Law Broker’s headquarters is located at 5th Floor, No. 311 3rd Section, Nanjing East Road, Taipei City, Taiwan, with approximately 753.29 square meters (equivalent to 8,105 square feet) of office space. Law Broker renewed the office lease with Pon-Chen Co., Ltd. for additional two years commencing from June 1, 2019 to May 31, 2021 and with a monthly rent of NT $373,251. Law Broker has also entered into 41 leases for each of its sales and service outlets and training centers (excluding headquarter), for an aggregate monthly fee (untaxed) of NT$5,403,805 (equivalent to approximately $180,213).
Jiangsu Law’s office is located at Room 2006-2010, No. 215 Jiangdong Middle Road, Jian'ou District, Nanjing City, Jiangsu Province, China, with 5,955 square feet (equivalent to 553.26 square meters) of office space. The lease is between Zheng Guoxiang and Zhang Guoqiang. The lease term is for six years from November 3, 2018 to November 2, 2024, with rent of RMB4,530,579 (equivalent to $652,210) per year, payable every year during the term of the lease.
The following selected consolidated statement of operations data for the years ended December 31, 2019, and 2018 and the selected consolidated balance sheet data as of December 31, 2019, and 2018 are derived from our audited consolidated financial statements 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, 2019 and 2018 is derived in part from, and should be read in conjunction with the Company’s Consolidated Financial Statements and related notes.
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 trades over the counter under the ticker symbol “CUII” on the OTC Pink market. 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, 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.
A lot of countries, including the PRC, Japan, South Korea, have been affected by the outbreak of the coronavirus (“COVID-19”) since January 2020. We may expect that COVID-19 would have an adverse impact on our business in the PRC Segment in the short run and have taken actions, which include stimulations of our salesforce through online meetings and cloud-based trainings as well as our commitments to make timely commissions to sales professionals. Furthermore, we have developed effective communication channels with insurance companies to pass on individual customers’ information and upgraded our services to individuals. The Government of the PRC is providing businesses with certain incentive policies and programs, such as tax cuts and relief on the social security insurance. We plan to fully resume our regular operations no later than the end of April 2020 and expect to reach peak sales of health insurances soon; although we cannot guaranty we will resume the full operation within the expected timeframe. Any potential impacts of COVID-19 remain highly uncertain and cannot be predicted with confidence.
The preparation of financial statements in conformity with Accounting Principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the period. Management makes these estimates using the best information available when they are made. However, actual results could differ materially from those estimates. While there are a number of significant accounting policies affecting our financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments.
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, 2019 and 2018.
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.
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. We conduct our insurance brokerage business in 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.
The Company’s majority revenues derived from the commissions from sales of life insurance products. Total commission revenue from sales of life insurance products accounted for 93.6% and 92.6% of total revenue for the year ended December 31, 2019 and 2018, respectively; whereas commission revenue from sales of property and casualty insurance products only contributed 6.1% and 6.8% of total revenue for the year ended December 31, 2019 and 2018, respectively.
Most of the individual life insurance products we distribute allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term or make installment payments. If an insured chooses to pay for the life insurance by installment, a life insurance policy can generate periodic payments of fixed premiums for the insurance company for a period of time and as a result generate commissions and fee incomes for our Company from that policy for an extended period of time, sometimes up to 25 years. Because of this feature and the expected sustainable growth of life insurance sales, we have placed significant resources to expand and sell the life insurance products with periodic payment schedules. We expect that sales of life insurance products will continue to be our primary source of revenue in the next several years.
Our total revenue reached approximately $95.9 million for the year ended December 31, 2019, increased by approximately $17 million (or 21.9%) compared to the total revenue of $78.7 million for the year ended December 31, 2018. The increase in our total revenue was attributable primarily to the constant business growth in the Taiwan Segment. During the years ended December 31, 2019 and 2018, the revenues generated from the Taiwan, PRC and Hong Kong Segments were as follows:
The cost of revenue for the year ended December 31, 2019 increased by $16.0 million (or 32.5%) to $65.3 million compared to $49.3 million for the year ended December 31, 2018. This increase in the cost of revenue was due to the increase of the direct commission cost as a result of first year commission earned from insurance companies and the 2017 commission policy. In addition, the growth in the revenue also resulted in increasing indirect commission cost due to the high achievement rate of the sales target.
