangsu’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB518,000 ($75,475) and Anhou increased Jiangsu Law’s paid-in capital to RMB10,000,000 ($1,355,000) from RMB5,180,000 ($625,113) on January 18, 2011 to meet the PRC paid-in capital requirements for insurance brokerage companies. On September 28, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Jiangsu. On acquisition date, Jiangsu had net assets of RMB2,286,842 ($341,425). Based on the purchase price allocation, the fair value (“FV”) of the identifiable assets and liabilities assumed exceeded the FV of the consideration paid. As a result, the Company recorded a gain on acquisition of RMB1,768,842 ($267,156).
Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications and capital requirements of the investors, we operate our business primarily2017, through our Consolidated Affiliated Entities, (“CAE”) in China. On January 17, 2010, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. We do not hold equity interests in our CAE. However, through the VIE Agreements with these CAE and their respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these CAE.
Our CAE in China are VIE through which part of our insurance services are operated. It is through the VIE Agreements that we have effective control of the CAE, which allows us to consolidate the financial results of the CAE in our financial statements. If Anhou and its shareholders fail to perform their obligations under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that give us effective control. Furthermore, if we are unable to maintain effective control of our CAE, we would not be able to continue to consolidate the CAE’s financial results with our financial results. On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, however, how these changes will affect entities currently operating in China, particularly foreign controlled variable interest entities, is not entirely clear. For more information see “Risk Factors-Risks Related to Our Corporate Structure.”
On July 2, 2012, the Board of Directors and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Yi-Hsiao Mao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification.
Mr. Mao has extensive experience in the insurance agency and brokerage industry and has acted as the chairman of the board of Law Broker. Under the leadership of Mr. Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades and generated substantial shareholder value for its stockholders. The management of the Company wanted Mr. Mao to apply his years of experience in insurance industry into the Company’s expansion and to lead its growth. As a result the Company approached Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and operation of the Company and its subsidiaries. To ensure the consistently implementation of strategies and policies of the Company, through mutual discussion and negotiations, both the Company and Mr. Mao (and subsequently a majority of the shareholders) agreed to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for the reclassification, Mr. Mao agreed to be engaged by the Company as its Chief Executive Officer within 6 months after July 2, 2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief Executive Officer, effective immediately.
All 1,000,000 shares of Series A Preferred Stock were reclassified from the 1,000,000 shares of common stock held by Mr. Mao and no additional consideration was paid by Mr. Mao in connection with the Reclassification. The preferred stock has no material quantitative preferences over common stock, such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of Action Holdings Financial Limited (“AHFL”), a limited liability company (“LLC”) incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned subsidiary of the Company.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Risk Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent” collectively with “ Law Enterprise”, “Law Broker”, “Risk Management” and “Law Agent”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”), a LLC incorporated in Taiwan on June 3, 2000.
Pursuant to the provisions of the Acquisition Agreement between the Company and the selling shareholders of AHFL and for all of the issued and outstanding shares of AHFL, the Company was to pay NT$15 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments, subject to terms and conditions therein. In addition the Company agreed to (i) issue 8,000,000 shares of common stock of the Company to the shareholders of AHFL; (ii) issue 2,000,000 shares of common stock of the Company to certain employees of Law Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of the Company.
On March 14, 2013, the Company and the selling shareholders of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS common stock, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of the Company (including Law Broker employees). On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the Acquisition Agreement (the “Second Amendment”), pursuant to which, the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL. On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the Acquisition Agreement (the “Second Amendment”), pursuant to which, the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL. On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company is committed to complete the listing of the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least US$10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NT$22.5 million (approximately US$676,466), on a pro rata basis, to the selling shareholders of AHFL and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the Selling Shareholders as if the said acquisition had never happened. If the Company fails to meet either of these criteria and the shareholders of AHFL exercise their right to unwind the Acquisition of AHFL by CUIS, the business and financial prospects of the Company may be severely negatively affected. The Company is doing its best to achieve the targeted milestones as set forth in the third Amendment to the Acquisition Agreement. However, given the tight schedule and harsh general environment, despite every efforts of the Company, it might be really difficult for the Company to do so within the stipulated deadline. Therefore, the Company is actually negotiating with the Selling Shareholders of AHFL to convince them to give up such termination rights in case of failure to comply with the first and second requirements under Third Amendment within the stipulated deadline while continuously using its best efforts to fulfill such obligations.
Law Enterprise is a holding company for its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Risk Management and Law Agent are not active. We operate our Taiwan business primarily through Law Broker.
On January 17 2014, the Company’s Board of Directors approved a change in our fiscal year end to December 31 from June 30.
On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Chun Kwok Wong (“Mr. Wong”), the owner of Prime Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr. Wong would increase PFAL’s capital contribution from HK$500,000 to HK$1,470,000, and AHFL would contribute HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital contribution by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
In the fourth quarter of 2014, the shareholders of the Risk Management and Law Agent made the resolution to dissolve Risk Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Risk Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Risk Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Risk Management and Law Agent completed the liquidation process in the year ended of December 31, 2015.
On February 13, 2015, the Company and AHFL entered into an acquisition agreement (the “Acquisition Agreement”) with Mr. Chwan Hau Li, the selling shareholder of Genius Holdings Financial Limited (the “Selling Shareholder”), a company with limited liability incorporated under the laws of British Virgin Islands (“GHFL”), to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock (“AHFL Shares”) together with an granted put option for 352,166 shares of common stock of the Company (“Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the Selling Shareholder would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL will become a wholly-owned subsidiary of the Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds approximately 15% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. On February 13, 2015, the acquisition was completed, the Selling Shareholder transferred 100% shares in GHFL to AHFL. On March 31, 2015, the put option was exercised and Mr. Li received 352,166 shares of common shares of CUIS in exchange for his AHFL shares. On February 17, 2016, the Company and AHFL entered into an Amendment 2 to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Li, pursuant to which, on or prior to February 28, 2016, (i) the Company is committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least $10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised. The right to revoke the Put Option has not been exercised as March 24, 2016.
AHFL holds 51% of the issued and outstanding shares of PFAL. PFAL incorporated (i) Max Key Investment Ltd.,(“MKI”) a company limited by shares incorporated in British Virgin Islands on August 7, 2015 (ii) Prime Technology Consulting (Nanjing) Co., Ltd., (“PTC Nanjing”) a company limited by shares incorporated in Nanjing on August 15, 2015.
On September 3, 2015, MKI incorporated Prime Technology Consulting Co., Ltd., (“PTC Taiwan”) a company limited by shares incorporated in Taiwan. MKI is a holding company for its operating subsidiaries in Taiwan. PTC Taiwan primarily engages in insurance platform establishment and related information technology consulting service business across Taiwan.
As of December 31, 2015, through our CAE, we had two insurance agencies, one brokerage and 43 service outlets with 4,7112,715 full-time sales professionals and 140116 administrative staff in Nanjing, Henan, Sichuan, Jiangsu, Fujian, Guangdong and JiangsuYunnan provinces in China. In addition, through Law Insurance Broker, Co., Ltd., we had 2630 sales and service outlets (including the headquarters) with 2,1692,414 sales professionals and 160195 administrative staff in Taiwan.
During the year ended December 31, 2015, 89.29%2017, 85.31%, 14.37% and 10.71%0.32% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and CAE,Hong Kong, respectively. During the year ended December 31, 2014, 93.55%2016, 87.52%, 12.10% and 6.45%0.38% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and CAE,Hong Kong, respectively. During the year ended December 31, 2015, 88.45%, 10.71% and 0.84% of our revenues were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and Hong Kong, respectively.
Restatement
The Company has restated our consolidated financial statements as of and for years ended December 31, 2016 and 2015 contained in our Annual Reports on Form 10-K for the years ended December 31, 2016 and 2015, and unaudited interim consolidated financial statements contained in our Quarterly Reports on Form 10-Q as of and for each of the quarters ended March 31, 2017, June 30, 2017 and September 30, 2017. The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the Restatement. The Restatement corrects a material error related to the method of accounting for the GHFL Acquisition in 2015, which was erroneously accounted for as the acquisition of a business but which the Company has determined should have been accounted for as an acquisition of assets. This change in accounting has required corrections which included adjustments to, certain 2015 and 2016 consolidated balance sheets line items, including goodwill, total assets, retained earnings, stockholders’ equity attribute to parent’s shareholders, total stockholders’ equity, total liabilities and stockholders’ equity and certain 2015 consolidated statement of operations and other comprehensive income line items, such as general and administrative, total operating expense, income from operations, income before income taxes, net income, net income attributable to parent’s shareholders and comprehensive income attributable to parent’s shareholder. In the aggregate, these corrections decreased fiscal year 2015 net income by $2.0 million to $661,285 and decreased the December 31, 2015 and 2016 balance of (accumulated deficit) retained earnings by $2.0 million to $(231,175) and $1,246,722, respectively. For discussion of the restatement adjustments, see “Explanatory Note Regarding Restatement,” “Item 8. Financial Statements and Supplementary Data,” “Note 9 – Goodwill,” “Note 27 – Restatement” and “Note 28 – Quarterly Financial Data (Unaudited)” to our consolidated financial statements included elsewhere. Additionally, see “Item 6. Selected Financial Data.” Our 2016 consolidated statements of operations and other comprehensive income were not impacted.
The Company had material weaknesses in adequate procedures and controls to appropriately account for asset acquisition and the impact resulted in restatement of our previously filed consolidated financial statements for 2016 and 2015. We are working to remediate the material weaknesses by taking steps to enhance our internal control environment and strengthen our internal review of accounting standards and pronouncements to ensure transactions are properly accounted for. See Item 9A (c) of Part II, “Remediation of Material Weaknesses.”
Critical Accounting Policies
The preparation of financial statements in conformity with Accounting Principles generally accepted in the United States of America (“USU.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the period. Management makes these estimates using the best information available when they are made. However, actual results could differ materially from those estimates. While there are a number of significant accounting policies affecting the Company’sour financial statements; the Company believeswe believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments The Company hasjudgments. We have not made any material changes in the methodology used in these accounting polices during the past twothree years.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of China Unitedour Company and its subsidiaries as shown in the organization structure in Note 1.our subsidiaries. All significant intercompany transactions and balances werehave been eliminated in consolidation.
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Basis of PresentationAccounts Receivable and Allowance for Doubtful Accounts
The Company’s financial statements are preparedWe review our accounts receivable regularly to determine if a bad debt allowance is necessary at each quarter-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in accordance with accounting principles generally accepted incustomer payment patterns to evaluate the United Statesnecessity of America (“US GAAP”). making such allowance. No allowance was deemed necessary as of December 31, 2017 and 2016.
Noncontrolling InterestImpairment of Long-Lived Assets
Noncontrolling interest consists
In accordance with ASC Topic 360,“Property, Plant and Equipment”, we review the carrying values of directlong-lived assets when circumstances warrant in order to determine whether their carrying value has become impaired. We consider assets to be impaired if the carrying value of an asset exceeds the present value of future net undiscounted cash flows from related operations. No impairment was recognized for the years ended December 31, 2017, 2016 and indirect equity interest2015.
Goodwill and Intangible Assets
Goodwill represent the excess of acquisition cost over the fair value of the net assets in AHFL and subsidiaries arising from the acquisition of AHFLbusiness. Goodwill is not amortized but instead is tested for impairment annually or more frequently if events or charges in circumstances indicate it might be impaired, using two-step goodwill impairment test. The first step screens for potential impairment of goodwill to determine if the fair value of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied fair value of goodwill to its carrying value. As of December 31, 2017 and 2016, there were no indications of impairment of goodwill.
On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with the sole shareholder of GHFL, Mr. ChwanHau Li, under the terms of which the Company issued 352,166 fully paid and non-assessable shares of AHFL Common Stock and granted an option to purchase 352,166 shares of common stock of CUIS (the “Option”), in exchange for all of the issued and outstanding 704,333 shares of common stock of GHFL. On February 13, 2015, the acquisition was completed; the selling shareholder transferred 100% of the shares in GHFL to AHFL. The Option was exercised by the selling shareholder on March 31, 2015. The GHFL Acquisition was accounted for as the acquisition of PFA by AHFL on August 24, 2012 and April 23, 2014, respectively.
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreasesbusiness in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
Use of Estimates
The preparation of theCompany’s consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amountsas of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available when they are made; however, actual results could differ materially from those estimates.
Risks and Uncertainties
The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, and foreign currency exchange rates.
Foreign Currency Transactions
The functional currency for our subsidiaries in Taiwan is New Taiwan Dollar (“NT$”), for our subsidiaries in Hong Kong is Hong Kong Dollar (“HK$”) and for the VIEs in China is Renminbi (“RMB”).
The consolidated financial statements were translated into United States Dollars (“USD” or “$”) in accordance with FASB ASC Topic 830“Foreign Currency Transaction.” According to the standard, all assetsyear ended December 31, 2015 and liabilities were translated at the exchange rate on the balance sheet dates; stockholders’ equity is translated at historical rates2016, but upon reflection and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC 220. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss).
Marketable Securities
The Company invests part of its excess cash in equity securities, money market funds and government bonds. Such investments are included in “Marketable securities” in the accompanying consolidated balance sheets. Held-to-maturity represents securitiesfurther analysis, the Company has intends and hascome to the ability to hold to maturity; trading securities represent securities bought and held primarilyconclusion that it would be more accurately accounted for sale in the near-term to generate income on short-term price differences; available-for-sale represents securities not classified as held-to-maturity or trading securities.
The Company classifies the equity security investments as trading securities and reports them at FV with changes in FV recorded in “Other Income” in the statements of operations and other comprehensive income (loss). The Company classifies bonds as available-for-sale and reports them at FV with unrealized gains and losses included in “Accumulated other comprehensive income (loss)” on the equity sectionan asset acquisition. As a result of the balance sheets.restatement of these financial statements. The effect of restatement reduced our goodwill in each year was reduced from $2,071,491 to $31,651. Please refer to Note 27 of the Notes to the Consolidated Financial Statements for additional information.
Revenue recognition
The Company’sOur revenue is from insurance agency and brokerage services. TheOur Company, through itsour subsidiaries, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. TheOur Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of issuance of the policies, in which customers can cancel the contract without any fees. TheOur Company is notified of such cancellations by the insurance carriers. For the fiscal years ended December 31, 20152017, 2016 and 2014,2015, policy cancellations were $2,226$227,901, $340,086 and $84,476,$291,325, respectively.
The
Our Company pays commissions to its sub-agentssales professional when an insurance product is sold by the sub-agent. Thesales professional and accepted by the insurance company. Our Company recognizes commission revenue on a gross basis. The commissions paid by the Companyus to its sub-agentsour sales professional are recorded as costs of revenue.
Income taxes
The Company utilizes ASC Topic 740 “Income Taxes”, which requires recognitionrecords income tax expense using the asset-and-liability method of accounting for deferred tax assets and liabilities for the expected future tax consequences of events that were included in the financial statements or tax returns.income taxes. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period endyear-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowancesDeferred tax assets are established, when necessary, to reducereduced by a valuation allowance if, based on available evidence, it is more likely than not that the deferred tax assets to the amount expected towill not be realized.
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When tax returns are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of operations and other comprehensive income (loss). As of December 31, 2015 and 2014, the Company did not have any uncertain tax positions.
The Company was not subjected to income tax examinations by taxing authorities during the current or past fiscal years. In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit, which has been accrued in the fiscal year ended December 31, 2014, and it has not been paid during the year ended December 31, 2015.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360,“Property, Plant and Equipment”, the Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value (“FV”). Assets to be disposed of are reported at the lower of the carrying amount or FV, less costs of disposal. No impairment was recognized for the years ended December 31, 2015 and 2014.
Goodwill
Goodwill arose from both the acquisition of PFAL and GHFL. Goodwill is the excess of the cost of an acquisition over the FV of the net assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using the prescribed two-step process under US GAAP. The first step screens for potential impairment of goodwill to determine if the FV of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied FV of goodwill to its carrying value. As of December 31, 2015, there were no any indications of the impairment of goodwill that arose from the acquisition of PFAL and GHFL.
Recent Accounting Pronouncements
In May 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent). The ASU removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and also removes certain disclosure requirements. The new requirements are effective for the Company beginning January 1, 2016 with retrospective application to all periods presented required and early adoption permitted. The Company does not expect the ASU to materially affect our financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's accounting for Fees Paid in a Cloud Computing Agreement. The ASU will require an entity's management to assess, for each annual and interim period, whether a cloud computing arrangement includes a software license. All software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. If the arrangement does not include a software license, the arrangement should be accounted for as a service contract. The ASU will be effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. Entities will have the choice of prospective or retrospective adoption of the standard. The Company believes the adoption of this ASU will not have a material impact on its consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented as a deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. Recognition and measurement guidance for debt issuance costs is not affected by this ASU. The ASU is effective for periods beginning after December 15, 2015, and the Company does not expect the implementation to have a material effect on its financial position or results of operations.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this update defers the effective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, interim and annual reporting periods after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is still in the process of analyzing the effect of this new standard, including the transition method, to determine the impact on the Company's consolidated financial position, results of operations, cash flows, and related disclosures.
The FASB has issued Accounting Standards Update No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments". Measurement period adjustments are changes to provisional amounts recorded when the accounting for a business combination is incomplete as of the end of a reporting period. The measurement period can extend for up to a year following the transaction date. The new guidance requires companies to recognize these adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. Companies are no longer required to retroactively apply measurement period adjustments to the prior period. This update is effective for annual and interim periods beginning after December 15, 2016. We have early adopted this standard beginning in fiscal 2015. There was no material impact to the Consolidated Financial Statements.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes". The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. ASU 2015-17 will be effective for us, but will not cause a material impact on our financial condition or the results of our operations.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Corporation is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.
Results of Operations
Overview of the years ended December 31, 20152017 and 20142016
The following table shows the results of operations for the years ended December 31, 20152017 and 2014:2016:
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||
| 2015 | 2014 | Change | Percent | 2017 | 2016 | Change | Percent | |||||||||||||||||||||||||
| Revenues | $ | 55,023,766 | $ | 47,449,962 | $ | 7,573,804 | 16 | % | ||||||||||||||||||||||||
| Revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 2,914,438 | 4 | % | ||||||||||||||||||||||||
| Cost of revenue | 35,423,762 | 30,408,118 | 5,015,644 | 16 | % | 42,801,007 | 46,554,495 | (3,753,488 | ) | (8 | )% | |||||||||||||||||||||
| Gross profit | 19,600,004 | 17,041,844 | 2,558,160 | 15 | % | 30,047,437 | 23,379,511 | 6,667,926 | 29 | % | ||||||||||||||||||||||
| Gross profit margin | 36 | % | 36 | % | 34 | % | 94 | % | 41 | % | 33 | % | 229 | % | 725 | % | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling | 3,084,408 | 4,034,409 | (950,001 | ) | (24 | )% | 2,344,633 | 2,842,744 | (498,111 | ) | (18 | )% | ||||||||||||||||||||
| General and administrative | 12,675,171 | 11,971,863 | 703,308 | 6 | % | 14,959,384 | 13,852,277 | 1,107,107 | 8 | % | ||||||||||||||||||||||
| Income (loss) from operations | 3,840,425 | 1,035,572 | 2,804,853 | 271 | % | |||||||||||||||||||||||||||
| Income from operations | 12,743,420 | 6,684,490 | 6,058,930 | 91 | % | |||||||||||||||||||||||||||
| Other income (expenses): | ||||||||||||||||||||||||||||||||
| Interest income | 229,855 | 229,317 | 538 | 0 | % | 339,169 | 208,665 | 130,504 | 63 | % | ||||||||||||||||||||||
| Interest expense | (35,375 | ) | (19,722 | ) | (15,653 | ) | 79 | % | ||||||||||||||||||||||||
| Dividend income | 332,302 | 273,873 | 58,429 | 21 | % | |||||||||||||||||||||||||||
| Other - net | 150,071 | 365,225 | (215,154 | ) | (59 | )% | 312,066 | (8,125 | ) | 320,191 | (3941 | )% | ||||||||||||||||||||
| Total other income (expenses) | 379,926 | 594,542 | (214,616 | ) | (36 | )% | 948,162 | 454,691 | 493,471 | 109 | % | |||||||||||||||||||||
| Income (loss) before income taxes | 4,220,351 | 1,630,114 | 2,590,237 | 159 | % | |||||||||||||||||||||||||||
| Income before income taxes | 13,691,582 | 7,139,181 | 6,552,401 | 92 | % | |||||||||||||||||||||||||||
| Income tax expense | 1,519,226 | 1,672,840 | (153,614 | ) | (9 | )% | 3,513,717 | 2,119,598 | 1,394,119 | 66 | % | |||||||||||||||||||||
| Net income (loss) | 2,701,125 | (42,726 | ) | 2,743,851 | (6422 | )% | ||||||||||||||||||||||||||
| Net income | 10,177,865 | 5,019,583 | 5,158,282 | 103 | % | |||||||||||||||||||||||||||
| Net income attributable to the noncontrolling interests | 1,623,198 | 865,406 | 757,792 | 88 | % | 3,023,227 | 2,127,428 | 895,799 | 42 | % | ||||||||||||||||||||||
| Net income (loss) attributable to parent's shareholders | 1,077,927 | (908,132 | ) | 1,986,059 | (219 | )% | ||||||||||||||||||||||||||
| Net income attributable to parent's shareholders | 7,154,638 | 2,892,155 | 4,262,483 | 147 | % | |||||||||||||||||||||||||||
Please note that our results of operations in 2016 were not affected by the restatement.
90
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RevenuesRevenue
As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies.companies in among Taiwan, PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales agentsprofessionals in our distribution and service network. The acquisitionRevenue in the year ended December 31, 2017 totaled over $72.8 million, an increase of AHFL enabled usapproximately $2.9 million (or slightly over 4%) compared with approximately $69.9 million in the previous year. This increase was attributable primarily to reachgrowth of our business in Taiwan and the untapped market in Taiwan.PRC. For the years ended December 31, 20152017 and 2014,2016, the revenue generated respectively from Taiwan, PRC and PRC isHong Kong was as follows:
| Years ended December 31, | For the year ended December 31, | |||||||||||||||
| Geographical Areas | 2015 | 2014 | 2017 | 2016 | ||||||||||||
| Revenue | ||||||||||||||||
| Taiwan | $ | 62,147,136 | $ | 61,208,145 | ||||||||||||
| PRC | $ | 5,892,928 | $ | 3,060,765 | 10,467,488 | 8,461,511 | ||||||||||
| Taiwan | 49,130,838 | 44,389,197 | ||||||||||||||
| $ | 55,023,766 | $ | 47,449,962 | |||||||||||||
| Hong Kong | 302,096 | 325,408 | ||||||||||||||
| Elimination adjustment | (68,276 | ) | (61,058 | ) | ||||||||||||
| Total Revenue | $ | 72,848,444 | $ | 69,934,006 | ||||||||||||
During the year ended December 31, 2015, 89.29%2017, 85.31%, 14.37% and 10.71%0.32% of our revenuesrevenue in our audited consolidated financial statements were derived from our Taiwan, Subsidiaries and Consolidated Affiliated Entities (“CAE”) in PRC and Hong Kong, respectively. During the year ended December 31, 2014, 93.55%2016, 87.52%, 12.10% and 6.45%0.38% of our revenuesrevenue in our audited consolidated financial statements were derived from our Taiwan, SubsidiariesCAE in PRC and CAE,Hong Kong, respectively.
Total revenuesrevenue increased by $7,573,804,$2,914,438, or 16%4%, from $47,449,962$69,934,006 for the year ended December 31, 20142016 to $55,023,766$72,848,444 for the year ended December 31, 2015, which is2017, mainly due to the increase of the revenue in Taiwan and PRC for the following reasons,reasons:
| a) | The revenue of TransGlobe Life Insurance Inc. (“TransGlobe”) increased in 2017. The main reason for this increase was the launch of TransGlobe’s top seller product that offers better disability support insurance coverages with an affordable insurance premium. This selling package drew more attention from the Company’s customers and boosted the sales performance in the year ended December 31, 2017. |
| b) | The revenue of |
| c) | On June 14, 2017, with AIATW’s consent, the 2016 Letter has been revoked in order to conform with the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in a third amendment (Amendment No. 3). As result, the Company recognized AIATW’s business promotion revenue in each contract year based on the performance milestones set for each contract year. |
| d) | The |
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Cost of revenue and gross profit
The costCost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the year ended December 31, 2015 increased2017 decreased by $5,015,644$3,753,488 or 16%8%, to $35,423,762$42,801,007 compared to $30,408,118with $46,554,495 for the year ended December 31, 2014.2016. This decrease was primarily due to the decrease in indirect commission cost, which included special allowance, high-performance awards, practicing bonus, etc. The cost of revenue increased with the increaseCompany cancelled high-performance awards and reduced recruitment referral bonus in revenue.September 2017, and certain special allowances were reduced in July 2017.
The gross profit for the year ended December 31, 20152017 increased by $2,558,160$6,667,926 or 15%29%, to $19,600,004$30,047,437 compared to $17,041,844with $23,379,511 for the year ended December 31, 2014.2016. The gross profit ratiosratio increased to 41% for the year ended December 31, 2015 and2017 from 33% for the year ended December 31, 2014 were consistent.2016. The increase was primary due to the increase in AIATW’s promotion revenue in year 2017, and indirect commission cost also decreased in year 2017.
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Selling expenses
Selling expenses were mainly occurred in Law Broker, representing the expense for marketing promotion.promotion and selling related expense. The selling expense for the year ended December 31, 20152017 decreased by $950,001$498,111 or 24%18%, to $3,084,408$2,344,633 compared to $4,034,409with $2,842,744 for the year ended December 31, 2014.2016. The decrease iswas mainly results fromdue to decreased advertising expense. The advertising expense decreased because the decrease of the advertisement expense, donation fee and other business expenses incurred by the sales department.Company strategically adopted social media as a means for brand promotion.
General and administrative expenses
The generalGeneral and administrative (“G&A”) expenses are principally comprisecomprised of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees.
For the year ended December 31, 2015,2017, G&A expenses were $12,675,171, increased by $703,308,$14,959,384, an increase of $1,107,107, or 6%8%, compared with $11,971,863$13,852,277 for the year ended December 31, 2014,2016, which was mainly due tothe expanded number of branches, increased personnel costs in payroll, health insuranceChina, increased personnel costs, rent and employee retirement plan. The numbers of administrative employees were increasedpension in Taiwan and professional fees.
Other income (expenses)
Total other income (expenses) for the year ended December 31, 20152017 was $948,162, compared with the same period in last year. In addition, the G&A expense increased in Anhou due to the fact the company recently added additional location in Yunnan and requires more expenditure to start the business operation and increased the number of employee in the new location.
Other income
Other income (expense) mainly consists of interest income; gain on change of fair value of marketable securities, loss on disposal of fixed assets and foreign currency exchange gain and loss. Netnet other income for the year ended December 31, 2015 was $379,926. Net2016 of $454,691. Other income (expense) mainly consists of interest income, interest expenses, dividend income and other income, for the year ended December 31, 2014 was $594,542. Compared with the year ended December 31, 2014, net othernet. Other income decreased(expenses) increased by over $493,471 primarily due to the exchange rate fluctuations and other income as well as a 63% increase of foreign exchange loss.in interest income.
Income tax
For the year ended December 31, 2015, the2017, income tax expense was $1,519,226, decreased by $153,614,$3,513,717, an increase of $1,394,119, or 9%66%, compared with $1,672,840$2,119,598 for the year ended December 31, 2014.The decrease2016. The increase was mainly due to the company paid additional 10% on any undistributed earningsincreased income before income tax from prior period for the year ended December 31, 20152017, which increased by $6.5 million compared towith that for the year ended December 31, 2014.2016.
The Company’sOur subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. InAlso, the meanwhile, Income Tax Law of Taiwan provides that a company is taxed atan additional 10% on any undistributed earnings to its shareholders. On December 31, 2015 and 2014, Law Enterprises decided not to distribute its earnings in 2015 and 2014. Accordingly, additional NT$14,018,314 and NT$9,200,945, approximately $427,000 and $304,000, of income tax was accrued as of December 31, 2015 and 2014.
CU WFOE and the CAEsCAE in the PRC are governed by the Income Tax Law of the PRC concerning the private-runprivately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. According to the requirement of local tax authorities, the taxable income of Jiangsu Law iswas deemed asto be 10% of total revenue, instead of theactual income before income tax. The tax rate of Jiangsu Law is also 25%.
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Beginning in the year ended December 31, 2017 Anhou and its branches elected to file joint tax returns under PRC tax jurisdiction. Due to the adoption of this filing method, operating loss in the branches from the year 2016 and prior years can no longer deduct earnings beginning in the year 2017. However, any loss incurred in any of the branches in the joint tax return will be consolidated and any further loss in the joint tax return can be carried over to five years from the year 2017. Due to the joint filing of tax returns for Anhou, the Company reversed deferred tax assets and related valuation allowance of $67,577 previously recognized as of December 31, 2016.
Our subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong, and are generally subject to a profits tax at the rate of 16.5% on the estimated assessable profits.
As a result of all these factors, net income increased by $5.16 million to almost $10.2 million in the year ended December 31, 2017, from just over $5.0 million in the previous fiscal year.
Overview of the years ended December 31, 20142016 and 20132015 (Restated)
The following table shows the results of operations for the years ended December 31, 20142016 and 2013:2015:
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||
| 2014 | 2013 | 2016 | 2015 | Change | Percent | |||||||||||||||||||||||||||
| (AUDITED) | (UNAUDITED) | Change | Percent | (Restated) | ||||||||||||||||||||||||||||
| Revenues | $ | 47,449,962 | $ | 45,156,574 | $ | 2,293,388 | 5 | % | ||||||||||||||||||||||||
| Revenue | $ | 69,934,006 | $ | 55,023,766 | $ | 14,910,240 | 27 | % | ||||||||||||||||||||||||
| Cost of revenue | 30,408,118 | 27,576,749 | 2,831,369 | 10 | % | 46,554,495 | 35,423,762 | 11,130,733 | 31 | % | ||||||||||||||||||||||
| Gross profit | 17,041,844 | 17,579,825 | (537,981 | ) | -3 | % | 23,379,511 | 19,600,004 | 3,779,507 | 19 | % | |||||||||||||||||||||
| Gross profit margin | 36 | % | 39 | % | -3 | % | -8 | % | 33 | % | 36 | % | 25 | % | 70 | % | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling | 4,034,409 | 2,737,131 | 1,297,278 | 47 | % | 2,842,744 | 3,084,408 | (241,664 | ) | (8 | )% | |||||||||||||||||||||
| General and administrative | 11,971,863 | 10,386,735 | 1,585,128 | 15 | % | 13,852,277 | 14,715,011 | (862,734 | ) | (6 | )% | |||||||||||||||||||||
| Impairment of goodwill | - | 122,250 | (122,250 | ) | -100 | % | ||||||||||||||||||||||||||
| Income (loss) from operations | 1,035,572 | 4,333,709 | (3,298,137 | ) | -76 | % | ||||||||||||||||||||||||||
| Income from operations | 6,684,490 | 1,800,585 | 4,883,905 | 271 | % | |||||||||||||||||||||||||||
| Other income (expenses): | ||||||||||||||||||||||||||||||||
| Interest income | 229,317 | 156,719 | 72,598 | 46 | % | 208,665 | 230,509 | (21,844 | ) | (9 | )% | |||||||||||||||||||||
| Interest expense | (19,722 | ) | (654 | ) | (19,068 | ) | (2916 | )% | ||||||||||||||||||||||||
| Dividend income | 273,873 | - | 273,873 | 100 | % | |||||||||||||||||||||||||||
| Other - net | 365,225 | (385,563 | ) | 750,788 | 195 | % | (8,125 | ) | 150,071 | (158,196 | ) | (105 | )% | |||||||||||||||||||
| Total other income (expenses) | 594,542 | (228,844 | ) | 823,386 | 360 | % | 454,691 | 379,926 | 74,765 | �� | 20 | % | ||||||||||||||||||||
| Income (loss) before income taxes | 1,630,114 | 4,104,865 | (2,474,751 | ) | -60 | % | ||||||||||||||||||||||||||
| Income before income taxes | 7,139,181 | 2,180,511 | 4,958,670 | 227 | % | |||||||||||||||||||||||||||
| Income tax expense | 1,672,840 | 931,919 | 740,921 | 80 | % | 2,119,598 | 1,519,226 | 600,372 | 40 | % | ||||||||||||||||||||||
| Net income (loss) | (42,726 | ) | 3,172,946 | (3,215,672 | ) | -101 | % | |||||||||||||||||||||||||
| Net income | 5,019,583 | 661,285 | 4,358,298 | 659 | % | |||||||||||||||||||||||||||
| Net income attributable to the noncontrolling interests | (865,406 | ) | (1,629,398 | ) | 763,992 | -47 | % | 2,127,428 | 1,623,198 | 504,230 | 31 | % | ||||||||||||||||||||
| Net income (loss) attributable to parent's shareholders | (908,132 | ) | 1,543,548 | (2,451,680 | ) | -159 | % | |||||||||||||||||||||||||
| Net income attributable to parent's shareholders | 2,892,155 | (961,913 | ) | 3,854,068 | (401 | )% | ||||||||||||||||||||||||||
Revenues
Revenue
As noted above, as a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies.companies in Taiwan, PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market in Taiwan. For the years ended December 31, 20142016 and 2013,2015, the revenue generated respectively from Taiwan, PRC and PRC isHong Kong was as follows:
| Years ended December 31, | ||||||||
| Geographical Areas | 2014 | 2013 | ||||||
| PRC | $ | 3,060,765 | $ | 2,720,382 | ||||
| Taiwan | 44,389,197 | 42,436,192 | ||||||
| $ | 47,449,962 | $ | 45,156,574 | |||||
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| For the year ended December 31, | ||||||||
| Geographical Areas | 2016 | 2015 | ||||||
| (Restated) | ||||||||
| Revenue | ||||||||
| Taiwan | $ | 61,208,145 | $ | 48,669,261 | ||||
| PRC | 8,461,511 | 5,892,928 | ||||||
| Hong Kong | 325,408 | 461,577 | ||||||
| Elimination adjustment | (61,058 | ) | - | |||||
| Total Revenue | $ | 69,934,006 | $ | 55,023,766 | ||||
Revenue in the year ended December 31, 2016 totaled approximately $69.9 million, an increase of $14.9 million (or 27.1%) compared with revenue of $55.0 million in the previous year. This was attributable to the expansion of our business in Taiwan and a significant increase in our PRC operations.
