Law Enterprise and Law Broker shared the same address as their registered address, which is located at 5th Floor, No. 311 3rd Section, Nanjing East Road, Taipei City, Taiwan, with approximately 753.29 square meters of office space. The lease is between Pon-Chen Co., Ltd. and Law Broker, for two years commencing from June 1, 2015 to May 31, 2017 and with a monthly rent of $11,562 (NT$373,251). Law Broker has also entered into 50 leases for each of its sales and service outlets and training centers (excluding its headquarters), with an aggregate office size of 18,036 square meters for an aggregate monthly fee of $125,132 (NT$4,030,989). Set forth below is a summary of our lease arrangements for the key offices and branches of our Company.
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 approximately $12,241 (RMB 85,000) per year, payable every year.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included in Part II, Item 8 of this Form 10-K Report.
On January 16, 2011, we issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non-U.S. persons for $300,000 in cash invested in our subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended. The consideration was paid as of June 30, 2012. On January 28, 2011, we increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common and 10,000,000 shares of preferred stock.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Yanyan Wang, Zhaohui Chen, Weizhe Hou and Yong Zhang, to invest in Anhou on its behalf. On September 26, 2013, the Anhou New Investors and the Anhou Original Shareholders entered into a shareholders’ resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million. On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements with Anhou Existing Shareholders, pursuant to which Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer price of RMB10 million. Mr. Hu is currently the legal representative and the sole director of Anhou. On October 24, 2013, Anhou completed the registration with local Administration Industry and Commerce (“AIC”). The new business license was issued to Anhou on October 25, 2013. On November 17, 2016, Li Chen and Chunyan Lu entered into a share transfer agreement, pursuant to which Li Chen agreed to transfer all of his equity interest in Anhou to Chunyan Lu for an aggregate consideration of RMB3 million.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million. The branch offices of Anhou were all in Henan province. To better implement its expansion strategies, Anhou increased its registered capital to RMB50 million to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in Mainland China.
Sichuan Kangzhuang was founded on September 4, 2006 in Sichuan province in the PRC and provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB532,622. On September 6, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Sichuan Kangzhuang. Sichuan Kangzhuang then had net liabilities of RMB219,123. Goodwill of RMB751,745 was therefore recorded. However, Sichuan Kangzhuang suffered loss since the acquisition, indicating the impairment of goodwill. As of December 31, 2014, the carrying value of the goodwill was fully impaired.
Jiangsu Law was founded on September 19, 2005 in Jiangsu Province in the PRC and provides insurance brokerage services in the PRC. On August 12, 2010, at Jiangsu’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB518,000 and Anhou increased Jiangsu Law’s paid-in capital to RMB10,000,000 from RMB5,180,000 on January 18, 2011 to meet the PRC paid-in capital requirements for insurance brokerage companies. On September 28, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Jiangsu. On acquisition date, Jiangsu had net assets of RMB2,286,842. Based on the purchase price allocation, the fair value of the identifiable assets and liabilities assumed exceeded the fair value of the consideration paid. As a result, our Company recorded a gain on acquisition of RMB1,768,842.
Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications and capital requirements of the investors, we operate our business primarily through our Consolidated Affiliated Entities in China. On January 17, 2010, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of Old VIE Agreements pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of VIE Agreements, including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. We do not hold equity interests in our Consolidated Affiliated Entities. However, through the VIE Agreements with these Consolidated Affiliated Entities and their respective shareholders, our Company effectively control, and are able to derive substantially all of the economic benefits from, these Consolidated Affiliated Entities, which allows us to consolidate the financial results of the Consolidated Affiliated Entities in its financial statements.
All 1,000,000 shares of Series A Preferred Stock were reclassified from the 1,000,000 shares of common stock held by Mr. Mao and no additional consideration was paid by Mr. Mao in connection with the Reclassification. The preferred stock has no material quantitative preferences over common stock, such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter submitted to a vote of our stockholders; while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter submitted to a vote of our stockholders.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise. Law Enterprise holds 100% Law Broker; 97.84% of Law Management; and 96% of Law Agent.