Consequently, the cost of revenue increased more than the proportional increase of revenue, causing a decrease in the gross profit margin by 5.4% from 37.3% for the year ended December 31, 2018 to 31.9% for the year ended December 31, 2019.
For the year ended December 31, 2019, G&A expenses were $20.2 million, an increase of $2.3 million (or 13.2%), compared with $17.9 million for the year ended December 31, 2018. The increase in G&A expenses was attribute to the increasing performance bonus to employees and the sales taxes as a result of the sales growth in 2019 and additional professional service fees to our outside counsel and SEC-appointed monitor to enhance the Company’s governance and compliance.
Net other income of $0.9 million for the year ended December 31, 2019 decreased 0.1 million (or 13.1%) compared to $1.1 million net other income for the year ended December 31, 2018. Net total other income mainly consists of interest income, interest expenses, dividend income, other income, gain on valuation of financial assets and gain on foreign exchange. Net other income decreased due to the increase of interest expense resulting from increased borrowings from bank loans.
For the year ended December 31, 2019, income tax expense was $2.7 million, a decrease of $0.9 million (or 25.1%), compared with $3.6 million for the year ended December 31, 2018. The decrease was mainly due to the recognition of a one-time transition tax of $1,199,195 imposed on accumulated earnings of foreign subsidiaries by the 2017 Tax Cuts and Jobs Act in the year of 2018.
Our subsidiaries in Taiwan segment are governed by the Income Tax Law of Taiwan and are generally subject to tax at 20% on income reported in the statutory financial statements after appropriate adjustments. Also, the Income Tax Law of Taiwan provides that a company is taxed an additional 5% on any undistributed earnings to its shareholders.
As a result of all these factors, our net income increased by $0.5 million (or 8.9%) from $5.4 million for the year ended December 31, 2018 to $5.9 million for the year ended December 31, 2019.
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 borrowing on our revolving line of credit, will be sufficient for our working capital needs, including commissions payable to sales professionals, performance bonus payable to management, payments of tax liabilities, marketing and advertising needs to promoting sales, as well as purchase of equipment. However, future business opportunities may cause a change in our estimate.
The following table represents a comparison of our cash flows for the years ended December 31, 2019 and 2018:
Net cash provided by operating activities for the year ended December 31, 2019 was $5.4 million in comparison with net cash of $3.9 million provided by operating activities for the year ended December 31, 2018. The increase of $1.5 million (or 38.5%) was mainly due to a strong business performance, resulting in higher net income for the year ended December 31, 2019 compared with that of the same period in 2018.
Net cash used in investing activities was $13.1 million for the year ended December 31, 2019 in comparison with net cash of $4.3 million used in investing activities for the year ended December 31, 2018. The increase in the cash flows used in investing activities resulted from the Company’s investment of its excess cash in time deposits in the year of 2019, leading to cash outflows from investing activities.
As of December 31, 2019, our Company had no off balance sheet arrangements.
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 2018, and the results of their operations and their cash flows for each of the two years 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.
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 company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding the Company has yet established effective entity-level controls at group level in application of Internal Control-Integrated Framework (2013), has been identified and described in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 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.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers in 2018.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
China United Insurance Service, Inc. (“China United”, “CUII”, 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’s common stock currently trades over the counter under the ticker symbol “CUII” on the OTC Pink market. 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 manages its business through aggregating them into three geographic operating segments, Taiwan, PRC, and Hong Kong.
In May 2019, AHFL entered into an agreement to make capital contributions of $485,909 (NTD15,000,000) to AIlife International Investment Co., Limited (“AIlife”, formerly known as “Ilife”). After the transaction, the Company owned 93.75% of AIlife. In July 2019, AHFL acquired the remaining 6.25% shares of AIlife, which became the Company’s wholly owned subsidiary. The business objective of AIlife is to obtain a non-exclusive license covering certain information technology systems from Law Broker and generate revenues from marketing and making the technologies available to insurance intermediary companies.
O 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 acquisition is accounted as an assets purchase.