During the year ended December 31, 2014, 93.55%2016, 87.52%, 12.10% and 6.45%0.38% of our revenuesrevenue in our audited consolidated financial statements were derived from our Taiwan, SubsidiariesConsolidated Affiliated Entities in PRC and CAE,Hong Kong, respectively. During the year ended December 31, 2013, 93.98%2015, 88.45%, 10.71% and 6.02%0.84% of our revenuesrevenue in our restated audited consolidated financial statements were derived from our Taiwan, SubsidiariesPRC and CAE,Hong Kong, respectively.
Total revenuesrevenue increased by $2,293,388,$14,910,240, or 5%over 27%, from $45,156,574$55,023,766, as restated, for the year ended December 31, 20132015 to $47,449,962$69,934,006 for the year ended December 31, 2014,2016, which iswas mainly due to the increase of the revenue in Taiwan and PRC for the following reasons,reasons:
| a) |
| b) | The | |
| c) | The remaining revenue increase in the Taiwan area was primarily due to the Taiwan central bank’s decreased interest rate, which caused an increase in the demand for both investment-oriented insurance and long-term care insurance. |
| d) | Revenue increased in the PRC area primarily due to the increase in critical illness insurance and annuity insurance in Sichuan and Henan for the year ended December 31, 2016. On the other hand, we expanded our business geographically and improved our reputation within local markets to generate higher revenue for the year ended December 31,2016. |
Cost of revenue and gross profit
The cost
Cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the year ended December 31, 20142016 increased by $2,831,369$11,130,733, or 10%31%, to $30,408,118$46,554,495 compared to $27,576,749with $35,423,762 for the year ended December 31, 2013.2015. The primary attribute of the heightened cost of revenue was the portion of the first-year commission (FYC) revenue over total revenue increased noticeably. Since the commission rate of FYC revenue was comparatively higher than any other type of commission revenue, the cost of revenue increased with the increase in revenue.accordingly.
The grossGross profit for the year ended December 31, 2014 decreased2016 increased by $537,981,$3,779,507, or 3%19%, to $17,041,844$23,379,511 compared to $17,579,825with $19,600,004 for the year ended December 31, 2013.2015. The gross profit ratio decreased to 33% for the year ended December 31, 2016 from 36% for the year ended December 31, 2014 from 39% for2015. The primary cause of the year ended December 31, 2013. The decrease was mainly because the bonuses and awards to subagents increased and the shareheightened cost of revenue fromwas the FYCportion notable increase of first-year commission (FYC) revenue over total revenue increased noticeably. Based primarily on the increase in revenue in year 2016, other indirect commission cost, also increased in year 2016, such as high-performance awards, practicing bonus, etc. Since the totalcommission rate of FYC revenue compared towas comparatively higher than any other type of commission revenue, the year ended December 31, 2013.cost of revenue increased accordingly.
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Selling expenses
Selling expenses were mainly occurred in our subsidiary Law Broker, representing the expense forand was mainly due to marketing promotion.promotion expenses. The selling expense for the year ended December 31, 2014 increased2016 decreased by $1,297,278$241,664, or 47%8%, to $4,034,409$2,842,744 compared to $2,737,131with $3,084,408 for the year ended December 31, 2013, which is2015. The decrease was mainly becausedue to the Company’s decision to decrease advertising expense spent in publicityto publicize of the company’s brand increased by approximately $1 million.our brand.
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General and administrative expenses
The generalGeneral and administrative (“G&A”) expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees to the auditor and attorney.fees.
For the year ended December 31, 2014,2016, G&A expenses were $11,971,863, increased by $1,585,128,$13,852,277, a decrease of $862,734, or 15%6%, compared with $10,386,735$14,715,011, as restated, for the year ended December 31, 2013, which2015. This was mainly due to the ratecompensation expenses recorded in connection with the acquisition of GHFL in 2015. As restated, general and administrative expenses in the business tax directly related to sales in Taiwan Subsidiariesyear ended December 31, 2015 increased from 2% to 5% from July 2014. In addition, the G&A expense increased in Anhou dueby approximately $2.0 million, or 16.1% compared to the relocation expense of moving the Company’s headquarter to Nanjing and setup expense of opening an outlet in Yunnan by Anhou.previously reported amount.
Other income (expenses)
NetTotal other income for the year ended December 31, 20142016 was $594,542 and the net$454,691 compared with total other expenseincome for the year ended December 31, 2013 is $228,844.2015 of $379,926. Other income (expense)(expenses) mainly consists of interest income, (expense), gain (loss) on change of fair value of marketable securitiesinterest expenses, dividend income and rental income of sub-leased spare offices and garage. In the year ended December 31, 2013, the Company recorded $303,000 of loss from disposal of fixed assets and $370, 000 of estimated tax penalties for late filings of income tax return in the U.S.A.other income. Compared with the year ended December 31, 2013, the Company’s interest2015, other income increased by approximately $70,000(expenses) rose due to the fixed depositincrease in dividend income, significantly offset by a decrease in other net income of RMB. In$158,196 due to the meantime, the loss from disposal of fixed assets decreased by approximately $0.2 million and the gain on change of fair value of marketable securities increased by approximately $0.17 million.decrease in foreign exchange gain.
Income tax
For the year ended December 31, 2014,2016, the income tax expense were $1,672,840, increased by $740,921,was $2,119,598, an increase of $600,372, or 80%40%, compared with $931,919$1,519,226 for the year ended December 31, 2013.2015. The increase was mainly due to the increased income before income tax for the year ended December 31, 2016 compared with that for the year ended December 31, 2015.
The Company’sOur subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. InAlso, the meanwhile, Income Tax Law of Taiwan provides that a company is taxed atan additional 10% on any undistributed earnings to its shareholders. In June 2014, Law Enterprises decided not to distribute its earnings accumulated as of December 31, 2013. Accordingly, NT$18,903,349, approximately $626,406, of income tax was accrued for the undistributed earnings. On December 31, 2014, Law Enterprises decided not to distribute its earnings in 2014. Accordingly, additional NT$9,200,945, approximately $303,589, of income tax was accrued as of December 31, 2014.
CU WFOE and the CAEsConsolidated Affiliated Entities in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. According to the requirement of local tax authorities, the taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. The tax rate of Jiangsu Law is also 25%.
According to Chinese tax regulationsOur subsidiaries in Hong Kong are governed by the ChineseInland Revenue Ordinance Tax Law of Hong Kong, and are generally subject to a profits tax authorities effective January 1, 2008, commissions paid to sub-agents in excessat the rate of 5% of16.5% on the commission revenue were not tax deductible. According to China State Administration of Taxation #15 Announcement in 2012, effective from 2011, such commissions can be fully deducted. Also, such tax payable over three years can be reversed. In the year ended December 31, 2013, the Company reversed tax payable of $160,780 accordingly.
In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit which was accrued in the year ended December 31, 2013.assessable profits.
Liquidity and Capital Resources
The following table represents a comparison of the net cash provided by operating activities, net cash provided by (used in) investing activities, and net cash provided by (used in) financing activities for the years ended December 31, 20152017 and 2014:2016:
| Years Ended December 31, | ||||||||||||||||
| 2015 | 2014 | |||||||||||||||
| (AUDITED) | (AUDITED) | Change | Percent | |||||||||||||
| Net cash provided by operating activities | $ | 1,770,017 | $ | 469,470 | 1,300,547 | 277 | % | |||||||||
| Net cash provided by (used in) in investing activities | (383,843 | ) | 1,205,962 | (1,589,805 | ) | (132 | )% | |||||||||
| Net cash provided by financing activities | 706,145 | 391,812 | 314,333 | 80 | % | |||||||||||
| Years Ended December 31, | ||||||||||||||||
| 2017 | 2016 | Change | Percent | |||||||||||||
| Net cash provided by operating activities | $ | 5,655,491 | $ | 7,544,382 | (1,888,891 | ) | (25 | )% | ||||||||
| Net cash used in investing activities | (14,435,727 | ) | (89,341 | ) | (14,346,386 | ) | 16058 | % | ||||||||
| Net cash provided by (used in) financing activities | 2,506,795 | (376,473 | ) | 2,883,268 | (766 | )% | ||||||||||
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Operating activities
Net cash provided by operating activities during the year ended December 31, 20152017 was $1,770,017, significantly increased$5,655,491, slightly decreased in comparison with $469,470,$7,544,382, net cash provided by operating activities during the year ended December 31, 2014.2016. The increasedecrease was mainly due to increased net incomedecrease commissions payable to sales professionals for the year ended December 31, 20152017 compared towith that for the year ended December 31, 2014.2016.
Investing activities
Net cash used in investing activities was $383,843$14,435,727 during the year ended December 31, 2015,2017, which iswas mainly due to purchase of structured deposit, marketable securities and time deposits of approximately $39 million less proceeds from maturities of time deposits of approximately $17 million and disposals of marketable securities of approximately $8 million. Net cash used in investing activities was $89,341 during the year ended December 31, 2016, which was mainly due to purchase of property, plant and equipment and intangible assets of $0.6 million. Net cash provided by investing activities was $1,205,962 during the year ended December 31, 2014, which is mainly dueapproximately $1 million, loan made to selling investmentRFL amount of approximately $1.6$1.5 million in current deposit and cashpurchases of time deposits of approximately $0.2$7 million obtained by acquisitionless proceeds from maturities of PFAL. In addition, compared with the year ended December 31, 2014, during the year ended December 31, 2015, the Company’s investment in property, plant and equipment, and intangible assets increased bytime deposits of approximately $0.7$10 million.
Financing activities
Net cash provided by financing activities was $706,145$2,506,795 during the year ended December 31, 2015,2017, which iswas mainly due to the loan borrowedproceeds from related partiesparty and third parties. Duringparty borrowings of approximately $2.8 million. Net cash used in financing activities was $376,473 during the year ended December 31, 2014, net cash provided by financing activities2016, which was $391,812, which is mainly due to the loan borrowed from Shu-Fen Lee, the Series A Director of the company, in the amount of $314,644repayment to AHFL.related parties and third parties loan.
The following table represents a comparison of the net cash provided by operating activities, net cash provided by (used in) investing activities, and net cash provided by (used in) financing activities for the years ended December 31, 20142016 and 2013:2015:
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||
| 2014 | 2013 | 2016 | 2015 | Change | Percent | |||||||||||||||||||||||||||
| (AUDITED) | (UNAUDITED) | Change | Percent | (Restated) | ||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 469,470 | $ | 10,411,924 | (9,942,454 | ) | (95 | )% | $ | 7,544,382 | $ | 1,770,017 | 5,774,365 | 326 | % | |||||||||||||||||
| Net cash provided by (used in) in investing activities | 1,205,962 | (1,706,555 | ) | 2,912,517 | 171 | % | ||||||||||||||||||||||||||
Net cash provided by (used in) investing activities | (89,341 | ) | 609,777 | (699,118 | ) | (115 | )% | |||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 391,812 | (1,071,853 | ) | 1,463,665 | 137 | % | (376,473 | ) | 706,145 | (1,082,618 | ) | (153 | )% | |||||||||||||||||||
Operating activities
Net cash provided by operating activities during the year ended December 31, 20142016 was $469,470,$7,544,382, significantly decreasedincreased in comparison with $10,411,924,$1,770,017, net cash provided by operating activities during the year ended December 31, 2013.2015. The decrease isincrease was mainly because AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”) in June 2013. Then AHFL received an Execution Fee of approximately $8.3 million from AIATW, which is recorded as unearned revenue by the Company. In addition, compared withdue to increased net income and other current liabilities for the year ended December 31, 2013,2016 compared with that for the Company’s income from operations decreased by approximately $3.2 million, which is the other factor that result in the decrease of net cash provided by the operating activities.year ended December 31, 2015.
Investing activities
Net cash used in investing activities was $89,341 during the year ended December 31, 2016, which was mainly due to purchase of property, plant and equipment and intangible assets of approximately $1 million, loan made to RFL amount of approximately $1.5 million and purchases of time deposits of approximately $7 million less proceeds from maturities of time deposits of approximately $10 million. Net cash provided by investing activities was $1,205,962$609,777 during the year ended December 31, 2014,2015, which iswas mainly due to selling investmentpurchase of property, plant and equipment, intangible assets amount of approximately $1.6$0.6 million and purchases of time deposits amount of approximately $9.6 million less dividend received in current deposit and cashexcess of earnings as reductions of cost of the investment amount of approximately $0.2 million obtained by acquisitionand proceeds from maturities of PFAL. During the year ended December 31, 2013, net cash used in investing activities was $1,706,555, which is mainly due to the investment in purchasetime deposit amount of marketable securities. In addition, compared with the year ended December 31, 2013, during the year ended December 31, 2014, the Company’s investment in property, plant and equipment decreased by approximately $0.3$10.6 million.
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Financing activities
Net cash provided byused in financing activities was $391,812$376,473 during the year ended December 31, 2014,2016, which iswas mainly due to the repayment to related parties and third parties loan. Net cash provided by financing activities was $706,145 during the year ended December 31, 2015, which was mainly due to the loan borrowed from Shu-Fen Lee, the Series A Director of the Company, in the amount of $314,644 (NTD10 million) to AHFL. The term for the loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. In January 2015, the principal amount of this loan together with the accrued interests was fully repaid by AHFL.
During the year ended December 31, 2013, net cash used in financing activities was $1,071,853, which is mainly due to the repayment for the borrowing from the related parties and third parties.
Related Party Loan and Loans to Unrelated Third Parties
Anhou Registered Capital Increase
On April 27, 2013, the China Insurance Regulatory Commission (“CIRC”)CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”),Provisions, pursuant to which, CIRC mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million (approximately $ 8 million)(approximately $8 million). On May 16, 2013, CIRC issued the 2013 Notice, for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million (approximately(approximately $8 million)million) can continue to operate its existing business within the provinces where they have a registered office or branch office, but shall not set up any new branches in any provinces where it has no registered office or a branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, used to have a registered capital of RMB10 million (approximately $1.6 million). The branch offices of Anhou currently were all in Henan province. To better implement its expansion strategies, Anhou intended to increase its registered capital to RMB50 million (approximately(approximately $8 million) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in Mainland China.
Due to certain restrictions on direct foreign investment in insurance agency business under current PRC legal regime, Anhou has sought certain investments made by the Investor Borrowers and they may need funds through individual loans. Upon the completion of the contemplated increase of registered capital of Anhou, each Investor Borrower shall, or cause their designated persons to, enter into the Variable Interest Entities Agreement with CU WFOE, Anhou and other parties so as to consolidate any additional VIE interest generated from the said registered capital increase into the Company.
On June 9, 2013, AHFL entered into a Loan Agreement (the “Company Loan Agreement”) with CU Hong Kong.
Under the Company Loan Agreement, AHFL agreed to provide a loan to the CU Hong Kong with the principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such was ten years which could be extended upon the agreement of the parties. The amount of such loan was remitted to the account of CU Hong Kong on August 30, 2013.
In August 2013, the CU Hong Kong entered into several Loan Agreements (collectively, the “Investor Loan Agreements”) with the following unrelated parties: Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, Mr. Li Chen and Ms. Jing Yue, both PRC citizens (collectively, the “Investor Borrowers”).
Under the Investor Loan Agreements, the Investor Borrowers loaned cash from CU Hong Kong for their investment in Anhou and CU Hong Kong agreed to provide certain loans to each of the Investor Borrowers with an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such loans was ten years which could be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers covenants to enter into certain Variable Interest Entities Agreements with Anhou, CU WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers shall be solely used to increase the registered capital of Anhou, and CU Hong Kong may determine the repayment methods including transferring of the Investor Borrowers’ corresponding registered capital in Anhou or through other manner as full payment of the loans subject to terms and conditions therein in the event that the Investor Borrowers fails to repay the loan in currency to CU Hong Kong.
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The specific amounts loaned to the Investor Borrowers were as follows:
Able Capital Holding Co., Ltd.: RMB29,500,000 ($4,712,570)
Mr. Chen:Ms. Chunyan Lu: RMB3,000,000 ($479,244)
Ms. Yue: RMB7,500,000 ($1,198,111)
On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925).
Related Party Loan Receivable
On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Shu-Fen Lee (“Ms. Lee”), the Series A Director of the Company. Pursuant to the Loan Agreement, Ms. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The entire loan and interest amount of $314,928 (ND$10,009,041) have been paid off on January 14, 2015.
On December 25, 2015, theOctober 24, 2016, our Company entered into a loan agreement (the “Short-termwith an unaffiliated third party, Rich Fountain Limited (“RFL”), a company incorporated under the laws of Samoa. We provided a short-term loan approximately $1,486,846 (NTD 48,000,000) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest were payable of the loan were payable on April 23, 2017. On April 21, 2017, the Company and RFL entered a supplemental agreement to extend the loan to October 23, 2017. The Company received partial payment of approximately $71,974 (NTD2,134,440) and approximately $36,256 (NTD1,075,200) on June 22, 2017 and July 14, 2017, respectively. As of December 31, 2017, the outstanding principal balance of the loan was approximately $1,510,347 (NTD44,790,360). On March 7, 2018, RFL paid off all outstanding balance of loan to the Company.
Short-term Loans
The Company entered into a line of credit agreement with O-Bank for a $1,500,000 credit facility from June 22, 2017 to June 21, 2018. Borrowings under the agreement bear interest at the O-Bank’s cost of fund plus a margin of 0.5%. On December 11, 2017, the Company draw down a borrowing of $600,000 on with interest at a rate of 2.35% per annum and the principal are due on March 11, 2018. On December 26, 2017, the Company borrowed $800,000 with interest at a rate of 2.70% per annum and the principal are due on March 26, 2018. The credit facility is secured by a total amount of approximately $1,686,017 (NTD50,000,000) of time deposits.
On November 17, 2017, the Company entered into a line of credit agreement with CTBC, pursuant to which the Company has a credit facility of $1,000,000 from November 17, 2017 to July 31, 2018. Borrowings under the agreement bear interest at the CTBC’s cost of fund plus a margin of 1%. On December 28, 2017, the Company draw down a borrowing of $950,000 with interest at a rate of 3.30% per annum and the principal amount was due on January 29, 2018. Law Broker is the guarantor of the credit facility. On January 29, 2018, the Company paid off the entire principal and interest of Loan Agreement)C.
Total interest expense of short-term loans was $1,531 for the year ended December 31, 2017.
Long-term Loans
On May 15, 2016, Anhou entered into a loan agreement (“Loan A”) with Multiple Capital Enterprise Co., Ltd.an individual third party. The Short-termlong-term Loan Agreement provided for a $608,941 (NTD 20,000,000)approximately $130,641 (RMB850,000) and $144,055 (RMB850,000) as of December 31, 2017 and 2016, respectively, loan to the Company. The Short-termlong-term Loan boreA bears an interest rate of 1.5%8% per annum and interest is payable annually. The principal and the principleaccrued interest will be due on May 15, 2019.
On July 20, 2016, Anhou entered into a loan agreement (“Loan B”) with an individual third party. The long-term Loan Agreement provided for approximately $118,345 (RMB 770,000) and $110,892 (RMB 770,000) as of December 31, 2017 and 2016, respectively, loan to the Company. The long-term Loan B bears an interest rate of 8% per annum and interest areis payable annually. The principal and the accrued interest will be due on July 20, 2019.
Total interest expense for these long-term loans was $20,737 and $11,755, for the year ended December 31, 2017 and 2016, respectively.
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Convertible Bonds
On June 30, 2016. The entire loan and interest23, 2016, our Company issued two units of its convertible bonds with an aggregate principal amount of $598,905(NT$20,014,795) have been paid off on January 11, 2016. Majority$200,000 to a non-US person and the value of Multiple Capital Enterprise shareholder are the Company’s management level.embedded derivatives liabilities is trivial. As of December 31, 2017 and 2016, our Company had an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $12,000 and 6,363, for the year ended December 31, 2017 and 2016, respectively.
Except for the two aforementioned loans, the advance arose from Due to related parties bore no interest and were payable on demand.
Due to related parties
The related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of December 31, 20152017 and 2014:2016:
December 31, 2015 | December 31, 2014 | |||||||
| Due to Mr. Mao (Principal Shareholder of the Company) | $ | 297,414 | $ | 214,165 | ||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li) | 32,223 | - | ||||||
| Due to Mr. Zhu (Legal Representative of Jiangsu) | 2,133 | 2,255 | ||||||
| Due to Ms. Lee (Director of CUIS) | 826 | 315,027 | ||||||
| Due to Multiple Capital Enterprise | 608,941 | - | ||||||
| Due to other shareholders | 4,395 | - | ||||||
| Total | $ | 945,932 | $ | 531,447 | ||||
| December 31, 2017 | December 31, 2016 | |||||||
| Due to Mr. Mao (CEO of the Company) | $ | 409,054 | $ | 361,379 | ||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li*) | - | 32,374 | ||||||
| Due to Mr. Zhu (Legal Representative of Jiangsu) | 2,128 | 1,994 | ||||||
| Ms. Lu (Shareholder of Law Anhou) | 161,380 | - | ||||||
| Due to Yuli Broker (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to Yuli Investment (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to I Health Management Corp*** | 17,703 | 3,724 | ||||||
| Total | $ | 590,265 | $ | 400,001 | ||||
* Chwan Hau Li is a Director of the Company
** Mr. Lee is the Director of Law Broker
*** 25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise, and 24% of Multiple Capital Enterprise’s shares are owned by members of the Company’s management level.
On a going forward basis, the Company’sour primary requirements for cash over the next 12 months consist of:
| · | providing insurance agency services to its existing clients in its existing branches; |
| · | developing new clients; |
| · | promoting sales activities; |
| · | opening more branches in China; and |
| · | expanding business scale in China, through mergers & acquisitions. |
Debt Forgiveness – Related Parties
Xude Investment was owned by Mr. Chwan Hau Li, a Director of the Company. The outstanding balance as of December 31, 2016 was primarily related to the set-up fees on behalf of GHFL and GIC. In March 2017, Xude Investment agreed to forgive the Company’s debt. As of December 31, 2017, the Company has debt forgiveness recognized with a total amount of $32,937.
Lease Agreements
On July 1, 2016, the Company entered into a lease agreement with Yuli Broker to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $590 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. We recorded rent income of $564 and $279, respectively, for the years ended December 31, 2017 and 2016.
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On July 1, 2016, the Company entered into a lease agreement with Yuli Investment to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $590 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. We recorded rent income of $564 and $279, respectively, for the years ended December 31, 2017 and 2016.
Advisory Agreements
On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $42,000 (NTD1,275,000). For the year ended December 31, 2017, The Company had cost of revenue related to I Health amounted $13,315. The Company has cost of revenue and due to I Health totaled $25,130 and $3,724, respectively, for the year ended and as of December 31, 2016.
On December 7, 2016, the Company entered into an advisory agreement with Fu Chang Li (“Mr. Li,” the Director of the Company). Pursuant to this Advisory Agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. On December 7, 2017, both parties agreed to extend this advisory agreement from December 7, 2017 to December 6, 2018. The total advisory fee was approximately $59,000 (NTD1,800,000). The Company had general and administrative expense related to this advisory agreement amounted $59,214 and $0 for the year ended December 31, 2017 and 2016, respectively.
Consulting Agreement
On November 1, 2016, the Company entered into a consulting agreement with Apex Biz Solution Limited. (“Apex,” was formerly known as Prime Technology Corp.) According to the Agreement, the Company would provide administrative operational consulting services to Apex from November 1, 2016 through December 31, 2021. As of December 31, 2017 and 2016, the Company had account receivable of $17,231 and $6,660, respectively. The Company also had revenue of $50,053 and $6,356 for the years ended December 31, 2017 and 2016, respectively.
Contractual Obligations
Operating Leases
The Company has operating leases for its offices. Rental expenses for the years ended December 31, 2017, 2016 and 2015 2014, June 30, 2013were $2,537,348, $2,132,950 and for the six months ended December 31, 2013 were $1,735,521, $1,668,571, $1,410,945, and $754,029, respectively. At December 31, 2015,2017, total future minimum annual lease payments under operating leases were as follows, by years:
| Twelve months ended December 31, 2016 | $ | 1,774,101 | ||
| Twelve months ended December 31, 2017 | 1,028,775 | |||
| Twelve months ended December 31, 2018 | 533,041 | |||
| Twelve months ended December 31, 2019 | 101,645 | |||
| Twelve months ended December 31, 2020 | 22,401 | |||
| Thereafter | - | |||
| Total | $ | 3,459,963 |
Acquisition Agreement
On February 22, 2015, the Company and the selling shareholder of GHFL entered into an Amendment to the Acquisition Agreement dated February 13, 2015, pursuant to which if the Guaranteed Price per share is higher than the Average Price per share, then the Parties shall negotiate in good faith on an adjustment to the Purchase Price as necessary, if any.
| Twelve months ending December 31, 2018 | $ | 2,022,510 | ||
| Twelve months ending December 31, 2019 | 877,362 | |||
| Twelve months ending December 31, 2020 | 197,971 | |||
| Twelve months ending December 31, 2021 | 50,461 | |||
| Twelve months ending December 31, 2022 | 14,199 | |||
| Thereafter | - | |||
| Total | $ | 3,162,503 |
Off Balance Sheet Arrangements
As of December 31, 2015, the2017, our Company had no off balance sheet arrangements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We are exposed to market risk in the ordinary course
This Annual Report includes an attestation report of our business. Market risk represents the riskindependent registered public accounting firm regarding internal control over financial, which states that, in their opinion, we did not maintain in all material respects, effective internal control over financial reporting as of loss that may impact our financial position dueDecember 31, 2017. Please refer to adverse changes in financial market pricesItem 8 of Part II, “Financial Statements and rates. Our market risk exposure is primarily a resultSupplementary Data—Report of fluctuations in interest rates and foreign currency exchange rates.Independent Registered Public Accounting Firm” for details.
Interest Rate Sensitivity
As of December 31, 2015,2017, we had cash of RMB16.8RMB9.0 million, approximately $2.6$1.4 million, and NT$592.9411.5 million, approximately $18.1$13.9 million, and HK$0.7 million, approximately $0.1 million. We hold our cash for working capital purposes. Declines in interest rates would reduce future interest income. For the year ended December 31, 2015,2017, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.
Foreign Currency Risk
The functional currency for the subsidiaries in Taiwan is NT$ and the functional currency for the subsidiaries and CAEConsolidated Affiliated Entities in the PRC is RMB. TheOur financial statements of the Company are in USD. The fluctuation of NT$ and RMB will affect our operating results expressed in USD. The Company reviews itsWe review our foreign currency exposures. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. The management does not consider its present foreign exchange risk to be significant.
We performed a sensitivity analysis assuming a hypothetical 100 basis point increase in foreign currency exchange rates applied to our historical fiscal 2017 results of operations. For the year ended December 31, 2017, the analysis indicated that a decrease of 1% in exchange rates would have decreased our revenues by approximately $721,273.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
shareholders of China United Insurance Service, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets ofChina United Insurance Service, Inc. and Subsidiaries (collectively the “Company”) as of December 31, 20152017 and 20142016, and the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 20152017 , including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 20142016, and six monthsthe results of its operations and its cash flows for each of the three years in the period ended December 31, 2013. These2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting existed as of an ineffective control environment, due to (i) not effectively implementing a process to hire qualified employees who has proficient knowledge of US GAAP, and can identify unusual transactions timely and appropriately assessed for financial report impact; (ii) not effectively establishing structure, authority, and responsibilities to ensure the objectives of internal control over financial reporting were adequately achieved, and lacking a strong Internal Audit function to assist management with assessing the effectiveness of internal control over financial reporting; and (iii) not designing and maintaining sufficient controls over revenue recognition to ensure the completeness of commission and bonus revenue at the period end.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, areand our opinion regarding the responsibilityeffectiveness of the Company’s management.internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Restatement
As discussed inNote 27to the consolidated financial statements, the Company has restated its 2016 and 2015 consolidated financial statements to correct for errors.
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Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting referred to above. Our responsibility is to express an opinionopinions on thesethe Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration oferror or fraud, and whether effective internal control over financial reporting as a basis for designing auditwas maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
In our opinion,Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2015 and 2014, and the resultsstatements.
Because of its consolidated operations and its cash flows forinherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the years ended December 31, 2015 and 2014 and six months ended December 31, 2013,risk that controls may become inadequate because of changes in conformityconditions, or that the degree of compliance with accounting principles generally accepted in the United States of America.policies or procedures may deteriorate.
