Anhou’s current registered address is located at Room 2008-2010, No. 215 Jiangzhong Middle Road, Jianye District, Nanjing, Jiangsu Province, China, with 553.26 square meters of office space. The lease agreement is between Zheng Yong Xiang, Zhang Guo Qiang and Anhou. The term is from November 3, 2018 to November 2, 2024 with rent of first year being RMB $686,595 ($107,036), second year being RMB 720,925 ($112,387), third year being RMB 757,274 ($118,054), the fourth year being RMB $795,643 ($124,035), and the fifth year being RMB 836,031 ($130,332).
The following selected consolidated financial and other data is as of and for the years ended December 31, 2018 and 2017 is derived in part from, and should be read in conjunction with the Company’s Consolidated Financial Statements and related notes.
During the year ended December 31, 2018, 85.82%, 13.31% and 0.87% of our revenues were derived from our Taiwan Segment, PRC Segment and Hong Kong Segment, respectively. During the year ended December 31, 2017, 85.31%, 14.37% and 0.32% of our revenues were derived from our Taiwan Segment, PRC Segment, and Hong Kong Segment, respectively.
We review our accounts receivable regularly to determine if a bad debt allowance is necessary at each quarter-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2018 and 2017.
We adopted the new revenue standard 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. We recognize revenue when control over services provided by the Company is transferred to the respective insurance company, whereby the transfer of control is considered complete when the insurance policy becomes effective. The new guidance 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 subsequent periods. Applying the new revenue standard requires significant judgment and estimate to be made by the Company.
In June 2016, the FASB issued ASU No. 2016-13, (Topic 326), Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments which amends the current accounting guidance and requires the use of the new forward-looking “expected loss” model, rather than the “incurred loss” model, which requires all expected losses to be determined based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for most financial assets and certain other instruments including trade and other receivables, held-to-maturity debt securities, loans and other instruments. ASU 2016-13 is effective for public entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial position and results of operations.
a) The total revenue related to TransGlobe Life Insurance Inc. (“TransGlobe”) increased by $2,111,268 from $8,168,837 for the year ended December 31, 2017 to $10,280,105 for the year ended December 31, 2018. The revenue earned from TransGlobe experienced a visible increase because TransGlobe offered health insurance products with greater affordability and more favorable terms that appealed to the market, thereby boosting the sales of health insurance products for the year ended December 31, 2018. In addition, due to a regulatory change in Taiwan proposing to limit total claims from multiple insurance policies up to incurred losses, our sales professionals are focusing on selling TransGlobe products to other existing policy holders to maximize insured benefits before the enactment.
b) The total revenue related Taiwan Life Insurance Co., Ltd (“Taiwan Life”) increased by $1,714,574 from $9,309,759 for the year ended December 31, 2017 to $11,024,333 for the year ended December 31, 2018. The increase was primarily driven by the launch of a new affordable comprehensive long-term disability insurance product in 2017. This package attracted more attention from customers in 2018 and led to the increase in sales. Policies sold in 2017 and retained through their 13th month also generated additional commission bonuses for the Company which further increased revenue.
WFOE and the CAE in the PRC are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. According to the requirement of local tax authorities, the taxable income of Jiangsu Law was deemed to be 10% of total revenue, instead of actual income before income tax. The tax rate of Jiangsu Law is also 25%.
The following table represents a comparison of the net cash provided by operating activities, net cash provided by (used in) investing activities, and net cash provided by (used in) financing activities for the years ended December 31, 2018 and 2017:
Net cash provided by operating activities during the year ended December 31, 2018 was $3,907,452, which was a decrease from $5,906,923, net cash provided by operating activities during the year ended December 31, 2017. The decrease was mainly due to a decrease in net income due to increasing selling expenses for the year ended December 31, 2018 compared with that of the year ended December 31, 2017.
Net cash used in investing activities was $4,301,227 during the year ended December 31, 2018, which was mainly due to an increase in purchases of time deposits in 2018 as compared to 2017. Net cash used in investing activities was $14,435,727 during the year ended December 31, 2017, which was mainly due to purchase of structured deposit, marketable securities and time deposits of approximately $39 million less proceeds from maturities of time deposits of approximately $17 million and disposals of marketable securities of approximately $8 million.