On November 15, 2019, AIlife, Cyun-Jhan Enterprise Co., Ltd. (“Cyun-Jhan”), and Jian-Zao International Industrial Co., Ltd. (“Jian-Zao” and, collectively with AIlife and Cyun-Jhan, the “Parties”) entered into a Joint Venture Agreement (the “JV Agreement”). Under the terms of the JV Agreement, the Parties agreed to invest funds, labor and technology into Uniwill. Under the terms of 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 other 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 $3.3 million. However, certain necessary regulatory approvals and other procedures of Uniwill were not completed as of December 31, 2019 and are being processed as of the date of this annual report.
The corporate structure as of December 31, 2019 is as follows:
The Company’s financial statements are presented in U.S. dollars ($), which is the Company’s reporting and functional currency. The functional currencies of the Company’s subsidiaries are New Taiwan dollar (“NTD”), China yuan (“RMB”) and Hong Kong dollar (“HKD”). The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, “Reporting Comprehensive Income”. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currency are translated at the functional currency using the rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the consolidated statements of operations and other comprehensive income (loss).
The Company 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, 2019 and 2018.
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 recognize in net income for those equity investments.
The Company adopted FASB ASC Topic 606, Revenue from Contracts with Customers, at the beginning of 2018, which requires that recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company’s revenue is generated from providing insurance agency and brokerage services. The Company, through its subsidiaries and VIEs, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company recognizes revenue when services provided by the Company to customers is transferred to the respective insurance company; whereby the transfer of control is considered complete when the insurance policy becomes effective. The revenue standard includes requirements to estimate variable or contingent consideration to be received and recognize variable consideration to the extent that a significant reversal of revenue will not probably occur in the subsequent periods. Applying the revenue standard requires significant judgment and estimate to be made by the Company.
As the holders of preferred stock of the Company are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Company as may be declared by the board of directors, the preferred stock is treated as a participating security. When calculating the basic earnings per common share, the two-class method is used to allocate earnings to common stock and participating security as required by FASB ASC Topic 260, “Earnings Per Share.” As of December 31, 2019 and 2018, the Company does not have any potentially dilutive instrument.
For the years ended December 31, 2019 and 2018, the Company realized commission revenues granted from insurance company individually more than 10% of the total revenue of the Company were:
As of December 31, 2019, and 2018, the Company’s accounts receivable due from insurance company individually accounted more than 10% of the total account receivable were:
The Company follows FASB ASC Subtopic 810-10-05-8, “Consolidation of VIEs”, which 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:
On January 17, 2011, WFOE and Anhou and Anhou Original Shareholders entered into the VIE Agreements (the “First VIE Agreements”) which included:
The management does not believe that other than disclosed above, accounting pronouncements the recently issued but not yet adopted will have a material impact on its financial position results of operations or cash flows.
Noncurrent restricted cash includes a mandatory deposit in the bank in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies in PRC, which is not allowed to be withdrawn without the permission of the regulatory commission, and a trust account held for the bonus accrued for Law Broker’s officers.
Depreciation expense was $452,266 and $375,588 for the years ended December 31, 2019 and 2018, respectively.
Estimated future assets amortization as of December 31, 2019 is as follows:
Law Broker entered into a credit agreement with O-Bank, which matures on October 22, 2020, and the agreement provides for a $3.3 million (NTD 100 million) revolving credit facility. Borrowings under this agreement bear interest at the TAIFX3 rate plus a margin of 0.75%. As of December 31, 2019 and 2018, the outstanding loan under this credit agreement was nil.
CUII has a revolving credit facility in amount of $1,500,000 with CTBC, which matures on August 31, 2020, and borrowings under the revolving credit facility bear interest at the CTBC’s cost of funds plus a margin of 1%. As of December 31, 2019 and 2018, the outstanding balance of the revolving credit facility were $1,500,000 with an interest rate of 3.20% and $1,000,000 with an interest rate of 3.26%. The borrowing is secured by a total amount of $1,736,045 (NTD 52 million) of time deposits. Law Broker is the guarantor of the credit facility.
Total interest expenses of bank loans incurred were $199,979 and $105,536 for the years ended December 31, 2019 and 2018, respectively.
Commissions payable to sales professionals are usually settled within twelve months.
Other current liabilities consisted of the following as of December 31, 2019 and 2018:
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 an Amendment No. 3 to the Alliance Agreement (the “Third Amendment to the Alliance Agreement”). Pursuant to the Third Amendment to the Alliance Agreement, 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 the Third Amendment to the Alliance Agreement, 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 execution fees at NTD50 million for the first contract year, NTD35 million for the second contract year, and NTD33 million for each contract year thereafter within one month after the termination.
2) For the year ended December 31, 2016, the Company recognized the second contract year’s revenue amount of $422,883 (NTD 12,855,000), net of VAT, and refunded the amount of $690,537 (NTD 20,478,333), net of VAT, due to uncertainty resolved after Amendment 3 went effective.
The Company’s foreign subsidiaries have various bonus plans, which provide cash awards to employees based upon their performance, and had accrued bonus of $4,057,515 and $2,320,445, respectively, related to cash awards to employees as of December 31, 2019 and 2018.
The compensation plans eligible to Law Broker’s officers include a surplus bonus based on a percentage of income after tax and other performance bonuses such as retention and non-competition. For the years ended December 31, 2019 and 2018, the bonus expenses to Law Broker’s officers under the compensation plans were $824,213 and $682,554, respectively. As of December 31, 2019 and 2018, the Company had accrued bonus of $903,808 and $597,631 payable within next 12 months, and noncurrent accrued bonus of $471,466 and nil, respectively, related to the compensation plans for Law Broker’s officers. See Note 19 for additional information of appointment and engagement agreements with Law Broker’s officers.
The Company’s other liabilities consisted of the following as of December 31, 2019 and 2018:
Law Broker has a defined benefit retirement plan for eligible employees and the benefits are based on years of service and average service. The plan was underfunded by $208,230 and $131,605 as of December 31, 2019 and 2018, respectively.
According to Taiwan accounting rules and corporation regulations, the Company’s subsidiaries in Taiwan must appropriate 10% of net income to statutory reserves until the accumulated reserve reaches registered capital. The reserve can be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting to share capital. As of December 31, 2019 and 2018, the Company had statutory reserves in responding to the regulation requirements in Taiwan in the amount of $8,228,904 and $7,299,123, respectively.
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 due to as the accumulated deficit as of December 31, 2019 and 2018.
The Company’s revenue is derived primarily from insurance agency and brokerage services provided. 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.
Since the majority of the Company’s fee arrangements involve contracts that cover a single year of service, there was no significant change in the amount of revenue recognized in an annual period after adoption of the new revenue recognition accounting policy. The cumulative effect of adopting the new standard from January 1, 2018 is nil to the opening balance of retained earnings.
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, 2019 and 2018, the Company had nil of contract assets.
The Company has operating leases for its offices with lease terms ranging from one to six years. We determine if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides us the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, we consider it to be, or contain, a lease. We record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments. The lease term used in the calculation of right-of-use assets and lease liabilities include renewal and termination options that are reasonably certain to be exercised. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. Our leases do not provide an implicit borrowing rate, and we estimate the Company’s incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Operating lease right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. As of December 31, 2019, operating lease right-of-use assets and lease liabilities were as follows:
The present value of future minimum lease payment as of December 31, 2019 is as follows:
Significant components of the deferred tax assets and liabilities for income taxes as of December 31, 2019 and 2018 consisted of the following:
Management determined that it was unlikely that the Company’s deferred tax assets from the net operating loss in PRC and CUIS would be realized and provided a full valuation allowance against the deferred tax assets. In 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 deferred tax assets of $441,364 and $268,237 related to the Taiwan segment were included in other assets on the consolidated balance sheets as of December 31, 2019 and 2018, respectively.
The following table reconciles the Company’s statutory tax rates to effective tax rates for the years ended December 31, 2019 and 2018:
The Company’s income tax expense is mainly generated by its subsidiaries in Taiwan. The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan. In February 2018. The Income Tax Law was amended to increase the statutory tax rate on income reported in the statutory financial statements after appropriate adjustments from 17% to 20% starting from the beginning of 2018 and reduce the tax rate on any undistributed earnings from 10% to 5%. The Company has recorded an income tax expense of $21,434 for remeasuring the Company’s deferred tax as a result of the tax rate change in the year ended December 31, 2018. In June 2018, the shareholders of Law Enterprise approved the distribution of accumulated earnings to shareholders including AHFL. Under the Income Tax Law of Taiwan, the distributed earnings are not subject to the undistributed earning tax and the foreign shareholders of a Taiwan company will bear 21% of withholding tax after deducting certain tax credits allowed by the Income Tax Law of Taiwan for the dividend received. As a result of the earning distribution, Law Enterprise reversed $902,479 of the undistributed earning tax liability accrued in 2018 and AHFL accrued $877,746 of withholding tax liability that cannot be deducted in its tax jurisdiction. In 2019, the Company had no plan to distribute earnings, and thee tax on undistributed earnings of 5% was estimated. As of December 31, 2019 and 2018, the Company had current tax payable of $2,230,793 and $1,416,540 for Taiwan income tax, respectively.