/s/ Simon & Edward, LLP
Los Angeles, California
March 25, 2016
103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
China United Insurance Service, Inc.15, 2018
We have auditedserved as the accompanying consolidated statements of operations and comprehensive income (loss), changes in stockholder’s equity and cash flows for the year ended June 30, 2013 of China United Insurance Service, Inc. Management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.Company’s auditor since 2014.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of its operations and its cash flows for the year ended June 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ Goldman Kurland and Mohidin LLP
September 23, 2013
Encino, California
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2015 | December 31, 2014 | December 31, 2017 | December 31, 2016 | |||||||||||||
| (Restated) | ||||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and equivalents | $ | 20,831,824 | $ | 19,571,799 | ||||||||||||
| Cash and cash equivalents | $ | 15,473,949 | $ | 20,169,455 | ||||||||||||
| Time deposits | 21,470,113 | 5,352,347 | ||||||||||||||
| Marketable securities | 2,369,082 | 2,437,006 | 33,381 | 2,426,870 | ||||||||||||
| Structured deposit | 1,248,340 | - | ||||||||||||||
| Accounts receivable, net | 9,630,993 | 7,706,273 | 13,301,006 | 15,774,159 | ||||||||||||
| Other current assets | 1,055,015 | 574,467 | 2,193,086 | 1,831,318 | ||||||||||||
| Total current assets | 33,886,914 | 30,289,545 | 53,719,875 | 45,554,149 | ||||||||||||
| Property, plant and equipment, net | 918,798 | 1,061,762 | 946,302 | 926,905 | ||||||||||||
| Intangible assets | 468,779 | 270,956 | 775,778 | 784,219 | ||||||||||||
| Goodwill | 2,071,491 | 31,651 | 31,651 | 31,651 | ||||||||||||
| Long-term Investment | 1,264,611 | 95,328 | ||||||||||||||
| Long-term investments | 1,399,762 | 1,285,064 | ||||||||||||||
| Other assets | 791,223 | 587,522 | 2,399,875 | 785,715 | ||||||||||||
| TOTAL ASSETS | $ | 39,401,816 | $ | 32,336,764 | $ | 59,273,243 | $ | 49,367,703 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Taxes payable | $ | 1,521,962 | $ | 919,907 | $ | 3,508,790 | $ | 2,249,869 | ||||||||
| Short-term loans | 2,350,000 | - | ||||||||||||||
| Convertible bonds | 200,000 | - | ||||||||||||||
| Due to related parties | 590,265 | 400,001 | ||||||||||||||
| Other current liabilities | 10,867,607 | 9,534,371 | 12,789,588 | 18,639,909 | ||||||||||||
| Short-term loan | 222,235 | - | ||||||||||||||
| Deferred tax liability | 3,143 | 37,662 | ||||||||||||||
| Due to related parties | 945,932 | 531,447 | ||||||||||||||
| TOTAL CURRENT LIABILITIES | 13,560,879 | 11,023,387 | ||||||||||||||
| Total current liabilities | 19,438,643 | 21,289,779 | ||||||||||||||
| Convertible bonds - noncurrent | - | 200,000 | ||||||||||||||
| Long-term loans | 248,986 | 254,907 | ||||||||||||||
| Long-term liabilities | 6,594,530 | 7,500,645 | 4,842,240 | 5,315,327 | ||||||||||||
| TOTAL LIABILITIES | 20,155,409 | 18,524,032 | 24,529,869 | 27,060,013 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | 10 | 10 | 10 | ||||||||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 and 29,100,503 issued and outstanding | 295 | 291 | ||||||||||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding | 295 | 295 | ||||||||||||||
| Additional paid-in capital | 8,157,512 | 4,674,593 | 8,190,449 | 8,157,512 | ||||||||||||
| Statutory Reserves | 2,385,327 | 1,388,014 | ||||||||||||||
| Statutory reserves | 5,781,008 | 3,799,585 | ||||||||||||||
| Retained earnings | 6,419,937 | 1,246,722 | ||||||||||||||
| Accumulated other comprehensive gain/(loss) | (680,133 | ) | (350,881 | ) | 616,019 | (667,976 | ) | |||||||||
| Retained earnings | 1,808,665 | 1,717,278 | ||||||||||||||
| Stockholder’s equity attribute to parent’s shareholders | 11,671,676 | 7,429,305 | ||||||||||||||
| Noncontrolling interest | 7,574,731 | 6,383,427 | ||||||||||||||
| Stockholders' equity attribute to parent’s shareholders | 21,007,718 | 12,536,148 | ||||||||||||||
| Noncontrolling interests | 13,735,656 | 9,771,542 | ||||||||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 19,246,407 | 13,812,732 | 34,743,374 | 22,307,690 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 39,401,816 | $ | 32,336,764 | $ | 59,273,243 | $ | 49,367,703 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
105
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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
| Year Ended December 31, | Six Months Ended | Year Ended June | Year Ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | December 31, 2013 | 30, 2013 | 2017 | 2016 | 2015 | ||||||||||||||||||||||
| (Restated) | ||||||||||||||||||||||||||||
| Revenues | $ | 55,023,766 | $ | 47,449,962 | 23,689,110 | $ | 37,842,246 | |||||||||||||||||||||
| Revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 55,023,766 | ||||||||||||||||||||||
| Cost of revenue | 35,423,762 | 30,408,118 | 16,040,303 | 24,309,716 | 42,801,007 | 46,554,495 | 35,423,762 | |||||||||||||||||||||
| Gross profit | 19,600,004 | 17,041,844 | 7,648,807 | 13,532,530 | 30,047,437 | 23,379,511 | 19,600,004 | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Selling | 3,084,408 | 4,034,409 | 2,010,744 | 962,958 | 2,344,633 | 2,842,744 | 3,084,408 | |||||||||||||||||||||
| General and administrative | 12,675,171 | 11,971,863 | 5,948,516 | 9,062,828 | 14,959,384 | 13,852,277 | 14,715,011 | |||||||||||||||||||||
| Impairment loss of goodwill | - | - | 122,250 | - | ||||||||||||||||||||||||
| Total operating expense | 15,759,579 | 16,006,272 | 8,081,510 | 10,025,786 | 17,304,017 | 16,695,021 | 17,799,419 | |||||||||||||||||||||
| Income (loss) from operations | 3,840,425 | 1,035,572 | (432,703 | ) | 3,506,744 | |||||||||||||||||||||||
| Income from operations | 12,743,420 | 6,684,490 | 1,800,585 | |||||||||||||||||||||||||
| Other income: | ||||||||||||||||||||||||||||
| Other income (expenses): | ||||||||||||||||||||||||||||
| Interest income | 229,855 | 229,317 | 108,654 | 83,682 | 339,169 | 208,665 | 230,509 | |||||||||||||||||||||
| Bargain gain on purchase of subsidiaries | - | - | - | 5,280,042 | ||||||||||||||||||||||||
| Interest expenses | (35,375 | ) | (19,722 | ) | (654 | ) | ||||||||||||||||||||||
| Dividend income | 332,302 | 273,873 | - | |||||||||||||||||||||||||
| Other - net | 150,071 | 365,225 | (652,079 | ) | 432,064 | 312,066 | (8,125 | ) | 150,071 | |||||||||||||||||||
| Total other income | 379,926 | 594,542 | (543,425 | ) | 5,795,788 | |||||||||||||||||||||||
| Total other income (expenses) | 948,162 | 454,691 | 379,926 | |||||||||||||||||||||||||
| Income before income taxes | 4,220,351 | 1,630,114 | (976,128 | ) | 9,302,532 | |||||||||||||||||||||||
| Income before income tax | 13,691,582 | 7,139,181 | 2,180,511 | |||||||||||||||||||||||||
| Income tax expense | 1,519,226 | 1,672,840 | 143,660 | 698,508 | 3,513,717 | 2,119,598 | 1,519,226 | |||||||||||||||||||||
| Net income (loss) | 2,701,125 | (42,726 | ) | (1,119,788 | ) | 8,604,024 | ||||||||||||||||||||||
| Net income | 10,177,865 | 5,019,583 | 661,285 | |||||||||||||||||||||||||
| Net income attributable to the noncontrolling interests | 1,623,198 | 865,406 | 32,190 | 1,386,556 | 3,023,227 | 2,127,428 | 1,623,198 | |||||||||||||||||||||
| Net income (loss) attributable to parent’s shareholders | 1,077,927 | (908,132 | ) | (1,151,978 | ) | 7,217,468 | ||||||||||||||||||||||
| Net income attributable to parent's shareholders | 7,154,638 | 2,892,155 | (961,913 | ) | ||||||||||||||||||||||||
| Other comprehensive items | ||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | (329,562 | ) | (268,695 | ) | (38,218 | ) | 13,195 | |||||||||||||||||||||
| Other comprehensive income(loss) | 310 | (6,298 | ) | 4,001 | 384 | |||||||||||||||||||||||
| attributable to parent’s shareholder | (329,252 | ) | (274,993 | ) | (34,217 | ) | 13,579 | |||||||||||||||||||||
| Other comprehensive items | ||||||||||||||||||||||||||||
| attributable to noncontrolling interest | (477,738 | ) | (346,783 | ) | (16,557 | ) | (1,630 | ) | ||||||||||||||||||||
| Foreign currency translation gain | 1,241,081 | (30,045 | ) | (329,562 | ) | |||||||||||||||||||||||
| Other | 42,914 | 42,202 | 310 | |||||||||||||||||||||||||
| Comprehensive income (loss) attributable to parent’s shareholders | $ | 748,675 | $ | (1,183,125 | ) | (1,186,195 | ) | $ | 7,231,047 | |||||||||||||||||||
| Other comprehensive income attributable to parent's shareholders | 1,283,995 | 12,157 | (329,252 | ) | ||||||||||||||||||||||||
| Other comprehensive items attributable to noncontrolling interests | 940,887 | 147,487 | (477,738 | ) | ||||||||||||||||||||||||
| Comprehensive (income) loss attributable to noncontrolling interest | $ | (1,145,460 | ) | $ | (518,623 | ) | (15,633 | ) | $ | (1,388,186 | ) | |||||||||||||||||
| Comprehensive income attributable to parent's shareholders | $ | 8,438,633 | $ | 2,904,312 | $ | (1,291,165 | ) | |||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | $ | 3,964,114 | $ | 2,274,915 | $ | 1,145,460 | ||||||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||||
| Basic | 29,365,834 | 29,100,503 | 29,100,503 | 27,593,654 | 29,452,669 | 29,452,669 | 29,365,834 | |||||||||||||||||||||
| Diluted | 30,365,834 | 29,100,503 | 29,100,503 | 28,588,174 | 30,509,552 | 30,462,097 | 29,365,834 | |||||||||||||||||||||
| Income (loss) per share: | ||||||||||||||||||||||||||||
| Net income per share attributable to parent's shareholders: | ||||||||||||||||||||||||||||
| Basic | $ | 0.037 | $ | (0.031 | ) | 0.040 | $ | 0.262 | $ | 0.243 | $ | 0.098 | (0.033 | ) | ||||||||||||||
| Diluted | $ | 0.035 | $ | (0.031 | ) | 0.040 | $ | 0.252 | $ | 0.235 | $ | 0.095 | (0.033 | ) | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
106
| 68 |
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS' EQUITY
| Common stock | Amount | Preferred stock | Amount | Additional Paid -in Capital | Reserves | Other comprehensive loss | (Accumulated Deficit)/ Retained earnings | Total | Noncontrolling interest | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2012 | 20,100,503 | 201 | - | - | 2,674,693 | - | (55,250 | ) | (1,918,972 | ) | 700,672 | - | 700,672 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to preferred stock | (1,000,000 | ) | (10 | ) | 1,000,000 | 10 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 10,000,000 | 100 | - | - | 1,999,900 | - | - | - | 2,000,000 | - | 2,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | 13,195 | - | 13,195 | (1,630 | ) | 11,565 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprerhensive gain (loss) | - | - | - | - | - | - | 384 | - | 384 | - | 384 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 257,785 | - | (390,879 | ) | (133,094 | ) | 133,094 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 7,217,468 | 7,217,468 | 1,386,556 | 8,604,024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | - | - | - | - | - | - | - | - | - | 4,171,965 | 4,171,965 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2013 | 29,100,503 | $ | 291 | 1,000,000 | $ | 10 | $ | 4,674,593 | $ | 257,785 | $ | (41,671 | ) | $ | 4,907,617 | $ | 9,798,625 | $ | 5,689,985 | $ | 15,488,610 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 157,256 | - | (157,256 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | (38,218 | ) | - | (38,218 | ) | (18,623 | ) | (56,841 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 4,001 | - | 4,001 | 2,066 | 6,067 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | (1,151,978 | ) | (1,151,978 | ) | 32,190 | (1,119,788 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2013 | 29,100,503 | $ | 291 | 1,000,000 | $ | 10 | $ | 4,674,593 | $ | 415,041 | $ | (75,888 | ) | $ | 3,598,383 | $ | 8,612,430 | $ | 5,705,618 | $ | 14,318,048 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 972,973 | - | (972,973 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payable | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend distributable | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | (268,695 | ) | - | (268,695 | ) | (343,537 | ) | (612,232 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | (6,298 | ) | - | (6,298 | ) | (3,246 | ) | (9,544 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | (908,132 | ) | (908,132 | ) | 865,406 | (42,726 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | - | - | - | - | - | - | - | - | - | 159,186 | 159,186 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Amount | Preferred Stock | Amount | Additional Paid -in Capital | Statutory Reserves | Accumulated Other Comprehensive Loss | Retained Earnings | Total | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2014 | 29,100,503 | $ | 291 | 1,000,000 | $ | 10 | $ | 4,674,593 | $ | 1,388,014 | $ | (350,881 | ) | $ | 1,717,278 | $ | 7,429,305 | $ | 6,383,427 | $ | 13,812,732 | 29,100,503 | $ | 291 | 1,000,000 | $ | 10 | $ | 4,674,593 | $ | 1,388,014 | $ | (350,881 | ) | $ | 1,717,278 | $ | 7,429,305 | $ | 6,383,427 | $ | 13,812,732 | ||||||||||||||||||||||||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 997,313 | - | (997,313 | ) | - | - | - | - | - | - | - | - | 997,313 | - | (997,313 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share exchange to acquire GHFL | 352,166 | 4 | - | - | 3,482,919 | - | - | - | 3,482,923 | - | 3,482,923 | 352,166 | 4 | - | - | 3,482,919 | - | - | - | 3,482,923 | - | 3,482,923 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | (329,562 | ) | - | (329,562 | ) | (479,347 | ) | (808,909 | ) | - | - | - | - | - | - | (329,562 | ) | - | (329,562 | ) | (479,347 | ) | (808,909 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 310 | - | 310 | 1,609 | 1,919 | - | - | - | - | - | - | 310 | - | 310 | 1,609 | 1,919 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liquidations of Risk Management and Law Agent | - | - | - | - | - | - | - | 10,773 | 10,773 | 45,844 | 56,617 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liquidation of subsidiaries | - | - | - | - | - | - | - | 10,773 | 10,773 | 45,844 | 56,617 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (Restated) | - | - | - | - | - | - | - | (961,913 | ) | (961,913 | ) | 1,623,198 | 661,285 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2015 (Restated) | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,157,512 | $ | 2,385,327 | $ | (680,133 | ) | $ | (231,175 | ) | $ | 9,631,836 | $ | 7,574,731 | $ | 17,206,567 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 1,414,258 | - | (1,414,258 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | (30,045 | ) | - | (30,045 | ) | 125,701 | 95,656 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 42,202 | - | 42,202 | 21,786 | 63,988 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reduction of cash capital | - | - | - | - | - | - | - | - | - | (78,104 | ) | (78,104 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 1,077,927 | 1,077,927 | 1,623,198 | 2,701,125 | - | - | - | - | - | - | - | 2,892,155 | 2,892,155 | 2,127,428 | 5,019,583 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2015 | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,157,512 | $ | 2,385,327 | $ | (680,133 | ) | $ | 1,808,665 | $ | 11,671,676 | $ | 7,574,731 | $ | 19,246,407 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2016 (Restated) | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,157,512 | $ | 3,799,585 | $ | (667,976 | ) | $ | 1,246,722 | $ | 12,536,148 | $ | 9,771,542 | $ | 22,307,690 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 1,981,423 | - | (1,981,423 | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | 1,241,081 | - | 1,241,081 | 940,518 | 2,181,599 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 42,914 | - | 42,914 | 369 | 43,283 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forgiveness of debt | - | - | - | - | 32,937 | - | - | - | 32,937 | - | 32,937 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 7,154,638 | 7,154,638 | 3,023,227 | 10,177,865 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2017 | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 5,781,008 | $ | 616,019 | $ | 6,419,937 | $ | 21,007,718 | $ | 13,735,656 | $ | 34,743,374 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
107
| 69 |
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | Six Months Ended | Year Ended June | ||||||||||||||
| 2015 | 2014 | December 31, 2013 | 30, 2013 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (Loss) | $ | 2,701,125 | $ | (42,726 | ) | $ | (1,119,788 | ) | $ | 8,604,024 | ||||||
| Adjustments to reconcile net income to net cash | ||||||||||||||||
| Depreciation and amortization | 463,201 | 407,390 | 152,362 | 108,492 | ||||||||||||
| Gain on valuation of financial assets | (16,550 | ) | (11,181 | ) | - | - | ||||||||||
| Loss (Gain) on disposal of fixed assets | 56,707 | 99,443 | 303,079 | - | ||||||||||||
| Bargain gain on purchase of subsidiaries | - | - | - | (5,280,042 | ) | |||||||||||
| Impairment loss on goodwill | - | - | 122,250 | - | ||||||||||||
| Write off VAT to be deducted | - | - | 68,003 | - | ||||||||||||
| Change in deferred tax liabilities | (34,424 | ) | 39,447 | - | - | |||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (2,259,028 | ) | (841,719 | ) | (3,181,659 | ) | (1,773,181 | ) | ||||||||
| Other current assets | (518,684 | ) | (200,081 | ) | (514,736 | ) | 103,643 | |||||||||
| Other assets | (236,501 | ) | (22,502 | ) | (73,905 | ) | (19,207 | ) | ||||||||
| Tax payable | 658,010 | 460,524 | (398,047 | ) | (123,260 | ) | ||||||||||
| Other current liabilities | 1,113,740 | 580,875 | 6,115,072 | (21,894 | ) | |||||||||||
| Long-term liabilities | (157,579 | ) | - | 6,344,152 | - | |||||||||||
| Net cash provided by operating activities | 1,770,017 | 469,470 | 7,816,783 | 1,598,575 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Cash from acquisition | 318 | 128,933 | - | 12,766,882 | ||||||||||||
| Sale of investment in current deposit | - | 1,627,816 | - | - | ||||||||||||
| Purchase of marketable securities | - | - | (4,190,739 | ) | (2,553 | ) | ||||||||||
| Dividend received in excess of earnings as reductions of cost of the investment | 244,058 | - | - | - | ||||||||||||
| Purchase of property, plant and equipment | (283,568 | ) | (464,286 | ) | (450,864 | ) | (8,912 | ) | ||||||||
| Purchase of intangible assets | (344,651 | ) | (86,501 | ) | (195,442 | ) | (17,291 | ) | ||||||||
| Net cash provided by (used in) investing activities | (383,843 | ) | 1,205,962 | (4,837,045 | ) | 12,738,126 | ||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from related party borrowing | 794,009 | 391,812 | 54,679 | 1,260,382 | ||||||||||||
| Repayment to related parties | (315,443 | ) | - | (1,668,838 | ) | - | ||||||||||
| Proceeds from loans | 227,579 | - | - | - | ||||||||||||
| Net cash provided by (used in) financing activities | 706,145 | 391,812 | (1,614,159 | ) | 1,260,382 | |||||||||||
| Foreign currency translation | (832,294 | ) | (565,538 | ) | (813 | ) | (149,967 | ) | ||||||||
| Net increase in cash and cash equivalents | 1,260,025 | 1,501,706 | 1,364,766 | 15,447,116 | ||||||||||||
| Cash and cash equivalents, beginning balance | 19,571,799 | 18,070,093 | 16,705,327 | 1,258,211 | ||||||||||||
| Cash and cash equivalents, ending balance | $ | 20,831,824 | $ | 19,571,799 | $ | 18,070,093 | $ | 16,705,327 | ||||||||
| SUPPLEMENTARY DISCLOSURE: | ||||||||||||||||
| Interest paid | $ | 285 | $ | - | $ | - | $ | - | ||||||||
| Income tax paid | $ | 824,716 | $ | 1,187,694 | $ | 483,058 | $ | 974,615 | ||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW FOR NON-CASH TRANSACTION: | ||||||||||||||||
| Issuance of common stock for acquisition of GHFL | $ | 3,482,923 | $ | - | $ | - | $ | - | ||||||||
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Restated) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 10,177,865 | $ | 5,019,583 | $ | 661,285 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
| Depreciation and amortization | 561,184 | 626,028 | 463,201 | |||||||||
| Pension plan | 2,169 | 65,394 | - | |||||||||
| Amortization of bond premium | - | 244 | - | |||||||||
| Compensation on asset acquisition | - | - | 2,039,840 | |||||||||
| Gain on settlement of debt | - | (83,425 | ) | - | ||||||||
| Gain on valuation of financial assets | 64,749 | (16,669 | ) | (16,550 | ) | |||||||
| Loss on disposals of property, plant and equipment | 110,964 | 38,421 | 56,707 | |||||||||
| Deferred income tax | 87,391 | (87,983 | ) | (34,424 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 3,657,114 | (6,095,236 | ) | (2,259,028 | ) | |||||||
| Other current assets | (335,939 | ) | 724,922 | (518,684 | ) | |||||||
| Other assets | (1,528,647 | ) | 80,733 | (236,501 | ) | |||||||
| Tax payable | 1,036,997 | 714,343 | 658,010 | |||||||||
| Other current liabilities | (7,149,596 | ) | 7,954,780 | 1,113,740 | ||||||||
| Long-term liabilities | (1,028,760 | ) | (1,396,753 | ) | (157,579 | ) | ||||||
| Net cash provided by operating activities | 5,655,491 | 7,544,382 | 1,770,017 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Cash from acquisition | - | - | 318 | |||||||||
| Repayments to pervious shareholders | - | (150,959 | ) | - | ||||||||
| Dividend received in excess of earnings as reductions of cost of the investment | 244,058 | |||||||||||
| Purchases of structured deposit | (1,285,882 | ) | - | - | ||||||||
| Purchases of time deposits | (32,699,028 | ) | (7,161,459 | ) | (9,562,553 | ) | ||||||
| Proceeds from maturities of time deposits | 17,437,704 | 9,697,617 | 10,556,173 | |||||||||
| Loan made to RFL | 105,586 | (1,490,040 | ) | - | ||||||||
| Proceeds from disposals of marketable securities | 7,515,680 | - | - | |||||||||
| Purchase of marketable securities | (4,967,359 | ) | - | - | ||||||||
| Purchase of property, plant and equipment | (382,473 | ) | (537,156 | ) | (283,568 | ) | ||||||
| Purchase of intangible assets | (159,955 | ) | (447,344 | ) | (344,651 | ) | ||||||
Net cash provided by (used in) investing activities | (14,435,727 | ) | (89,341 | ) | 609,777 | |||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from related party borrowings | 464,850 | 86,572 | 794,009 | |||||||||
| Repayment to related parties | (285,856 | ) | (626,852 | ) | (315,443 | ) | ||||||
| Payment to noncontrolling interest as reduction of cash capital | - | (77,425 | ) | - | ||||||||
| Proceeds from third party borrowings | 2,350,000 | 466,445 | 227,579 | |||||||||
| Repayment to third party loans | (22,199 | ) | (225,213 | ) | - | |||||||
| Net cash provided by (used in) financing activities | 2,506,795 | (376,473 | ) | 706,145 | ||||||||
| Foreign currency translation | 1,577,935 | 7,530 | (564,053 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | (4,695,506 | ) | 7,086,098 | 2,521,886 | ||||||||
| Cash and cash equivalents, beginning balance | 20,169,455 | 13,083,357 | 10,561,471 | |||||||||
| Cash and cash equivalents, ending balance | $ | 15,473,949 | $ | 20,169,455 | $ | 13,083,357 | ||||||
| SUPPLEMENTARY DISCLOSURE: | ||||||||||||
| Interest paid | $ | 33,844 | $ | 42,935 | $ | 285 | ||||||
| Income tax paid | $ | 2,307,768 | $ | 1,562,037 | $ | 824,716 | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW FOR NON-CASH TRANSACTION: | ||||||||||||
| Debt forgiveness - related parties | $ | 32,937 | $ | - | $ | - | ||||||
| Issuance of common stock for acquisition of GHFL | $ | - | $ | - | $ | 1,443,083 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
China United Insurance Service, Inc. (“China United”, “CUIS”, or the “Company”) is a Delaware corporation, organized on June 4, 2010 by Yi-Hsiao Mao, a TaiwaneseTaiwan citizen, as a listing vehicle for both ZLI Holdings Limited (“CU Hong Kong”) to beand Action Holdings Financial Limited (“AHFL,” a company incorporated in the British Virgin Islands). The Company is quoted on the United States Over the Counter Bulletin Board (the “OTCBB”).Board.
CU Hong Kong, a wholly owned Hong Kong-based subsidiary of China United, was incorporated by China United, on July 12, 2010 under Hong Kong law. On October 20, 2010, CU Hong Kong incorporatedestablished a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd.Limited (“CU WFOE”) in Henan province in the People’s Republic of China (“PRC”(the “PRC”).
On January 16, 2011, the Company issued 20,000,000 shares of common stock, $0.00001at par value of $0.00001, to several non-US personscitizens or residents for $300,000. The issuance was made pursuant to an exemption from registration in Regulation S under the Securities Act of 1933, as amended. The considerationentire $300,000 contribution was paidwired to the account of CU Hong Kong by May 6, 2011. All $300,000 was contributed into theWFOE’s bank account of CU WFOE as registered capital. in PRC.
On January 28, 2011, the Company increased the authorized number of authorizedcommon shares of common stock from 30,000,000 to 100,000,000 and also authorized 10,000,000 shares of preferred stock.
On January 17, 2011, after approved by the Board of Directors and stockholders of both Companies, the CU WFOE entered a series of agreements (“VIE Agreement”), including Exclusive Business Cooperation Agreement, Option Agreement, and Share Pledge Agreement with Law Anhou Insurance Agency Co., Ltd.Limited (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd.Limited or Henan Law Anhou Insurance Agency Co., Ltd.Limited) in Nanjing City, PRC. These agreements established a Variable Interest Entity (“VIE”) and Primary Beneficiary relationship between the two entities.
Anhou was incorporatedestablished in Henan province of the PRC on October 9, 2003. Anhou provides2003 and obtained its insurance agency servicesbrokerage license in April 2012 in PRC. Its primary business is to sell life and property casualty insurance products in the PRC.
Due
Prior to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirementsentering of VIE agreements with CU WFOE, Anhou acquired the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Yanyan Wang, Zhaohui Chen, Weizhe Hou and Yong Zhang, to invest in Anhou on its behalf. On September 26, 2013, the new PRC individual investors, namely Yanyan Wang, Zhaohui Chen, Jing Yue, Weizhe Hou, Yong Zhang, Li Chen (“Anhou New Investors”) and the original shareholdersentire interest of Anhou (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million (approximately $8 million). On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with ChangrongHu, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu.
On February 26, 2014, Anhou completed the registration of the change of its registered address to Room 1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued by Jiangsu Bureau of CIRC on April 21, 2014. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
Sichuan Kangzhuang Insurance Agency Co., Ltd.Limited (“Sichuan Kangzhuang”), which was incorporated onestablished in September 4, 2006 in the Sichuan province inProvince of the PRC, and provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB532,622 ($78,318). On September 6, 2010,or approximately USD78,000. Anhou also acquired the equity transfer agreements were signed between Anhou and each shareholderentire interest of Sichuan Kangzhuang. Sichuan Kangzhuang then had net liabilities of RMB219,123 ($32,134). Goodwill of RMB751,745 ($110,452) was therefore recorded. However, Sichuan Kangzhuang suffered loss since the acquisition, indicating the impairment of goodwill. As of December 31, 2013, the carrying value of the goodwill was fully impaired.
Jiangsu Law Insurance BrokerBrokers Co., Ltd.Limited (“Jiangsu”), which was incorporated onestablished in September 19, 2005 in Jiangsu Province of the PRC, for RMB518,000 or approximately USD75,470. Both subsidiaries are also engaged in selling life and property casualty insurance products in the PRC. Jiangsu provides insurance brokerage servicesFor the purpose of procuring certain economic benefits and establishing a more centralized control over the business operations in the PRC. On August 12, 2010, at Jiangsu’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB518,000 ($75,475) and Anhou increased Jiangsu’s paid-in capital to RMB10,000,000 ($1,355,150) from RMB5,180,000 ($625,113), on January 18, 2011, to meet the PRC paid-in capital requirements for insurance brokerage companies. On September 28, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Jiangsu. On acquisition date, Jiangsu had net assets of RMB2,286,842 ($341,425). Based on the purchase price allocation, the fair value (“FV”) of the identifiable assets and liabilities assumed exceeded the FV of the consideration paid. As a result,Sichuan province, the Company recordedcommenced the dissolution process of Sichuan Kangzhuang, a gain on acquisitionwholly owned subsidiary and set up a branch office of RMB1,768,842 ($267,156).Anhou in Sichuan province. Accordingly, Sichuan Kangzhuang had filed a dissolution application to the local Bureau of Administration. On June 22, 2017, the Sichuan Branch of Anhou obtained its business license to conduct insurance agency business. As of this date, Sichuan Kangzhuang has not received formal approval from relevant government authorities regarding the dissolution.
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Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications and capital requirements of the investors, we operate our business primarily through our Consolidated Affiliated Entities (“CAE”) in PRC. On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. We do not hold equity interests in our CAE. However, through the VIE Agreements with these CAE and their respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these CAE, which allows us to consolidate the financial results of the CAE in our financial statements.
On July 2, 2012, the Board of Directors and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Yi-Hsiao Mao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification.
Mr. Mao has extensive experience in the insurance agency and brokerage industry and has acted as the chairman of the board of Law Broker. Under the leadership of Mr. Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades and generated substantial shareholder value for its stockholders. The management of the Company wanted Mr. Mao to apply his years of experience in insurance industry into the Company’s expansion and to lead its growth. As a result the Company approached Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and operation of the Company and its subsidiaries. To ensure the consistently implementation of strategies and policies of the Company, through mutual discussion and negotiations, both the Company and Mr. Mao (and subsequently a majority of the shareholders) agree to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for the reclassification, Mr. Mao agreed to be engaged by the Company as its Chief Executive Officer within 6 months after July 2, 2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief Executive Officer, effective immediately.
All 1,000,000 shares of Series A Preferred Stock were reclassified from the 1,000,000 shares of common stock held by Mr. Mao and no additional consideration was paid by Mr. Mao in connection with the Reclassification. The preferred stock has no material quantitative preferences over common stock, such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of Action Holdings Financial Limited (“AHFL”),AHFL, a limited liability company (“LLC”) incorporatedestablished in April 2012, under the laws of British Virgin Islands, on April 30, 2012, together with itsAHFL’s four majority owned subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned subsidiaryTaiwan in exchange for 8,000,000 common shares of the Company.
AHFL holds 65.95% of the issuedCompany and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. As of August 24, 2012, Law Enterprise held (i) 100% of Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporatedNTD22.5 million or approximately USD676,000 in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Risk Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent”), an LLC incorporated in Taiwan on June 3, 2000.
Pursuant to the provisions of the Acquisition Agreement between thetwo installments. The Company and the selling shareholders of AHFL and for allhad entered into a total of five amendments to the Acquisition Agreement since August 24, 2012. Pursuant to the Fifth Amendment entered into on March 12, 2017, the Company is required to pay off the entire remaining balance of NTD15 million no later than March 31, 2019.
As part of the issued and outstanding shares ofacquisition agreement with AHFL, the Company was to pay NT$15 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments, subject to terms and conditions therein. In addition the Company agreed to (i) issue 8,000,000 shares of common stock of the Company to the shareholders of AHFL; (ii) issue 2,000,000 common shares of common stock of the Company to certainAHFL employees of Law Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of the Company. However, as of this date, the Company has not fulfilled this obligation.
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On March 14, 2013,
Among the Company and the selling shareholdersfour majority owned subsidiaries in Taiwan, AHFL owns 65.95% of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS common stock, among which 2,000,000 shares shall be solely granted to employeesinterest of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of the Company (including Enterprise Co., Limited (“Law Broker employees)Enterprise”). On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the Acquisition Agreement (the “Second Amendment”), pursuant to which, the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL. On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company is committed to complete the listing of the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least US$10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NT$22.5 million (approximately US$676,466), on a pro rata basis, to the selling shareholders of AHFL and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the Selling Shareholders as if the said acquisition had never happened. The Company is doing its best to achieve the targeted milestones as set forth in the third Amendment to the Acquisition Agreement. However, given the tight schedule and harsh general environment, despite every efforts of the Company, it might be really difficult for the Company to do so within the stipulated deadline. Therefore, the Company is actually negotiating with the Selling Shareholders of AHFL to convince them to give up such termination rights in case of failure to comply with the first and second requirements under Third Amendment within the stipulated deadline while continuously using its best efforts to fulfill such obligations.
Through Law Enterprise, is a holding company for its operatingAHFL owns three second tier subsidiaries, including Law Insurance Broker Co., Limited (“Law Broker”) with 100% equity interest, Law Insurance Agent Co., Limited (“Law Agent”) with 96% equity interest, and Law Risk Management & Consultant Co., Limited (“Law Management”) with 97.84% of equity interest. All of these subsidiaries are engaging in Taiwan. Law Broker primarily engagesbusiness in insurance brokerage and insurance agency service businessservices across Taiwan, while Risk Managementexcept that Law Agent and Law Agent are notManagement were dissolved in operation. We operate our Taiwan business primarily through Law Broker.November 2014 and January 2015, respectively.
On January 17, 2014, the Company’s Board of Directors of the Company approved a change in ourits fiscal year end to December 31 from June 30.30, retroactively effective July 1, 2013 with a transition period of six months.
On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Mr. Wong, Chun Kwok Johnny (“Mr. Wong”), the owner of Prime Financial Asia LtdLimited (PFAL) which is a re-insurance broker company resided in Hong Kong. Pursuant to the Agreement, Mr. Wong would increase PFAL’s capital contribution from HK$500,000HKD500,000 to HK$1,470,000,HKD1,470,000, and AHFL would contribute HK$1,530,000HKD1,530,000 to PFAL’s registered capital. Upon the completion of capital contribution by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
In the fourth quarter of 2014, the shareholders of the Risk Management and Law Agent made the resolution to dissolve Risk Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Risk Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Risk Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Risk Management and Law Agent are under the process of liquidation as of now.
On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with thea selling shareholder (Mr. Chwan hau Li, the director of the Company) of Genius Holdings Financial Limited ( “GHFL”(“GHFL”), a company with limited liability incorporated under the laws of British Virgin Islands ,Mr. Chwan hau Li, to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock together with ana granted option for 352,166 shares of common stock of CUIS (“Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. GHFL is a limited liability company established under the laws of British Virgin Islands in July 2013. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of CUIS.AHFL. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited liability company incorporated under the laws of Taiwan, which in turn holds 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. On February 13, 2015, the acquisition was completed; the selling shareholder transferred 100% shares in GHFL to AHFL. On March 31, 2015, the put option was exercised and Mr. Li received 352,166 shares of common shares of CUIS in exchange for his AHFL shares.
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On February 17, 2016, the Company and AHFL entered into an Amendment 2 to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Li, pursuant to which, on or prior to February 28, 2016, (i) the Company is committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least $10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised. The right to revoke the Put Option has not been exercised as of reporting date.
