Jiangsu Law’s office is located at No. 888 Jintong Road, Xingren County, Tongzhou District, Nantong City, Jiangsu province, China, with 21,527 square feet (2,000 square meters) of office space. The lease was between Xiangriya Industrial (Nantong) Co., Ltd., which is an affiliate of Yi-Hsiao Mao. The lease term is from January 1, 2021 to December 31, 2021, with rent of RMB10,917 ($1,680) per month.
We are a Delaware corporation, incorporated on June 4, 2010 by Mr. Mao, as a holding company for both ZLI Holdings Limited (“CU Hong Kong”) and Action Holdings Financial Limited (“AHFL”, a company incorporated in the British Virgin Islands). Our common stock is quoted over the counter under the ticker symbol “CUII” on the OTCQB. The Company primarily engages in brokerage and insurance agency services by providing two broad categories of insurance products, life insurance products and property and casualty insurance products, and conducts its business primarily in three geographic operating segments, Taiwan, the PRC, and Hong Kong. The insurance products that the Company’s subsidiaries sell are underwritten by certain leading insurance companies in Taiwan, the PRC and regions and countries near the PRC.
Through our Consolidated Affiliated Entities in the PRC segment, we had two insurance agencies, one brokerage and 37 service outlets with 1,553 full-time sales professionals and 100 administrative staff in the PRC segment as of December 31, 2020. Our PRC segment contributed 5.2% of total revenue of the Company for the year ended December 31, 2020.
Our Hong Kong segment mainly consists of one operating subsidiary, which acts as a broker for reinsurance products and earns commissions on sales of insurance products from other insurers. As of December 31, 2020, we had one sales and service outlet (including the headquarters) with no sales professionals and one administrative staff in Hong Kong segment.
As COVID-19 and its duration remain uncertain, we have been monitoring and will continue to measure and modify our business to protect our customers, sales professionals and employees. The extent of the COVID-19 impact to the Company will depend on numerous factors and developments. Consequently, any potential impacts of COVID-19 remain highly uncertain and cannot be predicted with confidence.
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of financial statements requires us 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. We make these estimates using the best information available when they are made. However, actual results could differ materially from those estimates.
We believe critical accounting policies involve the most complex, difficult and subjective estimates and judgments are as follows:
● Recognition of stock-based compensations and the valuation of fair value to equity securities due to multi- performance targets with counter parties in the arrangement; and
Overall revenue from our Taiwan segment increased by $30.4 million, or 34.9%, from $87.1 million for the year ended December 31, 2019 to $117.5 million for the same period ended December 31, 2020. We continued to deliver solid financial results through our Taiwan segment due to the following reasons:
The revenue in the Hong Kong segment primarily derived from reinsurance commission on sales of insurance products from other insurers to Taiwan Life Insurance Co., Ltd. (“Taiwan Life”) for risk management. Overall revenue from our Hong Kong segment for the year ended December 31, 2020 remained consistent with the same period in 2019.
The cost of revenue mainly consists of commissions paid to our sales professionals. Our commission policy to our sales professionals designs to divide sales target into smaller and more attainable targets and provides more incentives to our sales professionals to improve the achievement rate, especially for the first-year commissions.
The cost of revenue for the year ended December 31, 2020 increased by $22.4 million or 34.2%, to $87.7 million compared to $65.3 million for the year ended December 31, 2019. This increase was primarily due to increases in the direct commission cost as a result of the growth of the first-year commissions earned from insurance companies. In addition, the growth in the revenue also resulted in increasing indirect commission cost due to the high achievement rate of the sales target.
Accordingly, the cost of revenue increased more than the proportional increase of revenue, causing a decrease in the gross profit margin by 2.5% from 31.9% for the year ended December 31, 2019 to 29.4% for the year ended December 31, 2020.
For the year ended December 31, 2020, income tax expense was $3.4 million, an increase of $0.7 million or 26.0%, compared with $2.7 million for the year ended December 31, 2019. The increase was mainly due to a supplementary tax payment of $0.3 million related to withholding tax matters and more taxes on undistributed earning accrued because of more revenues generated in the Taiwan segment during the year of 2020.