Due to certain restrictions on direct foreign investment in insurance agency business under current PRC legal regime, Anhou has sought certain investments made by the Investor Borrowers (defined as below) and they may need funds through individual loans. Upon the completion of the contemplated increase of registered capital of Anhou, each Investor Borrower shall, or cause their designated persons to, enter into the Variable Interest Entities Agreement with WFOE, Anhou and other parties so as to consolidate any additional VIE interest generated from the said registered capital increase into the Company.
On October 24, 2016, the Company entered into a loan agreement with a third party, Rich Fountain Limited (“RFL”), a company incorporated under the laws of Samoa. The Company provided a short-term loan approximately $1,618,577 (NT$48,000,000) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest of the loan were payable on April 23, 2017. On April 21, 2017, the Company and RFL entered into a supplemental agreement to extend the loan to October 23, 2017. The Company received partial payment of approximately $71,974 (NT$ 2,134,440) and approximately $36,256 (NT$1,075,200) on June 22, 2017 and July 14, 2017, respectively. As of December 31, 2017, the outstanding principal balance of the loan was approximately $1,510,347 (NT$ 44,790,360). On March 7, 2018, RFL paid off all outstanding balance of loan to the Company.
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, 2018 and 2017:
***On May 10, 2016, Law Broker entered into an engagement agreement (“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. 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. On March 13, 2017, Law Broker and Ms. Chao entered into an amendment to the Engagement above-mentioned Agreement to specify 1) Ms. Chao’s pension calculation assumptions and start date, and 2) the non-competition provision start date. As of December 31, 2018 and 2017, the Company had current liabilities amounted $597,631 and $210,752, respectively, related to accrued bonus for Ms. Chao.
The Company’s long-term loans consisted of the following as of December 31, 2018 and 2017:
On February 1, 2018, Prime Asia Corporation, Limited, the Company’s majority owned subsidiary entered into a lease agreement with Apex Biz Solution Limited (“Apex,” was formerly known as Prime Technology Corp.) Apex is a related party of the Company because it is affiliated to the Company’s management. The lease is to lease the office space in Taipei City to Apex. The lease commencement date is December 1, 2018, with a monthly base rent of approximately $680 (NT$20,476). The Company recorded rent income of $7,317 for the year ended December 31, 2018.
On May 2, 2016, the Company entered into an advisory agreement with I Health Management Corp (“I Health”) who is contracted to provide 10,000 Taiwan citizens’ health information to the Company. The total advisory fee was approximately $42,000 (NT$1,275,000). For the year ended December 31, 2017, the Company had cost of revenue related to I Health amounted $13,315. The Company had due to I Health $17,703 as of December 31, 2017.
On November 1, 2016, the Company entered into a consulting agreement with Apex pursuant to which the Company would provide administrative operational consulting services to Apex from November 1, 2016 through December 31, 2021. As of December 31, 2018 and 2017, the Company had accounts receivable amounted of nil and $17,231, respectively. The Company also had revenue of $31,449 and $50,053 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, our Company had no off balance sheet arrangements.
Opinion on the Consolidated Financial Statements and Internal Control over Financial Reporting
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, 2018 and 2017, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2018, 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, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
In January of 2011, through Zhengzhou Zhonglian Hengfu Business Consulting Co., Limited (“WFOE”), a wholly owned Hong Kong based subsidiary of CU Hong Kong, the Company entered a series of agreements (“VIE agreements”) with Law Anhou Insurance Agency Co., Limited (“Anhou”) that established, among other things, an exclusive business cooperation agreement. Prior to the VIE agreements with WFOE, Anhou owned 100% interest of Sichuan Kangzhuang Insurance Agency Co., Limited (“Sichuan Kangzhuang”) and 100% interest of Jiangsu Law Insurance Brokers Co., Limited. Both subsidiaries are also engaged in selling life and property casualty insurance products in the PRC. With the establishment of VIE in 2011, the Company expanded business operations into Peoples’ Republic of China (“PRC” or “China”).
For the purpose of procuring certain economic benefits and establishing a more centralized control over the business operations in Sichuan province, the Company reorganized by dissolving Sichuan Kangzhuang, and set up a branch office of Anhou in Sichuan province instead. On October 8, 2018, Sichuan Kangzhuang was legally dissolved.