AHFL holds 51% of the issued and outstanding shares of PFAL. PFAL incorporated (i)August 7, 2015, Max Key Investment Ltd.,(“MKI”) a companywas incorporated with limited by shares incorporatedliability in the British Virgin Islands onIslands. On August 7,15, 2015, (ii) Prime TechnologyManagement Consulting (Nanjing) Co., Ltd., (“PTC Nanjing”) a companywas incorporated with limited by shares incorporatedliability in Nanjing on August 15, 2015.province of the PRC.
On September 3, 2015, MKI incorporatedMay 10, 2016, Prime Technology Consulting Co., Ltd., (“PTC Taiwan”) a company limited by shares incorporated in Taiwan. MKI is a holding company forchanged its operating subsidiaries in Taiwan. PTCname to Prime Asia Corporation, Limited (“PA Taiwan”). PA Taiwan primarily engages in insurance platform establishment and related information technology consulting service business across Taiwan. Each of MKI, PTC Nanjing and PTC Taiwan is a wholly owned subsidiary of PFAL.
The corporate structure as of December 31, 20152017 is as follows:
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of China United, and its subsidiaries and VIEs as shown in the organizationcorporate structure in Note 1 above.1. All significant intercompany transactions and balances werehave been eliminated in consolidation. Certain reclassifications have been made to the consolidated financial statements for prior years to the current year’s presentation. Such reclassifications have no effect on net income as previously reported. Please see Note 25, Reclassifications.
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BasisUse of PresentationEstimates
The preparation of the Company’s consolidated financial statements are prepared in accordanceconformity with accounting principles generally accepted in the United States of America (“USU.S. GAAP”). requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
Noncontrolling Interest
Noncontrolling interest consists of direct and indirect equity interest in AHFL and its subsidiaries arising from the acquisition of AHFL by CUIS and acquisition of PFAL by AHFL onin August 24, 2012 and April 23, 2014, respectively.
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,“Consolidation,” which governs the accounting for and reporting of noncontrolling interests (“NCIs”NCI”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available when they are made; however, actual results could differ materially from those estimates.
Risks and Uncertainties
The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, and foreign currency exchange rates.
Comprehensive Income
The Company follows FASB ASC Topic 220 (“ASC 220”),“Reporting Comprehensive Income,” which establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC 220 defines comprehensive income as net income and all changes to stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.securities held as available-for-sale.
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Foreign Currency Transactions
The functional currency for our subsidiaries in Taiwan is New Taiwan Dollar (“NT$”), for our subsidiaries in Hong Kong is Hong Kong Dollar (“HK$”) and for the VIEs in China is Renminbi (“RMB”).
The consolidatedCompany’s financial statements were translated into United States Dollars (“USD” or “$”)are presented in accordance with FASB ASC Topic 830“Foreign Currency Transaction.” According toU.S. dollars ($), which is the standard, all assetsCompany’s reporting and liabilities were translated atfunctional currency. The functional currencies of the exchange rate on the balance sheet dates; stockholders’ equity is translated at historical ratesCompany’s subsidiaries are NTD, RMB and statement of operations items are translated at the weighted average exchange rate for the period.HKD. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC 220. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currency are translated at the functional currency using the rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the consolidated statements of operations and other comprehensive income (loss).
The Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD, RMB and HKD into U.S. dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for financial statements are as follows:
| Average Rate for the years ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Taiwan dollar (NTD) | NTD | 30.39845 | NTD | 32.21390 | NTD | 31.73010 | ||||||
| China yuan (RMB) | RMB | 6.75701 | RMB | 6.64301 | RMB | 6.21750 | ||||||
| Hong Kong dollar (HKD) | HKD | 7.79223 | HKD | 7.76173 | HKD | 7.75210 | ||||||
| United States dollar ($) | $ | 1.00000 | $ | 1.00000 | $ | 1.00000 | ||||||
| Exchange Rate at | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Taiwan dollar (NTD) | NTD | 29.65568 | NTD | 32.28310 | ||||
| China yuan (RMB) | RMB | 6.50638 | RMB | 6.94370 | ||||
| Hong Kong dollar (HKD) | HKD | 7.81493 | HKD | 7.75434 | ||||
| United States dollar ($) | $ | 1.00000 | $ | 1.00000 | ||||
Cash and Cash Equivalents
For Statements of Cash Flows purposes, the Company considersand cash equivalents include cash on hand, bank deposits, and other highly-liquidhighly liquid investments with maturities of three months or less when purchased, such as commercial paper, to be cash and equivalents.at the date of origination.
Marketable Securities
The Company invests part of its excessexcessive cash in equity securities, money market funds, debt and government bonds.equity funds. Such investments are included in “Marketable securities” in the accompanying consolidated balance sheets. Held-to-maturity represents securities the Company has intends and has the ability to hold to maturity; tradingTrading securities represent securities bought and held primarily for sale in the near-term to generate income on short-term price differences; available-for-sale represents securities not classified as held-to-maturity or trading securities.
The Company classifies the equity security investments as trading securitiesdifferences and reports themare stated at FV with changes in FV recorded in “Other Income” in the statements of operationsfair value. Realized and other comprehensive income (loss). The Company classifies bonds as available-for-sale and reports them at FV with unrealized gains and losses includedare recorded in “Accumulated other comprehensive income (loss)” on the equity section of the balance sheets.(expense).
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Accounts Receivable netand Allowance for Doubtful Accounts
Accounts receivable includes commission receivables and is stated at net realizable values. The Company reviews its accounts receivable regularly to determine if a bad debt allowance is necessary at each year-end.quarter-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 20152017 and 2014.2016.
Property, Plant and Equipment net
Property, plant and equipment are recordedstated at cost. Gaincost, less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Upon sale of retirement, the cost and related accumulated depreciation are removed from the accounts and any gain or loss on disposal of property, plant and equipment is recorded in other income at disposal. Expenditures for betterments, renewals and additions are capitalized. Repairs and maintenance expenses are expensed as incurred.(expense).
Depreciation for financial reporting purposesof office equipment, office furniture, leasehold improvements, transportation equipment and other equipment is providedcomputed using the straight-line method over abased on estimated useful life of threelives ranging from one to ten years with estimated salvage value of 10% to 25%. Property, plant and equipment mainly consist of office furniture, computers, vehicles and leasehold improvements.value.
Impairment of Long-LivedGoodwill and Intangible Assets
In accordance with ASC Topic 360,“Property, Plant and Equipment,” the Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate an asset may be impaired. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by it. If an asset is considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds its FV. Assets to be disposed of are reported at the lower of the carrying amount or FV, less cost of disposal. No impairment was recognized for the years ended December 31, 2015 and 2014.
Goodwill
Goodwill arose from both the acquisition of PFAL and GHFL (Note 10). Goodwill isrepresents the excess of theacquisition cost of an acquisition over the FVfair value of the net assets acquired.in the acquisition of a business. Goodwill is not amortized but instead is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using the prescribed two-step process under US GAAP.goodwill impairment test. The first step screens for potential impairment of goodwill to determine if the FVfair value of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied FVfair value of goodwill to its carrying value. As of December 31, 2015,2017, and 2016, there were no any indications of the impairment of goodwillgoodwill.
Intangible assets, which primarily consist of software, are stated at cost, less accumulated amortization, and amortized over estimated useful lives ranging from 3 to 5 years.
Impairment of Long-Lived Assets Other than Goodwill
The Company reviews the carrying values of the long-lived assets when circumstances warrant as to whether the carrying value has become impaired. The Company considers assets to be impaired if the carrying value of an asset exceeds the present value of future net undiscounted cash flows from its related operations. There were no impairment recognized for the years ended December 31, 2017, 2016 and 2015.
Long-Term Investments
Long-term investments include government bonds held as available-for-sale and equity investments accounted for the cost method. Available-for-sale investments are carried at fair value and unrealized gains and losses as a result of changes in the fair value are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.
The Company applies the cost method of accounting for investments in companies that arose fromdo not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the acquisitionability to exercise significant influence. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.
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Convertible Bonds
Convertible debt is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20 governs the calculation of PFALan embedded beneficial conversion. The amount of the value of beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. Many of the conversion features embedded in the Company’s notes are variable and GHFL.are adjusted based on a discount to market prices which could cause an unlimited number of shares of common stock to be issued. In these cases, the Company records the embedded conversion feature as a derivative instrument, at fair value. The embedded conversion features are recorded as discounts when the notes become convertible. The excess of fair value of the embedded conversion feature over the carrying value of the debt is recorded as an immediate charge to operations. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts relating to the initial recording of the derivatives or beneficial conversion features will be amortized over the terms of the convertible bonds.
Revenue Recognition
The Company’s revenue is from insurance agency and brokerage services. The Company, through its subsidiaries and VIEs, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency and brokerage services are considered complete and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of issuance of the policies, in which customers can cancel the contract without any fees. The Company is notified of such cancellations by the insurance carriers.companies. For the fiscal years ended December 31, 20152017, 2016 and 2014,2015, policy cancellations were $2,226$227,901, $340,086 and $84,476,$291,325, respectively.
The Company pays commissions to its sub-agentssales professionals when an insurance product is sold by the sub-agent.sales professionals. The Company recognizes commission revenue from insurance companies on a gross basis. Thebasis, and the commissions paid by the Company to its sub-agentssales professionals are recordedrecognized as cost of revenue.
Income Taxes
The Company utilizes ASC Topic 740,“Income Taxes”, which requires recognitionrecords income tax expense using the asset-and-liability method of accounting for deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements or tax returns.income taxes. Under this method, deferred taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowancesDeferred tax assets are established, when necessary, to reducereduced by a valuation allowance if, based on available evidence, it is more likely than not that the deferred tax assets to the amount expected towill not be realized.
When tax returns are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in general and administrative expenses in the consolidated statements of incomeoperations and other comprehensive income (loss). As of December 31, 2015 and 2014, the Company did not have any uncertain tax positions.
The Company was not subjected to income tax examinations by taxing authorities during the current or past fiscal years. In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit, which has been accrued in the fiscal year ended December 31, 2014, and it has not been paid during the year ended December 31, 2015.
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Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value. We currently have 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of December 31, 2014, which was classified as equity.
Section 480-10-25 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Section 480-10-05-2 classifies all of the following as examples of an obligation:
a. An entity incurs a conditional obligation to transfer assets by issuing (writing) a put option that would, if exercised, require the entity to repurchase its equity shares by physical settlement. (Further, an instrument that requires the issuer to settle its obligation by issuing another instrument [for example, a note payable in cash] ultimately requires settlement by a transfer of assets.)
b. An entity incurs a conditional obligation to transfer assets by issuing a similar contract that requires or could require net cash settlement.
c. An entity incurs a conditional obligation to issue its equity shares by issuing a similar contract that requires net share settlement.
The Series A Preferred Stock does not fall in to any of the above categories as an obligation. The preferred stock is convertible into a fixed number of common shares (one for one). Therefore, the preferred stock has been classified as equity.
Fair ValuesValue of Financial Instruments
FASB ASC Topic 820,“Fair Value Measurements and Disclosures,” defines FV,value accounting establishes a three-levelframework for measuring fair value and expands disclosure about fair value measurements. Fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This framework provides a fair value hierarchy that prioritizes the inputs to valuation hierarchy for disclosures of FV measurement and enhances disclosure requirements for FV measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are reasonable estimates of FV because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. Thetechniques used to measure fair value into three levels are defined as follows:
•· Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
•· Level 3 inputs to the valuation methodology are unobservable and significant to the FV.fair value.
The carrying amounts of financial assets and liabilities in the consolidated balance sheets for cash and cash equivalents, accounts payable and accrued expense approximate fair value due to the short-term duration of those instruments. See Note 24 for additional information on the fair values related to other financial assets and liabilities.
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Concentration of Risk
The Company maintains cash with banks in the USA, PRC, Hong Kong, and Taiwan. Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. In Taiwan, a depositor has up to NT$3,000,000NTD3,000,000 insured in a bank.by Central Deposit Insurance Corporation (“CDIC”). In China, a depositor has up to RMB500,000 insured in a bank.by the People’s Bank of China Financial Stability Bureau (“FSD”). In Hong Kong, a depositor has up to HK$500,000HKD500,000 insured in a bank.by Hong Kong Deposit Protection Board (“DPB”). In the United States, the standard insurance amount is $250,000 per depositor in a bank underinsured by the FDIC’s general deposit insurance rules.Federal Deposit Insurance Corporation (“FDIC”).
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, time deposits and accounts receivable. As of December 31, 20152017 and 2014,2016, approximately $1,349,000$1,512,000 and $824,000$1,382,000 of the Company’s cash and cash equivalents and time deposits held by financial institutions, was insured, and the remaining balance of approximately$19,483,000approximately $33,949,000 and $18,587,000,$24,312,000, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.
For the fiscal yearyears ended December 31, 2015, 2014,2017, 2016 and June 30, 2013, and for the six months ended December 31, 2013,2015, the Company’s revenues from sale of insurance policies underwritten by these companies were:
| Year ended December 31, 2015 | Year ended December 31, 2014 | Six months ended December 31, 2013 | Year ended June 30, 2013 | Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||||||||||||||||||||||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 17,649,359 | 36 | % | $ | 13,493,644 | 28 | % | $ | 6,590,776 | 28 | % | $ | 12,118,121 | 32 | % | $ | 18,617,293 | 26 | % | $ | 23,684,774 | 34 | % | $ | 17,649,359 | 36 | % | ||||||||||||||||||||||||||||
| Taiwan Life Insurance Co., Ltd. (**) | 9,309,759 | 13 | % | 8,381,587 | 12 | % | 6,112,311 | 13 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| TransGlobe Life Insurance Inc. | 8,168,837 | 11 | % | (*) | (*) | 4,729,565 | 10 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Fubon Life Insurance Co., Ltd. | 6,744,014 | 14 | % | 7,621,634 | 16 | % | 4,894,133 | 21 | % | 9,245,419 | 24 | % | (*) | (*) | 7,167,163 | 10 | % | 6,744,014 | 14 | % | ||||||||||||||||||||||||||||||||||||
| CTBC Life Insurance Co., Ltd. | 6,112,311 | 13 | % | (*) | (*) | (*) | (*) | (*) | (*) | |||||||||||||||||||||||||||||||||||||||||||||||
| TransGlobe Life Insurance Inc. | 4,729,565 | 10 | % | 5,584,124 | 12 | % | 3,983,464 | 17 | % | (*) | (*) | |||||||||||||||||||||||||||||||||||||||||||||
| AIA International Ltd., Taiwan | (*) | (*) | 6,938,013 | 15 | % | 3,424,615 | 14 | % | (*) | (*) | ||||||||||||||||||||||||||||||||||||||||||||||
(*) Revenue for the year ended had not exceeded 10% or more of the consolidated revenue.
(**) Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.
As of December 31, 2015, 2014, 20132017, 2016 and June 30, 20132015, the Company’s accounts receivable from these companies were:
| December 31, 2015 | December 31, 2014 | December 31, 2013 | June 30, 2013 | |||||||||||||||||||||||||||||
| Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | |||||||||||||||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 3,689,404 | 43 | % | $ | 2,150,294 | 28 | % | $ | 1,967,886 | 27 | % | $ | 1,501,865 | 36 | % | ||||||||||||||||
| Fubon Life Insurance Co., Ltd. | 990,327 | 11 | % | 963,118 | 12 | % | 1,390,208 | 19 | % | 673,710 | 16 | % | ||||||||||||||||||||
| CTBC Life Insurance Co., Ltd | 994,978 | 11 | % | 1,200,562 | 16 | % | (*) | (*) | (*) | (*) | ||||||||||||||||||||||
| TransGlobe Life Insurance Inc. | (*) | (*) | 735,755 | 10 | % | (*) | (*) | (*) | (*) | |||||||||||||||||||||||
| AIA International Ltd., Taiwan | (*) | (*) | 1,098,879 | 14 | % | (*) | (*) | (*) | (*) | |||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||
| Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | |||||||||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 3,430,661 | 26 | % | $ | 6,503,843 | 41 | % | $ | 3,689,404 | 43 | % | ||||||||||||
| Taiwan Life Insurance Co., Ltd. (**) | 2,192,668 | 17 | % | 1,973,410 | 13 | % | 994,978 | 11 | % | |||||||||||||||
| TransGlobe Life Insurance Inc. | 1,811,401 | 14 | % | (*) | (*) | % | 747,993 | 8 | % | |||||||||||||||
| Fubon Life Insurance Co., Ltd | (*) | (*) | 1,660,685 | 11 | % | 990,327 | 11 | % | ||||||||||||||||
(*) Accounts receivableThe related revenue for the year ended had not exceeded 10% or more of the consolidated accounts receivable.revenue.
(**) Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.
The Company’s operations are in the PRC, Hong Kong and Taiwan. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC, Hong Kong and Taiwan, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, Hong Kong and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
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Operating Leases
Leases, where substantially all the rewards and risks of ownership of assets remain with the leasing company, that do not meet the capitalization criteria of FASB ASC Topic 840“Leases,” are accounted for as operating leases. Rentals under operating leases are expensed on the straight-line basis over the lease term.
Segment Reporting
The Company follows FASB ASC Topic 280, “Segment Reporting” for its segment reporting. In the past periods, the Company managed and reviewed its business as twothree operating segments. The business of CU WOFEWFOE, CU Hong Kong and CAEthe Company’s Consolidated Affiliated Entities (“CAE”) in PRC was managed and reviewed as the PRC segment. The business of AHFL and its subsidiaries in Taiwan was managed and reviewed as Taiwan segment.
ASC-280-10-50-12 states, a public entity shall report separately information about an operating segment that meets any The business of the following quantitative thresholds:
a. Its reported revenue, including both sales to external customersPFAL was managed and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments.
b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:
1. The combined reported profit of all operating segments that did not report a loss
2. The combined reported loss of all operating segments that did report a loss.
c. Its assets are 10 percent or more of the combined assets of all operating segments.
reviewed as Hong Kong segment. The PRC segment does not meet any of the above quantitative thresholds and Taiwan segment issegments are substantially all of the reported consolidated amounts. Therefore, we are not reporting these two segments separately.Please refer to Note 23 disclose revenues from26 for additional information on the two segments.segment reporting.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which could result in a loss to the Company which will be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies arising from legal proceedings pending against the Company or unasserted claims that may rise from such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates it is probable a material loss will be incurred and the amount of the loss can be reasonably estimated, then the estimated loss is accrued in the Company’s financial statements. If the assessment indicates a material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Statement of Cash Flows
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In accordance with FASB ASC Topic 230,“Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies and an average exchange rate is used. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows may not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Cash from operating, investing and financing activities is net of the effect of acquisition described in Note 10.
Variable Interest Entities
The Company follows FASB ASC Subtopic 810-10-05-8”,810-10-05-8, “Consolidation of VIEs,” states that a VIE is a corporation, partnership, limited liability corporation, trust or any other legal structure usedentity in which equity investors do not have sufficient equity at risk for the legal entity to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry outfinance its principal activities without additional subordinated financial support (2) hasor, as a group, the holders of the equity owners that are unable to make significant decisions about its activities, or (3) has a groupinvestment at risk lack any one of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.following three characteristics:
| a. | The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance | |
| b. | The obligation to absorb the expected losses of the legal entity | |
| c. | The right to receive the expected residual returns of the legal entity. |
Due to the PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, the Company operates its insurance agency and brokerage business in PRC primarily through Anhou, a VIE owned by seven individual shareholders, andwith its two subsidiaries of Anhou.in the PRC.
On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders (as defined in Note 1) entered into the Old VIE Agreements (as defined in Note 1)(the “First VIE Agreements”) which included:
| · | Exclusive Business Cooperation Agreement (“EBCA” or the “Agreement”) through which: (1) CU WFOE has the right to provide Anhou with complete technical support, business support and related consulting services during the term of this Agreement; (2) Anhou agrees to accept all the consultations and services provided by CU WFOE. Anhou further agrees that unless with CU WFOE’s prior written consent, during the term of this Agreement, Anhou shall not directly or indirectly accept the same or any similar consultations and/or services provided by any third party and shall not establish similar cooperation relationship with any third party regarding the matters contemplated by this Agreement; (3) Anhou shall pay CU WFOE fees equal to 90% of the net income of Anhou, and the payment is quarterly, and (4) CU WFOE retains all exclusive and proprietary rights and interests in all rights, ownership, interests and intellectual properties arising out of or created during the performance of this Agreement. |
The term of this Agreement is 10 years. Subsequent to the execution of this Agreement, both CU WFOE and Anhou shall review this Agreement on an annual basis to determine whether to amend or supplement the provisions. The term of this Agreement may be extended if confirmed in writing by CU WFOE prior to the expiration thereof. The extended term shall be determined by CU WFOE, and Anhou shall accept such extended term unconditionally.
During the term of this Agreement, unless CU WFOE commits gross negligence, or a fraudulent act, against Anhou, Anhou may not terminate this Agreement. Nevertheless, CU WFOE shall have the right to terminate this Agreement upon giving 30 days prior written notice to Anhou at any time.
| · | Power of Attorney under which each shareholder of Anhou executed an irrevocable power of attorney to authorize CU WFOE to act on behalf of the shareholder to exercise all of his/her rights as equity owner of Anhou, including without limitation to: (1) attend shareholders’ meetings of Anhou; (2) exercise all the shareholder’s rights and shareholder’s voting rights that he/she is entitled to under the laws of the PRC and Anhou’s Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the shareholder’s shareholding in part or in whole, and (3) designate and appoint on behalf of the shareholder the legal representative, the director, supervisor, the chief executive officer and other senior management members of Anhou. |
| · | Option Agreement under which the shareholders of Anhou irrevocably granted CU WFOE or its designated person an exclusive and irrevocable right to acquire, at any time, the entire portion of Anhou’s equity interest held by each shareholder of Anhou, or any portion thereof, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in Anhou shall be the lower of (i) RMB1 ($0.16) and (ii) the lowest price allowed by relevant laws and regulations. If appraisal is required by the laws of PRC when CU WFOE exercises the Equity Interest Purchase Option (as defined in the Option Agreement), the Parties shall negotiate in good faith and based on the appraisal result make necessary adjustment to the Equity Interest Purchase Price (as defined in the Option Agreement) so that it complies with any and all then applicable laws of the PRC. The term of this Agreement is 10 years, and may be renewed at CU WFOE’s election. |
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| · | Share Pledge Agreement under which the owners of Anhou pledged their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the EBCA. Pursuant to this agreement, if Anhou fails to pay the exclusive consulting or service fees in accordance with the EBCA, CU WFOE shall have the right, but not the obligation, to dispose of the owners of Anhou’s equity interests in Anhou. This Agreement shall be continuously valid until all payments due under the EBCA have been repaid by Anhou or its subsidiaries. |
As a result of the capital increase and the share transfer, described in Note 1, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders (as defined in Note 1) entered into a series of variable interest agreements (the “VIE“Second VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous OldFirst VIE Agreements, other than the change of shareholder names and their respective shareholdings. The OldFirst VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The EBCA executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect.
As a result of the agreements among CU WFOE, the shareholders of Anhou and Anhou, CU WFOE is considered the primary beneficiary of Anhou, CU WFOE has effective control over Anhou; therefore, CU WFOE consolidates the results of operations of Anhou and its subsidiaries. Accordingly the results of operations, assets and liabilities of Anhou and its subsidiaries are consolidated in the Company’s financial statements from the earliest period presented. However, the VIE is monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change. These events include:
| a. | The legal entity’s governing documents or contractual arrangements are changed in a manner that changes the characteristics or adequacy of the legal entity’s equity investment at risk. |
| b. | The equity investment or some part thereof is returned to the equity investors, and other interests become exposed to expected losses of the legal entity. |
| c. | The legal entity undertakes additional activities or acquires additional assets, beyond those anticipated at the later of the inception of the entity or the latest reconsideration event, that increase the entity’s expected losses. |
| d. | The legal entity receives an additional equity investment that is at risk, or the legal entity curtails or modifies its activities in a way that decreases its expected losses. |
The Company reviews the VIE’s status on an annual basis. For the years ended December 31, 20152017, 2016 and 2014,2015, no event including a-d above took place that would change the Company’s primary beneficiary status.
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ReclassificationsNew Accounting Pronouncements and Other Guidance
Certain prior period amounts were reclassified to conform toGuidance for Accounting Impacts of the manner of presentation in the current period. These reclassifications had no effect on the net income (loss) or stockholders’ equity.Tax Cuts and Jobs Act
RecentIncome Tax Accounting PronouncementsImplications of the Tax Cuts and Jobs Act
In May 2015,On December 22, 2017, the FASB issued Accounting Standards Update (“ASU”2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent). The ASU removeswas enacted into law and the requirementnew legislation contains several key tax provisions that impact the Company, including a reduction of the corporate income tax rate to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and also removes certain disclosure requirements. The new requirements are21% effective for the Company beginning January 1, 2016 with retrospective application to all periods presented required and early adoption permitted. The Company does not expect the ASU to materially affect our financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s accounting for Fees Paid in a Cloud Computing Agreement. The ASU will require an entity’s management to assess, for each annual and interim period, whether a cloud computing arrangement includes a software license. All software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. If the arrangement does not include a software license, the arrangement should be accounted for as a service contract. The ASU will be effective for interim and annual periodstax years beginning after December 15, 201531, 2017 and early adoption is permitted. Entities will have the choice of prospective or retrospective adoptionTransition Tax, among others. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the standard.Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act and provides for a measurement period that should not extend beyond one year from the enactment date of the Tax Reform Act. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting under ASC 740 is complete. Adjustments to incomplete and unknown amounts will be recorded and disclosed prospectively during the measurement period. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Reform Act.
As of December 31, 2017, there are no material elements of the Tax Reform Act for which the Company’s accounting is complete. While the Company's accounting for the following elements of the Tax Reform Act is incomplete, the Company was able to make reasonable estimates of the tax effect with respect to the reduction of the federal corporate tax rate. The Company believeshas determined that the adoption of this ASU willtax rate reduction does not have aany material impact on itsthe current consolidated financial statements.
The Company's accounting for the following law changes of the Tax Reform Act is incomplete, and it is not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustment was recorded. One-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that it previously deferred from U.S. income taxes. The Company has a significant number of foreign subsidiaries and therefore has not yet completed its calculation of the total post-1986 E&P as well as non-U.S. income taxes paid for these foreign subsidiaries. In April 2015,addition, the FASB issued Accounting Standards Update No. 2015-03, ImputationTax Reform Act also creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of Interest: Simplifying the PresentationCFCs’ U.S. shareholder. GILTI is the excess of Debt Issuance Costs,the shareholder’s net CFC tested income over the net deemed tangible income return, which requires that debt issuance costs be presentedis currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a deduction fromU.S. shareholder over (2) the carrying amount of certain interest expense taken into account in the debt liability, consistent with debt discounts or premiums. Recognition and measurement guidance for debt issuance costs is not affected by this ASU. The ASU is effective for periods beginning after December 15, 2015, and the Company does not expect the implementation to have a material effect on its financial position or resultsdetermination of operations.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this update defers the effective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, interim and annual reporting periods after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt ASU 2014-09.net CFC-tested income. The Company is still incontinuing to evaluate the processprovision of analyzing the effectTax Reform Act and the application of this new standard, including the transition method, to determine the impact on the Company’s consolidated financial position, results of operations, cash flows, and related disclosures.ASC 740.
The FASB has issuedAdoption of New Accounting Standards Update No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms
Balance Sheet Classification of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”. Measurement period adjustments are changes to provisional amounts recorded when the accounting for a business combination is incomplete as of the end of a reporting period. The measurement period can extend for up to a year following the transaction date. The new guidance requires companies to recognize these adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. Companies are no longer required to retroactively apply measurement period adjustments to the prior period. This update is effective for annual and interim periods beginning after December 15, 2016. We have early adopted this standard beginning in fiscal 2015. There was no material impact to the Consolidated Financial Statements.Deferred Taxes
In November 2015, the FASB issued Accounting Standards Update No.ASU 2015-17, “Balance"Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes”. The new guidanceTaxes." ASU 2015-17 simplifies the presentation of deferred income taxes and requires that all deferred tax assetsliabilities and liabilities, along with any related valuation allowance,assets be classified as noncurrent on the balance sheet. This updateThe Company applied the guidance retrospectively to all periods presented; as a result, $123,406 and $59,233 were reclassified from current deferred tax assets to non-current deferred tax assets as of December 31, 2017 and 2016, respectively. See Note 25 for additional information on the effect of the reclassifications.
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Accounting Standards Issued but Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which, when effective, will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of the standard is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance is effective for annualus in the first quarter of 2018. Two methods of transition are permitted upon adoption: full retrospective and modified retrospective. The Company will adopt this standard in the first quarter of 2018 using a modified retrospective adoption approach. Under this approach, prior periods beginning after December 15, 2016will not be restated. Rather, revenues and interimother disclosures for prior periods within those annual periods. ASU 2015-17 will be effective for us, but will not cause a material impact on our financial condition orprovided in the results of our operations.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changesnotes to the current guidance primarily affect the accounting for equity investments, financial liabilitiesstatements as previously reported under the fair value option,current revenue standard, and the presentation and disclosure requirements for financial instruments. In addition,cumulative effect of initially applying the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption,will be recognized as an entity should apply the amendments by means of a cumulative-effect adjustment to retained earnings as of January 1, 2018. An assessment to determine the balance sheet at the beginningimpacts of the first reporting period innew accounting standard has been performed. The Company implemented new accounting and operational processes which were a result of the new guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Corporation is currently evaluatingand analyzed the impact of adopting this guidance.these changes. The primary impacts of the new standard to the Company are expected to be as follows:
Revenue - The revenue recognition for commissions derived from insurance agency and brokerage services has been accelerated from historical patterns, recognition when the monthly or quarterly remuneration becomes determinable, to the recognition of an estimate of expected commissions upon the policy effective date. Under the new guidance, the Company will also need to defer certain revenues to reflect delivery of services over the contract period. As a result, revenue from certain arrangements will be recognized in earlier periods under the new guidance in comparison to our current accounting policies, and others will be recognized in later periods. This change is anticipated to result in a significant shift in timing of interim revenue.
Contract Costs - The assets recognized for the costs to obtain and/or fulfill a contract will be amortized on a systematic basis that is consistent with the transfer of the services to which the asset relates. These costs, including certain sales commissions and internal costs related to pre-placement broking activities, were previously expensed as incurred. As such, the Company expects the recognition of costs to shift among quarters. For situations where the amortization period of the asset is one year or less, the Company plans to apply a practical expedient and recognize the costs of obtaining a contract as an expense when incurred.
Leases
In February 2016, the FASB issued Accounting Standards Update No.ASU 2016-02,Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840,Leases (FAS (Statement of Financial Accounting Standards No. 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its Consolidated consolidated financial statements.
Credit Losses
In June 2016, the FASB issued ASC Update No. 2016-13, (Topic 326),Financial Statements.Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASC update introduces new guidance for the accounting for credit losses on financial instruments within its scope. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider both historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses and subsequent adjustment to such loss estimates, will be recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. ASC No. 2016-13 also modifies the impairment model for available-for-sale debt securities. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The updated guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. The Company is evaluating the impact of the adoption of ASC Update No. 2016-13 on its financial position and results of operations.
Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
Simplifying the Test for Goodwill Impairment
In January 2017 the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (ASU 2017-04), which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350, “Intangibles—Goodwill and Other”. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the current ASC 350 requirement to calculate a goodwill impairment charge using Step 2. ASU 2017-14 will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
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The Company does not believe that new accounting pronouncements other than disclosed above will have a material impact on its financial position, results of operations or cash flows.
NOTE 3 – CASH AND CASH EQUIVALENTS AND TIME DEPOSITS
Cash and cash equivalents and time deposits consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Cash and cash equivalents: | ||||||||
| Cash in banks and on hand | $ | 11,774,489 | $ | 17,713,744 | ||||
| Cash equivalent – re-purchase bonds | 2,697,628 | - | ||||||
| Time deposits – with original maturities less than three months | 1,001,832 | 2,455,711 | ||||||
| 15,473,949 | 20,169,455 | |||||||
| Time deposits – with original maturities over three months but less than one year | 21,470,113 | 5,352,347 | ||||||
| Total cash and cash equivalents and time deposits | $ | 36,944,062 | $ | 25,521,802 | ||||
On December 22, 2017, the Company and China Bills Finance Corporation entered into a repurchase agreement to purchase re-purchase bonds of $2,697,628 (NTD 80,000,000) and with 0.38% interest rate per annum. The re-purchase bonds were due in January and February 2018.
As of December 31, 2015 and 2014, our cash and equivalents primarily consisted2017, the Company had time deposits of cash and certificatesapproximately $1,686,017 (NTD 50,000,000) pledged as collateral for short-term loans. The amount was recorded in time deposits with original maturities over three months but less than one year. See Note 13 for the information of deposits. The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents approximate fair value.short-term loans.
