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 RMB $750,000 ($110,996), second year being RMB 795,000 ($117,656), third year being RMB 842,700 ($124,715), the fourth year being RMB $893,262 ($132,198), and the fifth year being RMB 946,857 ($140,130).
Sichuan Kangzhuang’s office is located at A and B areas, 14th Floor Renbao Building, No. 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, 2017 to August 31, 2020, for three years, with rent of RMB $41,606 ($6,157) per month, to be increased by 5% per annum commencing from September 1, 2018, 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 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 Mao Yi Hsiao. The lease term is from January 1, 2014 to December 31, 2019 for five years, with rent of RMB $85,000 ($12,580) per year, payable every year.
The following selected consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the selected consolidated balance sheet data as of December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K.
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:
We are a Delaware corporation, organized 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), which is quoted on the Over the Counter Bulletin Board. As of December 31, 2017, through our Consolidated Affiliated Entities, we had two insurance agencies, one brokerage and 43 service outlets with 2,715 full-time sales professionals and 116 administrative staff in Nanjing, Henan, Sichuan, Jiangsu, Fujian, Guangdong and Yunnan provinces in China. In addition, through Law Broker, we had 30 sales and service outlets (including the headquarters) with 2,414 sales professionals and 195 administrative staff in Taiwan.
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.”
In accordance with ASC Topic 360, “Property, Plant and Equipment”, we review the carrying values of long-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 2015.
Goodwill represent the excess of acquisition cost over the fair value of the net assets in the acquisition of business. 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.
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 in among Taiwan, PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales professionals in our distribution and service network. Revenue in the year ended December 31, 2017 totaled over $72.8 million, an increase of approximately $2.9 million (or slightly over 4%) compared with approximately $69.9 million in the previous year. This increase was attributable primarily to growth of our business in Taiwan and the PRC. For the years ended December 31, 2017 and 2016, the revenue generated respectively from Taiwan, PRC and Hong Kong was as follows:
During the year ended December 31, 2017, 85.31%, 14.37% and 0.32% of our revenue in our audited consolidated financial statements were derived from Taiwan, Consolidated Affiliated Entities (“CAE”) in PRC and Hong Kong, respectively. During the year ended December 31, 2016, 87.52%, 12.10% and 0.38% of our revenue in our audited consolidated financial statements were derived from Taiwan, CAE in PRC and Hong Kong, respectively. Total revenue increased by $2,914,438, or 4%, from $69,934,006 for the year ended December 31, 2016 to $72,848,444 for the year ended December 31, 2017, mainly due to the increase of the revenue in Taiwan and PRC for the following reasons:
b) The revenue of Taiwan Life Insurance Co., Ltd (“Taiwan Life”) increased in 2017, primarily due to the increase in sales of the disability support insurance and full medical expense reimbursement insurance. This selling package drew more attention from the company’s customers and raised the sales performance in the year ended December 31, 2017.
The gross profit for the year ended December 31, 2017 increased by $6,667,926 or 29%, to $30,047,437 compared with $23,379,511 for the year ended December 31, 2016. The gross profit ratio increased to 41% for the year ended December 31, 2017 from 33% for the year ended December 31, 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.
General and administrative expenses are principally comprised 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, 2017, G&A expenses were $14,959,384, an increase of $1,107,107, or 8%, compared with $13,852,277 for the year ended December 31, 2016, which was mainly due the expanded number of branches, increased personnel costs in China, increased personnel costs, rent and pension in Taiwan and professional fees.
For the year ended December 31, 2017, income tax expense was $3,513,717, an increase of $1,394,119, or 66%, compared with $2,119,598 for the year ended December 31, 2016. The increase was mainly due to increased income before income tax for the year ended December 31, 2017, which increased by $6.5 million compared with that for the year ended December 31, 2016.
CU WFOE and the CAE in the PRC are governed by the Income Tax Law of the PRC concerning privately-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 was deemed to be 10% of total revenue, instead of actual income before income tax. The tax rate of Jiangsu Law is also 25%.
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.
Gross profit for the year ended December 31, 2016 increased by $3,779,507, or 19%, to $23,379,511 compared with $19,600,004 for the year ended December 31, 2015. The gross profit ratio decreased to 33% for the year ended December 31, 2016 from 36% for the year ended December 31, 2015. The primary cause of the heightened cost of revenue was the portion 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 commission rate of FYC revenue was comparatively higher than any other type of commission revenue, the cost of revenue increased accordingly.
General and administrative expenses principally comprise 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, 2016, the income tax expense was $2,119,598, an increase 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.
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.
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, 2017 and 2016:
Net cash provided by operating activities during the year ended December 31, 2017 was $5,655,491, slightly decreased in comparison with $7,544,382, net cash provided by operating activities during the year ended December 31, 2016. The decrease was mainly due to decrease commissions payable to sales professionals for the year ended December 31, 2017 compared with that for the year ended December 31, 2016.
Net cash used in investing activities was $14,435,727 during the year ended December 31, 2017, which was 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 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 operating activities during the year ended December 31, 2016 was $7,544,382, significantly increased in comparison with $1,770,017, net cash provided by operating activities during the year ended December 31, 2015. The increase was mainly due to increased net income and other current liabilities for the year ended December 31, 2016 compared with that for the year ended December 31, 2015.
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 $609,777 during the year ended December 31, 2015, which was mainly due to purchase of property, plant and equipment, intangible assets amount of approximately $0.6 million and purchases of time deposits amount of approximately $9.6 million less dividend received in excess of earnings as reductions of cost of the investment amount of approximately $0.2 million and proceeds from maturities of time deposit amount of approximately $10.6 million.
Net cash used in financing activities was $376,473 during the year ended December 31, 2016, which was 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 related parties and third parties.
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.
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 C.
Total interest expense of short-term loans was $1,531 for the year ended December 31, 2017.
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 (RMB850,000) and $144,055 (RMB850,000) 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.
On June 23, 2016, our Company 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, 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.
On a going forward basis, our primary requirements for cash over the next 12 months consist of:
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.
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.
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.
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.
To the Board of Directors and shareholders of China United Insurance Service, Inc.
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, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
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 opinions on the 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.
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.
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 Taiwan citizen, as a listing vehicle for both ZLI Holdings Limited (“CU Hong Kong”) and 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.
On January 28, 2011, the Company increased the authorized number of common shares from 30,000,000 to 100,000,000 and also authorized 10,000,000 shares of preferred stock.
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 Limited (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 HKD500,000 to HKD1,470,000, and AHFL would contribute HKD1,530,000 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.
On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with a selling shareholder of Genius Holdings Financial Limited (“GHFL”), Mr. Chwan hau Li, to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock together with a 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 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.
The corporate structure as of December 31, 2017 is as follows:
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.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.
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 securities held as available-for-sale.
The Company’s financial statements are presented in U.S. dollars ($), which is the Company’s reporting and functional currency. The functional currencies of the Company’s subsidiaries are NTD, RMB and 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).
Cash and cash equivalents include cash on hand, bank deposits, and highly liquid investments with maturities of three months or less at the date of origination.
The Company invests part of its excessive cash in equity securities, money market funds, debt and equity funds. Such investments are included in “Marketable securities” in the accompanying consolidated balance sheets. Trading 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).
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.
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 operations and other comprehensive income (loss).
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.
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, 2017 and 2016, approximately $1,512,000 and $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 $33,949,000 and $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.
As of December 31, 2017, 2016 and 2015, the Company’s accounts receivable from these companies were:
(**) 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.
The Company follows FASB ASC Subtopic 810-10-05-8, “Consolidation of VIEs,” states that a VIE is a legal entity in which equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any one of the following three characteristics:
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 with its two subsidiaries in the PRC.
· 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.
The Company reviews the VIE’s status on an annual basis. For the years ended December 31, 2017, 2016 and 2015, no event including a-d above took place that would change the Company’s primary beneficiary status.
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted into law and the new legislation contains several key tax provisions that impact the Company, including a reduction of the corporate income tax rate to 21% effective for tax years beginning after December 31, 2017 and the Transition Tax, among others. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the 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.
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 us 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 will not be restated. Rather, revenues and other disclosures for prior periods will be provided in the notes to the financial statements as previously reported under the current revenue standard, and the cumulative effect of initially applying the new standard will be recognized as an adjustment to retained earnings as of January 1, 2018. An assessment to determine the impacts of the new accounting standard has been performed. The Company implemented new accounting and operational processes which were a result of the new guidance and analyzed the impact of these changes. The primary impacts of the new standard to the Company are expected to be as follows:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (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 financial statements.
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.
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.
As of December 31, 2017, the Company had time deposits of approximately $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 short-term loans.
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.
As of December 31, 2017 and 2016, the Company’s intangible assets consisted the following:
Amortization expense was $235,972, $310,684 and $130,486 for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017 and 2016, the Company’s long-term investments consisted the following:
The Company’s other assets consisted of the following as of December 31, 2017 and 2016:
The Company’s taxes payable consisted of the following as of December 31, 2017 and 2016:
PRC tax represents income tax and other taxes accrued according to PRC tax law by the Company’s subsidiaries and CAE in the PRC. Taiwan tax represents income tax and other taxes accrued according to Taiwan tax law by the Company’s subsidiaries and branches in Taiwan. Hong Kong tax represents income tax accrued according to Hong Kong tax law by the Company’s subsidiaries in Hong Kong.
· 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.
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.
Other current liabilities were as follows, as of December 31, 2017 and 2016:
Commissions payable to sales professionals, accrued bonus, salaries payable to administrative staff, and accrued advertisement expense are usually settled within 12 months. Accrued business tax, withholding tax, accrued labor, health insurance and employee retirement plan will be paid to the 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.
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.
The Company’s long-term liabilities consisted of the following as of December 31, 2017 and 2016:
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.
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:
(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.
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.
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 long-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 Ms. Chao.
On January 28, 2011, the Company increased 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:
Pursuant to the PRC regulations, the Company’s CAE are required to transfer 10% of net 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.
Non-controlling interests consisted of the following as of December 31, 2017 and 2016:
Provision (benefit) for income taxes for the year ended December 31, 2017 consisted of:
Significant components of the deferred tax assets and liabilities for income taxes as of December 31, 2017 and 2016 consisted of the following:
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.
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.
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.
The following summarized the Company’s loans payable related parties as of 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 $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.
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.
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 managment. 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 years ended December 31, 2017 and 2016, respectively.
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.
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.
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.
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.
Long-term loans - The fair value of the long-term loans were determined by discounted cash flows based on the interest rates.
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.
{a} The Company corrected the acquisition method from business acquisition to asset 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 asset acquisition.
The following quarterly data are derived from the Company’s consolidated balance sheet. See “Note 27-Restatement” for information concerning the Restatement of the Company’s financial statements.
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.
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.