Our primary sources of liquidity are cash and cash equivalents, time deposits, marketable securities, and cash generated from operations. Cash available from operations, including our cash, time deposits, and borrowings under our revolving line of credit, will be sufficient for our working capital needs, including commissions payable to sales professionals, performance bonus payable to management,
Net cash provided by operating activities for the year ended December 31, 2020 was $3.3 million in comparison with net cash of $5.4 million provided by operating activities for the year ended December 31, 2019. The decrease of $2.1 million or 39.1% was mainly due to more general operating expenditures paid during the year of 2020 as a result of the business expansion of Uniwill.
Net cash used in investing activities was $13.8 million for the year ended December 31, 2020 in comparison with net cash of $13.1 million used in investing activities for the year ended December 31, 2019. The increase in the cash outflows of 0.7 million used in investing activities resulted from purchases of more equipment during the year of 2020.
Net cash provided by financing activities was $5.4 million for the year ended December 31, 2020 in comparison with net cash of $0.4 million used in financing activities for the year ended December 31, 2019. The cash inflows from the financing activities for the year ended December 31, 2020 was mainly due to the proceeds of $27.2 million but offset by the repayments of credit facilities of $21.5 million.
(3) Capital commitment related to the Joint Venture Agreement (the “JV Agreement”) with non-related parties with AIlife, see Note 12 to our 2020 consolidated financial statements.
We have audited the accompanying consolidated balance sheet of China United Insurance Services Inc. and subsidiaries (the “Company”) as of December 31, 2020, and the related consolidated statements of operations and other comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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.
Our audit procedures related to management’s conclusion on amount, timing and presentation of revenue recognition, as well as the estimates of total costs and fees for the performance obligations that recognize the revenue include the following, among others:
● We will submit and obtain the revenue and accounts receivable confirmations for a selection of insurance companies.
oTest the accuracy and completeness of the costs incurred to date for the performance obligation.
oTest the mathematical accuracy of management’s calculation of revenue for the performance obligation.
On November 15, 2019, AIlife entered into a Joint Venture Agreement (the “JV Agreement”) with two non-related entities (collectively, the “Labor Parties”) and agreed to invest funds, labor, and technology into Uniwill. Pursuant to the JV Agreement, the paid-in capital of Uniwill should increase to an aggregate amount of $13.3 million (NTD 400 million) by AIlife, provided that the Labor Parties fulfill their commitments no later than December 31, 2021. On August 15, 2019, AIlife increased and completed the capital injections in Uniwill to the amount of $3.3 million (NTD 100 million).
According to the term of the JV Agreement, the Labor Parties shall be entitled of 9,608 preferred stock if the following milestones are met:(a) the registered number of insurance business professional sales of Uniwill is more than 200, (b) the business performance shall reach FYB NTD 5 million or more, and (c) one of two employees of the Labor Parties designated by AIlife shall join Uniwill within 6 months after the paid-in capital of Uniwill increased to NTD 100 million (hereinafter refer to the “performance target”). The preferred stock shall provide for (a) the right to receive a distribution of 50% of the net-income of Uniwill, (b) the right to convert such preferred stock into common stock at 1 to 1000 after the date when the registered number of sales reaches 1,000 and FYC reaches NT$250 million, (c) the right to elect directors, (d) the voting rights owned by the Company and the Labor Parties should be 51:49 due to 1,000 voting right per preferred stock, and (e) the number of the preferred stock to the Labor Parties shall be issued along with the proportion when the paid-in capital of Uniwill increases to NTD 400 million once the registered number of sales reaches 1,000.
On February 10, 2020, the grant date, Uniwill issued a total of 9,608 preferred stock (the “initial preferred stock”) to the Labor Parties for cash and recognized compensation cost when the performance target was achieved. The Company determined that each of the preferred stock has a value of approximately $102 (NTD 3,070) using the Black-Scholes-Merton option pricing model. Compensation cost of $980,466 was recognized on the grant date when the performance target was achieved.