In July of 2018, the Company completed its acquisition of Kao Te Insurance Broker (“KT Broker”) for its existing brokerage licenses. Under Taiwanese law, the brokerage license is undetachable from the legal entity and the entity itself cannot be dissolved, so the Company renamed KT Broker to Joint Insurance Broker Co., Limited (“JIB”) to serve as a holding entity for the brokerage licenses. The Company has no intention of operating the existing business of KT Broker nor retain any of its sales personnel, therefore the Company accounted the acquisition as assets purchase in accordance with ASC 805.
The accompanying consolidated financial statements include the accounts of China United, its subsidiaries and variable interest entities as shown in the corporate structure in Note 1. All significant intercompany transactions and balances have been eliminated in the consolidation. The Company consolidates variable interest entities where it has been determined that the Company is the primary beneficiary of those entities' operations. Certain reclassifications have been made to the consolidated financial statements for prior years to the current year’s presentation. Such reclassifications have no effect on net income as previously reported.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of noncontrolling interests (“NCI”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
The Company follows FASB ASC Topic 220, “Reporting Comprehensive Income,” which establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general-purpose financial statements. ASC 220 defines comprehensive income as net income and all changes to stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on securities held as available-for-sale.
Accounts receivable includes commission receivables stated at net realizable values. The Company reviews its accounts receivable regularly to determine if a bad debt allowance is necessary at each quarter-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2018 and 2017.
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, 2018 and 2017.
Convertible debt is accounted for under the guidelines established by ASC Subtopic 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 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 adopted the new revenue standard 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 recognizes revenue when control over services provided by the Company is transferred to the respective insurance company; whereby the transfer of control is considered complete when the insurance policy becomes effective. The new guidance 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 new revenue standard requires significant judgment and estimate to be made by the Company.
Basic earnings per common share (“EPS”) is computed by dividing net income attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted EPS is computed in the same manner as basic EPS, except the number of shares includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued.
· Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
· Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
The carrying amounts of financial assets and liabilities in the consolidated balance sheets for cash and cash equivalents, accounts payable and accrued expense approximate fair value due to the short-term duration of those instruments. See Note 22 for additional information on the fair values related to other financial assets and liabilities.
The Company managed and reviewed its business as three operating segments. The business of WFOE, CU Hong Kong and the Company’s Consolidated Affiliated Entities (“CAE”) in PRC was managed and reviewed as the 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. The PRC and Taiwan segments are substantially all of the reported consolidated amounts. Please refer to Note 23 for additional information on the segment reporting.
Certain conditions may exist as of the date the financial statements are issued, which could result in a loss to the Company which will be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies arising from legal proceedings pending against the Company or unasserted claims that may rise from such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
a) The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance
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.
During the term of this Agreement, unless WFOE commits gross negligence, or a fraudulent act, against Anhou, Anhou may not terminate this Agreement. Nevertheless, WFOE shall have the right to terminate this Agreement upon giving 30 days prior written notice to Anhou at any time.
· Option Agreement under which the shareholders of Anhou irrevocably granted WFOE or its designated person an exclusive and irrevocable right to acquire, at any time, the entire portion of Anhou’s equity interest held by each shareholder of Anhou, or any portion thereof, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in Anhou shall be the lower of (i) RMB1 ($0.16) and (ii) the lowest price allowed by relevant laws and regulations. If appraisal is required by the laws of PRC when WFOE exercises the Equity Interest Purchase Option (as defined in the Option Agreement), the Parties shall negotiate in good faith and based on the appraisal result make necessary adjustment to the Equity Interest Purchase Price (as defined in the Option Agreement) so that it complies with any and all then applicable laws of the PRC. The term of this Agreement is 10 years, and may be renewed at WFOE’s election.
a) The legal entity’s governing documents or contractual arrangements are changed in a manner that changes the characteristics or adequacy of the legal entity’s equity investment at risk.
The Company’s revenue is derived from insurance agency and brokerage services. The Company, through its subsidiaries, 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 becomes effective. 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.
Since the majority of the Company’s fee arrangements involve contracts that cover a single year of services, 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. The comparative information and prior periods were not restated and reported under the legacy accounting standards.