WFOE and the Company’s Consolidated Affiliated Entities (“CAE”) in PRC are governed by the Income Tax Law of PRC concerning private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustments, except for Jiangsu. For Jiangsu province in PRC, according to the requirement of local tax authorities, the tax basis is levied at 10% of total revenue, instead of net income. WFOE and CAE had no income tax expenses for the years ended December 31, 2019 and 2018 due to the loss positions.
The 2017 Tax Act was enacted into law on December 22, 2017. The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing 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 Company has determined the implication of the tax rate reduction does not have any impact on its consolidated financial statements. A 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, 2019, and 2018, the Company had current tax payable of $101,518 and $95,936 and noncurrent tax payable of $815,451 and $1,007,323 for U.S. income tax.
Due to related parties consisted of the following as of December 31, 2019 and 2018:
See time deposits pledged as collateral for short-term loans in Note 8.
On December 20, 2018, the Company and one of the Company’s former employees, agreed to settle fraud charges brought by the SEC relating to a scheme to manipulate the Company’s trading volume for the purpose of obtaining a listing on Nasdaq. Neither the Company nor the former employee realized financial gain from the scheme. Both the Company and the former employee agreed to the entry of a final judgment that enjoins them from violating the charged provisions of the federal securities laws, orders the Company to comply with its undertaking to retain an independent compliance monitor for a period of not less than one year. The SEC did not seek a monetary penalty against the Company and there is no financial impact to the Company.
On December 21, 2018, Law Broker entered into an appointment agreement with Shu-Fen, Lee (“Ms. Lee”), pursuant to which, she serves as the president of Law Broker from December 21, 2018 to December 20, 2021. Ms. Lee’s primary responsibilities include 1) overall business planning, 2) implementation of resolution of the shareholders' meeting or the board of directors, 3) the appointment and dismissal of the Law Broker’s employees and sales professionals, except for internal auditors, 4) financial management and application, 5) being the representative of Law Broker, 6) other matters assigned by the board of directors. According to the agreement, Ms. Lee’s compensation plan include: 1) base salary, 2) managerial allowance, 3) surplus bonus based on 1.25% of Law Broker’s income after tax, and 4) annual year-end bonus. For the year ended December 31, 2019 and 2018, the Company has recorded the compensation expense of $160,613 and $0 under the appointment agreement, respectively.
On May 10, 2016, Law Broker entered into an engagement agreement with Hui-Hsien Chao (“Ms. Chao”), pursuant to which, she serves as the general manager of Law Broker from December 29, 2015 to December 28, 2018. The engagement agreement with Ms. Chao was renewed in 2019 and her service period has extended to December 20, 2021. Ms. Chao’s primary responsibilities are to assist Law Broker in operating and managing insurance agency business. According to the engagement agreement, Ms. Chao’s Bonus plans include: 1) execution, 2) long-term service fees, 3) pension and 4) non-competition. The payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms in the engagement agreement. Ms. Chao acts as the general manager or equivalent position of Law Broker for a term of at least three years. For the year ended December 31, 2019 and 2018, the Company has recorded the performance bonus expense of $663,601 and $682,554 under the engagement agreement, respectively.
The carrying amounts of current financial assets and liabilities in the consolidated balance sheets for cash equivalents, time deposits, and restricted cash equivalents approximate fair value due to the short-term duration of those instruments.
The geographical distribution of the Company’s financial information as of December 31, 2019 and 2018 were as follows:
In January 2020, the Company drew down $1,100,000 from the line of credit with O-Bank. The credit facility is with interest at a rate of 2.48% per annum and matures on February 21, 2020.