In December 2020, when the registered number of sales reaches 1,000, the Labor Parties are entitled of the incremental preferred stock of 28,823. Each incremental preferred stock (the “incremental preferred stock”) to be issued along with the proportion of the paid-in capital has a value of approximately $16 (NTD 437), and the compensation cost of $447,137 was recorded. For the year ended December 31, 2020, a total of the compensation cost related to the JV agreement was $1,427,603, which was considered as the Labor Parties’ contributions to Uniwill.
● A high degree of subjective auditor judgment was involved in evaluating certain inputs to the model used to determine the fair value of the equity securities. We will assess methodologies and testing the significant assumptions and underlying data used by the Company.
● Consider management’s policy of reviewing valuation methodologies, inputs and assumptions utilized by third-party valuation services.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2019, and the results of their operations and their cash flows for the year in the period ended December 31, 2019, 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, 2019, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
China United Insurance Service, Inc. (“China United” or “CUII”), its subsidiaries and variable-interest entities (collectively referred to herein as the “Company”) primarily engages in brokerage and insurance agency services. The Company markets and sells 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 are underwritten by some of the leading insurance companies in Taiwan and China. The Company manages its business through aggregating them into three geographic operating segments, Taiwan, the PRC, and Hong Kong. The Company’s common stock currently trades over the counter under the ticker symbol “CUII” on the OTCQB.
On June 4, 2019, AIlife entered into an acquisition agreement with the selling shareholder of Uniwill Insurance Broker Co., Ltd (“Uniwill”), Pursuant to the acquisition agreement, AIlife agreed to pay $14,535 (NTD 450,000) in exchange for the insurance brokerage licenses issued to Uniwill by the Taiwanese government, along with right to the Uniwill company name and $6,455 (NTD 200,000) of legal deposits. The Company has no intention of operating the Uniwill existing brokerage business nor retaining any of its sales personnel. Therefore, the transaction was accounted for an asset acquisition.
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results may differ from those estimates and assumptions.
Pursuant to the EBCA, (a) WFOE has the right to provide Anhou with complete technical support, business support and related consulting services during the term of the EBCA; (b) Anhou agrees to accept all the consultations and services provided by WFOE. Anhou further agrees that unless with WFOE’s prior written consent, during the term of the EBCA, 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 the EBCA; (c) Anhou shall pay WFOE fees equal to 90% of the net income of Anhou, and the payment is quarterly; and (d) 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 the EBCA. The term of the EBCA is 10 years and may be extended and determined by WFOE prior to the expiration thereof, and Anhou shall accept such extended term unconditionally.
To extend the business within the PRC, Anhou intended to increase its registered capital to RMB50 million (approximately $8 million) to meet the requirement of the China Insurance Regulatory Commission (the “CIRC”) so that it can set up new branches in any province beyond its current operations in China. China United increased the investment in Anhou through various loan agreements with the shareholders of Anhou. Due to the capital increase, a series of variable interest agreements (the “Second VIE Agreements”), which include Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, were signed on October 24, 2013 and entered in the same form as the First VIE Agreements, other than the change of shareholder names and their respective shareholdings. The First VIE Agreements were terminated by and among WFOE, Anhou and Anhou original shareholders on the same date. The EBCA executed by and between WFOE and Anhou on January 17, 2011 remains in full effect.
As a result of the Second VIE Agreements, WFOE is considered the primary beneficiary of Anhou and has effective control over Anhou. Accordingly, the results of operations, assets and liabilities of Anhou and its subsidiaries (collectively, the “Consolidated Affiliated Entities” or the “CAE”) are consolidated from the earliest period presented. The Company reviews the VIE’s status on an annual basis and determine if any events have occurred that could cause its primary beneficiary status to change, which 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; and (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. For the years ended December 31, 2020 and 2019, no event took place that would change the Company’s primary beneficiary status.