On March 14, 2013, our Company and the selling shareholders of AHFL entered into the First Amendment to AHFL Acquisition Agreement, pursuant to which, (i) the cash payment deadline as set forth in the AHFL Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among our Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the AHFL Acquisition Agreement, our Company agrees to use our best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of common stock of our Company, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of our Company (including Law Broker employees). On March 13, 2015, our Company and the selling shareholders of AHFL entered into the Second Amendment to the AHFL Acquisition Agreement, pursuant to which, the cash payment deadline as set forth in the AHFL Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among our Company and the selling shareholders of AHFL. On February 17, 2016, our Company and the selling shareholders of AHFL entered into the Third Amendment to the AHFL Acquisition Agreement, pursuant to which, on or prior to June 30, 2016, (i) our Company committed to complete the listing of our Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least USD10,000,000; (ii) our Company committed to distribute the cash payment in the amount of NTD22.5 million (approximately US$676,466), on a pro rata basis, to the selling shareholders of AHFL and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by our Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of our Company under Article 8 of the AHFL Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the AHFL Acquisition Agreement and unwind the acquisition of AHFL by our Company and restore the status quo of our Company and the selling shareholders of AHFL as if the said acquisition had never happened. On August 8, 2016, our Company and the selling shareholders of AHFL entered into the Fourth Amendment to the AHFL Acquisition Agreement, pursuant to which: (i) the Third Amendment to the AHFL Acquisition Agreement was terminated with immediate effect on August 8, 2016, and (ii) our Company agreed to pay NTD15 million (USD475,406) to the selling shareholders of AHFL on or prior to March 31, 2017; and (iv) pay NTD4,830,514 (USD153,097) to the selling shareholders of AHFL on July 21, 2016. On July 21, 2016, our Company arranged for the payment of NTD4,830,514 (USD153,097) to the selling shareholders of AHFL. As a result, the selling shareholders of AHFL no longer have the right to unwind the acquisition of AHFL by our Company. On March 12, 2017, our Company and the selling shareholders of AHFL entered into the Fifth Amendment to the AHFL Acquisition Agreement, pursuant to which our Company agreed to distribute the cash payment in the amount of NTD15 million to the selling shareholders of AHFL on or prior to March 31, 2019.
Law Enterprise is a holding company for its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are completed the liquidation in April 2016. We operate our Taiwan business primarily through Law Broker.
On April 23, 2014, AHFL and Mr. Wong entered into a Capital Increase Agreement, pursuant to which Mr. Wong agreed to increase PFAL’s registered capital from HK$500,000 to HK$1,470,000 and AHFL agreed to contribute HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital increase on April 30, 2014, Mr. Wong and AHFL own 49% and 51% of PFAL’s equity interest, respectively.
On February 13, 2015, our Company, AHFL and Mr. Chwan Hau Li, being the selling shareholder of GHFL, entered into the GHFL Acquisition Agreement. Pursuant to the GHFL Acquisition Agreement, our Company agreed to issue 352,166 fully paid and non-assessable shares of AHFL Shares together with a granted Put Option, in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the selling shareholder of GHFL would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of our Company. GHFL holds 100% issued and outstanding shares of Taiwan Genius, a company limited by shares and incorporated under the laws of Taiwan, which in turn holds approximately 15.64% issued and outstanding shares of Genius Broker, a company limited by shares and incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. Mr. Chwan Hau Li is the sole shareholder of GHFL and a director and shareholder of our Company. On March 31, 2015, Mr. Chwan Hau Li exercised the Put Option, pursuant to which, 352,166 shares of AHFL held by Mr. Chwan Hau Li were transferred back to our Company as the consideration for 352,166 shares of common stock of our Company, which were issued to Mr. Chwan Hau Li on April 29, 2015. On February 17, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into the Second Amendment to GHFL Acquisition Agreement, pursuant to which our Company agreed to complete the listing of our Company in a major capital market on or prior to February 28, 2016 where the net proceeds raised through such public offering financing shall be at least $10.0 million. On August 8, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into the Third Amendment to GHFL Acquisition Agreement, pursuant to which, the Second Amendment to GHFL Acquisition Agreement was terminated with immediate effect. As a result, Mr. Chwan Hau Li is no longer entitled to revoke the exercised Put Option right.
AHFL holds 51% of the issued and outstanding shares of PFAL. PFAL incorporated MKI on August 7, 2015 and PTC Nanjing on August 15, 2015.
During the year ended December 31, 2016, 87.52%, 12.10% and 0.38% of our revenues were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and Hong Kong, respectively. During the year ended December 31, 2015, 88.45%, 10.71% and 0.84% of our revenues were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and Hong Kong, respectively. During the year ended December 31, 2014, 93.55% and 6.45% of our revenues were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively.
We review our accounts receivable regularly to determine if a bad debt allowance is necessary at each year-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2016 and 2015.
In accordance with ASC Topic 360, “Property, Plant and Equipment”, we review the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fare value, less costs of disposal. No impairment was recognized for the years ended December 31, 2016 and 2015.
