On January 17 2014, our board of directors approved a change in our fiscal year end to December 31 from June 30.
Our Consolidated Affiliated Entities in China are variable interest entities through which part of our insurance services are operated. It is through the VIE Agreements that it has effective control of the Consolidated Affiliated Entities, which allows us to consolidate the financial results of the Consolidated Affiliated Entities in our financial statements. If Anhou and its shareholders fail to perform their obligations under the VIE Agreements, it could be limited in its 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. On January 19, 2015, MOFCOM published 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 January 17, 2014, our Board of Directors approved a change in our fiscal year end to December 31 from June 30.
The cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the year ended December 31, 2016 increased by $11,130,733 or 31%, to $46,554,495 compared with $35,423,762 for the year ended December 31, 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 accordingly.
For the year ended December 31, 2016, the income tax expense was $2,119,598, an increased of $600,372, or 40%, compared with $1,519,226 for the year ended December 31, 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 cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the year ended December 31, 2015 increased by $5,015,644 or 16%, to $35,423,762 compared with $30,408,118 for the year ended December 31, 2014. The cost of revenue increased with the increase in revenue.
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, the Company operates its business primarily through its 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 exercises 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. The Company does not hold equity interests in its CAE. However, through the VIE Agreements with these CAE and their respective shareholders, the Company effectively control, and are able to derive substantially all of the economic benefits from, these CAE, which allows the Company to consolidate the financial results of the CAE in its financial statements.
Equity investment - The fair value of the Company’s equity investment is unobservable data point and include situations where there is little, if any, market activity.
Convertible bonds - The Company determined the fair value of the convertible bonds is based on the average closing trading price for the 10 business days immediately prior to the conversion date times 80%.
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, and two subsidiaries of Anhou.
The FV 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 FV of assets acquired and liabilities assumed as goodwill. No intangible assets were identified as of the acquisition date. As of December 31, 2016, there were no indications of the impairment of the goodwill.
Provision (benefit) for income taxes for the year ended December 31, 2014 consists of:
Except for the aforementioned loan, the loan due to related parties bore no interest and were payable on demand.