The Company invests part of its excessive cash in equity securities and money market funds. Marketable securities represent securities bought and held primarily for sale in the near-term to generate income on short-term price differences and are stated at fair value. Realized and unrealized gains and losses are recorded in other income (expense).
Accounts receivable include commission receivables stated at net realizable values. The Company reviews its 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 customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2020 and 2019.
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 was no impairment recognized for the years ended December 31, 2020 and 2019.
The Company measures equity investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% using cost method, and no changes in fair value is recognized in net income (loss) for the equity investments accounted for the cost method. The Company's cost method investments are carried at cost and adjusted for other-than-temporary declines in fair value. The Company evaluates its investments for impairments annually and when factors indicate that a significant decrease in value has occurred. Factors considered in making such assessments may include near-term prospects of the investees and the investees' capital structure, as well as other economic variables which reflect assumptions market participants may use in pricing these assets. If an investment is deemed to have experienced an other-than-temporary decline below its cost basis, the Company reduces the carrying amount of the investment to its quoted or estimated fair value, as applicable, and establish a new cost basis for the investment.
The Company expenses all advertising costs, which include promotions and branding, as incurred. The Company incurred $237,418 and $238,648 in advertising and marketing costs during the years ended December 31, 2020 and 2019, respectively.
The Company’s revenue is derived from insurance agency and brokerage services. The Company, through its subsidiaries and variable interest entities, sells insurance products provided by insurance companies to individuals, and is compensated in the form of commissions from the respective insurance companies, according to the terms of each service agreement made by and between the Company and the insurance companies. The sale of an insurance product by the Company is considered complete when initial insurance premium is paid by an individual and the insurance policy is approved by the respective insurance company. When a policy is effective, the insurance company is obligated to pay the agreed-upon commission to the Company under the terms of its service agreement with the Company and such commission is recognized as revenue.
The Company considers the contracts with insurance companies contain one performance obligation and consideration should be recorded when performance obligation is satisfied at point in time. The amount of revenue to be recognized when the insurance policy is effective includes first year commission and other contingent commission that a significant reversal of revenue would not occur in the subsequent periods. When other contingent commission that could not be determined if a significant reversal of revenue would occur, the Company recognizes the commission after receiving insurance companies' notice.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, time deposits, restricted cash, register capital deposits and accounts receivable. As of December 31, 2020, and 2019, approximately $2,229,000 and $2,293,000 of the Company’s cash and cash equivalents, time deposits, restricted cash, and register capital deposits held by financial institutions, was insured, and the remaining balance of approximately $63,222,000 and $50,108,000, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have collectability concern.
For the years ended December 31, 2020 and 2019, the Company earns commission revenues from an insurance company individually more than 10%of the total revenue of the Company were:
(*)The related accounts receivable for the year ended had not exceeded 10% or more of the consolidated accounts receivable.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions in which the reference LIBOR or another reference rate are expected to be discontinued as a result of the Reference Rate Reform. The standard is effective for all entities. The standard may be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022. We are currently evaluating the effects of the standard on our consolidated financial statements and related disclosures.
Time deposits are short-term bank deposits with maturities of more than three months but less than one year at the date of origination and consisted of the following:
The deposits are presented at their cost, including accrued interest. The deposits bear annual interest rates ranging from 0.05% to 2.60% and from 0.24% to 3.53% during 2020 and 2019, respectively.
Property and equipment consisted of the following, as of December 31, 2020 and 2019:
Depreciation expense was $730,263 and $452,266 for the years ended December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, the Company’s intangible assets consisted the following:
According to Taiwan Regulations Governing Deposit of Bond and Acquirement of Insurance by Insurance Agents, Insurance Brokers and Insurance Surveyors (“RGDBAI”) Article 3 and 4, Law Broker is required to maintain a minimum of NTD 3,000,000 ($106,848 and $100,156 as of December 31, 2020 and 2019, respectively) restricted balance in a separate account or government bonds issued by the central government in order to maintain its insurance license. The government bonds are valued based on theoretical bond price in Taipei Exchange.