In November 2016, the FASB issued ASU No. 2016-18, (Topic 230), Statement of Cash Flows, amending the presentation of restricted cash within the consolidated statements of cash flows. The new guidance requires that restricted cash be added to cash and cash equivalents on the consolidated statements of cash flows. The Company adopted this ASU in the first quarter of 2018 on a retrospective basis with the following impacts to the Company’s prior period consolidated statement of cash flows:
The equity investment without readily determinable fair value held by the Company is the equity investment of Genius Insurance Broker Co., Ltd. The Company elects to measure the equity investment using measurement alternative and records the investment at cost minus impairment, if any, plus or minus changes resulting from qualifying observable prices changes. Adjustments resulting from impairments and observable prices changes are recorded in the income statement. Further, in accordance with the guidance, recurring fair value disclosures are no longer provided for equity securities measured using the measurement alternative. In addition, the existing impairment model has been replaced with a new one-step qualitative impairment model. No initial adoption adjustment was recorded for these instruments since the guidance is required to be applied prospectively for securities measured using the measurement alternative. For the year ended December 31, 2018, there is no impairment indicator and no adjustment to the cost of the equity investment in Genius Insurance Broker Co., Ltd. As of December 31, 2018 and 2017, the equity investment of Genius Insurance Broker Co., Ltd. is classified under long-term investments and the carrying amounts were $1,257,485 and $1,296,039, respectively.
In February 2016, FASB issued ASU No. 2016-02, (Topic 842), Leases. ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and makes certain changes to the accounting for lease expenses. We anticipate that the adoption of ASU 2016-02 for our leasing arrangements will likely (i) increase our recorded assets and liabilities, (ii) increase depreciation and amortization expense, (iii) increase interest expense and (iv) decrease lease/rental expense.
The Company’s other current assets consisted of the following as of December 31, 2018 and 2017:
On October 24, 2016, the Company entered into a loan agreement with a third party, Rich Fountain Limited (“RFL”), a company incorporated under the laws of Samoa. The Company provided a short-term loan approximately $1,618,577 (NTD 48,000,000) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest of the loan were payable on April 23, 2017. On April 21, 2017, the Company and RFL entered into a supplemental agreement to extend the loan to October 23, 2017. The Company received partial payment of approximately $71,974 (NTD 2,134,440) and approximately $36,256 (NTD1,075,200) on June 22, 2017 and July 14, 2017, respectively. As of December 31, 2017, the outstanding principal balance of the loan was approximately $1,510,347 (NTD 44,790,360). On March 7, 2018, RFL paid off all outstanding balance of loan to the Company.
Property, plant and equipment consisted of the following, as of December 31, 2018 and 2017:
Estimated future assets amortization as of December 31, 2018 is as follows:
Amortization expense was $261,392 and $235,972 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018 and 2017, the Company’s long-term investments consisted the following:
According to Taiwan Regulations Governing Deposit of Bond and Acquirement of Insurance by Insurance Agents, Insurance Brokers and Insurance Surveyors (“RGDBAI”) Article 3 and 4, Law Broker is required to maintain a minimum of NTD 3,000,000 ($98,152 and $101,161 as of December 31, 2018 and 2017, respectively) restricted balance in a separate account or government bonds issued by the central government. The government bonds are valued based on theoretical bond price in Taipei Exchange.
REITs are valued based on quoted market prices in the active market of Taiwan. The fair value of REITs as of December 31, 2018 was $1,120,239. Unrealized losses due to revaluation included in earnings for assets held at the end of the reporting period were $220,596 for the year ended December 31, 2018.
The Company’s other assets consisted of the following as of December 31, 2018 and 2017:
According to China Insurance Regulatory Commission No. 82, promulgated on September 29, 2016, the Company should deposit all of its registered capital in a custody fund account and subject to limited usage, among which, no less than 10% of the registered capital can be invested in significant deposit by agreement or term deposit. As of December 31, 2018 and 2017, the Company had register capital deposits in the amount of $872, 544 and $1,075,867, respectively.
Goodwill arose from the acquisition of PFAL in April 2014. The fair value of the net identifiable assets of PFAL at acquisition date was $324,871, and 51% of which was $165,684. The Company recorded $31,651 excess of purchase price over the fair value of assets acquired and liabilities assumed as goodwill. No intangible assets were identified as of the acquisition date. As of December 31, 2018 and 2017, there were no indications of the impairment of the goodwill.