NOTE 4 – MARKETABLE SECURITIES
Marketable securities representrepresented investment in equity securities of listed stocks and funds which are classified as Level 1 securities as follows:
| December 31, 2015 | ||||||||||||
| Cost or | Gross | |||||||||||
| Amortized | Unrealized | Total | ||||||||||
| Cost | Gains (Losses) | Fair Value | ||||||||||
| Level 1 securities: | ||||||||||||
| Stocks | $ | 28,278 | $ | 585 | $ | 28,863 | ||||||
| Funds | 2,408,728 | (68,509 | ) | 2,340,219 | ||||||||
| $ | 2,437,006 | $ | (67,924 | ) | $ | 2,369,082 | ||||||
| December 31, 2014 | ||||||||||||
| Cost or | Gross | |||||||||||
| Amortized | Unrealized | Total | ||||||||||
| Cost | Gains (Losses) | Fair Value | ||||||||||
| Level 1 securities: | ||||||||||||
| Stocks | $ | 31,210 | $ | (2,932 | ) | $ | 28,278 | |||||
| Funds | 2,532,475 | (123,747 | ) | 2,408,728 | ||||||||
| $ | 2,563,685 | $ | (126,679 | ) | $ | 2,437,006 | ||||||
| December 31, 2017 | ||||||||||||
| Gross | ||||||||||||
| Unrealized | Total | |||||||||||
| Cost | Gains | Fair Value | ||||||||||
| Trading: | ||||||||||||
| Funds | $ | 33,117 | $ | 264 | $ | 33,381 | ||||||
| $ | 33,117 | $ | 264 | $ | 33,381 | |||||||
| December 31, 2016 | ||||||||||||
| Fair Value at | Gross | Fair Value at | ||||||||||
| December 31, | Unrealized | December 31, | ||||||||||
| 2015 | Gains | 2016 | ||||||||||
| Trading: | ||||||||||||
| Stocks | $ | 28,863 | $ | 9,900 | $ | 38,763 | ||||||
| Funds | 2,340,219 | 47,888 | 2,388,107 | |||||||||
| $ | 2,369,082 | $ | 57,788 | $ | 2,426,870 | |||||||
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NOTE 5 – STRUCTURED DEPOSIT
On July 7, 2017, the Company entered into an agreement with Cathay United Bank to purchase a 185-day structured deposit in effective on July 7, 2017 and mature on January 8, 2018, with principal approximately $1,229,563 (RMB8,000,000). The structured deposit has an embedded foreign exchange option linked to US Dollar to China Yuan offshore exchange rate (“USDCNH”). Strike price of the structured deposit is set at 7.3 USDCNH and the fixing date is on January 4, 2018. Yield rate will be at 4.1% per annum when the USDCNH is above or equal strike price on the fixing date, or at 3.9% per annum when blow. As of December 31, 2017, the Company used 3.9% per annum to calculate the interest because of USDCNH below the strike price.
| December 31, 2017 | ||||||||||||
| Cost | Gross Unrealized Losses | Total Fair Value | ||||||||||
| Structured deposit | $ | 1,278,551 | $ | (30,211 | ) | $ | 1,248,340 | |||||
| $ | 1,278,551 | $ | (30,211 | ) | $ | 1,248,340 | ||||||
NOTE 56 – OTHER CURRENT ASSETS
The Company’s other current assets consisted of the following as of December 31, 20152017 and 2014:2016:
| December 31, 2015 | December 31, 2014 | |||||||
| Prepaid expenses | $ | 603,557 | $ | 77,150 | ||||
| Current assets associated with discontinued operations | 224,140 | 174,308 | ||||||
| Prepaid rent and rent deposit | 133,179 | 191,995 | ||||||
| Other receivable | 86,539 | 69,546 | ||||||
| Refundable business tax | 7,600 | 912 | ||||||
| Other | - | 60,556 | ||||||
| Total other current assets | $ | 1,055,015 | $ | 574,467 | ||||
| December 31, 2017 | December 31, 2016 | |||||||
| Loan receivable | $ | 1,510,347 | $ | 1,486,846 | ||||
| Prepaid rent and rent deposits | 213,688 | 199,022 | ||||||
| Prepaid expenses | 87,947 | 64,678 | ||||||
| Other receivables | 135,996 | 50,683 | ||||||
| Refundable business tax | 150,221 | 17,441 | ||||||
| Interest receivable | 94,887 | 12,648 | ||||||
| Total other current assets | $ | 2,193,086 | $ | 1,831,318 | ||||
On October 24, 2016, the Company entered into a loan agreement with a third party, Rich Fountain Limited (“RFL”), a company incorporated under the laws of Samoa. The Company provided a short-term loan approximately $1,618,577 (NTD48,000,000) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest of the loan were payable on April 23, 2017. On April 21, 2017, the Company and RFL entered into a supplemental agreement to extend the loan to October 23, 2017. The Company received partial payment of approximately $71,974 (NTD2,134,440) and approximately $36,256 (NTD1,075,200) on June 22, 2017 and July 14, 2017, respectively. As of December 31, 2017, the outstanding principal balance of the loan was approximately $1,510,347 (NTD44,790,360). On March 7, 2018, RFL paid off all outstanding balance of loan to the Company.
NOTE 67 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following, as of December 31, 20152017 and 2014:2016:
| December 31, 2015 | December 31,2014 | December 31, 2017 | December 31,2016 | |||||||||||||
| Office Equipment | $ | 1,080,621 | $ | 1,026,426 | ||||||||||||
| Office Furniture | 125,746 | 139,755 | ||||||||||||||
| Office equipment | $ | 1,198,456 | $ | 1,070,061 | ||||||||||||
| Office furniture | 103,025 | 168,658 | ||||||||||||||
| Leasehold improvements | 511,874 | 478,154 | 761,522 | 581,964 | ||||||||||||
| Transportation equipment | 84,398 | 89,240 | 221,477 | 132,344 | ||||||||||||
| Other equipment | 97,996 | 64,002 | 90,990 | 87,302 | ||||||||||||
| Total | 1,900,635 | 1,797,577 | 2,375,470 | 2,040,329 | ||||||||||||
| Less: accumulated depreciation | (981,837 | ) | (735,815 | ) | (1,429,168 | ) | (1,113,424 | ) | ||||||||
| Total property, plant and equipment, net | $ | 918,798 | $ | 1,061,762 | $ | 946,302 | $ | 926,905 | ||||||||
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Depreciation expense was $325,212, $315,344 and $332,715 for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE 78 – INTANGIBLE ASSETS
As of December 31, 20152017 and 2014,2016, the Company’s intangible assets consisted the following:
| December 31, 2015 | December 31, 2014 | |||||||
| Software | $ | 780,355 | $ | 462,903 | ||||
| Less accumulated amortization | (311,576 | ) | (191,947 | ) | ||||
| Total other current assets | $ | 468,779 | $ | 270,956 | ||||
| December 31, 2017 | December 31, 2016 | |||||||
| Software | $ | 1,797,227 | $ | 1,500,339 | ||||
| Less: accumulated amortization | (1,021,449 | ) | (716,120 | ) | ||||
| Total intangible assets | $ | 775,778 | $ | 784,219 | ||||
Estimated future intangible assets amortization as of December 31, 20152017 is as follows:
| Years ending December 31, | Amount | Amount | ||||||
| 2016 | $ | 141,622 | ||||||
| 2017 | 88,631 | |||||||
| 2018 | 88,631 | $ | 258,824 | |||||
| 2019 | 83,268 | 222,200 | ||||||
| 2020 | 54,985 | 190,875 | ||||||
| 2021 | 78,270 | |||||||
| 2022 | 25,609 | |||||||
| Thereafter | 11,642 | - | ||||||
| Total | $ | 468,779 | $ | 775,778 | ||||
NOTE 8 – LONG-TERM INVESTMENT
The Company classifies its investments as available-for-sale in accordance with ASC 320 “DebtAmortization expense was $235,972, $310,684 and Equity Securities”, Investments – Debt and Equity Securities, and are reported at fair value. Unrealized gains and losses as a result of changes in$130,486 for the fair value of the available-for-sale investments are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.
The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.
As ofyears ended December 31, 2017, 2016 and 2015, and 2014, the Company’s long-term investment consisted the following:respectively.
| December 31, 2015 | December 31, 2014 | |||||||
| Equity Investment Co., Ltd | $ | 1,170,230 | $ | - | ||||
| Government Bonds | 94,381 | 95,328 | ||||||
| Total | $ | 1,264,611 | $ | 95,328 | ||||
The Company had the following long-term investment in equity:
| Type | Investee | December 31, 2015 Investment Ownership | Amount | |||||||
| Cost | Genius Insurance Broker Co., Ltd | 15.64 | % | $ | 1,170,230 | |||||
According to Taiwan regulatory requirements, Law Broker is required to maintain a minimum of NT$3,000,000 ($91,341) in a separate account. Law Broker chose to buy government bonds and has the right to trade such bonds with other debt or equity instruments. The amount, however, was defined as restricted asset.
| December 31, 2015 | ||||||||||||
| Cost or | Gross | |||||||||||
| Amortized | Unrealized | Total | ||||||||||
| Cost | Gains (Losses) | Fair Value | ||||||||||
| Government bonds | 93,089 | 1,292 | 94,381 | |||||||||
| $ | 93,089 | $ | 1,292 | $ | 94,381 | |||||||
| December 31, 2014 | ||||||||||||
| Cost or | Gross | |||||||||||
| Amortized | Unrealized | Total | ||||||||||
| Cost | Gains (Losses) | Fair Value | ||||||||||
| Government bonds | 95,405 | (77 | ) | 95,328 | ||||||||
| $ | 95,405 | $ | (77 | ) | $ | 95,328 | ||||||
NOTE 9 – OTHER ASSETS
The Company’s other assets consisted of the following as of December 31, 2015 and 2014:
| December 31, 2015 | December 31, 2014 | |||||||
| Rental deposits | $ | 401,920 | $ | 384,670 | ||||
| Restricted cash | 231,100 | 162,906 | ||||||
| Prepayments | 156,772 | - | ||||||
| Other | 1,431 | 39,946 | ||||||
| Total other assets | $ | 791,223 | $ | 587,522 | ||||
Rental deposits include long-term leasing deposits. Restricted cash is a deposit in bank by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, and cannot be withdrawn without the permission of the regulatory commission. Prepayments are prepaid long-term software-maintenance contract pending for final acceptance, and will be transferred to intangible assets upon acceptance.
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NOTE 10 – ACQUISITION AND GOODWILL
(1) AcquisitionGoodwill arose from the acquisition of PFAL
On in April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Chun Kwok Wong (“Mr. Wong”), the owner of Prime Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr. Wong would increase PFAL’s capital contribution from HK$500,000 to HK$1,470,000, and AHFL would contribute HK$1,530,000, approximately $197,000, to PFAL’s capital contribution. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively.2014. The transaction was completed on April 30, 2014.
The FVfair value of the net identifiable assets of PFAL at acquisition date was $324,871, and 51% of which was $165,684. The Company recorded $31,651 excess of purchase price over the FVfair value of assets acquired and liabilities assumed as goodwill. No intangible assets were identified as of the acquisition date. As of December 31, 2015,2017 and 2016, there were no any indications of the impairment of the goodwill.
(2) Acquisition of GHFLNOTE 10 – LONG-TERM INVESTMENTS
On February 13, 2015, CUISAs of December 31, 2017 and AHFL entered into an acquisition agreement with2016, the selling shareholder (Mr. Chwan hau Li,Company’s long-term investments consisted the directorfollowing:
| December 31, 2017 | December 31, 2016 | |||||||
| Equity investment accounted for the cost method | $ | 1,296,039 | $ | 1,190,558 | ||||
| Government bonds held for available-for-sale | 103,723 | 94,506 | ||||||
| Total long-term investments | $ | 1,399,762 | $ | 1,285,064 | ||||
Equity investment accounted for the cost method
| Type | Investee | Investment Ownership | December 31, 2017 Amount | December 31, 2016 Amount | ||||||||||
| Cost Method | Genius Insurance Broker Co., Ltd | 15.64 | % | $ | 1,296,039 | $ | 1,190,558 | |||||||
Government bonds held for available-for-sale
According to Taiwan Regulations Governing Deposit of the Company)Bond and Acquirement of Genius Holdings Financial Limited ( “GHFL”), a company with limited liability incorporated under the laws of British Virgin Islands , to issue 352,166 fully paidInsurance by Insurance Agents, Insurance Brokers and non-assessable shares of AHFL Common Stock together with an granted option for 352,166 shares of common stock of CUISInsurance Surveyors (“Option”RGDBAI”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of CUIS. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Article 3 requirement, Law Broker is primarily engagedrequired to maintain a minimum of NTD3,000,000 ($101,161 and $92,928 as of December 31, 2017 and 2016, respectively) restricted balance in broker business across Taiwan. On February 13, 2015,a separate account. RGDBAI Article 4 is required to deposit a minimum amount in the acquisition was completed; the selling shareholder transferred 100% shares in GHFL to AHFL. The Option has been exercisedform of cash or government bond issued by the selling shareholder on March 31, 2015. The total fair value of AHFL 352,166 shares ($1,771,395) and CUIS 352,166 option ($1,711,562) at acquisition date was $3,482,957. The Company recorded $2,039,840 excess of purchase price as goodwill.central government.
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| December 31, 2017 | ||||||||||||
| Fair Value at | Gross | Fair Value at | ||||||||||
| December 31, | Unrealized | December 31, | ||||||||||
| 2016 | Gains | 2017 | ||||||||||
| Government bonds | 94,506 | 9,217 | 103,723 | |||||||||
| $ | 94,506 | $ | 9,217 | $ | 103,723 | |||||||
| December 31, 2016 | ||||||||||||
| Fair Value at | Gross | Fair Value at | ||||||||||
| December 31, | Unrealized | December 31, | ||||||||||
| 2015 | Gains | 2016 | ||||||||||
| Government bonds | 94,381 | 125 | 94,506 | |||||||||
| $ | 94,381 | $ | 125 | $ | 94,506 | |||||||
NOTE 11 – OTHER ASSETS
The acquisitionCompany’s other assets consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Rental deposits | $ | 508,352 | $ | 445,283 | ||||
| Register capital deposit | 1,075,867 | - | ||||||
| Restricted cash | 469,615 | 248,803 | ||||||
| Prepayments | 140,404 | 5,576 | ||||||
| Deferred tax assets | 123,406 | 84,597 | ||||||
| Other | 82,231 | 1,456 | ||||||
| Total other assets | $ | 2,399,875 | $ | 785,715 | ||||
According to China Insurance Regulatory Commission No. 82, promulgated on September 29, 2016, the Company should deposit all of its registered capital in a custodian account and subject to limited usage, among which, no less than 10% of the registered capital can be invested in significant deposit by agreement or term deposit. The Company should deposit this amount after six months of the issuance date.
Restricted cash was accounted for under the purchase method of accounting. Accordingly, the results of GHFL have been includeda deposit in the consolidated financial statements sincebank by the dateCompany in conformity with Provisions of acquisition. The purchase price has been allocatedthe Supervision and Administration of Specialized Insurance Agencies, which is not allowed to be withdrawn without the assets acquired and liabilities assumed based upon their estimated fair valuespermission of the regulatory commission, and the price were allocated as follows:
| February 13, 2015 | ||||
| Current assets | $ | 321 | ||
| Long-term investment | 1,488,829 | |||
| Goodwill | 2,039,840 | |||
| Current liabilities | (46,033 | ) | ||
| Total purchase price | $ | 3,482,957 | ||
No supplemental pro forma information is presentedtrust account for the acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.Law Broker’s general manager’s bonus plans.
NOTE 1112 – TAXES PAYABLE
The Company’s taxes payable consisted of the following as of December 31, 20152017 and 2014:2016:
| December 31, 2015 | December 31, 2014 | December 31, 2017 | December 31, 2016 | |||||||||||||
| PRC Tax | $ | 99,505 | $ | 172,765 | $ | 270,267 | $ | 163,461 | ||||||||
| Hong Kong Tax | 5,527 | 14,233 | ||||||||||||||
| Taiwan Tax | 1,422,457 | 747,142 | 3,232,996 | 2,072,175 | ||||||||||||
| Total tax payable | $ | 1,521,962 | $ | 919,907 | ||||||||||||
| Total taxes payable | $ | 3,508,790 | $ | 2,249,869 | ||||||||||||
PRC tax represents income tax and other taxes accrued according to PRC tax law by ourthe Company’s subsidiaries and CAE in the PRC. Taiwan tax represents income tax and other taxes accrued according to Taiwan tax law by ourthe Company’s subsidiaries and branches in Taiwan. Both will be settled within the next twelve monthsHong Kong tax represents income tax accrued according to Hong Kong tax law by the respective tax laws.Company’s subsidiaries in Hong Kong.
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NOTE 13 – SHORT-TERM LOANS
The Company’s short-term loans consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Credit facility, O-Bank | $ | 1,400,000 | $ | - | ||||
| Credit facility, CTBC | 950,000 | - | ||||||
| Total short-term loans | $ | 2,350,000 | $ | - | ||||
The Company entered into three credit agreements with several commercial banks during the fiscal year 2017 as follows:
| · | O-Bank Co., Ltd. (“O-Bank”): The Company entered into a line of credit agreement with O-Bank for a $1,500,000 credit facility from June 22, 2017 to June 21, 2018. Borrowings under the agreement bear interest at the O-Bank’s cost of fund plus a margin of 0.5%. On December 11, 2017, the Company draw down a borrowing of $600,000 with interest at a rate of 2.35% per annum and the principal are due on March 11, 2018. On December 26, 2017, the Company borrowed $800,000 with interest at a rate of 2.70% per annum and the principal are due on March 26, 2018. The credit facility is secured by a total amount of approximately $1,686,017 (NTD50,000,000) of time deposits. |
| · | CTBC Bank Co., Ltd. (“CTBC”): On November 17, 2017, the Company entered into a line of credit agreement with CTBC, pursuant to which the Company has a credit facility of $1,000,000 from November 17, 2017 to July 31, 2018. Borrowings under the agreement bear interest at the CTBC’s cost of fund plus a margin of 1%. On December 28, 2017, the Company draw down a borrowing of $950,000 with interest at a rate of 3.30% per annum and the principal amount was due on January 29, 2018. Law Broker is the guarantor of the credit facility. On January 29, 2018, the Company paid off the entire principal and interest of the borrowing. |
| · | Far Eastern International Bank(“FEIB”): On September 21, 2017, the Company entered into a line of credit agreement with FEIB for a credit facility of $2,000,000 from September 21, 2017 to September 21, 2018. Borrowings under the agreement bear interest at the higher of the LIBOR rate plus a margin of 1.3% or the TAIFX3 rate plus a margin of 1.25%. As of December 31, 2017, there was no amount drawn on the credit facility. |
Total interest expense of short-term loans was $1,531 for the year ended December 31, 2017.
NOTE 14 – CONVERTIBLE BONDS
The Company intends to issue the convertible bonds during the period commencing on June 23, 2016 and ended on September 30, 2016 with an aggregate principal amount of up to $10,000,000. The convertible bonds shall be sold in units, with each unit being $100,000 in principal amount. The Company would not make any offers or sales of the convertible bonds to U.S. persons and there would be no directed selling efforts in the United States. The bonds would not be convertible until two years from the issuance date and with an annual interest rate of 6% payable on a quarterly basis. The purchaser of the convertible bonds might cause the Company to redeem the convertible bonds before the end of the term, subject to certain penalties depending on the holding period of the convertible bonds when redeemed. Upon the expiration of the term of the convertible bond, the bond holder may, in its sole discretion, choose to collect the payment of full principal amount of the convertible bond together with any interest accrued or convert the convertible bond into common shares of the Company at the conversion price. The conversion price shall be the product of (i) the average closing trading price for the 10 business days immediately prior to the conversion date times (ii) 80%.
On June 23, 2016, the Company had issued two units of its convertible bonds with an aggregate principal amount of $200,000 to a non-US person and the value of the embedded derivatives liabilities is trivial. As of December 31, 2017 and 2016, the Company had an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $12,000 and $6,363 for the years ended December 31, 2017 and 2016, respectively.
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NOTE 1215 – OTHER CURRENT LIABILITIES
Other current liabilities arewere as follows, as of December 31, 20152017 and 2014:2016:
| December 31, 2015 | December 31, 2014 | December 31, 2017 | December 31, 2016 | |||||||||||||
| Commissions payable to sub-agents | $ | 6,644,989 | $ | 5,311,365 | ||||||||||||
| Commissions payable to sales professionals | $ | 6,415,071 | $ | 11,869,181 | ||||||||||||
| AIATW and Farglory | 1,237,684 | 2,090,718 | ||||||||||||||
| Due to previous shareholders of AHFL | - | 480,559 | ||||||||||||||
| Accrued business tax | 487,586 | 469,259 | ||||||||||||||
| Withholding tax | 347,824 | 362,954 | ||||||||||||||
| Accrued tax penalties | - | 370,000 | ||||||||||||||
| Accrued bonus | 1,050,411 | 1,057,082 | 1,730,278 | 1,935,091 | ||||||||||||
| Refund to AIATW | 502,532 | - | ||||||||||||||
| Accrued tax penalties | 370,000 | 370,000 | ||||||||||||||
| Accrued business tax | 326,954 | 316,652 | ||||||||||||||
| Withholding employee personal tax | 295,989 | 259,458 | ||||||||||||||
| Salary payable to administrative staff | 229,624 | 144,158 | 1,194,725 | 183,066 | ||||||||||||
| Due to previous shareholders of AHFL | 685,059 | 750,910 | ||||||||||||||
| Accrued advertisement fee | 151,535 | 325,102 | ||||||||||||||
| Accrued labor, health insurance and employee retirement plan | 84,138 | 77,563 | 114,556 | 92,085 | ||||||||||||
| Current liabilities associated with discontinued operations | - | 781 | ||||||||||||||
| Other accrued expenses | 396,117 | 697,768 | ||||||||||||||
| Others | 130,259 | 223,532 | ||||||||||||||
| Accrued advertisement expense | - | 32,525 | ||||||||||||||
| Accrued bonus for Ms. Chao | 210,752 | - | ||||||||||||||
| Other accrued liabilities | 1,051,112 | 754,471 | ||||||||||||||
| Total other current liabilities | $ | 10,867,607 | $ | 9,534,371 | $ | 12,789,588 | $ | 18,639,909 | ||||||||
Commissions payable to sub-agents,sales professionals, accrued bonus, salaries payable to administrative staff, accrued bonus, and accrued advertisement feeexpense are usually settled within 12 months. Refund to AIATW is described in Note 14. Accrued business tax, penalties are described in Note 2. Withholding employee personalwithholding tax, and accrued labor, health insurance and employee retirement plan will be paid to local tax bureauthe related government departments within one month. Accrued tax penalties are estimated potential penalty in the event of a tax audit. Other accrued liabilities consist of accrued interest, accrued marketing expense and operating expenses payable for training and travelling.
See Note 17 for additional information on current liabilities related to AIA International Limited Taiwan Branch (“AIATW”) and Farglory, due to previous shareholders of AHFL, and accrued bonus for Ms. Chao.
NOTE 16 – LONG-TERM LOANS
The Company’s long-term loans consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Loan A, interest at 8% per annum, maturity date May 15, 2019 | $ | 130,641 | $ | 144,015 | ||||
| Loan B, interest at 8% per annum, maturity date July 20, 2019 | 118,345 | 110,892 | ||||||
| Total long-term loans | $ | 248,986 | $ | 254,907 | ||||
On May 15, 2016, Anhou entered into a loan agreement (“Loan A”) with an individual third party. The long-term Loan Agreement provided for approximately $130,641 (RMB 850,000) and $144,015 (RMB 850,000), as of December 31, 2017 and 2016, respectively, loan to the Company. The long-term Loan A bears an interest rate of 8% per annum and interest is payable annually. The principal and the accrued interest will be due on May 15, 2019.
On July 20, 2016, Anhou entered into a loan agreement (“Loan B”) with an individual third party. The long-term Loan Agreement provided for approximately $118,345 (RMB 770,000) and $110,892 (RMB 770,000), as of December 31, 2017 and 2016, respectively, loan to the Company. The long-term Loan B bears an interest rate of 8% per annum and interest is payable annually. The principal and the accrued interest will be due on July 20, 2019.
Total interest expenses for the long-term loans were $20,737 and $11,755, respectively, for the years ended December 31, 2017 and 2016.
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NOTE 17 – LONG-TERM LIABILITIES
The Company’s long-term liabilities consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Unearned revenue – AIATW | $ | 4,239,130 | $ | 4,742,272 | ||||
| Unearned revenue – Farglory | - | 495,615 | ||||||
| Deferred tax liabilities | 122,551 | - | ||||||
| Due to previous shareholders of AHFL | 480,559 | - | ||||||
| Other long-term liabilities | - | 77,440 | ||||||
| Total long-term liabilities | $ | 4,842,240 | $ | 5,315,327 | ||||
Unearned revenue – AIATW
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIATW, the purpose to which is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The original term of the Alliance Agreement was from June 1, 2013 to May 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL an execution fee approximately $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762, the “Execution Fee”), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “Supplemental Agreement”) with AIATW. In the Supplemental Agreement, the performance targets and the provision about refunding the Execution Fee on a pro rata basis when the performance targets are not met were revised.
On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW. To the extent permitted by applicable laws and regulations, AHFL shall assist and encourage any insurance agency company or insurance brokerage company duly approved by the competent government authorities of Taiwan (the “Appointed Broker/Agent”), to cooperate with AIATW for the promotion of life insurance products of AIATW. Pursuant to the Amendment No. 2, the expiration date of the Strategic Alliance Agreement was extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 was suspended. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of Execution Fees. On March 15, 2016, AHFL issued a promise letter (the “2016 Letter”) to AIATW that AHFL is required to (i) fulfill sales targets and (ii) the 13-month persistency ratio.
On June 14, 2017, with AIATW’s consent, the 2016 Letter was revoked in order to conform with the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in a third amendment (Amendment No. 3). Pursuant to the Amendment No. 3, both AHFL and AIATW agreed to adjust certain terms and conditions set forth this amendment, among which (i) except the first contract year (April 15th, 2013 to September 30th, 2014), the sales target of the alliance between the parties shall be changed to (a) value of new business (“VONB”) and (b) the 13-month persistency ratio; and (ii) AIATW will calculate and recognize the VONB and 13-month persistency ratio each contract year and inform the Company the result; and (iii) the Company agrees to return the basic business promotion fees to AIATW within thirty (30) days of receipt of the notice sent by AIATW if the Company fails to meet the targets set forth in Amendment No. 3, AIATW reserves the right to offset such amount against the amount payable by it to the Company; and (iv) upon the termination of the Alliance Agreement and its amendments pursuant to the Section 8.2 of the Alliance Agreement, both parties agreed to calculate the amount to be returned or repaid, as applicable, based on the past and current contract years. The Company shall return the basic business promotion fees at NTD 330,000,000 for each contract years within one month after the termination.
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The Company recognizes AIATW’s revenue when the life insurance products provided by AIATW are met: (i) persuasive evidence of an agreement between the insurance company and insured exists, (ii) insurance brokerage services have been provided, (iii) the fee to be paid by the related insurer to the Company for such services is fixed or determinable, and (iv) the collectability of the fee is reasonably assured. The refund is primarily due to the portion of performance sales targets are not met in that contract year. The following table presents the amounts recognized as revenue and the refunded for each contract year:
Contract Year | Period | Execution Fees | Revenue Amount | Revenue VAT Amount | Refund Amount | Refund VAT Amount | ||||||||||||||
| First | 4/15/2013 ~ 9/30/2014 | NTD | 50,000,000 | NTD | 27,137,958 | (1) | NTD | 1,356,898 | NTD | 20,481,090 | (1) | NTD | 1,024,054 | |||||||
| Second | 1/1/2016 ~ 12/31/2016 | NTD | 35,000,000 | NTD | 12,855,000 | (2) | NTD | 642,750 | NTD | 20,478,333 | (2) | NTD | 1,023,917 | |||||||
| Third | 1/1/2017 ~ 12/31/2017 | NTD | 33,000,000 | NTD | 12,628,201 | (3) | NTD | 631,410 | NTD | 18,800,370 | (3) | NTD | 940,019 | |||||||
| Fourth | 1/1/2018 ~ 12/31/2018 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| Fifth | 1/1/2019 ~ 12/31/2019 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| Sixth | 1/1/2020 ~ 12/31/2020 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| Seventh | 1/1/2021 ~ 12/31/2021 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| TOTAL | NTD | 250,000,000 | NTD | 52,621,159 | NTD | 2,631,058 | NTD | 59,759,793 | NTD | 2,987,990 | ||||||||||
| (1) | The revenue recognition for the first contract year is based on the annual first year premium (“AFYP”) set in Alliance Agreement, which is difference from other contract years. From the second contract year to the seventh contract year, the revenue calculation is based on VONB. The Company recognized the first contract year’s revenue amount of $892,742 (NTD27,137,958), net of Value-Added Tax (“VAT”). On December 3, 2015 and February 23, 2016, the Company refunded the amounts of $160,573 (NTD4,761,905), net of VAT, and $530,056 (NTD15,719,185), net of VAT, to AIATW, respectively, due to the portion of performance sales targets not met during the first contract year. | |
| (2) | For the year ended December 31, 2017, the Company recognized the second contract year’s revenue amount of $422,883 (NTD12,855,000), net of VAT, and refunded the amount of $690,537 (NTD20,478,333), net of VAT, for the same contract period. | |
| (3) | For the year ended December 31, 2017, the Company estimated to recognize the third contract year’s revenue amount of $415,423 (NTD12,628,201), net of VAT, and refund the amount of $633,955 (NTD18,800,370), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency. |
The Company recognized revenue of $1,731,048 (NTD52,621,159), net of VAT, and nil for the years ended December 31, 2017 and 2016 related to this agreement. As of December 31, 2017 and 2016, the Company had non-current portion of unearned revenue of $4,239,130 and $4,742,272, respectively, and amounts in current liabilities of $633,955 and $1,966,814, respectively, related to the Alliance Agreement.
Unearned revenue – Farglory
On April 20, 2016, the Company entered into a service agreement (“Service Agreement”) with Farglory Life Insurance Co., Ltd. (“Farglory”). The Company is to provide consulting services to Farglory for NTD4,000,000 per year and the aggregate consulting services fee is NTD20,000,000 from May 1, 2016 to April 30, 2021. On January 2, 2018, both parties reached the final agreement and the Company received termination notice from Farglory. Pursuant to the termination notice, the Company should refund approximately $603,729 (NTD17,904,000) to Farglory. As of December 31, 2017 and 2016, the Company had long-term liabilities amount of nil and $495,615, respectively, and amounts in the current liabilities of $603,729 and $123,904, respectively, related to this Service Agreement. For the year ended December 31, 2017, the Company recognized revenue amount of $68,951 (NTD2,096,000) and refund amount of $603,729 related to this Service Agreement.
Due to previous shareholders of AHFL
Due to previous shareholders of AHFL is the remaining balance payable of the acquisition cost describedcost. The Company and the selling shareholders of AHFL entered into a third Amendment to the Acquisition Agreement (the “Third Amendment”), pursuant to which, the Company committed to distribute the cash payment in Note 1. the amount approximately $676,466 (NTD 22.5 million) to the selling shareholders of AHFL on or prior to June 30, 2016. On July 21, 2016, the Company arranged for the payment of $153,097 (NTD4,830,514) to the selling shareholders. On March 12, 2017, the Company and the selling shareholders of AHFL entered into a fifth amendment to the acquisition agreement (the “Fifth Amendment”), pursuant to which, the Company agreed to make the cash payment in the amount of $480,559 (NTD15 million) on or prior to March 31, 2019.
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Other long-term liabilities
On May 10, 2016, Law Broker entered into an engagement agreement (“Engagement Agreement”) with Hui-Hsien Chao (“Ms. Chao”), pursuant to which, she acts as the general manager of Law Broker for and a term from December 29, 2015 to December 28, 2018. Ms. Chao’s primary responsibilities are to assist Law Broker in operating and managing insurance agency business. According to the Engagement Agreement, Ms. Chao’s Bonus plans include: 1) execution, 2) long-term service fees, 3) pension and 4) non-competition. The payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms in the Engagement Agreement. Ms. Chao acts as the general manager or equivalent position of Law Broker for a term of at least three years.
On May 14, 2016, Law Broker and Ms. Chao entered into a supplementary agreement (“Supplementary Agreement”) to postpone her pension vesting date to December 29, 2016. Law Broker expects that none of the above-mentioned bonuses are to be paid prior to May 2019, and therefore it has recorded as long-term liabilities representing the corresponding portion of such bonuses accrued. On March 13, 2017, Law Broker and Ms. Chao entered into another amendment to Engagement Agreement dated May 10, 2016 to specify 1) Ms. Chao’s pension calculation assumption and start date, and 2) the non-competition provision start date. As of December 31, 2017 and 2016, the balance of such accrued expenses are mainlylong-term liabilities was $0 and $77,440, respectively. The Company had current liabilities amounted $210,752 and $0 as of December 31, 2017 and 2016, respectively, related to accrued bonus for operating expenses payable within the credit terms provided by suppliers. Others mainly represent short term payable for expenses such as training and travelling.Ms. Chao.
NOTE 1318 – SHORT TERM LOANS
| December 31, 2015 | December 31, 2014 | |||||||
| Loan A, interest at 1.5%, maturity date December 31, 2016 | $ | 70,000 | $ | - | ||||
| Loan B, interest at 1.5%, maturity date December 31, 2016 | 152,235 | - | ||||||
| Total short term loans | $ | 222,235 | $ | - | ||||
On October 12, 2015, the Company entered into a loan agreement (“Loan A”) with Zhengxiong Huang. The Short-term Loan Agreement provided for a $70,000 loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principle and interest were due on December 31, 2015. On December 31, 2015, the Company extended this loan agreement to December 31, 2016 with same conditions.PREFERRED STOCK
On December 3, 2015,January 28, 2011, the Company enteredincreased the number of authorized shares of common stock from 30,000,000 to 100,000,000 and authorized 10,000,000 shares of preferred stock with $0.00001 par value. It currently has 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) issued and outstanding as of December 31, 2017 and 2016. The Series A Stock has the following rights and preferences:
| · | Voting Rights. Except as otherwise provided by law, the Series A Stock and the common stock vote together on all matters submitted to a vote of the Company’s shareholders. Each holder of Series A Stock is entitled to ten votes for each share of Series A Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Registrant. |
| · | Series A Board Designee and Board Restriction. In addition to the voting rights disclosed above, the holders of the Series A Stock shall be entitled to appoint one director (the “Series A Director”). No Board resolution regarding certain material Company actions can be made without the affirmative vote of the Series A Director. |
| · | Dividends. The holders of Series A Stock are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Registrant as may be declared by the Board. |
| · | Liquidation. In the event of a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Registrant, the holders of common stock and the holders of Series A Stock shall be entitled to share equally on a per share basis, in all assets of the Registrant of whatever kind available for distribution. |
| · | Conversion Rights. The holders of the Series A Stock have the right to convert their shares thereof at any time into shares of the Registrant’s common stock. Each share of Series A Stock is convertible into one share of common stock. |
If the Registrant in any manner subdivides or combines the outstanding shares of common stock, the outstanding shares of the Series A Stock will be subdivided or combined in the same manner.
Business Combinations. In any merger, consolidation, reorganization or other business combination, the consideration received per share by the holders the common stock and the holders of the Series A Stock in such merger, consolidation, reorganization or other business combination shall be identical; provided however, that if such consideration consists, in whole or in part, of certain equity interests, the rights and limitations of such equity interests may differ from the extent that the rights and limitations of the common stock and the Series A Stock differ.
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Fully Paid and Nonassessable. All of the Company’s outstanding shares of preferred stock are fully paid and nonassessable.
From the qualitative aspect, the Company notes the following regarding this deemed compensation:
| Ø | Does not violate any debt or other contract covenants; |
| Ø | Does not change any earnings or EPS trends; |
| Ø | Does not affect any previous earnings or EPS guidance; |
| Ø | Does not affect any segment or class of revenue; |
| Ø | Does not affect any regulatory compliance matters; | |
| Ø | Does not affect cash compensation of management; | |
| Ø | Does not involve concealment of an unlawful act |
Additional preferred stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors deems appropriate. In the event that the Registrant issues any shares of preferred stock, a loan agreement (“Loan B”)certificate of designation containing the rights, privileges and limitations of this series of preferred stock will be filed with Yuzhen Chen.the Secretary of State of the State of Delaware. The Short-term Loan Agreement provided foreffect of this preferred stock designation power is that its Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a $152,235 (NTD 5,000,000) loanchange in control without further action by its stockholders, and may adversely affect the voting and other rights of the holders of its common stock.
All 1,000,000 shares of Series A Preferred Stock were reclassified from the 1,000,000 shares of common stock held by Mr. Mao and no additional consideration was paid by Mr. Mao in connection with the Reclassification. The preferred stock has no material quantitative preferences over common stock, such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to the Company. The Short-term Loan bore an interest rateterms of 1.5% per annum and the principle and interest were dueCertificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on December 31, 2015. On December 31, 2015,any matter submitted to a vote of the Company extended this loan agreementstockholders of the Company; while each holder of Series A Preferred Stock is entitled to December 31, 2016 with same conditions.ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
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NOTE 14 – LONG-TERM LIABILITIES
Long-term liabilities are as follows as of December 31, 2015 and 2014:
| December 31, 2015 | December 31, 2014 | |||||||
| Unearned revenue | 6,594,530 | 7,500,645 | ||||||
| Total other long-term liabilities | $ | 6,594,530 | $ | 7,500,645 | ||||
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”). The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The term of the Alliance Agreement is from April 15, 2013 to August 31, 2018. Pursuance to the terms of the Alliance Agreement, AIATW paid AHFL the Execution Fee of $8,326,700 (NT$250,000,000, including the tax of NT$11,904,762), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL. On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “Supplemental Agreement”) with AIATW. In the Supplemental Agreement, the performance targets and the provision about refunding the Execution Fee when the performance targets are not met were revised. On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW. The purpose of the Strategic Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan through insurance agency companies or insurance brokerage companies. To the extent permitted by applicable laws and regulations, AHFL shall assist and encourage any insurance agency company or insurance brokerage company duly approved by the competent government authorities of Taiwan (the “Appointed Broker/Agent”), to cooperate with AIATW for the promotion of life insurance products of AIATW. Pursuant to the Amendment No. 2, the expiration date of the Strategic Alliance Agreement has been extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 has been suspended. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of Execution Fees.
AHFL refunded amount of $152,235 (NTD 5,000,000) and $502,532(NTD 16,505,144) to AIATW on December 3, 2015 and February 23, 2016, respectively, due to the portion of performance sales targets are not met during the period from June 10, 2013 to September 30, 2014. AHFL did not book any short-term unearned revenue since the Strategic Alliance Agreement will end on December 31, 2021 and the performance will calculated then to determine how much revenue AHFL can book accordingly, and the Company booked the whole $6,594,530 as long-term liability.
NOTE 15 – PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value. We currently have 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of December 31, 2014. The Series A Stock has the following rights and preferences:
Voting Rights. Except as otherwise provided by law, the Series A Stock and the common stock vote together on all matters submitted to a vote of our shareholders. Each holder of Series A Stock is entitled to ten votes for each share of Series A Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Registrant.
Series A Board Designee and Board Restriction. In addition to the voting rights disclosed above, the holders of the Series A Stock shall be entitled to appoint one director (the “Series A Director”). No Board resolution regarding certain material Company actions can be made without the affirmative vote of the Series A Director.
Dividends. The holders of Series A Stock are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Registrant as may be declared by the Board.
Liquidation. In the event of a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Registrant, the holders of common stock and the holders of Series A Stock shall be entitled to share equally on a per share basis, in all assets of the Registrant of whatever kind available for distribution.
Conversion Rights. The holders of the Series A Stock have the right to convert their shares thereof at any time into shares of the Registrant’s common stock. Each share of Series A Stock is convertible into one share of common stock.
If the Registrant in any manner subdivides or combines the outstanding shares of common stock, the outstanding shares of the Series A Stock will be subdivided or combined in the same manner.
Business Combinations. In any merger, consolidation, reorganization or other business combination, the consideration received per share by the holders the common stock and the holders of the Series A Stock in such merger, consolidation, reorganization or other business combination shall be identical; provided however, that if such consideration consists, in whole or in part, of certain equity interests, the rights and limitations of such equity interests may differ to the extent that the rights and limitations of the common stock and the Series A Stock differ.
Fully Paid and Nonassessable. All of our outstanding shares of preferred stock are fully paid and nonassessable.
The fair value of the 1,000,000 preferred shares was $225,000 at the time of the preferred share issuance. The Fair value of the common shares was $200,000 at the time of the preferred share issuance based on its market price at the date of the transaction. Therefore, the incremental value of the preferred shares was $25,000. This amount may be deemed compensation.
From the qualitative aspect, the Company notes the following regarding this deemed compensation:
Does not violate any debt or other contract covenants;
Does not change any earnings or EPS trends;
Does not affect any previous earnings or EPS guidance;
Does not affect any segment or class of revenue;
Does not affect any regulatory compliance matters;
Does not affect cash compensation of management;
Does not involve concealment of an unlawful act
Additional preferred stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors deems appropriate. In the event that the Registrant issues any shares of preferred stock, a certificate of designation containing the rights, privileges and limitations of this series of preferred stock will be filed with the Secretary of State of the State of Delaware. The effect of this preferred stock designation power is that our Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control without further action by our stockholders, and may adversely affect the voting and other rights of the holders of our common stock.
NOTE 1619 – STATUTORY RESERVES
According to Taiwan accounting rules and corporation regulations, the company’sCompany’s subsidiaries in Taiwan must appropriate 10% of net income to statutory reserves until the accumulated reserve hits registered capital. The reserve can be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting to share capital.
Pursuant to the PRC regulations, the Company’s Consolidated Affiliated Entities (“CAE”)CAE are required to transfer 10% of their net profit,profits, as determined under the PRC accounting regulations, to a Statutory Common Reserve Fund (“Reserve Fund”). Appropriation to the Reserve Fund may cease when the fund equals 50% of a company’s registered capital or when a company has accumulated losses. The transfer to this reserve must be made before distribution of dividends to shareholders. The Company’s CAE did not appropriate such reserve as they have accumulated losses.
NOTE 20 – NON-CONTROLLING INTERESTS
Non-controlling interests consisted of the following as of December 31, 2017 and 2016:
| Name of Controlled Entity | % of Non- controlling Interest | As of December 31, 2016 | Net Income of Non-Controlling Interests | Other Comprehensive Gain/(Loss) of Non-Controlling Interests | As of December 31, 2017 | |||||||||||||||
| Law Enterprise | 34.05 | % | $ | 17,386 | $ | (307,217 | ) | $ | 46,591 | $ | (243,240 | ) | ||||||||
| Law Broker | 34.05 | % | 9,621,159 | 3,387,038 | 892,144 | 13,900,341 | ||||||||||||||
| PFAL | 49.00 | % | 232,414 | (3,817 | ) | (518 | ) | 228,079 | ||||||||||||
| MKI | 49.00 | % | (1,569 | ) | (548 | ) | - | (2,117 | ) | |||||||||||
| PA Taiwan | 49.00 | % | (95,448 | ) | (52,169 | ) | 2,175 | (145,442 | ) | |||||||||||
| PTC Nanjing | 49.00 | % | (2,400 | ) | (60 | ) | 495 | (1,965 | ) | |||||||||||
| Total | $ | 9,771,542 | $ | 3,023,227 | $ | 940,887 | $ | 13,735,656 | ||||||||||||
| Name of Controlled Entity | % of Non- controlling Interest | As of December 31, 2015 |
Non-Controlling | Other Comprehensive Gain/(Loss) of Non-Controlling Interests | As of December 31, 2016 | |||||||||||||||
| Law Enterprise | 34.05 | % | $ | 199,699 | $ | (307,583 | ) | $ | 125,270 | $ | 17,386 | |||||||||
| Law Broker | 34.05 | % | 7,197,128 | 2,402,245 | 21,786 | 9,621,159 | ||||||||||||||
| PFAL | 49.00 | % | 206,098 | 26,411 | (95 | ) | 232,414 | |||||||||||||
| MKI | 49.00 | % | (1,065 | ) | (504 | ) | - | (1,569 | ) | |||||||||||
| PA Taiwan | 49.00 | % | (26,292 | ) | (70,341 | ) | 1,185 | (95,448 | ) | |||||||||||
| PTC Nanjing | 49.00 | % | (837 | ) | (904 | ) | (659 | ) | (2,400 | ) | ||||||||||
| Total | $ | 7,574,731 | $ | 2,094,324 | $ | 147,487 | $ | 9,771,542 | ||||||||||||
Restatement did not impact to non-controlling interests, see Note 27 for Restatement.
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NOTE 21 – INCOME TAX
Provision (benefit) for income taxes for the year ended December 31, 2017 consisted of:
| Year ended December 31, 2017 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | - | $ | - | $ | 3,426,326 | $ | 3,426,326 | ||||||||
| Deferred | - | - | 87,391 | 87,391 | ||||||||||||
| Total | $ | - | $ | - | $ | 3,513,717 | $ | 3,513,717 | ||||||||
Provision (benefit) for income taxes for the year ended December 31, 2016 consisted of:
| Year ended December 31, 2016 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | - | $ | - | $ | 2,207,581 | $ | 2,207,581 | ||||||||
| Deferred | - | - | (87,983 | ) | (87,983 | ) | ||||||||||
| Total | $ | - | $ | - | $ | 2,119,598 | $ | 2,119,598 | ||||||||
Provision (benefit) for income taxes for the year ended December 31, 2015 consisted of:
| Year ended December 31, 2015 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | - | $ | - | $ | 1,553,650 | $ | 1,553,650 | ||||||||
| Deferred | - | - | (34,424 | ) | (34,424 | ) | ||||||||||
| Total | $ | - | $ | - | $ | 1,519,226 | $ | 1,519,226 | ||||||||
Significant components of the deferred tax assets and liabilities for income taxes as of December 31, 2017 and 2016 consisted of the following:
| 2017 | 2016 | |||||||
| Deferred tax assets | ||||||||
| Net operating loss carry-forward | $ | 874,934 | $ | 993,050 | ||||
| Others | 123,406 | 84,597 | ||||||
| Total | $ | 998,340 | $ | 1,077,647 | ||||
| Valuation allowance | (874,934 | ) | (993,050 | ) | ||||
| Net deferred tax assets - noncurrent | $ | 123,406 | $ | 84,597 | ||||
| Deferred tax liabilities - noncurrent | $ | 122,551 | $ | - | ||||
A 100% valuation allowance was provided for the deferred tax assets related to the PRC segment as of December 31, 2017 and 2016. The deferred tax assets of $123,406 and $84,597 related to the Taiwan segment was included in other assets, respectively, on the consolidated balance sheets as of December 31, 2017 and 2016. Deferred tax liabilities were the timing differences of revenue and cost of sales recognized in the year ended December 31, 2017. Deferred tax liabilities of $122,551 and nil, respectively, related to the PRC segment were in other long-term liabilities on the consolidated balance sheets as of December 31, 2017 and 2016.
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CU WFOE and the VIE in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments, except for Jiangsu. For Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income.
Beginning for the year ended December 31, 2017 Anhou and its branches elected to file joint tax returns under PRC tax jurisdiction. Due to the adoption of this filing method, operating loss in the branches from the year 2016 and prior years can no longer deduct earnings beginning in the year 2017. However, any loss incurred in any of the branches in the joint tax return will be consolidated and any further loss in the joint tax return can be carried over to the five years from the year 2017. Due to the joint filing of tax returns for Anhou, the Company reversed deferred tax assets and related valuation allowance of $67,577 previously recognized as of December 31, 2016.
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional 10% on any undistributed earnings to its shareholders.
The Company’s subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong and are generally subject to a profit tax at the rate of 16.5% on the estimated assessable profits.
The following table reconciles the US statutory rates to the Company’s effective tax rate for the year ended December 31, 2017, 2016 and 2015:
| Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2015 | ||||||||||
| US statutory rate | 34 | % | 34 | % | 34 | % | ||||||
| Tax rate difference | (18 | )% | (20 | )% | (22 | )% | ||||||
| Tax base difference | - | % | 1 | % | (1 | )% | ||||||
| Income tax on undistributed earnings | - | % | 10 | % | 10 | % | ||||||
| Loss in subsidiaries | 3 | % | 5 | % | 15 | % | ||||||
| Un-deductible and non-taxable items | 7 | % | - | % | - | % | ||||||
| Effective tax rate | 26 | % | 30 | % | 36 | % | ||||||
Un-deductible and non-taxable items mainly represent un-deductible expenses according to PRC tax laws and the non-taxable tax income or loss.
In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012 and the potential penalty was estimated to be $370,000 in the event of a tax audit, which has been accrued in the fiscal year ended December 31, 2013. The Company reversed the tax penalty of $370,000 in the fiscal year ended December 31, 2017 as of a result of the statutes of limitations for examination has expired.
NOTE 17 – NON-CONTROLLING INTERESTS
Non-controlling interests consisted of the following:
| Name of Affiliate | % of Non- controlling Interest | As of December 31, 2014 | Acquisition and Increase Investment (Fair Value) | Adjustments/ Net Income of Non- controlling Interest | Discontinued | As of December 31, 2015 | ||||||||||||||||||
| Law Enterprise | 34.05 | % | $ | 882,327 | $ | - | $ | (682,628 | ) | $ | - | $ | 199,699 | |||||||||||
| Law Broker | 34.05 | % | 5,471,140 | - | 1,725,988 | - | 7,197,128 | |||||||||||||||||
| Law Agent | 36.69 | % | 24,689 | - | (1,033 | ) | (23,656 | ) | - | |||||||||||||||
| Risk Management | 35.47 | % | (91,809 | ) | - | 22,309 | 69,500 | - | ||||||||||||||||
| PFAL | 49.00 | % | 97,080 | - | 109,018 | - | 206,098 | |||||||||||||||||
| MKI | 49.00 | % | - | - | (1,065 | ) | - | (1,065 | ) | |||||||||||||||
| PTC Taiwan | 49.00 | % | - | - | (26,292 | ) | - | (26,292 | ) | |||||||||||||||
| PTC Nanjing | 49.00 | % | - | - | (837 | ) | - | (837 | ) | |||||||||||||||
| Total | $ | 6,383,427 | $ | - | $ | 1,145,460 | $ | 45,844 | $ | 7,574,731 | ||||||||||||||
| Name of Affiliate | % of Non- controlling Interest | As of December 31, 2013 | Acquisition and Increase Investment (Fair Value) | Adjustments/ Net Income of Non- controlling Interest | Discontinued | As of December 31, 2014 | ||||||||||||||||||
| Law Enterprise | 34.05 | % | $ | 1,556,550 | $ | - | $ | (674,223 | ) | $ | - | $ | 882,327 | |||||||||||
| Law Broker | 34.05 | % | 4,215,015 | - | 1,256,125 | - | 5,471,140 | |||||||||||||||||
| Law Agent | 36.69 | % | 25,067 | - | (378 | ) | - | 24,689 | ||||||||||||||||
| Risk Management | 35.47 | % | (91,014 | ) | - | (795 | ) | - | (91,809 | ) | ||||||||||||||
| PFAL | 49.00 | % | - | 159,186 | (62,106 | ) | - | 97,080 | ||||||||||||||||
| Total | $ | 5,705,618 | $ | 159,186 | $ | 518,623 | $ | - | $ | 6,383,427 | ||||||||||||||
NOTE 18 – INCOME TAX
CU WFOE and the VIEs in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Except for Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu is also 25%.
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional 10% on any undistributed earnings to its shareholders. Law Enterprises decided not to distribute its earnings in 2015. Accordingly, NT$14,018,314, approximately $427,000 of additional tax was accrued. In December 31, 2014, Law Enterprises decided not to distribute its earnings in 2014. Accordingly, additional NT$9,200,945, approximately $304,000, of income tax was accrued as of December 31, 2014, which is stated as “income tax on undistributed earnings” on the income tax rate reconciliation tables below.
The following table reconciles the US statutory rates to the Company’s effective tax rate for the year ended December 31, 2015, 2014, and June 30, 2013 and for the six months ended December 31, 2013:
| Year ended December 31, 2015 | Year ended December 31, 2014 | Six months ended December 31, 2013 | Year ended June 30, 2013 | |||||||||||||
| US statutory rate | 34 | % | 34 | % | 34 | % | 34 | % | ||||||||
| Tax rate difference | (22 | )% | (33 | )% | (2 | )% | (8 | )% | ||||||||
| Tax base difference | (1 | )% | 1 | % | (1 | )% | - | % | ||||||||
| Change in tax status | - | % | - | % | - | % | (3 | )% | ||||||||
| Income tax on undistributed earnings | 10 | % | 57 | % | (6 | )% | - | % | ||||||||
| Loss in subsidiaries | 15 | % | 45 | % | (38 | )% | 2 | % | ||||||||
| Write-off residual value of fixed assets | - | % | 1 | % | (5 | )% | - | % | ||||||||
| Impairment of goodwill | - | % | - | % | (3 | )% | - | % | ||||||||
| Gain on bargain purchase of subsidiary | - | % | - | % | - | % | (19 | )% | ||||||||
| Un-deductible and non-taxable items | - | % | (2 | )% | 6 | % | 2 | % | ||||||||
| Tax per financial statements | 36 | % | 103 | % | (15 | )% | 8 | % | ||||||||
Un-deductible and non-taxable items mainly represent un-deductible expenses according to PRC tax laws and the non-taxable tax income or loss.
NOTE 1922 – RELATED PARTY TRANSACTIONS
On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with Mr. Chwan hau Li (the director of the Company), the selling shareholder of Genius Holdings Financial Limited. (Please see detail in Note 10 (2))
Due to related parties
The following summarized the Company’s loans payable related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of December 31, 20152017 and 2014:2016:
| December 31, 2015 | December 31, 2014 | |||||||
| Due to Mr. Mao (Principal Shareholder of the Company) | $ | 297,414 | $ | 214,165 | ||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li) | 32,223 | - | ||||||
| Due to Mr. Zhu (Legal Representative of Jiangsu) | 2,133 | 2,255 | ||||||
| Due to Ms. Lee (Director of CUIS) | 826 | 315,027 | ||||||
| Due to Multiple Capital Enterprise | 608,941 | - | ||||||
| Due to other shareholders | 4,395 | - | ||||||
| Total | $ | 945,932 | $ | 531,447 | ||||
| December 31, 2017 | December 31, 2016 | |||||||
| Due to Mr. Mao (CEO of the Company) | $ | 409,054 | $ | 361,379 | ||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li*) | - | 32,374 | ||||||
| Due to Mr. Zhu (Legal Representative of Jiangsu) | 2,128 | 1,994 | ||||||
| Ms. Lu (Shareholder of Anhou) | 161,380 | - | ||||||
| Due to Yuli Broker (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to Yuli Investment (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to I Health Management Corp*** | 17,703 | 3,724 | ||||||
| Total | $ | 590,265 | $ | 400,001 | ||||
On December 23, 2014, AHFL entered into* Chwan Hau Li is a Loan Agreement (the “Loan Agreement”) with Shu-FenDirector of the Company
** Mr. Lee (“Ms. Lee”),is the Series ADirector of Law Broker
*** 25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise, and 24% of Multiple Capital Enterprise’s shares are owned by members of the Company’s management level.
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Debt Forgiveness – Related Parties
Xude Investment was owned by Mr. Chwan Hau Li, Director of the Company. PursuantThe outstanding balance as of December 31, 2016 was primarily related to the Loan Agreement, Ms. Lee providedset-up fees on behalf of GHFL and GIC. In March 2017, Xude Investment agreed to forgive the Company’s debt. As of December 31, 2017, the Company has debt forgiveness recognized with a loan in thetotal amount of $314,644 (NT$10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The entire loan and interest amount of $314,928 (NT$10,009,041) have been paid off on January 14, 2015.$32,937.
Lease Agreements
On December 25, 2015,July 1, 2016, the Company entered into a loanlease agreement (the “Short-term Loan Agreement) with Multiple Capital Enterprise Co., Ltd.Yuli Broker to lease its Nan-King East Road office space in Taipei City. The Short-term Loan Agreement providedlease term was for a $608,941 (NT$20,000,000) loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annumone year commencing on July 1, 2016 and the principle and interest were dueending on June 30, 2016.2017, with an annual base rent approximately of $590 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. The entire loanCompany recorded rent income of $564 and interest amount$279, respectively, for the years ended December 31, 2017 and 2016.
On July 1, 2016, the Company entered into a lease agreement with Yuli Investment to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $598,905 (NT$20,014,795) have been paid off on January 11,$590 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. The Company recorded rent income of $564 and $279, respectively, for the years ended December 31, 2017 and 2016. Majority
Advisory Agreements
On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $42,000 (NTD1,275,000). For the year ended December 31, 2017, The Company had cost of Multiple Capital Enterprise shareholderrevenue related to I Health amounted $13,315. The Company has cost of revenue and due to I Health totaled $25,130 and $3,724, respectively, for the year ended and as of December 31, 2016.
On December 7, 2016, the Company entered into an advisory agreement with Fu Chang Li (“Mr. Li,” the Director of the Company). Pursuant to this Advisory Agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. On December 7, 2017, both parties agreed to extend this advisory agreement from December 7, 2017 to December 6, 2018. The total advisory fee was approximately $59,000 (NTD1,800,000). The Company had general and administrative expense related to this advisory agreement amounted $59,214 and $0 for the years ended December 31, 2017 and 2016, respectively.
Consulting Agreement
On November 1, 2016, the Company entered into a consulting agreement with Apex Biz Solution Limited. (“Apex,” was formerly known as Prime Technology Corp.) Apex and PFAL are related parties of the Company because they are owned by the Company’s management level.
Exceptmanagment. According to the Agreement, the Company would provide administrative operational consulting services to Apex from November 1, 2016 through December 31, 2021. As of December 31, 2017 and 2016, the Company had account receivable amounted $17,231 and $6,660, respectively. The Company also had revenue amounted $50,053 and $6,356 for the two aforementioned loans, the advance arose from Due to related parties bore no interestyears ended December 31, 2017 and were payable on demand.2016, respectively.
NOTE 2023 – COMMITMENTS
Operating Leases
The Company has operating leases for its offices. Rental expenses for the years ended December 31, 2017, 2016 and 2015 2014, June 30, 2013were $2,537,348, $2,132,950 and for the six months ended December 31, 2013 were $1,735,521, $1,668,571, $1,410,945 and $754,029, respectively. At December 31, 2015,2017, total future minimum annual lease payments under operating leases were as follows, by years:
| Twelve months ending December 31, 2018 | $ | 2,022,510 | ||
| Twelve months ending December 31, 2019 | 877,362 | |||
| Twelve months ending December 31, 2020 | 197,971 | |||
| Twelve months ending December 31, 2021 | 50,461 | |||
| Twelve months ending December 31, 2022 | 14,199 | |||
| Thereafter | - | |||
| Total | $ | 3,162,503 |
| Twelve months ended December 31, 2016 | $ | 1,774,101 | ||
| Twelve months ended December 31, 2017 | 1,028,775 | |||
| Twelve months ended December 31, 2018 | 533,041 | |||
| Twelve months ended December 31, 2019 | 101,645 | |||
| Twelve months ended December 31, 2020 | 22,401 | |||
| Thereafter | - | |||
| Total | $ | 3,459,963 |
| 99 |
Acquisition Agreement
On February 22, 2015, the Company and the selling shareholder of GHFL entered into an Amendment to the Acquisition Agreement dated February 13, 2015, pursuant to which if the Guaranteed Price per share is higher than the Average Price per share, then the Parties shall negotiate in good faith on an adjustment to the Purchase Price as necessary, if any.
NOTE 21 – DISCONTINUED OPERATION
In the fourth quarter of 2014, the shareholders of the Risk Management and Law Agent made the resolution to dissolve Risk Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Risk Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Risk Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Risk Management and Law Agent are under the process of liquidation as of now. For the year ended December 31, 2015, the company has net cash used in operating activities and net cash provided by financing activities were approximately amount of $172,000 and $5,000, respectively.
Risk Management and Law Agent were acquired by the Company together with their parent Company, Law Enterprise, on August 24 2012. The Total Assets and Total Liabilities of Risk Management as of December 31, 2015, 2014, 2013 and June 30, 2013 are as follows:
| As of December 31, 2015 | As of December 31, 2014 | As of December 31, 2013 | As of June 30, 2013 | |||||||||||||
| Total Assets (including cash) | 224,140 | 334,512 | 203,597 | 277,582 | ||||||||||||
| Total Liabilities | 4,834 | 255,954 | 117,240 | 121,134 | ||||||||||||
The combined Revenue, Net Loss and EPS of Risk Management and Law Agent for the year ended December 31, 2015, 2014, June 30, 2013 and for the six months ended December 31, 2013 are as follows:
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | Six Months Ended December 31, 2013 | Year Ended June 30, 2013 | |||||||||||||
| Revenue | - | - | - | - | ||||||||||||
| Net Income (Loss) | 60,070 | (3,270 | ) | (132,229 | ) | (4,173 | ) | |||||||||
| EPS | - | - | - | - | ||||||||||||
NOTE 22 – FINANCIAL RISK MANAGEMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Risk Management
The Company has exposure to credit, liquidity and market risks which arise in the normal course of its business. This note presents information about the Company’s exposure to each of these risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.
The Board of Directors (“BOD”) has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Company’s BOD oversees how management monitors compliance with the Company’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company.
(a) Credit risk
The Company’s credit risk arises principally from accounts and other receivables, pledged deposits and cash and cash equivalents. Management has a credit policy in place and monitors exposures to these credit risks on an ongoing basis. The carrying amounts of trade and other receivables, pledged deposits and cash and cash equivalents represent the Company’s maximum exposure to credit risks. Accounts receivable are due within 30 days from the date of billing.
(b) Liquidity risk
The BOD of the Company is responsible for the overall cash management and raising borrowings to cover expected cash demands. The Company regularly monitors its liquidity requirements, to ensure it maintains sufficient reserves of cash and readily realizable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.
(c) Currency risk
The functional currency for the subsidiaries in Taiwan is NT$,NTD, the functional currency for the subsidiaries in Hong Kong is HK$,HKD, and the functional currency for the subsidiaries and VIEs in PRC is RMB. The consolidated financial statements of the Company are in USD. The fluctuation of NT$NTD, HKD and RMB will affect ourthe Company’s operating results expressed in USD. The Company reviews its foreign currency exposures. The management does not consider its present foreign exchange risk to be significant.
| 100 |
Fair Value of Financial Instruments
The following table presents the fair value and carrying value of the Company’s financial assets and liabilities as of December 31, 2017:
| Fair Value | Carrying | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||
| Assets | ||||||||||||||||
| Time deposits | $ | - | $ | 22,471,945 | $ | - | $ | 22,471,945 | ||||||||
| Marketable securities: | ||||||||||||||||
| Fund | 33,381 | - | - | 33,381 | ||||||||||||
| Structured deposit | - | 1,248,340 | - | 1,248,340 | ||||||||||||
| Loan receivable (Other current assets in Note 6) | - | - | 1,510,347 | 1,510,347 | ||||||||||||
| Long-term investment: | ||||||||||||||||
| Equity investment | - | - | 1,941,800 | 1,296,039 | ||||||||||||
| Government bonds | - | 103,723 | - | 103,723 | ||||||||||||
| Liabilities | ||||||||||||||||
| Short-term loans | $ | - | $ | - | $ | 2,350,000 | $ | 2,350,000 | ||||||||
| Due to related parties | - | - | 590,265 | 590,265 | ||||||||||||
| Convertible bonds | - | - | 200,000 | 200,000 | ||||||||||||
| Long-term loans | - | - | 248,986 | 248,986 | ||||||||||||
The following table presents the fair value and carrying value of the Company’s financial assets and liabilities as of December 31, 2016:
| Fair Value | Carrying | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||
| Assets | ||||||||||||||||
| Time deposits | $ | - | $ | 7,808,058 | $ | - | $ | 7,808,058 | ||||||||
| Marketable securities: | ||||||||||||||||
| Stocks | 38,763 | - | - | 38,763 | ||||||||||||
| Funds | 2,388,107 | - | - | 2,388,107 | ||||||||||||
| Loan receivable (Other current assets in Notes 6) | - | - | 1,486,846 | 1,486,846 | ||||||||||||
| Long-term investment: | ||||||||||||||||
| Equity investment | - | - | 1,288,279 | 1,190,558 | ||||||||||||
| Government bonds | - | 94,506 | - | 94,506 | ||||||||||||
| Liabilities | ||||||||||||||||
| Due to related parties | $ | - | $ | - | $ | 400,001 | $ | 400,001 | ||||||||
| Convertible bonds | - | - | 200,000 | 200,000 | ||||||||||||
| Long-term loans | - | - | 254,907 | 254,907 | ||||||||||||
Time deposits – The carrying amount approximates its fair value due to short-term duration of the bank time deposits.
Marketable securities – The fair value of stocks and funds is generally valued based on quoted market prices in active markets.
Structured deposit – The fair value of the structured deposit is determined based on present value of the structured deposit, using annum yield of 3.9%.
Loan receivable – The Company’s loan receivable is determined based on 4.5% per annum interest rate on the recent lending to Rich Fountain Limited.
Equity investment – The fair value of the Company’s equity investment was arrived at using the “Income Approach.” The calculation assumptions were based on the growth rate, cash discount rate (rate for weighted average cost of capital), and liquidity discount rate.
Government bonds – The fair value of government bonds is valued based on theoretical bond price in Taipei Exchange (formerly the Gre Tai Securities Market.)
Short-term loans – The fair value of the Company’s short-term loans had been determined based on the nature of the interest rates and the proximity to the issuance date.
Due to related parties – The amount due to related parties bears no interest and payable on demand.
Convertible bonds – The Company determined the fair value of the convertible bonds is 80% of the average closing trading price for the ten (10) business days immediately prior to the conversion date.
Long-term loans - The fair value of the long-term loans were determined by discounted cash flows based on the interest rates.
| 101 |
NOTE 2325 – GEOGRAPHICAL REVENUERECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for prior years to conform to the current year’s presentation. The changes of the presentation were with respect to present time deposits as a line item on the consolidated balance sheets and reclassify deferred current tax assets from other current assets to other assets in accordance with FASB ASU No. 2015-17. The effects of the reclassifications for the prior year were reflected below.
| Consolidated Balance Sheet | December 31, 2016 | |||
| Original: | ||||
| Cash and cash equivalents | $ | 25,521,802 | ||
| Other current assets | 1,890,551 | |||
| Other assets | 726,482 | |||
| Reclassified: | ||||
| Cash and cash equivalents | $ | 20,169,455 | ||
| Time deposits | 5,352,347 | |||
| Other current assets | 1,831,318 | |||
| Other assets | 785,715 | |||
| Consolidated Statements of Cash Flows | Year Ended December 31, 2016 | Year Ended December 31, 2015 | ||||||
| Original: | ||||||||
| Net cash used in investing activities | $ | (2,625,499 | ) | $ | (383,843 | ) | ||
| Foreign currency translation | 147,568 | (832,294 | ) | |||||
| Net increase in cash and cash equivalents | 4,689,978 | 1,260,025 | ||||||
| Cash and cash equivalents, beginning balance | 20,831,824 | 19,571,799 | ||||||
| Cash and cash equivalents, ending balance | 25,521,802 | 20,831,824 | ||||||
| Reclassified: | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchases of time deposits | $ | (7,161,459 | ) | $ | (9,562,553 | ) | ||
| Proceeds from maturities of time deposits | 9,697,617 | 10,556,173 | ||||||
| Net cash provided by (used in) investing activities | (89,341 | ) | 609,777 | |||||
| Foreign currency translation | 7,530 | (564,053 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 7,086,098 | 2,521,886 | ||||||
| Cash and cash equivalents, beginning balance | 13,083,357 | 10,561,471 | ||||||
| Cash and cash equivalents, ending balance | 20,169,455 | 13,083,357 | ||||||
| 102 |
NOTE 26 – SEGMENT REPORTING
The geographical distributions of the Company’s financial information for the years ended December 31, 2017, 2016 and 2015 were as follows:
| For the years ended December 31, | ||||||||||||
| Geographical Areas | 2017 | 2016 | 2015 | |||||||||
| (Restated) | ||||||||||||
| Revenue | ||||||||||||
| Taiwan | $ | 62,147,136 | $ | 61,208,145 | $ | 48,669,261 | ||||||
| PRC | 10,467,488 | 8,461,511 | 5,892,928 | |||||||||
| Hong Kong | 302,096 | 325,408 | 461,577 | |||||||||
| Elimination adjustment | (68,276 | ) | (61,058 | ) | - | |||||||
| Total revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 55,023,766 | ||||||
| Income (loss) from operations | ||||||||||||
| Taiwan | $ | 12,109,928 | $ | 7,303,616 | $ | 3,073,888 | ||||||
| PRC | 489,017 | (817,914 | ) | (1,525,560 | ) | |||||||
| Hong Kong | 3,065 | 66,356 | 209,373 | |||||||||
| Elimination adjustment | 141,410 | 132,432 | 42,884 | |||||||||
| Total income (loss) from operations | $ | 12,743,420 | $ | 6,684,490 | $ | 1,800,585 | ||||||
| Depreciation and amortization expenses | ||||||||||||
| Taiwan | $ | 466,020 | $ | 541,461 | $ | 366,717 | ||||||
| PRC | 94,877 | 84,279 | 96,172 | |||||||||
| Hong Kong | 287 | 288 | 312 | |||||||||
| Elimination adjustment | - | - | - | |||||||||
| Total depreciation and amortization expenses | $ | 561,184 | $ | 626,028 | $ | 463,201 | ||||||
| Interest income | ||||||||||||
| Taiwan | $ | 422,688 | $ | 234,316 | $ | 208,526 | ||||||
| PRC | 1,696 | 4,464 | 31,047 | |||||||||
| Hong Kong | - | 1 | 2 | |||||||||
| Elimination adjustment | (85,215 | ) | (30,116 | ) | (9,066 | ) | ||||||
| Total interest income | $ | 339,169 | $ | 208,665 | $ | 230,509 | ||||||
| Interest expenses | ||||||||||||
| Taiwan | $ | 98,746 | $ | 38,083 | $ | 9,720 | ||||||
| PRC | 21,844 | 11,755 | - | |||||||||
| Hong Kong | - | - | - | |||||||||
| Elimination adjustment | (85,215 | ) | (30,116 | ) | (9,066 | ) | ||||||
| Total interest expenses | $ | 35,375 | $ | 19,722 | $ | 654 | ||||||
| Income tax | ||||||||||||
| Taiwan | $ | 3,236,264 | $ | 2,095,827 | $ | 1,496,206 | ||||||
| PRC | 282,504 | 13,135 | 16,429 | |||||||||
| Hong Kong | (5,051 | ) | 10,636 | 6,591 | ||||||||
| Elimination adjustment | - | - | - | |||||||||
| Total income tax | $ | 3,513,717 | $ | 2,119,598 | $ | 1,519,226 | ||||||
| Net income (loss) | ||||||||||||
| Taiwan | $ | 10,050,593 | $ | 5,803,241 | $ | 1,963,988 | ||||||
| PRC | 128,052 | (844,778 | ) | (1,531,555 | ) | |||||||
| Hong Kong | (7,790 | ) | 53,900 | 222,665 | ||||||||
| Elimination adjustment | 7,010 | 7,220 | 6,187 | |||||||||
| Total net income (loss) | $ | 10,177,865 | $ | 5,019,583 | $ | 661,285 | ||||||
| 103 |
The geographical distribution of China United’s revenue for the year endedCompany’s financial information as of December 31, 2015, 2014,2017 and June 30, 2013, and for the six months ended December 31, 20132016 were as follows:
| As of December 31, | ||||||||||||||||||||||||
| Geographical Areas | Year ended December 31, 2015 | Year ended December 31, 2014 | Six months ended December 31, 2013 | Year ended June 30, 2013 | 2017 | 2016 | ||||||||||||||||||
| (Restated) | ||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||
| Taiwan | $ | (507,983 | ) | $ | (835,564 | ) | ||||||||||||||||||
| PRC | $ | 5,892,928 | $ | 3,060,765 | $ | 1,488,110 | $ | 2,775,431 | (34,445 | ) | (148,936 | ) | ||||||||||||
| Hong Kong | - | - | ||||||||||||||||||||||
| Total capital expenditures | $ | (542,428 | ) | $ | (984,500 | ) | ||||||||||||||||||
| Long-lived assets | ||||||||||||||||||||||||
| Taiwan | 49,130,838 | 44,389,197 | 22,201,000 | 35,066,815 | $ | 1,612,125 | $ | 1,453,772 | ||||||||||||||||
| PRC | 109,597 | 256,704 | ||||||||||||||||||||||
| Hong Kong | 358 | 648 | ||||||||||||||||||||||
| Elimination adjustment | - | - | ||||||||||||||||||||||
| Total long-lived assets | $ | 1,722,080 | $ | 1,711,124 | ||||||||||||||||||||
| $ | 55,023,766 | $ | 47,449,962 | $ | 23,689,110 | $ | 37,842,246 | |||||||||||||||||
| Reportable assets | ||||||||||||||||||||||||
| Taiwan | $ | 96,399,321 | $ | 90,388,991 | ||||||||||||||||||||
| PRC | 11,140,124 | 13,325,433 | ||||||||||||||||||||||
| Hong Kong | 643,881 | 561,708 | ||||||||||||||||||||||
| Elimination adjustment | (48,910,083 | ) | (54,908,429 | ) | ||||||||||||||||||||
| Total reportable assets | $ | 59,273,243 | $ | 49,367,703 | ||||||||||||||||||||
| 104 |
NOTE 2427 – LOAN TO SHAREHOLDERSRESTATEMENT
Anhou Registered Capital Increase
The Company has restated its previously filed 2016 and 2015 consolidated financial statements to correct a material error related to the accounting for the acquisition of GHFL in 2015. The GHFL acquisition has been accounted for the acquisition of a business but upon reflection and further analysis, the Company has concluded that it would be more accurately accounted for as an asset acquisition.
On April 27, 2013, China Insurance Regulatory Commission mandated any insurance agency have a minimum registered capital requirement of RMB50 million (approximately $ 8 million). At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered capital of RMB10 million (approximately $ 1.6 million). To better implement its expansion strategies, Anhou intends to increase its registered capital to RMB50 million so that it can set up new branches in any province beyond its current operations in Mainland China.
The restatement for 2016 consolidated financial statements:
DueCONSOLIDATED BALANCE SHEET
| As of December 31, 2016 | ||||||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 25,521,802 | $ | (5,352,347 | ) | {b} | $ | 20,169,455 | ||||||||
| Time deposits | - | 5,352,347 | {b} | 5,352,347 | ||||||||||||
| Marketable securities | 2,426,870 | - | 2,426,870 | |||||||||||||
| Accounts receivable, net | 15,774,159 | - | 15,774,159 | |||||||||||||
| Other current assets | 1,890,551 | (59,233 | ) | {b} | 1,831,318 | |||||||||||
| Total current assets | 45,613,382 | (59,233 | ) | {b} | 45,554,149 | |||||||||||
| Property, plant and equipment, net | 926,905 | - | 926,905 | |||||||||||||
| Intangible assets | 784,219 | - | 784,219 | |||||||||||||
| Goodwill | 2,071,491 | (2,039,840 | ) | {a} | 31,651 | |||||||||||
| Long-term investment | 1,285,064 | - | 1,285,064 | |||||||||||||
| Other assets | 726,482 | 59,233 | {b} | 785,715 | ||||||||||||
| TOTAL ASSETS | $ | 51,407,543 | $ | (2,039,840 | ) | {a} | $ | 49,367,703 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Taxes payable | $ | 2,249,869 | $ | - | $ | 2,249,869 | ||||||||||
| Due to related parties | 400,001 | - | 400,001 | |||||||||||||
| Other current liabilities | 18,639,909 | - | 18,639,909 | |||||||||||||
| Total current liabilities | 21,289,779 | - | 21,289,779 | |||||||||||||
| - | ||||||||||||||||
| Convertible bonds | 200,000 | - | 200,000 | |||||||||||||
| Long-term loans | 254,907 | - | 254,907 | |||||||||||||
| Long-term liabilities | 5,315,327 | - | 5,315,327 | |||||||||||||
| TOTAL LIABILITIES | 27,060,013 | - | 27,060,013 | |||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | - | 10 | |||||||||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding | 295 | - | 295 | |||||||||||||
| Additional paid-in capital | 8,157,512 | - | 8,157,512 | |||||||||||||
| Statutory reserves | 3,799,585 | - | 3,799,585 | |||||||||||||
| Retained earnings | 3,286,562 | (2,039,840 | ) | {a} | 1,246,722 | |||||||||||
| Accumulated other comprehensive gain/ (loss) | (667,976 | ) | - | (667,976 | ) | |||||||||||
| Stockholders’ equity attribute to parent’s shareholders | 14,575,988 | (2,039,840 | ) | {a} | 12,536,148 | |||||||||||
| Noncontrolling interests | 9,771,542 | - | 9,771,542 | |||||||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 24,347,530 | (2,039,840 | ) | {a} | 22,307,690 | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 51,407,543 | $ | (2,039,840 | ) | {a} | $ | 49,367,703 | ||||||||
{a} The Company corrected the acquisition method from business acquisition to certain restrictionasset acquisition. The consideration provided in excess of fair market value of the purchased entity cannot be treated as goodwill. The excess payment is restated to compensation on direct foreign investment in insurance agency business under current PRC legal requirements, Anhou sought investments from certain Investor Borrowers who in turn needed funds through individual loans.asset acquisition.
On June 9, 2013, AHFL entered into a Loan Agreement with ZLI Holdings, whereby AHFL agreed{b} See Note 25 for additional information on the reclassifications.
| 105 |
The restatement for 2015 consolidated financial statements:
CONSOLIDATED BALANCE SHEET
| As of December 31, 2015 | ||||||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 20,831,824 | $ | (7,748,467 | ) | {b} | $ | 13,083,357 | ||||||||
| Time deposits | - | 7,748,467 | {b} | 7,748,467 | ||||||||||||
| Marketable securities | 2,369,082 | - | 2,369,082 | |||||||||||||
| Accounts receivable, net | 9,630,993 | - | 9,630,993 | |||||||||||||
| Other current assets | 1,055,015 | - | 1,055,015 | |||||||||||||
| Total current assets | 33,886,914 | - | 33,886,914 | |||||||||||||
| Property, plant and equipment, net | 918,798 | - | 918,798 | |||||||||||||
| Intangible assets | 468,779 | - | 468,779 | |||||||||||||
| Goodwill | 2,071,491 | (2,039,840 | ) | {a} | 31,651 | |||||||||||
| Long-term investment | 1,264,611 | - | 1,264,611 | |||||||||||||
| Other assets | 791,223 | - | 791,223 | |||||||||||||
| TOTAL ASSETS | $ | 39,401,816 | $ | (2,039,840 | ) | {a} | $ | 37,361,976 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Taxes payable | $ | 1,521,962 | $ | - | $ | 1,521,962 | ||||||||||
| Short-term loan | 222,235 | - | 222,235 | |||||||||||||
| Due to related parties | 945,932 | - | 945,932 | |||||||||||||
| Other current liabilities | 10,870,750 | - | 10,870,750 | |||||||||||||
| Total current liabilities | 13,560,879 | - | 13,560,879 | |||||||||||||
| - | ||||||||||||||||
| Long-term liabilities | 6,594,530 | - | 6,594,530 | |||||||||||||
| TOTAL LIABILITIES | 20,155,409 | - | 20,155,409 | |||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | - | 10 | |||||||||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding | 295 | - | 295 | |||||||||||||
| Additional paid-in capital | 8,157,512 | - | 8,157,512 | |||||||||||||
| Statutory reserves | 2,385,327 | - | 2,385,327 | |||||||||||||
| Retained earnings | 1,808,665 | (2,039,840 | ) | {a} | (231,175 | ) | ||||||||||
| Accumulated other comprehensive gain/ (loss) | (680,133 | ) | - | (680,133 | ) | |||||||||||
| Stockholders’ equity attribute to parent’s shareholders | 11,671,676 | (2,039,840 | ) | {a} | 9,631,836 | |||||||||||
| Noncontrolling interests | 7,574,731 | - | 7,574,731 | |||||||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 19,246,407 | (2,039,840 | ) | {a} | 17,206,567 | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 39,401,816 | $ | (2,039,840 | ) | {a} | $ | 37,361,976 | ||||||||
| 106 |
CONSOLIDATED STATEMENT OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
| For the year ended December 31, 2015 | ||||||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||||||
| Revenue | $ | 55,023,766 | - | $ | 55,023,766 | |||||||||||
| Cost of revenue | 35,423,762 | - | 35,423,762 | |||||||||||||
| Gross profit | 19,600,004 | - | 19,600,004 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 3,084,408 | - | 3,084,408 | |||||||||||||
| General and administrative | 12,675,171 | 2,039,840 | {a} | 14,715,011 | ||||||||||||
| Total operating expense | 15,759,579 | 2,039,840 | {a} | 17,799,419 | ||||||||||||
| Income from operations | 3,840,425 | (2,039,840 | ) | {a} | 1,800,585 | |||||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 230,509 | - | 230,509 | |||||||||||||
| Interest expense | (654 | ) | - | (654 | ) | |||||||||||
| Other - net | 150,071 | - | 150,071 | |||||||||||||
| Total other income (expenses) | 379,926 | - | 379,926 | |||||||||||||
| Income before income taxes | 4,220,351 | (2,039,840 | ) | {a} | 2,180,511 | |||||||||||
| Income tax expense | 1,519,226 | - | 1,519,226 | |||||||||||||
| Net income (loss) | 2,701,125 | (2,039,840 | ) | {a} | 661,285 | |||||||||||
| Net income attributable to the noncontrolling interests | 1,623,198 | - | 1,623,198 | |||||||||||||
| Net income (loss) attributable to parent’s shareholders | 1,077,927 | (2,039,840 | ) | {a} | (961,913 | ) | ||||||||||
| Other comprehensive items | ||||||||||||||||
| Foreign currency translations gain(loss) | (329,562 | ) | - | (329,562 | ) | |||||||||||
| Other | 310 | - | 310 | |||||||||||||
| Other comprehensive income (loss) attributable to parent’s shareholders | (329,252 | ) | - | (329,252 | ) | |||||||||||
| Other comprehensive items attributable to noncontrolling interests | (477,738 | ) | - | (477,738 | ) | |||||||||||
| Comprehensive income attributable to parent’s shareholders | $ | 748,675 | (2,039,840 | ) | {a} | $ | (1,291,165 | ) | ||||||||
| Comprehensive income attributable to noncontrolling interests | $ | 1,145,460 | - | $ | 1,145,460 | |||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 29,365,834 | 29,365,834 | ||||||||||||||
| Diluted | 30,365,834 | 29,365,834 | ||||||||||||||
| Income per share: | ||||||||||||||||
| Basic | $ | 0.037 | $ | (0.033 | ) | |||||||||||
| Diluted | $ | 0.035 | $ | (0.033 | ) | |||||||||||
{a} The Company corrected the acquisition method from business acquisition to provide a loan to ZLI Holdingsasset acquisition. The consideration provided in excess of RMB40 million ($6,389,925). The term for such loan is 10 years which may be extended upon the agreementfair market value of the parties.purchased entity cannot be treated as goodwill. The loan was remittedexcess payment is restated to ZLI Holdingscompensation on August 30, 2013. In August 2013, ZLI Holdings entered into three loan agreements (“Investor Loan Agreements”) with the following independent third parties, collectively, the Investor Borrowers:asset acquisition.
{b} See Note 25 for additional information on the reclassifications.
NOTE 28 – QUARTERLY INFORMATION (UNAUDITED)
The termfollowing quarterly data are derived from the Company’s consolidated balance sheet. See “Note 27—Restatement” for information concerning the above loans is 10 years which may be extended upon the agreementRestatement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers entered into a binding VIE agreement with Anhou, the WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers were solely used to increase the registered capital of Anhou. As of December 31, 2014 and 2013, the loan was offset against equity.Company’s financial statements.
| As of March 31, 2017 | ||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||
| CONSOLIDATED BALANCE SHEET | ||||||||||||
| ASSETS | ||||||||||||
| Goodwill | $ | 2,071,491 | $ | (2,039,840 | ) | $ | 31,651 | |||||
| TOTAL ASSETS | 49,227,142 | (2,039,840 | ) | 47,187,302 | ||||||||
| Retained earnings | 4,152,250 | (2,039,840 | ) | 2,112,410 | ||||||||
| Stockholders’ equity attribute to parent’s shareholders | 16,701,244 | (2,039,840 | ) | 14,661,404 | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 27,792,876 | (2,039,840 | ) | 25,753,036 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 49,227,142 | $ | (2,039,840 | ) | $ | 47,187,302 | |||||
On October 20, 2013, the investor borrowers increased Anhou’s registered capital by RMB 40 million ($6,389,925).
| As of June 30, 2017 | ||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||
| CONSOLIDATED BALANCE SHEET | ||||||||||||
| ASSETS | ||||||||||||
| Goodwill | $ | 2,071,491 | $ | (2,039,840 | ) | $ | 31,651 | |||||
| TOTAL ASSETS | 48,983,681 | (2,039,840 | ) | 46,943,841 | ||||||||
| Retained earnings | 5,804,053 | (2,039,840 | ) | 3,764,213 | ||||||||
| Stockholders’ equity attribute to parent’s shareholders | 18,721,318 | (2,039,840 | ) | 16,681,478 | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 30,295,360 | (2,039,840 | ) | 28,255,520 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 48,983,681 | $ | (2,039,840 | ) | $ | 46,943,841 | |||||
| As of September 30, 2017 | ||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||
| CONSOLIDATED BALANCE SHEET | ||||||||||||
| ASSETS | ||||||||||||
| Goodwill | $ | 2,071,491 | $ | (2,039,840 | ) | $ | 31,651 | |||||
| TOTAL ASSETS | 51,132,862 | $ | (2,039,840 | ) | 49,093,022 | |||||||
| Retained earnings | 6,663,807 | $ | (2,039,840 | ) | 4,623,967 | |||||||
| Stockholders’ equity attribute to parent’s shareholders | 20,077,289 | (2,039,840 | ) | 18,037,449 | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 32,344,226 | (2,039,840 | ) | 30,304,386 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 51,132,862 | $ | (2,039,840 | ) | $ | 49,093,022 | |||||
140
| 108 |
NOTE 29 – SUBSEQUENT EVENTS
Taiwan Income Tax Law Amendment become effective in February 2018. Income tax rate of Taiwan has been changed from 17% to 20% staring from 2018. The Company has determined that the change in tax rate will affect the Company’s deferred tax assets and liabilities beginning in the first quarterly consolidated financial statements in 2018.
On January 25, 2018, the Company draw down a borrowing of $1,500,000 from the credit agreement with FEIB. This borrowing bears an interest rate of 2.95% per annum and the principal and interest are due on February 23, 2018. The borrowing requires time deposits with a total amount of $2,000,000 as collateral. On February 23, 2018, the Company and FEIB agreed to extend this loan from February 23, 2018 to March 23, 2018.
The Company plans to invest in its Yuli Broker, a related party owned by Ms. Lee. The application of the investment was approved by Investment Commission of the Ministry of Economic Affairs in Taiwan in January 2018.
The Company has evaluated all other subsequent events through the date these consolidated financial statements were issued and determine that there were no other subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.
| 109 |
NOTE 25 – SUBSEQUENT EVENTSITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW. The purpose of the Strategic Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan through insurance agency companies or insurance brokerage companies. To the extent permitted by applicable laws and regulations, AHFL shall assist and encourage any insurance agency company or insurance brokerage company duly approved by the competent government authorities of Taiwan (the “Appointed Broker/Agent”), to cooperate with AIATW for the promotion of life insurance products of AIATW. Pursuant to the Amendment No. 2, the expiration date of the Strategic Alliance Agreement has been extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 has been suspended. In addition, both AHFL and AIATW agree to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of Execution Fees.None.
On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company is committed to complete the listing of the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least $10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NT$22.5 million (approximately $676,466), on a pro rata basis, to the selling shareholders of AHFL and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the Selling Shareholders as if the said acquisition had never happened. The Company is doing its best to achieve the targeted milestones as set forth in the third Amendment to the Acquisition Agreement. However, given the tight schedule and harsh general environment, despite every efforts of the Company, it might be really difficult for the Company to do so within the stipulated deadline. Therefore, the Company is actually negotiating with the Selling Shareholders of AHFL to convince them to give up such termination rights in case of failure to comply with the first and second requirements under Third Amendment within the stipulated deadline while continuously using its best efforts to fulfill such obligations.
On February 17, 2016, the Company and AHFL entered into an Amendment 2 to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Li, pursuant to which, on or prior to February 28, 2016, (i) the Company is committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least $10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised. The right to revoke the Put Option has not been exercised as of reporting date.
The following table summarizes what the results of operations of the Company would have been on a pro forma basis for the year ended December 31, 2015, if the Put Option has not been exercised on March 31, 2015. These results do not purport to represent what the results of operations for the Company would have actually been or to be indicative of the future results of operations of the Company.
| As of December 31, 2015 | ||||
| Retained earnings | $ | 1,696,335 | ||
| Stockholder’s equity attribute to parent’s shareholders | 11,559,346 | |||
| Noncontrolling interest | 7,687,061 | |||
| Year Ended December 31, 2015 | ||||
| Net income attributable to the noncontrolling interests | $ | 1,735,528 | ||
| Net income (loss) attributable to parent’s shareholders | 965,597 | |||
| Comprehensive income (loss) attributable to parent’s shareholders | 636,345 | |||
| Comprehensive income (loss) attributable to noncontrolling interest | 1,257,790 | |||
| Income (loss) per share: | ||||
| Basic | $ | 0.033 | ||
| Diluted | $ | 0.032 | ||
The Company has evaluated all other subsequent events through the date these consolidated financial statements were issued, and determine that there were no other subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures |
As required by SEC Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried outwe conducted an evaluation, under the supervision and with the participation of the Company’sour management, including the Company’sour Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2015. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of December 31, 2015, our disclosure controls and procedures were effective2017, to ensure thethat information required to be disclosed by an issuerus in the reports it filesfiled or submitssubmitted by us under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms, relatingincluding to ensure that information required to be disclosed by us and wasin the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officerprincipal executive and Chief Financial Officer,principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectivenessBased on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of any system ofDecember 31, 2017, our disclosure controls and procedures includingwere not effective at the possibility of humanreasonable assurance level due to the material weaknesses identified and described in Item 9A(b).
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and the circumvention or overriding of the controls and procedures. Accordingly, even effectiveall fraud. Although our disclosure controls and procedures can onlywere designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control objectives.system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s annual report on internal control over financial reporting
| (b) | Management’s annual report on internal control over financial reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for theour Company are provided by executive management's review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:
| (1) |
| 110 |
| (2) |
| (3) |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projectionsProjections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ManagementOur management assessed the effectiveness of the Company'sour internal control over financial reporting as of December 31, 2015.2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework. Management'sFramework(2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.In connection with management’s assessment included an evaluation of the design of our internal control over financial reporting, and testing of the operational effectiveness of these controls.
Based on this assessment, management has concludedidentified control deficiencies that as of December 31, 2015,constituted material weaknesses in our internal control over financial reporting was effective to provide reasonable assurance regarding the reliabilityas of December 31, 2017, as described below.
| (1) | We did not maintain an effective control environment as we did not effectively implement a process to ensure that the bonus revenue is properly recognized at the period end. |
| (2) | We did not have qualified individuals to identify unusual transactions and appropriately assess for financial impact, and ensure the consolidation and reporting are in compliance with US GAAP. |
| (3) | We did not establish a strong Internal Audit function to assist management with assessing the effectiveness of internal control over financial reporting. |
These material weaknesses resulted in material misstatements of our historical financial reporting and the preparationstatements, which necessitated a restatement of our consolidated financial statements for external purposesthe years ended December 31, 2016 and 2015 and our unaudited quarterly financial information for the first three quarters in accordance with U.S. generally accepted accounting principles.the year ended December 31, 2017. Disclosures related tothe restatement adjustmentsare included in Part II, Item 8, Note 27 and 28 of this Form 10-K.
This annual report does not include an attestation reportAdditionally, each of the Company'smaterial weaknesses described above could result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Simon & Edward, LLP, an independent registered certified public accounting firm, regardingas stated in their report, which appears in this Annual Report.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
| (c) | Management’s Remediation Plan |
We are committed to remediating the control deficiencies that constitute the material weaknesses described above by implementing changes to our internal control over financial reporting. Management's report was not subject to attestation byOur Chief Financial Officer is responsible for implementing changes and improvements in the Company's registered public accounting firm pursuantinternal control over financial reporting and for remediating the control deficiencies that gave rise to the Company’s status as an emerging growth company undermaterial weaknesses. We are currently evaluating the Jumpstart Our Business Startups Actimpact of 2012.the material weaknesses and have taken or are in the process of taking the following actions:
| (1) | We have begun to design our internal controls over the accounting for evaluating the completeness of the bonus revenue at the period end. |
| (2) | We plan to recruit personnel with the appropriate education, experience, and certifications, such as CPA or CIA, who has sufficient knowledge of US GAAP and SOX 404, and can identify unusual transactions timely and appropriately for assessing financial report impact. |
| (3) | We plan to establish structure, authority, and responsibilities to ensure the objectives of internal control over financial reporting were adequately achieved. We also plan to deliver training to control owners regarding risks, controls and maintaining adequate control evidence, as well as dedicate additional resources to support internal audit function. |
However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address the control deficiencies.
Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are fully implemented and concluded to be operating effectively, the material weaknesses described above will continue to exist.
| 111 |
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive OfficersThe information required by this item regarding directors is incorporated by reference to our definitive Proxy Statement (the Proxy Statement) to be filed with the Securities and Directors
Exchange Commission in connection with our 2018 Annual Meeting of Stockholders under the heading “Election of Directors.” The following table sets forth, as of March 24, 2016, the names and ages of our directors and executive officers. The directors will hold such office until the next annual meeting of shareholders and until his or her successor has been elected and qualified.
Business Experience
The following summarizes the occupation and business experience for our officers, directors, key employees and consultants.
Yi Hsiao Mao, Director and CEO
Mr. Mao has served as a directorinformation required by this item regarding compliance with Section 16(a) of the Company since June 2010. Mr. Mao, with 26 yearsSecurities Exchange Act of insurance industry experience,1934, as amended, is the founder of Taiwan Law Broker Co., Ltd., the biggest insurance broker company in Taiwan. In addition, Mr. Mao has served as a supervisor for the Company’s Consolidated Affiliated Entity Jiangsu Law since March 2005incorporated by reference to the present, also serves as the chairman of Law Enterprise, Law Agent and Law Management. He received his Bachelor’s degree from Taiwan Soochow University School of Law and acquired a Taiwan lawyer's practice certificate. Mr. Mao was selected as a director because of his experience in both the insurance industry and the Company’s PRC operations.
Fu Chang Li, Director
Mr. Li has served as a director of the Company since January 2011. Mr. Li has over 30 years of insurance industry experience, including 18years in the insurance agency industry. From 1980 to 1992, he worked as a manager for Guohua Life Insurance Co., Ltd. From 1992 to 1993 Mr. Li worked as General Manager for Gongxin insurance brokers Co., Ltd. or KHIB. Mr. Li served as a president to Time Insurance Brokers Co., Ltd. from 1993 to 2003. Mr. Li served as a consultant to the Company’s affiliated entity Anhou from October 2003 to October 2009 and as the Chairman of Anhou from October 2009 to May 2012. Mr. Li received a Bachelor degree in Mass Communication from Fu Jen Catholic University. He is one of the primary insurance brokers in Taiwan. Mr. Li was selected as a director because of his experience in both the insurance industry and the Company’s PRC operations.
Chwan Hau Li, Director
Mr. Li has served as a director of the Company since January 2011. Mr. Li has over 20 years of insurance industry experience. Mr. Li has served as a service manager at Taiwan Life Insurance from 1987 to 2000. In addition Mr. Li founded Genius Insurance Brokers Co., Ltd., and has served as its Chairman from April 2000 to the present. Mr. Li has also served as Chairman of Genius Financial Consultants Co., Ltd., a Taiwan company from February 2001 to the present. Mr. Li has served as a director to the Company’s affiliated entity Sichuan Kangzhuang from 2006 to 2010. He received a M.S. Degree in Actuarial Science in The University of Iowa and acquired North American actuarial qualification. Mr. Li was selected as a director because of his experience in both the insurance industry and the Company’s PRC operations.
Kuei Chiao Chen, Director
Ms. Chen served as a director of the Company since February 13, 2013. Prior to her appointment as a director of the Company, Ms. Chen served as store manager for KFC in Taiwan from 1987 to 1996. Ms. Chen has not served in any professional capacity in the past six years. Ms. Chen graduated from Yongda Technology College with an associate degree in chemical engineering. Ms. Chen was selected as a director because of her personnel management skills accumulated during her years at KFC.
Shu Fen Lee, Director
Ms. Lee served as a director of the Company since December 6, 2013. Ms. Lee has served as the Law Broker’s Chief Executive Officer since 1987. Ms. Lee worked in Nan Shan Life Insurance Company, Ltd. from September 1983 to September 1987. Ms. Lee serves as the Chairman of the Law Insurance Broker Co., Ltd. from February 2013 to the present. Ms. Lee also serves as the general manager of Law Enterprise Co., Ltd. from February 2013 to the present. Ms. Lee has over 30 years of insurance industry experience. Ms. Lee graduated from the National Taiwan Ocean University in Taiwan in the year of 1983, where she received a bachelor's degree of Department of Aquaculture.
Yung Chi Chuang, Chief Financial Officer
Ms. Chuang has served as the Company’s Chief Financial Officer since July 2012. Ms. Chuang has served as financial manager of Law Insurance Broker Co., Ltd. in Taiwan for 17years, where she has been responsible for overall financial management of such company, including financial and strategic planning, auditing and reporting, and communications to the investors. Prior to her joining Law Insurance Broker Co., Ltd., Ms. Chuang served as business secretary in Pacific Realtor, Inc. since 1996. Ms. Chuang graduated from the Ming Chuan University in Taiwan in the year of 2000, where she received a Bachelor degree of risk management and insurance.
Tung Chi Hsieh, Chief Operating Officer
Mr. Hsieh has served as the Chief Operating Officer of the Company since January 2011. Mr. Hsieh has served as Chief Operating Officer and Division Chief of Management of the Company’s Consolidated Affiliated Entity Jiangsu Law from January 2005 to the present. Mr. Hsieh has worked at First Bank, Head Office, as an Asset Management Specialist in 2000. He has worked at Taiwan Law brokers Co., Ltd., Operating Department, as an Administrative Personnel from 2000 to 2001, officer from 2001 to 2002, Assistant Manager in 2003 and Manager from 2004 to 2005. Mr. Hsieh graduated from the NATIONAL CHUNG HSING University in Taiwan in the year of 1998, where he received a Bachelor degree of Department of Land Economics & Administration.
Wen Yuan Hsu, Chief Marketing Officer
Mr. Hsu has served as the Company’s Chief Marketing Director since January 2011. Mr. Hsu has 18years of insurance industry experience. From February 2001 to May 2006, Mr. Hsu served as a Vice Business Executive at Alexander Leed Risks Service Inc., an insurance brokerage company. From September 2006 to May 2009, Mr. Hsu served as General Manager of KunshanWoma Insurance Agency Co., Ltd., an insurance agency company. From June 2009 to the present, Mr. Hus served as General Manager of the Company’s affiliated entity Sichuan Kangzhuang. Mr. Hsu graduated from Feng Chia University with a major in Risk Management and Insurance.
Te Yun Chiang, Chief Technology Officer
Mr. Chiang has served as the Company’s Chief Technology Officer since January 2011. Mr. Chiang graduated from insurance department of Shih Chien University and has ten years of experience in the insurance industry. From January 2004 to the present, Mr. Chiang has served as the Manager of the Company’s affiliated entity Jiangsu Law.
Code of Ethics
We have not adopted a code of ethics that applies to our officers, employees and directors, including our Chief Executive Officer and senior executives. However, we plan to adopt one in the future.
Family relationships
Ms. Lee Shu Fen, a director of the Company designated by the preferred shareholders of the Company, is the spouse of Mr. Mao Yi Hsiao who is the Chief Executive Officer and a director of the Company. Other than as described above, there are no family relationships by and between or among the members of the Board or other executives. None of our directors and officers is directors or executive officers of any company that files reports with the SEC.
Involvement in certain legal proceedings
No bankruptcy petition has been filed by or against any business of which any of our executive officers was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
No director has been convicted in a criminal proceeding and is not subject to a pending criminal proceeding (excluding traffic violations and other minor offenses).
No director has been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
No director has been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors (“BOD”) functions as an audit committee and performs some of the same functions as an audit committee including: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; and (3) engaging outside advisors. We are not a "listed company" under SEC rules and are therefore not required to have an audit committee comprised of independent directors. Our BOD has determined that its members do not include a person who is an "audit committee financial expert" within the meaning of the rules and regulations of the SEC. Our BOD has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member's financial sophistication. Accordingly, the BOD believes that each of its members have the sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have.
Indemnification
Under Delaware law and pursuant to our articles of incorporation and bylaws, we may indemnify our officers and directors for various expenses and damages resulting from their acting in these capacities. Insofar as indemnification for liabilities arisinginformation under the Securities Act of 1933 may be permitted to our officers or directors pursuant to those provisions, our counsel has informed us that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable.
Section 16(a) Beneficial Ownership Reporting Compliance
The following officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required bycaption “Compliance with Section 16(a) of the Exchange Act duringAct” to be contained in the year ended December 31, 2015: Company Director Li Chwan Hau did not file a Form 4 with respect to the receipt of 352,166 shares of common stock of the Company in connection with the exercised Put Option completed on April 29, 2015.Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The following table reflects the compensation paid to our principal executive officer during our fiscal years ended December 31, 2015 and 2014.
SUMMARY COMPENSATION TABLE
| Nonqualified | ||||||||||||||||||||||||||||||||||||
| Non-Equity | Deferred | |||||||||||||||||||||||||||||||||||
| Stock | Option | Incentive Plan | Compensation | All Other | ||||||||||||||||||||||||||||||||
| Name and | Fiscal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||||||||
| principal position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
| Yi Hsiao Mao Chief Executive Officer | 2015 | $ | 287,482 | - | - | - | - | - | - | $ | 287,482 | |||||||||||||||||||||||||
| 2014 | $ | 287,482 | - | - | - | - | �� | - | - | $ | 287,482 | |||||||||||||||||||||||||
On August 8, 2014, Mr. Chung Mei Lo resigned as the Company’s Chief Executive Officer and Mr. Mao was appointed Chief Executive Officer.
In the Fiscal years ended December 31, 2014 and 2015, Mr. Yi Hsiao Mao also served as the consultant of Law Broker and president of Law Enterprise and received all of his compensation from Law Broker and Law Enterprise. The above table identifies all compensation receivedinformation required by the named officer directly or indirectly from the Company, its subsidiaries, and its Consolidated Affiliated Entities.
Outstanding Equity Awards At Fiscal Year End
None.
Director Compensation
Our directors do not currently receive compensation for their service as directors of the Company. Set forth belowthis item is the compensation paid to each of our directors during the fiscal year ended December 31, 2015for compensation not related to their role as directors.
DIRECTOR COMPENSATION TABLE
| Name | Fees Earned or Paid in Cash ($) | All Other Compensation ($)(1)(2)(3) | Total ($) | |||||||||
| Yi Hsiao Mao | - | $ | 294,213.22 | $ | 294,213.22 | |||||||
| Fu Chang Li | - | $ | 56,728.47 | 56,728.47 | ||||||||
| Chwan Hau Li | - | - | ||||||||||
| Kuei Chiao Chen | ||||||||||||
| Shu Fen Lee | - | $ | 71520.32 | 71520.32 | ||||||||
Employment Agreements
Pursuant to an employment agreement between Yung Chi Chuang and the Company, dated July 2, 2012 (the “Chuang Agreement”), Ms. Chuang earns a salary of $2,300 per month to serve as Chief Financial Officer of the Company and will be eligible for other monetary rewards based on her performance evaluations. The term of the Chuang Agreement is indefinite. Chuang Yung Chi also serves as the manager of financial department of Law Broker.
Pursuant to an employment agreement between Law Broker and Hui-Hsien Chao, dated January 7, 2013 (the “Chao Agreement”), Hui-Hsien Chao serves as General Manager of Law Broker. The original term of the Chao Agreement was from January 7, 2013 to January 6, 2015. On January 7, 2015, the Chao Agreement was renewed and the term was extended to January 6, 2016. On December 29, 2015, the Chao Agreement was renewed and the term was extended to December 28, 2018. Ms. Chao is entitledincorporated by reference to the payment ofinformation under the remuneration, calculated as progressive percentage on commissions achievedcaption “Executive Compensation and subjectRelated Information Compensation Discussion and Analysis” to be contained in the satisfaction of the threshold 13-month and 25-month persistency ratio. The remuneration is paid each year. Ms. Chao is subject to a non-compete which prohibits her from competing with Law Broker during the term of the Chao Agreement within the territories of ROC and the PRC. Chao Agreement shall be terminated upon the expiration. In addition, Ms. Chao and Law Broker may terminate the Chao Agreement for enumerated reasons listed therein.Proxy Statement.
Pursuant to an employment agreement between Tung Chi Hsieh and Jiangsu Law, dated December 30, 2009 (the “Hsieh Agreement”), Mr. Hsieh earns a salary of RMB3,000 ($490) per month to serve as Division Chief of Management. The original term of the Hsieh Agreement expired on December 29, 2011, with an automatic extension of the Hsieh Agreement if neither party terminates the Hsieh Agreement. In addition, Mr. Hsieh and Jiangsu Law may terminate the Hsieh Agreement for enumerated reasons listed therein.
Pursuant to an employment agreement between Wen Yuan Hsu and Sichuan Kangzhuang, dated October 1, 2010 (the “Hsu Agreement”), Mr. Hsu earns a salary of RMB13,000 ($2,124) per month to serve as General Manager of Marketing for Sichuan Kangzhuang, the Hsu Agreement is not a fixed term employment agreement, it has no expiration date. The Hsu Agreement also provides for reimbursement of four trips by Mr. Hsu to Taiwan per year, an official car and gas subsidy, 20 days paid vacation, and reimbursement for business related travel and expenses. The Hsu Agreement initially provided for the performance targets with the total first year premium, or FYP, in 2011 must reach RMB10,000,000 ($1,566,661). Although Mr. Hsu failed to achieve the performance target, considering depressed general business environment as well as the extensive managerial experience of Mr. Hsu, Sichuan Kangzhuang continued the employment relationship with Mr. Hsu. Considering the slow-down of general economic environment in China, no FYP target has been set for the calendar year from 2012 to 2015. Mr. Hsu is subject to a non-compete which prohibits him from competing with Sichuan Kangzhuang during the term of the Hsu Agreement and for two years following the termination of his employment with Sichuan Kangzhuang. If Mr. Hsu violates the non-compete provisions of the Hsu Agreement, he is subject to a penalty fee of RMB100,000 ($16,340). Either party may terminate the Hsu Agreement prior to the expiration date of the agreement if such party (i) provides the non- terminating party 30 days notice and (ii) pays the non-terminating party RMB100,000 ($16,340). In addition, Mr. Hsu and Sichuan Kangzhuang may terminate the Hsu Agreement for enumerated reasons listed therein without payment of the termination fee.
Pursuant to an employment agreement between Jiangsu Law and Te Yun Chiang, dated December 30, 2009 (the “Chiang Agreement”), Mr. Chiang earns a salary of RMB2,250 ($352) per month to serve as Manager of Jiangsu Law. The original term of the Chiang Agreement expires on December 29, 2011, with an automatic extension of the Chiang Agreement if neither party terminates the Chiang Agreement. In addition, Mr. Chiang and Jiangsu Law may terminate the Chiang Agreement for enumerated reasons listed therein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information as of March 24, 2016, concerning, except as indicatedrequired by the footnotes below:
Unless otherwise noted below, the address of each of the persons set forth belowthis item is in care of China United Insurance Service, Inc., 7F, No. 311 Section 3, Nan-King East Road, Taipei City, Taiwan.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicatedincorporated by the footnotes below, we believe, based onreference to the information furnishedunder the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” to us, that the persons and entities namedbe contained in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.Proxy Statement.
Applicable percentage ownership is based on 29,452,669 shares of common stock and 1,000,000 shares of Series A Preferred Stock outstanding at March 24, 2016. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
The information provided in the table is based on our records, information filed with the SEC, and information provided to us, except where otherwise noted.
| Shares | Beneficially | Owned Preferred | % Total | |||||||||||||||||
| Common | Stock | Series A | Stock | Voting | ||||||||||||||||
| Name | Shares | % | Shares | % | Power(1) | |||||||||||||||
| Executive Officers and Directors | ||||||||||||||||||||
| Yi Hsiao Mao | 4,640,234 | (2) | 15.8 | 1,000,000 | 100 | 37.1 | ||||||||||||||
| Shu Fen Lee | 4,640,234 | (2) | 15.8 | 1,000,000 | 100 | 37.1 | ||||||||||||||
| Fu Chang Li | 800,000 | 2.7 | - | - | 2.0 | |||||||||||||||
| Chwan Hau Li | 1,352,166 | 4.6 | - | - | 3.4 | |||||||||||||||
| Kuei Chiao Chen | 0 | 0 | - | - | 0 | |||||||||||||||
| All executive officers and directors as a group (5 persons) | 6,792,400 | 23.1 | 1,000,000 | 100 | 42.6 | |||||||||||||||
| Other 5% Beneficial Owners | ||||||||||||||||||||
| Able Capital Holdings Co., Ltd. | 1,648,700 | 5.6 | - | - | 4.2 | |||||||||||||||
(1) Percentage total voting power represents voting power with respect to all shares of our common stock and Series A Preferred Stock, voting together as a single class. Each holder of common stock is entitled to one vote per share of common stock and each holder of Series A Preferred Stock is entitled to 10 votes per share of Series A Preferred Stock on all matters submitted to our stockholders for a vote.
(2) Includes 200,000 shares of common stock held by Shu Fen Lee, Yi Hsiao Mao’s spouse, 200,000 shares of common stock held by Mao Chieh Li, Yi Hsiao Mao’s daughter, 969,322 shares of common stock held by U-Li Investment Consulting Enterprise Co., Ltd. and 100,000 shares of common stock held by U-Link International CO LTD, Yi Hsiao Mao and Shu Fen Lee hold 34% and 66% shares of U-Li Investment Consulting Enterprise Co., Ltd. respectively and U-Link International CO LTD is solely owned by Lee Shu Fen, Mao Yi Hsiao’s spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Loans
The related parties below loaned money to the Company for working capital. As of the dates below, the following amounts were due to the related parties.
| June 30, | June 30, | December 31, | December 31, | December 31, | ||||||||||||||||
| 2012 | 2013 | 2013 | 2014 | 2015 | ||||||||||||||||
| Due to Mr. Mao (Shareholder of China United) | $ | 1,871 | $ | 71,487 | $ | 117,471 | $ | 214,165 | $ | 297,414 | ||||||||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li) | - | - | - | - | 32,223 | |||||||||||||||
| Due to Ms. Zhu | 441,272 | 1,099,331 | - | - | - | |||||||||||||||
| Due to Mr. Zhu (Legal representative of Jiangsu Law) | 2,139 | - | 2,265 | 2,255 | 2,133 | |||||||||||||||
| Due to Mrs. Lee (Director of China United) | - | 566,478 | 35,062 | 315,027 | 826 | |||||||||||||||
| Due to Multiple Capital Enterprise | - | - | - | - | 608,941 | |||||||||||||||
| Due to other shareholders | - | - | - | - | 4,395 | |||||||||||||||
| Total | $ | 445,332 | 1,737,296 | $ | 154,798 | $ | 531,447 | $ | 945,932 | |||||||||||
The term for the loan from Mrs. Leeinformation required by this item is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The borrowing from other related parties are interest-free, unsecured and repayable on demand.
During the six months ended December 31, 2013, Mr. Mao paid $54,679 on behalf of the Company for the operating expense and registered capital of AHFL’s Taiwan branch.
During the six months ended December 31, 2013, the company repaid Mrs. Lee $564,608 and Ms. Zhu Shu Qin $1,104,230.
During the year ended December 31, 2014, the Company borrowed $314,644 from Mrs. Lee and $96,694 from Mr. Mao.
In January 2015, the principal amount of loans from Mrs. Lee was fully repaid by the Company.
On December 25, 2015, the Company entered into a loan agreement (the “Short-term Loan Agreement) with Multiple Capital Enterprise Co., Ltd. The Short-term Loan Agreement provided for a $608,941 (NTD 20,000,000) loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on June 30, 2016. The entire loan and interest amount were paid off on January 11, 2016. A majority of Multiple Capital Enterprise’s shareholders are members of the Company’s management.
VIE Agreements
On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. The VIE Agreements now in effect included:
(1) An Exclusive Business Cooperation Agreement through which CU WFOE is appointed the exclusive services provider to provide Anhou with complete technical support, business support and related consulting services (as described in the agreement) in exchange for 90% of the net profits (as defined in the agreement) of Anhou. The agreement does not provide that CU WFOE is responsible for the debts of the Consolidated Affiliated Entities. The term of the Exclusive Business Cooperation Agreement began on January 17, 2011 and lasts ten years, unless earlier terminated as provide in the agreement. The term of the agreement may be extended at CU WFOE’s discretion prior to the expiration thereof. CU WFOE may terminate the agreement at any time with 30 days’ written notice but Anhou may only terminate the agreement if CU WFOE commits gross negligence or a fraudulent act against Anhou;
(2) a Power of Attorney under which the shareholders of Anhou have vested their collective voting control over Anhou to CU WFOE;
(3) an Option Agreement under which the shareholders of Anhou have granted to CU WFOE the irrevocable right and option to acquire all of their equity interests in Anhou, subject to applicable PRC laws and regulations. The term of the Option Agreement began on October 24, 2013 and lasts ten years, but may be renewed at CU WFOE’s election; and
(4) a Share Pledge Agreement under which the owners of Anhou have pledged all of their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the Exclusive Business Cooperation Agreement.
The foregoing description of the terms of the Exclusive Business Cooperation Agreement, the Power of Attorney, the Option Agreement and the Share Pledge Agreement is qualified in its entiretyincorporated by reference to the provisions ofinformation under the agreements filed as Exhibits 10.2caption “Certain Relationships and 10.55-10.57Related Transactions” to this report which are incorporated by reference herein.
Anhou owns 100% equity interest in both Sichuan Kangzhuang and Jiangsu Law. The shareholders of Anhou are Hu Changrong (20%), Wang Yanyan (20%), Chen Zhaohui (20%), Yue Jing (15%), Hou Weizhe (10%), Zhang Yong (9%) and Chen Li (6%).All of these shareholders are PRC citizens and none of them holds any sharesbe contained in the Company. Pursuant to the VIE Agreements, CU WFOE becomes the primary beneficiary of Anhou and only leaves Anhou shareholders nominal value therein. Please refer to the chart below for detailed information on any of the Company’s shareholders being a director or officer of the Company, the Company’s subsidiaries or our Consolidated Affiliated Entities.
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Proxy Statement.
156
Reclassification of Certain Common Stock into Preferred Shares
On July 2, 2012, the BOD and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Yi Hsiao Mao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000 common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification. Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Company.
Immediately prior to the Reclassification, the Common Stock beneficially owned by Mr. Mao, a director of the Company, represents 17.91% of the voting power of all of the Company’s voting power; immediately subsequent to the Reclassification, the Common Stock and the Series A Preferred Stock represents approximately 43.3% of the combined voting power of all of the Company’s voting stock.
Acquisition of AHFL
On August 24, 2012, the BOD and the shareholders of the Company have, through unanimous consent, approved the acquisition of all of the issued and outstanding shares of Action Holdings Financial Limited (“AHFL”), a LLC incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL becomes a 100% subsidiary of the Company.
Pursuant to the provisions of the Acquisition Agreement and in exchange for all of the issued and outstanding shares of AHFL, the Company will (i) issue eight million shares of common stock of the Company to the shareholders of AHFL; (ii) issue two million shares of common stock of the Company to certain employees of Law Broker; (iii) create an employee stock option pool, consisting of available options, exercisable for up to two million shares of common stock of the Company; and (iv) pay NT$15 million ($500,815) and NT$7.5 million ($250,095) in cash in two installments, subject to terms and conditions therein.
On March 14, 2013, the Company and the selling shareholders of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2 million employee stock option pool described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4 million shares of CUIS common stock, among which 2 million shares shall be solely granted to employees of Law Broker, and the remaining 2 million shares to be granted to employees of affiliated entities of the Company (including Law Broker employees).
On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the Acquisition Agreement (the “Second Amendment”), pursuant to which, the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL.
On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company is committed to complete the listing of the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least US$10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NT$22.5 million , on a pro rata basis, to the selling shareholders of AHFL and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the Selling Shareholders as if the said acquisition had never happened. The Company is doing its best to achieve the targeted milestones as set forth in the third Amendment to the Acquisition Agreement. However, given the tight schedule and harsh general environment, despite every efforts of the Company, it might be really difficult for the Company to do so within the stipulated deadline. Therefore, the Company is actually negotiating with the Selling Shareholders of AHFL to convince them to give up such termination rights in case of failure to comply with the first and second requirements under Third Amendment within the stipulated deadline while continuously using its best efforts to fulfill such obligations.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent”), a LLC incorporated in Taiwan on June 3, 2000.
Law Enterprise acts as a holding company of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not in active operation. We operate our Taiwan business primarily through Law Broker.
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan Government on November 26, 2014 and on January 13, 2015, respectively. In accordance with the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation.
As of the date immediately prior to the consummation of the Acquisition, certain shareholders of AHFL, including Mao Yi Hsiao, were also significant shareholders of the Company: (i) Yi Hsiao Mao, together with Shu Fen Lee (his wife) and Li Chieh Mao (his daughter), owned 17.9% of the outstanding shares of the Company and 24.3% of the outstanding shares of AHFL. Yi Hsiao Mao, one of the directors of the Company, also acts as the sole director of AHFL and the board chairman of Law Enterprise, Law Management and Law Agent, and as the supervisor of Jiangsu Law Broker Co., Ltd. In addition, Shu Fen Lee also acts as general manager of Law Enterprise and the board chairman of Law Broker; (ii) Hui Hsien Chao, a shareholder of AHFL and Law Agent, is also a shareholder of the Company. In addition, Chao Hui Hsien also acts as general manager of Law Broker and director of Law Enterprise and Law Agent; (iii) Yung Chi Chuang, a shareholder of AHFL, is also a shareholder and Chief Financial Officer of the Company; (iv) Tung Chi Hsieh, a shareholder of AHFL, is also a shareholder of the Company. In addition, Tung Chi Hsieh acts as the Chief Operating Officer of the Company; (v) Wen Ti Tu, a shareholder of AHFL, is also a shareholder of the Company. In addition, Wen Ti Tu acts as the assistant general manager of Law Broker; and (vi) Wen Che Shen, a shareholder of AHFL, is also a shareholder of the Company. In addition, Wen Che Shen acts as the assistant general manager of Law Broker.
Subsequent to the closing of the Acquisition, Yi Hsiao Mao holds 100% of the Company’s outstanding preferred shares, and holds, together with his affiliates, 15.6% of the Company’s outstanding common shares, and 37.2% of the voting power of the Company.
Acquisition of GHFL
On February 13, 2015, the Company and AHFL entered into an acquisition agreement with Mr. Chwan Hau Li, the selling shareholder of Genius Holdings Financial Limited (the “Selling Shareholder”), a company with limited liability incorporated under the laws of British Virgin Islands (“GHFL”)(the acquisition agreement hereafter referred to as “Genius Acquisition Agreement”), to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock (“AHFL Shares”) together with an granted put option for 352,166 shares of common stock of the Company (“Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the Selling Shareholder would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of the Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds approximately 15% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. The acquisition price may be further adjusted on the fourth anniversary of the closing date of the acquisition and depending on the earnings per share of GHFL during the fiscal years of 2014 through 2017, subject to other terms and conditions therein. Mr. Chwan Hau Li is the sole shareholder of GHFL and a director and shareholder of the Company. On February 13, 2015, the acquisition was completed, the Selling Shareholder transferred 100% shares in GHFL to AHFL. On March 31, 2015, the Selling Shareholder exercised the Put Option, pursuant to which, 704,333 shares of GHFL held by the Selling Shareholder were transferred back to CUIS as the consideration for 352,166 shares of common stock of CUIS, which were issued to the Selling Shareholder on April 29, 2015.
On February 17, 2016, the Company and AHFL entered into an amendment to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Li, pursuant to which, on or prior to February 28, 2016, (i) the Company is committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least USD 10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised. The right to revoke the Put Option has not been exercised as of March 24, 2016.
Intercompany Loan and Loans to Unrelated Third Parties
On June 9, 2013, Action Holdings Financial Limited (“AHFL”), a wholly-owned British Virgin Islands subsidiary of China United Insurance Service, Inc. (the “Company” or “CUIS”), entered into a Loan Agreement (the “Company Loan Agreement”) with ZLI Holdings Limited, a wholly-owned Hong Kong subsidiary of CUIS (the “HK Company”).
Under the Company Loan Agreement, AHFL agreed to provide a loan to the HK Company with the principal amount equal to the US Dollar equivalent of RMB 40,000,000 ($6,532,716). The term for such was ten (10) years which could be extended upon the agreement of the parties. The amount of such loan was remitted to the account of the HK Company on August 30, 2013.
In August 2013, the HK Company entered into several Loan Agreements (collectively, the “Investor Loan Agreements”) with the following unrelated parties: Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, Mr. Chen Li (“Mr. Chen”) and Ms. Yue Jing (Ms. Yue”), both PRC citizens (collectively, the “Investor Borrowers”).
Under the Investor Loan Agreements, the Investor Borrowers loaned cash from the HK Company for their investment in Henan Law Anhou Insurance Agency Co., Ltd. (“Anhou”) and the HK Company agreed to provide certain loans to each of the Investor Borrowers with an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,532,716). The term for such loans was ten (10) years which could be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers covenants to enter into certain Variable Interest Entities Agreements with Anhou, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. (the “WFOE”) and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers shall be solely used to increase the registered capital of Anhou, and the HK Company may determine the repayment methods including transferring of the Investor Borrowers’ corresponding registered capital in Anhou or through other manner as full payment of the loans subject to terms and conditions therein in the event that the Investor Borrowers fails to repay the loan in currency to the HK Company.
The specific amounts loaned to the Investor Borrowers were as follows:
Able: RMB29,500,000 ($4,817,896)
Mr. Chen: RMB3,000,000 ($489,949)
Ms. Yue: RMB7,500,000 ($1,224,871)
On January 14, 2015, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Law Broker, a wholly owned Taiwan subsidiary of Law Enterprise. Law Enterprise is a 65.95% owned Taiwan subsidiary of AHFL. Pursuant to the Loan Agreement, Law Broker will provide a loan in the amount of $632,491 (NTD20 million) (the “Loan”) to AHFL. The term for the Loan shall be from January 14, 2015 to December 31, 2015 with a fixed yearly interest rate at 1.5%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum prior to December 31, 2015. In the event that AHFL fails to repay the principal amount of the Loan together with the accrued interest on due time, AHFL shall pay twice of the fixed rate as the penalty to Law Broker. On December 30, 2015, the Loan was duly paid off by AHFL.
On January 4, 2016, Action Holdings Financial Limited Taiwan Branch (hereafter referred to as “AHFLTW”), a branch of AHFL which is a wholly-owned British Virgin Islands subsidiary of CUIS, entered into a loan agreement with Law Insurance Broker Co., Ltd. (“Law Broker”) (the loan agreement hereafter referred to as the “Loan Agreement with Law Broker”). Law Broker is a wholly owned Taiwan subsidiary of Law Enterprise Co., Ltd. (“Law Enterprise”). Law Enterprise is a 65.95% owned Taiwan subsidiary of AHFL. Mao Yi Hsiao, one of the directors of the Company, also acts as the board chairman of Law Enterprise. In addition, Lee Shu Fen, a director of the Company, also acts as general manager of Law Enterprise and the board chairman of Law Broker.
Pursuant to the Loan Agreement with Law Broker, Law Broker will provide a loan in the amount of 30 million New Taiwan Dollars (NT$) (approximately US$893,682) (the “Loan from Law Broker”) to AHFLTW. The term for the Loan shall be from January 12, 2016 to December 31, 2016 with a fixed annual interest rate at 1.5%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before December 31, 2016.
On January 15, 2016, AHFLTW entered into a loan agreement with Law Enterprise (the loan agreement hereafter referred to as the “Loan Agreement with Law Enterprise”).
Pursuant to the Loan Agreement with Law Enterprise, Law Enterprise will provide a loan in the amount of 10 million NT$ (approximately US$297,894) (the “Loan from Law Enterprise”) to AHFLTW. The term for the Loan shall be from February 15, 2016 to December 31, 2016 with a fixed annual interest rate at 1.5%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before December 31, 2016.
On February 15, 2016, AHFLTW entered into a loan agreement with Law Enterprise (the loan agreement hereafter referred to as the “Loan Agreement No. 2 with Law Enterprise”). Law Enterprise is a 65.95% owned Taiwan subsidiary of AHFL while AHFL is a 100% owned subsidiary of the Company. Mao Yi Hsiao, one of the directors of the Company, also acts as the board chairman of Law Enterprise. In addition, Lee Shu Fen, a director of the Company, also acts as general manager of Law Enterprise and the board chairman of Law Broker.
Pursuant to the Loan Agreement No. 2 with Law Enterprise, Law Enterprise will provide a loan to AHFLTW in the amount of 7 million NT$ (approximately US$210,456). The term for the Loan shall be from February 15, 2016 to December 31, 2016 with a fixed annual interest rate at 1.5%. The principal amount of the loan together with the accrued interest shall be paid in one lump sum before December 31, 2016.
Recent development of relevant laws and background of the loans
On April 27, 2013, the China Insurance Regulatory Commission (“CIRC”) issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8,165,895). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million ($8,165,895), can continue to operate their existing business within the provinces where they have a registered office or branch office, but shall not set up any new branches in any provinces where they do not have a registered office or a branch office.
On September 26, 2013, several new PRC individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong, Chen Li (“Anhou New Investors”) and the original shareholders of Anhou, namely, Zhu Shuqin, Wei Qun, Fang Qunlei and Chen Yanxia (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou (the “Capital Increase Resolution”), pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million ($8,165,895), among which, Wang Yanyan would invest RMB10 million ($1,633,179), accounting for 20%, Chen Zhaohui would invest RMB10 million ($1,633,179), accounting for 20%, Yue Jing would invest RMB7.5 million ($1,224,871), accounting for 15%, Hou Weizhe would invest RMB5 million ($816,589), accounting for 10%, Zhang Yong would invest RMB4.5 million ($734,930), accounting for 9%, and Chen Li would invest RMB3 million ($489,949), accounting for 6%, of the registered capital of Anhou.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, Hou Weizhe and Zhang Yong, to invest in Anhou on its behalf.
On October 24, 2013, Anhou completed the registration with local Administration Industry and Commerce (“AIC”) on the above-mentioned capital increase. The new business license was issued to Anhou on October 25, 2013.
On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer price of RMB10 million ($1,633,178). Mr. Hu is currently the legal representative and the sole director of Anhou.
On October 24, 2013, Anhou completed the share transfer registration with the local AIC. At the end of October 2013, Anhou completed its filing with Local CIRC with respect to its previously-conducted share transfer and capital increase.
As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect.
Insider Transactions Policies and Procedures
The Company does not currently have an insider transaction policy.
Director Independence
All of the Company’s directors except Mr. Mao and Ms. Lee are “independent directors” as defined by the NYSE Amex Stock Exchange.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Simon & Edward LLP (“Simon & Edward”) has served as our independent auditors for the transitional period from July 1, 2013 to December 31, 2013 and for the fiscal years ended December 31, 2014 and 2015. During the periods, fees for services billed by Simon & Edward were as follows:
2015 | 2014 | Transition Period | ||||||||||
| Audit fees(1) | $ | 293,500 | $ | 275,500 | $ | 127,500 | ||||||
| Audit-related fees(2) | 16,405 | 6,828 | - | |||||||||
| Tax fees(3) | 27,200 | 20,000 | - | |||||||||
| All other fees | - | - | - | |||||||||
| Total | $ | 337,105 | $ | 284,328 | $ | 127,500 | ||||||
(1) Consists of fees billed for the audit of our transition financial statements, and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(2) Consists of fees billed for all out-of-pocket expenses associated with performing auditThe information required by this item is incorporated by reference to the information under the caption “Principal Accounting Fees and review services.Services” to be contained in the Proxy Statement.
(3) “Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
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Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit service performed by Simon & Edward for our consolidated financial statements as of December 31, 2014 and 2015, and for the transitional period from July 1, 2013 to December 31, 2013.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Index of Financial Statements:
| (1) | The financial statements required by Item 15(a) are filed in Item 8of Part II, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. | |
| (2) | Schedules required by Item 15(a) are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto. | |
(b) Index of Exhibits:
| 113 |
| 10.21 | Jiangsu Law Share Transfer Agreement, dated September 28, 2010, by and between Anhou and Zhu Xumin | |
| 10.22 | Translation of Insurance Agency Contract, | |
| Translation of Creditors Right Subrogation Agreement, dated March 31, 2011, by and between Jin, Yong-Guang and Li, Fu-Chang (incorporated by reference to Exhibit 10.31 to the Form S-1/A filed with the SEC on November 14, 2011). |
| 114 |
| 10.24 | Translation of Debt Waiver Agreement, dated March 31, 2011, by and between Fu Chang Li and Henan Law Anhou Insurance Agency Co., Ltd. (incorporated by reference to Exhibit 10.32 to the Form S-1/A filed with the SEC on November 14, 2011). | |
| Translation of Employment Agreement, |
| 115 |
| 116 |
| Engagement Agreement, dated January | ||
| Translation of Loan Agreement, | ||
| 10.51 | Translation of Loan Agreement No. 2, dated February 15, 2016, by and between Action Holdings Financial Limited Taiwan Branch and Law Enterprise Co., Ltd. | |
| Translation of Loan Agreement, dated January 4, 2016, by and between Action Holdings Financial Limited Taiwan Branch and Law Insurance Broker Co., Ltd. |
| 117 |
| 118 |
| 32.1* | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 119 |
*The certifications attached as Exhibits 32.1 and 32.2 accompany this annual report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Yi Hsiao Mao | Chief Executive Officer | March | ||
| Yi Hsiao Mao | (Principal Executive Officer) | |||
| /s/ Yung Chi Chuang | Chief Financial Officer | March | ||
| Yung Chi Chuang | ||||
| (Principal Executive Officer) | ||||
| /s/ Fu Chang Li | Director | March | ||
| Fu Chang Li | ||||
| /s/ Chwan Hau Li | Director | March | ||
| Chwan Hau Li | ||||
| /s/ | Independent Director | March | ||
| /s/ | Independent Director | March | ||
| /s/ Chun Hui Yang | Independent Director | March 15, 2018 | ||
| Chun Hui Yang | ||||
| /s/ Tse Hsun Niu | Independent Director | March 15, 2018 | ||
| Tse Hsun Niu |
| 120 |
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