Commissions payable to professionals consisted of the following as of December 31, 2020 and 2019:
The Company’s short-term loans consisted of the following as of December 31, 2020 and 2019:
Borrowings under the revolving credit agreements are generally due 90 days or less. Total interest expenses incurred from the credit facilities were $200,900 and $199,979 for the years ended December 31, 2020 and 2019, respectively.
Other current liabilities consisted of the following as of December 31, 2020 and 2019:
The Company’s foreign subsidiaries have various bonus plans, which provide cash awards to employees based upon their performance, and had accrued bonus of $5,948,157 and $4,057,515, respectively, related to cash awards to employees as of December 31, 2020 and 2019. The Company has other compensation plans solely provided by Law Broker to its officers.
The Company’s other liabilities consisted of the following as of December 31, 2020 and 2019:
Due to previous shareholders of AHFL is the entire remaining balance payable of the 2012 acquisition cost. On March 27, 2019, the Company and the selling shareholders of Action Holdings Financial Limited (“AHFL”) entered into a sixth amendment to the acquisition agreement, pursuant to which, the Company will make the cash payment in the amount of NTD15 million on or prior to March 31, 2021. In March 2021, the Company entered a seventh amendment with the selling shareholders is in negotiation with the previous shareholders of AHFL to extend the repayment date to March 31, 2024. The amount consisted of 68% and 32% of payables due to related parties and third parties, respectively. As of December 31, 2020 and 2019, the amount due to previous shareholders of AHFL were $534,240 and $500,782, respectively.
On February 10, 2020, the grant date, Uniwill issued a total of 9,608 preferred stock (the “initial preferred stock”) to the Labor Parties for cash and recognized compensation cost when the performance target was achieved. During the fourth quarter of 2020, the Company and the Labor Parties conducted a business projection review and discovered that the sales professional retention rate was not considered in the initial business projection plan. As a result, the fair value of the preferred stock was reevaluated and updated to include the consideration of the sales professional retention rate. The Company determined that each of the initial preferred stock has a value of approximately $102 (NTD 3,070) using the Black-Scholes-Merton option pricing model and restated its interim consolidated financial statements previously filed during the year 2020 (see Note 25). Compensation cost of $980,466 was recognized for the initial preferred stock issued.
On March 3, 2021, the Labor Parties and AIlife entered to an amendment to the JV agreement (the “Amendment”) and agreed that the final paid-up capital of Uniwil will be NTD 400 million and the paid-up capital of initial stage is NTD100 million. AIlife is obligated to fulfill its NTD 400 million paid-in capital within eight years after the registered number of sales exceeds 1,000 and the cumulative revenue of Uniwill reaches NTD 8.7 billion. If the cumulative revenue of NTD 8.7 cannot be met, AIlife shall contribute the same percentage of such NTD 400 million obligation in accordance with the actual cumulative revenue to NTD 8.7 billion.
The assumptions used and the calculated fair value of the preferred stock on the grant date were as follows:
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.
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.
Fully Paid and Nonassessable. All of the Company’s outstanding shares of preferred stock are fully paid and nonassessable.
Information about accounts receivable, contract assets, and contract liabilities from contracts with customers is as follows:
Contract assets are the Company’s conditional rights to consideration for completed performance obligation and are in relation to the performance bonus to be rewarded based on the annual performance. The Company recognizes the contingent commission as a contract asset when the performance obligation is fulfilled, and the Company has not had the unconditional rights to the payment. As of December 31, 2020 and 2019, the Company had nil of contract assets.
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”), the purpose of which is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or China United. 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 of 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 January 6, 2016, AHFL entered into an Amendment No. 2 to the Alliance Agreement (the “Second Amendment to the Alliance Agreement”) 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 Second Amendment to the Alliance Agreement, the expiration date of the Strategic Alliance Agreement was extended from May 31, 2018 to December 31, 2021, and the effect of the 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 Alliance Agreement, some of which are as follows: (i) expanding 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) removing 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.