The Company’s short-term loans consisted of the following as of December 31, 2018 and 2017:
The Company entered into three credit agreements with several commercial banks as follows:
Far Eastern International Bank (“FEIB”): On September 21, 2017, the Company entered into a line of credit agreement with FEIB for a revolving credit facility of $2,000,000 from September 21, 2017 to September 21, 2018. The line of credit was renewed on October 26, 2018 and matures on September 21, 2019. Borrowings under the agreement bear interest at the higher of LIBOR or TAIFX3 rate plus a margin of 0.85%. On June 15 and June 22, 2018, the Company draw down borrowings of $1,000,000 and $500,000, respectively, with interest at a rate of 3.45% per annum. These amounts were paid off in July of 2018. On July 13 and July 20, 2018, the Company draw down $1,000,000 and $500,000 with interest at a rate of 3.38% and 3.39% per annum, respectfully. These amounts were paid off in August of 2018. On August 10 and August 17, 2018, the Company draw down $1,000,000 and $500,000 with interest at a rate of 3.37% and 3.38% per annum, respectfully. These amounts were paid off in September of 2018. On September 07, September 14 and September 21, 2018, the Company draw down $1,000,000, $500,000 and $500,000 with interest at a rate of 3.60%, 3.65% and 3.68% per annum, respectfully. These amounts were paid off in November of 2018. On November 13, 2018 the Company draw down a borrowing of $2,000,000 with interest at a rate of 3.40% per annum. The Company paid off the borrowing in December of 2018. On December 7, 2018, the Company draw down a borrowing of $2,000,000 with interest at a rate of 3.95% per annum. The Company paid off the borrowing in January of 2019. The credit facility is secured by a total amount of approximately $2,434,163 (NTD 74,400,000) of time deposits.
KGI Commercial Bank Co., Ltd. (“KGI”): On September 19, 2018, the Company was approved of entering into a line of credit agreement with KGI, pursuant to which the Company has a revolving credit facility of $1,600,000 from October 26, 2018 to October 26, 2019. Borrowings under the agreement bear interest at the LIBOR rate plus a margin of 0.9%. On December 27, 2018, the Company draw down a borrowing of $1,600,000 with interest at a rate of 3.41% per annum. The Company paid off the borrowing in January of 2019. The credit facility is secured by a total amount of approximately $1,799,450 (NTD 55,000,000) of time deposits.
Total interest expenses of short-term loans incurred were $105,536 and $1,531 for the years ended December 31, 2018 and December 31, 2017, respectively.
The Company’s income tax payable consisted of the following as of December 31, 2018 and 2017:
Commissions payable to professionals consisted of the following as of December 31, 2018 and 2017:
Other current liabilities consisted of the following as of December 31, 2018 and 2017:
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”), the purpose to which is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The original term of the Alliance Agreement was from June 1, 2013 to May 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL an execution fee approximately $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762, the “Execution Fee”), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.
3) For the year ended December 31, 2017, the Company recognized the third contract year’s revenue amount of $415,423 (NTD12,628,201), net of VAT, and refund amount of $633,955 (NTD18,800,370), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency.
The Company recognized revenue of $372,650 (NTD 11,228,600) and $1,731,048 (NTD 52,621,159), net of VAT, for the years ended December 31, 2018 and 2017 related to this agreement. As of December 31, 2018 and 2017, the Company had non-current portion of unearned revenue of $2,056,513 and $4,239,130, respectively, and amounts in current liabilities of $1,028,256 and $1,237,684, respectively, related to the Alliance Agreement.
On April 20, 2016, the Company entered into a service agreement (“Service Agreement”) with Farglory. The Company was to provide consulting services to Farglory for NTD 4,000,000 per year and the aggregate consulting services fee was NTD 20,000,000 from May 1, 2016 to April 30, 2021. On January 2, 2018, the Company received termination notice from Farglory. Pursuant to the termination notice, the Company refunded approximately $603,729 (NTD 17,904,000) to Farglory in January 2018.
On January 28, 2011, the Company increased the number of authorized shares of common stock from 30,000,000 to 100,000,000 and authorized 10,000,000 shares of preferred stock with $0.00001 par value. It currently has 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) issued and outstanding as of December 31, 2018 and 2017. The Series A Stock has the following rights and preferences:
· Voting Rights. Except as otherwise provided by law, the Series A Stock and the common stock vote together on all matters submitted to a vote of the Company’s shareholders. Each holder of Series A Stock is entitled to ten votes for each share of Series A Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Registrant.
From the qualitative aspect, the Company notes the following regarding this deemed compensation:
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 the stockholders of the Company; 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 the stockholders of the Company.
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, 2018 and 2017.
Noncontrolling interests consisted of the following as of December 31, 2018 and 2017:
A 100% valuation allowance was provided for the deferred tax assets related to the net operating loss in the PRC segment as of December 31, 2018 and 2017. The deferred tax assets of $268,237 and $123,406 related to the Taiwan segment were included in other assets, respectively, on the consolidated balance sheets as of December 31, 2018 and 2017. Deferred tax liabilities were the timing differences of revenue and cost of sales recognized in the year ended December 31, 2018. Deferred tax liabilities of nil and $122,551, respectively, related to the PRC segment were included in other long-term liabilities on the consolidated balance sheets as of December 31, 2018 and 2017.
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 prior years and AHFL accrued $877,746 of withholding tax liability that cannot be deducted in its tax jurisdiction.
The 2017 Tax Cuts and Jobs Act (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. The Company recorded $95,936 and $1,007,323 of income tax payable as current liabilities and long-term liabilities respectively based on the statutory due date as of December 31, 2018.
Due to related parties consisted of the following as of December 31, 2018 and 2017:
***On May 10, 2016, Law Broker entered into an engagement agreement (“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. 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. On March 13, 2017, Law Broker and Ms. Chao entered into an amendment to the Engagement above-mentioned to specify 1) Ms. Chao’s pension calculation assumptions and start date, and 2) the non-competition provision start date. As of December 31, 2018 and 2017, the Company had current liabilities amounted $597,631 and $210,752, respectively, related to accrued bonus for Ms. Chao. For the year ended December 31, 2018 and 2017, the Company recorded $398,801 and $123,362 bonus expense in accordance with the Agreement. The 2019 engagement agreement is in the process of negotiating.
On February 1, 2018, Prime Asia Corporation, Limited, the Company’s majority owned subsidiary entered into a lease agreement with Apex Biz Solution Limited (“Apex,” was formerly known as Prime Technology Corp.) Apex is a related party of the Company because it is affiliated to the Company’s management. The lease is to lease the office space in Taipei City to Apex. The lease term is for 10 months commencing on February 1, 2018, with a monthly base rent of approximately $660 (NTD 20,000). The new lease agreement is started from December 1, 2018, and the new monthly rent expense is $680 (NTD 20,476). The Company recorded rent income of $7,317 for the year ended December 31, 2018.
On May 2, 2016, the Company entered into an advisory agreement with I Health who is contracted to provide 10,000 Taiwan citizens’ health information to the Company. The total advisory fee was approximately $42,000 (NTD 1,275,000). For the year ended December 31, 2017, the Company had cost of revenue related to I Health amounted $13,315. The Company had due to I Health $17,703 as of December 31, 2017.
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.
The functional currency for the subsidiaries in Taiwan is NTD, the functional currency for the subsidiaries in Hong Kong is HKD, and the functional currency for the subsidiaries and VIEs in PRC is RMB. The reporting currency of the Company are USD. The fluctuation of NTD, HKD and RMB will affect the Company’s operating results expressed in USD. The Company reviews its foreign currency exposures. The management does not consider its present foreign exchange risk to be significant.
The following table presents the fair value and carrying value of the Company’s financial assets and liabilities as of December 31, 2018:
The following table presents the fair value and carrying value of the Company’s financial assets and liabilities as of December 31, 2017:
The following table presents a reconciliation from the opening balances to the closing balances for recurring fair value measurements categorized within level 3 of the fair value hierarchy:
During the twelve months ended December 31, 2018, there were no assets or liabilities that were transferred between any of the levels.
Government bonds - The fair value of government bonds is valued based on theoretical bond price in the Taipei Exchange.
Long-term loans and due to previous shareholders - The fair value of long-term loans and due to previous shareholders are determined based on the variable nature of the interest rates and the proximity to the issuance date.
The geographical distribution of the Company’s financial information as of December 31, 2018 and 2017 were as follows:
On January 30, 2019, the Company drew down $200,000 from the credit facility of CTBC with interest at a rate of 3.26% per annum. These amounts were paid off in February of 2019. On February 27, March 21 and March 28, 2019, the Company drew down borrowings of $450,000, $100,000 and $650,000 with interest at a rate of 3.75% per annum, respectively.