Our revenue is from insurance agency and brokerage services. Our Company, through our subsidiaries, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. Our Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of issuance of the policies, in which customers can cancel the contract without any fees. Our Company is notified of such cancellations by the insurance carriers. For the fiscal years ended December 31, 2016, 2015 and 2014, policy cancellations were $0, $2,226 and $84,476, respectively.
Our Company pays commissions to its sub-agents when an insurance product is sold by the sub-agent. Our Company recognizes commission revenue on a gross basis. The commissions paid by us to our sub-agents are recorded as costs of revenue.
a) The revenue of Farglory Life Insurance Co., Ltd (“Farglory”) increased in 2016 because Farglory bundles its life insurance products to customize each of its clients' needs better. By combining insurance contracts with the diversified term, premium, and coverage arrangements, the increased flexibility of the products of Farglory drew more attentions from the company’s customers and thus boosted the sales performance for the year ended December 31, 2016.
d) The revenue increased in the PRC area primarily due to the increase in critical illness insurance and annuity insurance in Sichuan and Henan for the year ended December 31, 2016. On the other hand, we expanded our business geographically and gained our reputation within local markets to generate higher revenue for the year ended December 31,2016.
The 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 attribute of the heightened cost of revenue was the portion of the first-year commission (FYC) revenue over total revenue increased noticeably. With 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.
Selling expenses mainly occurred in Law Broker, representing the expense for marketing promotion. The selling expense for the year ended December 31, 2016 decreased by $241,664 or 8%, to $2,842,744 compared with $3,084,408 for the year ended December 31, 2015. The decrease was mainly due to the decrease in advertising expense spent in publicity of our brand.
The 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.
During the year ended December 31, 2015, 88.45%, 10.71% and 0.84% of our revenues in our consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. During the year ended December 31, 2014, 93.55%, 6.45% and Nil of our revenues in our consolidated financial statements were derived from Taiwan, Consolidated Affiliated Entities and Hong Kong, respectively.
a) The sales of the products of Farglory Life Insurance Co., Ltd (“Farglory”) increased in 2015 because Farglory bundles its life insurance products to better customize each of its clients’ appeals. By combining insurance contracts with diversified term, premium, and coverage arrangements, the increased flexibility of the products of Farglory drew more attentions from the company’s customers and thus boosting the sales performance for the year ended December 31, 2015.
c) The company relocated its headquarter from Henan to Nanjing in the year of 2014 and tried to exploit more and more local markets and to expand its customer base in the PRC area. By setting up more and more business branch, accompanying with the company’s improved capability to serve more customers in different provinces, the company has gained its notability in China and thus generating more and more revenue for the year ended December 31, 2015.
The gross profit for the year ended December 31, 2015 increased by $2,558,160 or 15%, to $19,600,004 compared with $17,041,844 for the year ended December 31, 2014. The gross profit ratios for the year ended December 31, 2015 and for the year ended December 31, 2014 were consistent.
Selling expenses were mainly occurred in Law Broker, representing the expense for marketing promotion. The selling expense for the year ended December 31, 2015 decreased by $950,001 or 24%, to $3,084,408 compared with $4,034,408 for the year ended December 31, 2014. The decrease was mainly results from the decrease of the advertisement expense, donation fee and other business expenses incurred by the sales department.
The general and administrative expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees.
For the year ended December 31, 2015, general and administrative expenses were $12,675,171, increased by $703,308, or 6%, compared with $11,971,863 for the year ended December 31, 2014, which mainly due to the increase in payroll, health insurance and employee retirement plan. The numbers of administrative employees were increased for the year ended December 31, 2015 compared with the same period in last year. In addition, the general and administrative expense increased in Anhou due to the fact the company recently added additional location in Yunnan and requires more expenditure to start the business operation and increased the number of employee in the new location.
Net cash used in investing activities was $2,625,499 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 and loan made to RFL amount of approximately $1.5 million. Net cash used in investing activities was $383,843 during the year ended December 31, 2015, which was mainly due to purchase of property, plant and equipment and intangible assets amount of approximately $0.6 million less dividend received in excess of earnings as reductions of cost of the investment amount of approximately $0.2 million.
Net cash provided by operating activities during the year ended December 31, 2015 was $1,770,017, significantly increased in comparison with $469,470, net cash provided by operating activities during the year ended December 31, 2014. The increase was mainly due to increased net income for the year ended December 31, 2015 compared with that for the year ended December 31, 2014.
Net cash used in investing activities was $383,843 during the year ended December 31, 2015, which was mainly due to purchase of property, plant and equipment and intangible assets of approximately $0.6 million. Net cash provided by investing activities was $1,205,962 during the year ended December 31, 2014, which was mainly due to selling investment of approximately $1.6 million in current deposit and cash of approximately $0.2 million obtained by acquisition of PFAL. In addition, compared with the year ended December 31, 2014, during the year ended December 31, 2015, our investment in property, plant and equipment, and intangible assets increased by approximately $0.7 million.
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. During the year ended December 31, 2014, net cash provided by financing activities was $391,812, which was mainly due to the loan borrowed from Shu-Fen Lee, the Series A Director of the company, in the amount of $314,644 to AHFL.
In August 2013, the CU Hong Kong entered into several Loan Agreements (collectively, the “Investor Loan Agreements”) with the following unrelated parties: Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, Mr. Li Chen and Ms. Jing Yue, both PRC citizens (collectively, the “Investor Borrowers”).
Under the Investor Loan Agreements, the Investor Borrowers loaned cash from CU Hong Kong for their investment in Anhou and CU Hong Kong agreed to provide certain loans to each of the Investor Borrowers with an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such loans was ten years which could be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers covenants to enter into certain Variable Interest Entities Agreements with Anhou, CU WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers shall be solely used to increase the registered capital of Anhou, and CU Hong Kong may determine the repayment methods including transferring of the Investor Borrowers’ corresponding registered capital in Anhou or through other manner as full payment of the loans subject to terms and conditions therein in the event that the Investor Borrowers fails to repay the loan in currency to CU Hong Kong.
On October 24, 2016, our Company entered into a loan agreement (“Loan E”) with third party, Rich Fountain Limited (“RFL”), which was incorporated under the laws of Samoa. We provided a short-term loan amount of NTD 48,000,000 ($1,486,846) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest are due on April 23, 2017.
On May 15, 2016, our contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan C”) with third party Guowei Hu. The long-term Loan Agreement provided for a $144,015 loan to our Company. The long-term Loan C bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on May 15, 2019.
On June 23, 2016, our Company has 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, 2016, our Company has an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $6,363 for the year ended December 31, 2016.
On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Shu-Fen Lee (“Ms. Lee”), the Series A Director of our Company. Pursuant to the Loan Agreement, Ms. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan was from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The entire loan and interest amount of $314,928 (ND$10,009,041) have been paid off on January 14, 2015.
Except for the two aforementioned loans, the advance arose from due to related parties bore no interest and were payable on demand.
The related parties listed below loaned money to our Company for working capital. Due to related parties consisted of the following as of December 31, 2016 and 2015:
On January 1, 2016, our Company entered into a lease agreement with I Health Management Corp. (“I Health”) to lease its Nan-King East Road office space and some equipment in Taipei City. The lease term was for one year commencing on January 1, 2016 and ending on December 31, 2016, with an annual base rent of $5,200 (NTD167,515). For the year ended and as of December 31, 2016, rent income and advance amount were $5,200 and nil, respectively.
On July 1, 2016, our 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 of $559 (NTD18,000). For the year ended and as of December 31, 2016, rent income and advance amount were $279 and $279, respectively.
On November 1, 2016, our Company entered into an Advisory Agreement with Prime Technology Corp. (“Prime Tech”). Pursuant to the Advisory Agreement, our Company provided the following services to Prime Tech: 1) to set up the consulting software system, and 2) to develop the consulting project from November 1, 2016 to December 30, 2017. One of the Prime Tech board members is Mr. Wong, who owned 49% of PFAL. Our Company has revenue and accounts receivable from Prime Tech amount of $6,356 and $6,660, respectively, for the year ended and as of December 31, 2016.
We have audited the accompanying consolidated balance sheets of China United Insurance Service, Inc. and Subsidiaries (collectively the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
CU Hong Kong, a wholly owned Hong Kong-based subsidiary of China United, was incorporated by China United, on July 12, 2010 under Hong Kong law. On October 20, 2010, CU Hong Kong incorporated a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. (“CU WFOE”) in Henan province in the People’s Republic of China (“PRC”).
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Yanyan Wang, Zhaohui Chen, Weizhe Hou and Yong Zhang, to invest in Anhou on its behalf. On September 26, 2013, the new PRC individual investors, namely Yanyan Wang, Zhaohui Chen, Jing Yue, Weizhe Hou, Yong Zhang, Li Chen (“Anhou New Investors”) and the original shareholders of Anhou (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million (approximately $8 million). On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with Changrong Hu, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu. On November 17, 2016, Li Chen and Chunyan Lu entered into Share Transfer Agreement, pursuant to which, Li Chen agreed to transfer all of his equity interests in Anhou to Chunyan Lu.
On February 26, 2014, Anhou completed the registration of the change of its registered address to Room 1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local Administration Industry and Commerce (“AIC”) of Jiangsu Province. The new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued by Jiangsu Bureau of CIRC on April 21, 2014. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
On July 2, 2012, the Board of Directors and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Yi-Hsiao Mao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification.
Pursuant to the provisions of the Acquisition Agreement between the Company and the selling shareholders of AHFL and for all of the issued and outstanding shares of AHFL, the Company was to pay NTD15 million ($500,815) on or prior to March 31, 2013 and NTD7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments, subject to terms and conditions therein. In addition, the Company agreed to (i) issue 8,000,000 shares of common stock of the Company to the shareholders of AHFL; (ii) issue 2,000,000 shares of common stock of the Company to certain employees of Law Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of the Company.
On March 14, 2013, the Company and the selling shareholders of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agreed to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS common stock, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of the Company (including Law Broker employees). On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the Acquisition Agreement (the “Second Amendment”), pursuant to which, the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL. On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company committed to complete the listing of the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least USD10,000,000; (ii) the Company committed to distribute the cash payment in the amount of NTD22.5 million (approximately USD676,466), on a pro rata basis, to the selling shareholders of AHFL and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the Selling Shareholders as if the said acquisition had never happened. On August 8, 2016, the Company and the selling shareholders of AHFL entered into a fourth Amendment to the Acquisition Agreement (the “Fourth Amendment”), pursuant to which: (A) the Third Amendment was terminated with immediate effect on August 8, 2016, and (B) Sections 2.2(iii) and (iv) of the Acquisition Agreement are amended and restated so that the Company is now obligated to: (iii) pay NTD15 million (USD475,406) to the Selling Shareholders in the amounts set forth opposite each Selling Shareholder's name on Schedule I on or prior to March 31, 2017 or at any other time or in any other manner otherwise agreed upon by and among the Parties; and (iv) pay NTD4,830,514 (USD153,097) to the Selling Shareholders in the amounts set forth opposite each Selling Shareholder's name on Schedule I on July 21, 2016. Unless amended by the Fourth Amendment, any other provision of the Acquisition Agreement shall remain unchanged. On July 21, 2016, the Company arranged for the payment of NTD4,830,514 (USD153,097) to the Selling Shareholders. As a result, the former shareholders of AHFL no longer have the right to unwind the acquisition of AHFL by the Company. On March 12, 2017, the Company and the selling shareholders of AHFL entered into a fifth Amendment to the Acquisition Agreement (the “Fifth Amendment”), pursuant to which, the Company agreed to distribute the cash payment in the amount of NTD15 million on or prior to March 31, 2019.
On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Wong Chun Kwok Johnny (“Mr. Wong”), the owner of Prime Financial Asia Ltd (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 the selling shareholder (Mr. Chwan hau Li, the director of the Company) of Genius Holdings Financial Limited ( “GHFL”), a company with limited liability incorporated under the laws of British Virgin Islands , 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. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of CUIS. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. On February 13, 2015, the acquisition was completed; the selling shareholder transferred 100% shares in GHFL to AHFL. On March 31, 2015, the put option was exercised and Mr. Li received 352,166 shares of common shares of CUIS in exchange for his AHFL shares. On February 17, 2016, the Company and AHFL entered into an Amendment 2 to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Li, pursuant to which, on or prior to February 28, 2016, (i) the Company committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least $10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised. On August 8, 2016, the Company and AHFL entered into an Amendment 3 to the Genius Acquisition Agreement (the “Third Genius Amendment”) with Mr. Li, pursuant to which, the Second Genius Amendment is terminated with immediate effect on August 8, 2016. As a result, the selling shareholder is no longer entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised.
On September 3, 2015, MKI incorporated Prime Technology Consulting Co., Ltd., (“PTC Taiwan”) a company limited by shares incorporated in Taiwan. On May 10, 2016, PTC Taiwan changed its name to Prime Asia Corporation Limited (“PA Taiwan”). MKI is a holding company for its operating subsidiaries in Taiwan. PTC Taiwan primarily engages in insurance platform establishment and related information technology consulting service business across Taiwan.
The corporate structure as of December 31, 2016 is as follows:
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The Company follows FASB ASC Topic 220 (“ASC 220”), “Reporting Comprehensive Income,” which establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC 220 defines comprehensive income as net income and all changes to stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.
In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD, RMB and HKD into U.S. dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for interim financial statements in accordance with ASC 830, Foreign Currency Matters, are as follows:
For Statements of Cash Flows purposes, the Company considers cash on hand, bank deposits, and other highly-liquid investments with maturities of three months or less when purchased, such as commercial paper, to be cash and cash equivalents.
The Company reviews its accounts receivable regularly to determine if a bad debt allowance is necessary at each year-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2016 and 2015.
In accordance with ASC Topic 360, “Property, Plant and Equipment,” the Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate an asset may be impaired. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by it. If an asset is considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds its FV. Assets to be disposed of are reported at the lower of the carrying amount or FV, less cost of disposal. No impairment was recognized for the years ended December 31, 2016 and 2015.
Goodwill arose from both the acquisition of PFAL AGHFL (Note 8). Goodwill is the excess of the cost of an acquisition over the FV of the net assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using the prescribed two-step process under US GAAP. The first step screens for potential impairment of goodwill to determine if the FV of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied FV of goodwill to its carrying value. As of December 31, 2015 and 2016, there were no any indications of the impairment of goodwill that arose from the acquisition of PFAL and GHFL.
The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.
Convertible debt is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20 governs the calculation of an embedded beneficial conversion. The amount of the value of beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. Many of the conversion features embedded in the Company’s notes are variable and are adjusted based on a discount to market prices which could cause an unlimited number of shares of common stock to be issued. In these cases, the Company records the embedded conversion feature as a derivative instrument, at fair value. The embedded conversion features are recorded as discounts when the notes become convertible. The excess of fair value of the embedded conversion feature over the carrying value of the debt is recorded as an immediate charge to operations. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts relating to the initial recording of the derivatives or beneficial conversion features will be amortized over the terms of the convertible bonds.
The Company’s revenue is from insurance agency and brokerage services. The Company, through its subsidiaries, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of issuance of the policies, in which customers can cancel the contract without any fees. The Company is notified of such cancellations by the insurance carriers. For the fiscal years ended December 31, 2016, 2015 and 2014, policy cancellations were $0, $2,226 and $84,476, respectively.
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 statements of income and other comprehensive income (loss). As of December 31, 2016 and 2015, the Company did not have any uncertain tax positions.
a. An entity incurs a conditional obligation to transfer assets by issuing (writing) a put option that would, if exercised, require the entity to repurchase its equity shares by physical settlement. (Further, an instrument that requires the issuer to settle its obligation by issuing another instrument for example, a note payable in cash ultimately requires settlement by a transfer of assets.)
b. An entity incurs a conditional obligation to transfer assets by issuing a similar contract that requires or could require net cash settlement.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines FV, establishes a three-level valuation hierarchy for disclosures of FV measurement and enhances disclosure requirements for FV measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are reasonable estimates of FV because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follows:
The following table presents the fair value and carrying value of the Company’s marketable securities, loan receivable, borrowings and convertible bonds as of December 31, 2016:
The following table presents the fair value and carrying value of the Company’s marketable securities, loan receivable, borrowings and convertible bonds as of December 31, 2015:
Marketable securities - The fair value of marketable securities is generally valued based on quoted market prices in active markets.
Government bonds -The fair value of government bonds is valued based on quoted market price in active markets.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. As of December 31, 2016 and 2015, approximately $1,382,000 and $1,349,000 of the Company’s cash and cash equivalents held by financial institutions, was insured, and the remaining balance of approximately $24,312,000 and $19,483,000, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.
The Company follows FASB ASC Topic 280, “Segment Reporting” for its segment reporting. In the past periods, the Company managed and reviewed its business as three operating segments. The business of CU WOFE, ZLI and CAE in PRC was managed and reviewed as PRC segment. The business of AHFL and its subsidiaries in Taiwan was managed and reviewed as Taiwan segment. The business of PFAL was managed and reviewed as Hong Kong segment.
PRC and Taiwan segments are substantially all of the reported consolidated amounts. Note 25 disclose from the three segments.
If the assessment of a contingency indicates it is probable a material loss will be incurred and the amount of the loss can be reasonably estimated, then the estimated loss is accrued in the Company’s financial statements. If the assessment indicates a material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
b. The obligation to absorb the expected losses of the legal entity
c. The right to receive the expected residual returns of the legal entity.
As a result of the capital increase and the share transfer described in Note 1, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders (as defined in Note 1) entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The EBCA executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-03, “Intangibles-Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance”. The amendments in this ASU make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this ASU. Any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections. The amendments in this ASU also extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely. While this ASU extends transition guidance for Updates 2014-07 and 2014-18, there is no intention to change how transition is applied for those two ASUs. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” ASU No. 2016-07 eliminates the requirement for an investment that qualifies for the use of the equity method of accounting as a result of an increase in the level of ownership or degree of influence to adjust the investment, results of operations and retained earnings retrospectively. ASU No. 2016-07 will be effective prospectively for the Company for increases in the level of ownership interest or degree of influence that result in the adoption of the equity method that occur during or after the quarter ending December 31, 2017, with early adoption permitted. The impact of this guidance for the Company is dependent on any future increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.
In March 2016, the FASB issued Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. ‘The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Public entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update provide guidance to assist entities with evaluating when a group of transferred assets and activities (collective referred to as a "set") is a business. This new guidance provides for a "screen", which requires a determination that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen's threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output, eliminating the evaluation of whether a market participant could replace missing elements. This guidance is effective for public entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the effect this guidance will have on its consolidated financial statements.
Marketable securities represent investment in equity securities of listed stocks and funds, which are classified as Level 1 securities as follows:
The Company’s other current assets consisted of the following as of December 31, 2016 and 2015:
Property, plant and equipment consisted of the following, as of December 31, 2016 and 2015:
Depreciation expense was $315,344 and $332,715 for the years ended December 31, 2016 and 2015, respectively.
Estimated future intangible amortization as of December 31, 2016 is as follows:
Amortization expense was $310,684 and $130,486 for the years ended December 31, 2016 and 2015, respectively.
On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Chun Kwok Wong (“Mr. Wong”), the owner of Prime Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr. Wong would increase PFAL’s capital contribution from HKD500,000 to HKD1,470,000, and AHFL would contribute HKD1,530,000, approximately $197,000, to PFAL’s capital contribution. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
According to Taiwan regulatory requirements, Law Broker is required to maintain a minimum of NTD3,000,000 ($92,928) in a separate account. Law Broker chose to buy government bonds and has the right to trade such bonds with other debt or equity instruments. The amount, however, was defined as restricted asset.
The Company’s other assets consisted of the following as of December 31, 2016 and 2015:
Rental deposits include long-term leasing deposits. Restricted cash is a deposit in bank by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, cannot be withdrawn without the permission of the regulatory commission and the trust account for Law Broker’s general manager’s (Ms. Chao) Bonus Plans. Prepayments are prepaid long-term software-maintenance contract pending for final acceptance, and will be transferred to intangible assets upon acceptance. Other are deferred tax assets-noncurrent and other. As of December 31, 2016, the Company had deferred tax assets-noncurrent amount of $25,364.
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. Above tax will be settled within the next twelve months according to the respective tax laws.
On October 12, 2015, the Company entered into a loan agreement (“Loan A”) with Zhengxiong Huang. The Short-term Loan Agreement provided for a $70,000 loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on December 31, 2015. On December 31, 2015, the Company extended this loan agreement to December 31, 2016 with the same conditions. The entire amount of this Loan A and interest expense were paid off in May 2016.
The Company intends to issue the convertible bonds during the period commencing on June 23, 2016 and ended on September 30, 2016 with an aggregate principal amount of up to $10,000,000. The convertible bonds shall be sold in units, with each unit being $100,000 in principal amount. The Company would not make any offers or sales of the convertible bonds to U.S. persons and there would be no directed selling efforts in the United States. The bonds would not be convertible until two years from the issuance date and with an annual interest rate of 6% payable on a quarterly basis. The purchaser of the convertible bonds might cause the company to redeem the convertible bonds before the end of the term, subject to certain penalties depending on the holding period of the convertible bonds when redeemed. Upon the expiration of the term of the convertible bond, the bond holder may, in its sole discretion, choose to collect the payment of full principal amount of the convertible bond together with any interest accrued or convert the convertible bond into common shares of the Company at the conversion price. The conversion price shall be the product of (i) the average closing trading price for the 10 business days immediately prior to the conversion date times (ii) 80%.
On July 20, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan D”) with third party Guowei Hu. The long-term Loan Agreement provided for a $110,892 loan to the Company. The long-term Loan D bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on July 20, 2019.
Total interest expense was $11,755 for the year ended December 31, 2016.
Long-term liabilities are as follows as of December 31, 2016 and 2015:
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”). The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The term of the Alliance Agreement is from April 15, 2013 to August 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL the Execution Fee of $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL. On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “Supplemental Agreement”) with AIATW. In the Supplemental Agreement, the performance targets and the provision about refunding the Execution Fee when the performance targets are not met were revised. On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW. The purpose of the Strategic Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan through insurance agency companies or insurance brokerage companies. To the extent permitted by applicable laws and regulations, AHFL shall assist and encourage any insurance agency company or insurance brokerage company duly approved by the competent government authorities of Taiwan (the “Appointed Broker/Agent”), to cooperate with AIATW for the promotion of life insurance products of AIATW. Pursuant to the Amendment No. 2, the expiration date of the Strategic Alliance Agreement has been extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 has been suspended. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of Execution Fees. On March 15, 2016, AHFL issued a promise letter to AIATW that AHFL is required to (i) fulfill sales targets and (ii) the 13-month persistency ratio.
AHFL refunded the amounts of $152,235 (NTD 5,000,000) and $502,532 (NTD 16,505,144) to AIATW on December 3, 2015 and February 23, 2016, respectively, due to the portion of performance sales targets are not met during the period from June 10, 2013 to September 30, 2014. As of December 31, 2016, the Company had long-term liabilities and current liabilities amounts of $4,742,272 and $1,966,814, respectively, related to AIATW Alliance Agreement.
Conversion Rights. The holders of the Series A Stock have the right to convert their shares thereof at any time into shares of the Registrant’s common stock. Each share of Series A Stock is convertible into one share of common stock.
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 hits registered capital. The reserve can be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting to share capital.
Provision (benefit) for income taxes for the year ended December 31, 2016 consists of:
Provision (benefit) for income taxes for the year ended December 31, 2015 consists of:
A 100% valuation allowance was provided for the deferred tax assets related to the PRC segment as of December 31, 2016 and 2015. The deferred tax assets of $59,233 and $25,364 related to the Taiwan segment was included in other current assets and other assets, respectively, on the consolidated balance sheets at December 31, 2016. There were no deferred tax liability and deferred tax assets at December 31, 2016 and 2015, respectively. The deferred tax liability of $3,143 related to the Taiwan segment was included in other current liabilities on the consolidated balance sheets at December 31, 2015.
CU WFOE and the VIEs in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Except for Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu is also 25%.
The related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of December 31, 2016 and 2015:
**25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise.
On December 25, 2015, the Company entered into a loan agreement (the “Short-term Loan Agreement”) with Multiple Capital Enterprise Co., Ltd. The Short-term Loan Agreement provided for a $608,941 (NTD20,000,000) loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on June 30, 2016. Majority of Multiple Capital Enterprise shareholders are the Company’s management level. The entire loan and interest amount of $598,905 (NTD20,014,795) have been paid off on January 12, 2016.
On January 1, 2016, the Company entered into a lease agreement with I Health Management Corp. (“I Health”) to lease its Nan-King East Road office space and some equipment in Taipei City. The lease term was for one year commencing on January 1, 2016 and ending on December 31, 2016, with an annual base rent of $5,200 (NTD167,515). For the year ended and as of December 31, 2016, rent income and advance amount were $5,200 and $0, respectively.
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 $388,031 (NTD1,250,000). The Company has cost of revenue and due to I Health amount of $25,130 and $3,724, respectively, for the year ended and as of December 31, 2016.
On November 1, 2016, the Company entered into an Advisory Agreement with Prime Technology Corp. (“Prime Tech”). Pursuant to the Advisory Agreement, the Company provided the following services to Prime Tech: 1) to set up the consulting software system, and 2) to develop the consulting project from November 1, 2016 to December 30, 2017. One of the Prime Tech board member is Mr. Wong, who owned 49% of PFAL. The Company has revenue and accounts receivable from Prime Tech amount of $6,356 and $6,660, respectively, for the year ended and as of December 31, 2016.
The combined Revenue, Net Loss and EPS of Risk Management and Law Agent for the year ended December 31, 2016,2015 and 2014 were as follows:
The geographical distribution of the Company’s financial information as of December 31, 2016 and 2015 were as follows:
Due to certain restriction on direct foreign investment in insurance agency business under current PRC legal requirements, Anhou sought investments from certain Investor Borrowers who in turn needed funds through individual loans.
On March 12, 2017, the Company and the selling shareholders of AHFL entered into a fifth Amendment to the Acquisition Agreement (the “Fifth Amendment”), pursuant to which, on or prior to March 31, 2019, the Company agreed to distribute the cash payment in the amount of NTD15 million.