5) For the year ended December 31, 2019, the Company recognized the fifth contract year’s revenue amount of $306,961 (NTD9,481,371), net of VAT, and refund the amount of $710,545 (NTD 21,947,200), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency.
As of December 31, 2020 and 2019, the Company had non-current portion of contract liabilities of nil and $1,049,258, respectively, and current contract liabilities of $1,119,361 and 1,781,975, respectively, related to the Alliance Agreement.
The Company adopted ASC 842 as of January 1, 2019 using a modified retrospective transition with no adjustment to its comparative periods in the year of transition. The Company elected the practical expedients, which allow the Company not to reassess prior conclusions with respect to lease identification, lease classification and initial direct costs under ASC 842. The Company did not elect the hindsight practical expedient to determine the lease term or in assessing the likelihood that a lease purchase option will be exercised. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets of $4.0 million and corresponding operating lease liabilities of $3.7 million as of January 1, 2019 on the consolidated balance sheet.
Provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 consisted of:
Management determined that it was unlikely that the Company’s deferred tax assets from the net operating loss in the PRC and China United would be realized and provided a full valuation allowance against the deferred tax assets. In the PRC, the net operating losses generated in a tax year can be carryforward for ten years. The 2017 Tax Act allows the net operating losses generated after December 31, 2017 to be carryforward indefinitely, whereas the operating losses generated in tax years prior to December 31, 2017 can only be carryforward for twenty years.
The following table reconciles the Company’s statutory tax rates to effective tax rates for the years ended December 31, 2020 and 2019:
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 8.25% on the estimated assessable profits. As of December 31, 2020 and 2019, the Company had current tax payable of $13,613 and $56,993 for Hong Kong income tax.
The 2017 Tax Act was enacted into law on December 22, 2017 and imposed a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The one-time transition tax, based on the Company’s total post-1986 earnings and profits (“E&P”) that it previously deferred from U.S. income taxes, was recorded at $1,199,195 for the transition tax on undistributed earnings of non-U.S. subsidiaries during the year ended December 31, 2018. As of December 31, 2020, and 2019, the Company had current tax payable of $153,787 and $101,518 and noncurrent tax payable of $719,515 and 815,451 for U.S. income tax.
The 2017 Tax 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 the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s net CFC tested income over the net deemed tangible income return, which is currently defined as the excess of (a) 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 U.S. shareholder over (b) the amount of certain interest expense taken into account in the determination of net CFC-tested income. For the year ended December 31, 2020 and 2019, the Company did not have any GILTI tax obligation.
Due to related parties consisted of the following as of December 31, 2020 and 2019:
On April 10, 2020, the Company submitted a written certification (the "Certification") to the SEC of its compliance with the undertaking indicated by the Final Judgment entered into on January 18, 2019 in front of the United States District Court for the Southern District of New York (SEC v. China United Ins. Serv., Inc., No. 18 Civ. 12055, Consent of Defendant China United Insurance Service, Inc. (ECF No. 3-1) (S.D.N.Y Dec. 20, 2018)) requiring the Company to retain an independent compliance monitor ("Independent Monitor") for a period of not less than one year. The Independent Monitor was mandated to review and evaluate the Company's commitment to and implementation of a revised compliance program and to submit a final report to the SEC with respect to these matters. The Company reviewed the Independent Monitor's final report submitted to the SEC on December 23, 2019 and confirmed in its Certification that, to the best knowledge of the Company, the factual content of the final report was true and accurate as of the date of such report.
The Company manages its business as three operating segments by operating geographic areas. The business of WFOE and the CAE in PRC was managed and reviewed as PRC segment. The business of AHFL and its subsidiaries in Taiwan was managed and reviewed as Taiwan segment. The business of PFAL was managed and reviewed as Hong Kong segment. PRC and Taiwan segments retain majority of reported consolidated amounts.
The geographical distributions of the Company’s financial information for the years ended December 31, 2020 and 2019 were as follows: