Law Broker’s headquarters is located at 5th Floor, No. 311 3rd Section, Nanjing East Road, Taipei City, Taiwan, with approximately 753.29 square meters (equivalent to 8,105 square feet) of office space. Law Broker renewed the office lease with Pon-Chen Co., Ltd. for additional two years commencing from June 1, 2019 to May 31, 2021 and with a monthly rent of NT $373,251. Law Broker has also entered into 43 leases for each of its sales and service outlets and training centers (excluding headquarter), for an aggregate monthly fee (untaxed) of NT$5,335,737 (equivalent to approximately $181,230).
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 (equivalent to approximately 5,955 square feet) of office space. The lease agreement is by and among Zheng Yong Xiang, Zhang Guo Qiang and Anhou. The term is from November 3, 2018 to November 2, 2024. Anhou paid the rent of its office space in Nanjing in the total amount of RMB4,483,063 or approximately $687,000 during the fiscal year ended December 31, 2020.
As a smaller reporting company, we are not required to make such disclosure under Item 6.
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 Item 8 of Part II, “Financial Statements and Supplementary Data” of this Form 10-K Report. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months and periods of those fiscal years.
We have three operating subsidiaries in our Taiwan segment and conduct brokerage and insurance agency services through the subsidiaries across Taiwan. Through our recent acquisitions and integrations, our Taiwan segment is able to achieve synergies among group companies and generate more commission revenues from marketing and selling insurance products. Revenues from the Taiwan segment continues to increase and contributed about 94.6% of the total revenue of the Company for the year ended December 31, 2020. As of December 31, 2020, we had 51 sales and service outlets (including the headquarters) with 5,299 sales professionals and 246 administrative staff in the Taiwan segment.
The coronavirus pandemic (“COVID-19”) has resulted in global economic disruptions and numerous restrictions imposed by government authorities. We did not have any significant impact on the operations in the Taiwan segment due to the government’s responses and actions taken to COVID-19. However, our business in the PRC segment experienced certain negative impacts, such as limited access to our staff in the PRC in the beginning of the outbreak and restrictions on business travel within the PRC and between Taiwan and the PRC.
● Revenue recognition including our identification of performance obligations and significant assumptions in estimating variable consideration;
● Complexity in estimates of income taxes due to applications of tax rules in different foreign jurisdictions.
For other significant accounting policies affecting our financial statements, see Note 1 to our 2020 consolidated financial statements.
As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies in Taiwan, the PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales professionals in our distribution and service network.
The Company’s majority revenues are derived from the commissions from sales of life insurance products. Total commission revenue from sales of life insurance products accounted for 94.6% and 93.6% of total revenue for the years ended December 31, 2020 and 2019, respectively; whereas commission revenue from sales of property and casualty insurance products only contributed 5.4% and 6.1% of total revenue for the years ended December 31, 2020 and 2019, respectively.
Most of the individual life insurance products we distribute allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured, a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time and enables the Company to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years. Because of this feature and the expected sustained growth of life insurance sale, we have placed significant resources to expand and sell the life insurance products with periodic payment schedules. We expect that sales of life insurance products will continuously be our primary source of revenue in the next several years.
Our total revenue of $124.2 million for the year ended December 31, 2020 increased by $28.3 million (or 29.6%) compared to the total revenue of $95.9 million for the year ended December 31, 2019. The increase was attributable primarily to the constant business growth in the Taiwan segment. For the years ended December 31, 2020 and 2019, the revenue generated respectively from Taiwan, PRC and Hong Kong segments was as follows:
(i) Uniwill had contributed $20.0 million of the increased revenue during the year 2020 after stock compensation arrangements entered with two non-related entities. The positioning of Uniwill is to target those high-net-worth individual customers with strategies to sell investment-type insurance policies.
(ii) We discontinued certain long-term care and disability insurance products in the year of 2020. Prior to such discontinuation, many individual customers decided to lock in the long-term care and disability insurance policy that we had offered because the individual customers believed that these insurances products provided more favorable terms to them than the other ones available on the market. Such surge in the sales of those insurance policies in 2020 had boosted the total sales in our insurance policies.
(iii) We received more contingent commissions, which include trailing commissions, persistency rate linked bonuses and some other service allowance, for the year ended December 31, 2020 due to our continued growth in the sales of insurance products in the past recent years.
Overall revenue from our PRC segment decreased by $2.1 million, or 24.5% to $6.4 million for the year ended December 31, 2020 from $8.5 million for the same period ended December 31, 2019. Decrease in revenue for the PRC segment was due to the adverse impact on the outbreak of COVID-19. In addition, a new Chinese policy requesting sales agents to have audio and video recording during promotion of insurance, has increased difficulties for sales agents to expand the market and promote insurance products to individual customers.
Selling expenses were mainly incurred by Law Broker and Uniwill in connection with online marketing and advertising. Selling expenses increased 0.5 million or 19.2% from 2.7 million for the year ended December 31, 2019 to 3.2 million for the same period ended December 31, 2020. As a result, the Company incurred more expenses for Uniwill’s branding during the year 2020.
G&A expenses are principally comprised of salaries and benefits for our administrative staff, office lease expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees.
For the year end December 31, 2020, G&A expenses were $27.0 million, reflecting an increase of $6.7 million or 33.3%, compared with $20.2 million for year ended December 31, 2019. During the year of 2020, the Company recognized costs of $1.4 million related to stock-based compensation arrangements. Moreover, our revenue growth led to increases in performance bonus to employees and sales taxes during the year of 2020. We also incurred more general expenses due to business expansions of Uniwill and penalties related to a tax matter in the Taiwan segment for the year ended December 31, 2020.
The following table represents a comparison of our cash flows for the years ended December 31, 2020 and 2019:
We did not have any off-balance sheet arrangements as of December 31, 2020.
The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of December 31, 2020:
(2) Contractual obligations include operating lease obligations and other obligations related to compensation plans with Law Broker’s officers, amount due to previous shareholders of AHFL, and a Strategic Alliance Agreement with AIATW.
Board of Directors and Shareholders of China United Insurance Services Inc.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1 to the consolidated financial statements, The Company’s revenue is derived from insurance agency and brokerage services. The Company, through its subsidiaries and variable interest entities, sells insurance products provided by insurance companies to individuals, and is compensated in the form of commissions from the respective insurance companies, according to the terms of each service agreement made by and between the Company and the insurance companies. The sale of an insurance product by the Company is considered complete when initial insurance premium is paid by an individual and the insurance policy is approved by the respective insurance company. When a policy is effective, the insurance company is obligated to pay the agreed-upon commission to the Company under the terms of its service agreement with the Company and such commission is recognized as revenue.
Auditing the accounting for revenue recognition involved subjectivity and complexity in evaluating management's estimates. Specifically, the judgments necessary to determine the amount, timing and presentation of revenue and to estimate total costs and fees for the performance obligations that recognize the revenue. Auditing such estimates required extensive audit effort due to the volume and complexity of these contracts.
How the Critical Audit Matter Will Be Addressed in the Audit
● We will obtain an understanding of controls over contract revenue, including management’s controls over the initial setup of new contract arrangements and the estimates of total costs and fees for performance obligations.
o Evaluate the terms and conditions of each contract and the appropriateness of the accounting treatment within the context of the five-step model prescribed by ASC 606, Revenue from Contracts with Customers, and evaluating whether management’s conclusions were appropriate.
● Evaluating the reasonableness of the estimated revenue during the year by comparing the estimated revenue from the sale of the effective insurance policies without the insurance companies' notice to the sales of the insurance policies confirmed by the insurance companies in the subsequent period. In cases where estimated revenue by the insurance company was significantly higher or lower than expected, we obtained further explanations and corroborating supporting documentation to evaluate the impact to the estimated revenue.
Recognition of stock-based compensations and the valuation of fair value to equity securities due to multi- performance targets with counter parties in the arrangement
The Company has preferred stock-based compensation issued to non-related entities for Uniwill. The Company accounts for equity-based compensation cost in accordance with ASC 718, Compensation-Stock Compensation after adoption of ASC 2018-07, which requires the measurement and recognition of compensation expense related to the fair value of equity-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all share-based compensation payments granted to employees and nonemployees, net of estimated forfeitures, over the employees’ requisite service period or the non-employee performance period based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied towards modified, repurchased, or cancelled during the periods reported.
Our audit procedures related to management’s conclusion on amount, timing and presentation of transactions with recognition of stock-based compensations and the valuation of fair value to equity securities due to multi-performance targets with counter parties in the arrangement, include the following, among others:
● We will obtain an understanding of Management’s process and evaluate the design of controls relating to the Company's methods, significant assumptions, and inputs used for valuing the Company’s equity securities.
● We will use a valuation specialist to assist us in evaluating the Company’s models, valuation methodology, and significant assumptions used in the fair value estimates.
We have audited the accompanying consolidated balance sheet of China United Insurance Service, Inc. and subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statement of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year in the period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
The coronavirus pandemic (“COVID-19”) has resulted in global economic disruptions. We had experienced some adverse impacts on our business in the PRC Segment, such as limited access to our staff in the PRC in the beginning of the outbreak and restrictions on business travel within the PRC and between Taiwan and the PRC. Even though the operations in the PRC segment fully resumed in the year 2020, the pandemic has created global economic uncertainties and led to negative impact on the financial markets. The extent of the COVID-19 impact to the Company will depend on numerous factors and developments related to COVID-19. Consequently, any potential impacts of COVID-19 remain highly uncertain and cannot be predicted with confidence.
On May 27, 2020, the Company completed the acquisition of Rays Technology Corporation ("Rays") for its 90% equity interest. The consideration to acquire 27,000 shares of Ray was US$9,177 (NTD 270,000). The transaction is accounted for a business acquisition. However, the Company did not recognize any goodwill or gain on bargain purchase as a result of the net asset value acquired approximating to the consideration paid. In December 2020, the equity interest in Rays increased from 90% to 99% due to additional capital injections by the Company.
The accompanying consolidated financial statements include the accounts of China United, its subsidiaries and variable interest entities as shown 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 year 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 accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Due to the legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, China United, through its subsidiary, Zhengzhou Zhonglian Hengfu Business Consulting Co., Limited (“WFOE”), entered into Exclusive Business Cooperation Agreement (the “EBCA”), Power of Attorney, Option Agreement, and Share Pledge Agreement (collectively, the First VIE Agreements) on January 17, 2011 with Anhou and Anhou original shareholders so as to operate and conduct the insurance agency and brokerage business in the PRC.
Noncontrolling interests represent amounts related to majority-owned subsidiaries in which the Company has a controlling financial interest. The amount of noncontrolling interest is consisted of the amount of such interests at the date of the Company's original acquisition of an equity interest and the noncontrolling holders' percentage share of income or losses from the subsidiaries.
China United’s financial statements are presented in U.S. dollars ($), which is the China United’s reporting and functional currency. The functional currencies of the China United’s subsidiaries are New Taiwan dollar (“NTD”), China yuan (“RMB”) and Hong Kong dollar (“HKD”). The resulting translation adjustments are reported under other comprehensive income. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currency are translated at the functional currency using the rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the consolidated statements of operations and other comprehensive income (loss).
The Company 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 financial statements are as follows:
Cash and cash equivalents include cash in banks, bank deposits, and highly liquid investments with maturities of three months or less at the date of origination.
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Upon sale of retirement, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recorded in other income (expense).
Goodwill represents the excess of acquisition cost over the fair value of the net assets in the acquisition of a business. Goodwill is not amortized but instead is evaluated for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using two-step goodwill impairment test. The first step screens for potential impairment of goodwill to determine if the fair value of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied fair value of goodwill to its carrying value. Intangible assets, which primarily consist of software, are stated at cost, less accumulated amortization, and amortized over estimated useful lives ranging from 3 to 5 years.
Long-term investments include government bonds held as available-for-sale, investment in real estate investment trusts (“REITs”) measured at fair value through net income, and equity investments under cost method. Available-for-sale investments are carried at fair value and unrealized gains and losses as a result of changes in the fair value are recorded as a separate component within accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. The Company evaluates its available-for-sale debt securities to assess whether those with unrealized loss positions are other-than-temporarily impaired. Impairments are considered to be other-than-temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before the recovery of its cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other income (expense) in the consolidated statements of comprehensive loss.
For the years ended December 31, 2020 and 2019, the Company recorded revenue of $124,267,072 and $95,919,338, respectively. Disaggregation information of revenue is disclosed in Note 22.
We have preferred stock-based compensation issued to non-related entities for Uniwill. The Company accounts for equity-based compensation cost in accordance with ASC 718, Compensation-Stock Compensation after adoption of ASC 2018-07, which requires the measurement and recognition of compensation expense related to the fair value of equity-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all share-based compensation payments granted to employees and nonemployees, net of estimated forfeitures, over the employees’ requisite service period or the non-employee performance period based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Please see Note 12 for additional information.
The Company records income tax expense using the asset-and-liability method of accounting for deferred income taxes. Under this method, deferred taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company has elected to recognize a tax on global intangible low-taxed income ("GILTI"), which was imposed by the 2017 Tax Cuts and Jobs Act (the "2017 Tax Act"), as tax expense in the period the tax is incurred.
As the holders of preferred stock of the Company are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Company as may be declared by the board of directors, the preferred stock is treated as a participating security. When calculating the basic earnings per common share, the two-class method is used to allocate earnings to common stock and participating security as required by FASB ASC Topic 260, “Earnings Per Share.” As of December 31, 2020 and 2019, the Company does not have any potentially dilutive instrument.
The Company derives its revenue from insurance agency and brokerage services provided and operates their business in the PRC, Hong Kong and Taiwan. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC, Hong Kong and Taiwan, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, Hong Kong and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which is intended to simplify various aspects related to accounting for income taxes. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. The standard will be adopted upon the effective date for us beginning January 1, 2021. We are currently evaluating the effects of the standard on our consolidated financial statements and related disclosures.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. ASU 2020-01 will be effective for the Company in the first quarter of 2021. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity's own equity. ASU 2020-06 will be effective for the Company in the first quarter of 2022. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
Cash, cash equivalents and restricted cash consisted of the following as of December 31, 2020 and 2019:
Noncurrent restricted cash includes a mandatory deposit in the bank in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies in PRC, which is not allowed to be withdrawn without the permission of the regulatory commission, and a trust account held for the bonus accrued for officers of Law Insurance Broker Co., Limited ("Law Broker').
The Company had a total of $15,930,161 (NTD 447.3 million) and $11,920,632 (NTD 357.0 million) restricted time deposits, respectively, as of December 31, 2020 and 2019. During 2020, time deposits of $35,616 (NTD 1 million) was pledged as collateral for the Company’s credit card. In addition, the Company had time deposits of $15,894,545 and $11,920,632 pledged as collateral for short-term loans, respectively, as of December 31, 2020 and 2019. See Note 9.
For the years ended December 31, 2020 and 2019, the Company purchased marketable securities of $961,416 and 598,676, respectively.
Estimated future assets amortization as of December 31, 2020 is as follows:
Amortization expense was $257,426 and $241,193 for the years ended December 31, 2020 and 2019, respectively.
A decrease in the investment ownership was due to capital injections by other investors of GIB. The Company did not participate in the capital injections and hence the percentage of the investment ownership was diluted from 15.64% to 11.73%. The change does not have an effect on the classification and measurement of the investment in GIB.
The change in carrying value of equity investment between the two years resulted from the fluctuation of exchange rates. The Company received $325,197 and $311,350 dividend income distributed from the investee for the years ended December 31, 2020 and 2019, respectively.
REITs are valued based on quoted market prices in the active market of Taiwan. The fair value of REITs as of December 31, 2020 and 2019 were $1,359,100 and $1,308,711, respectively. Unrealized gains included in earnings for assets held at the end of the reporting periods were $50,389 and $188,472 for the years ended December 31, 2020 and 2019, respectively.
During the years ended December 31, 2020 and 2019, no other-than temporary impairment were recorded related to the long-term investments.
The compensation plans eligible to Law Broker’s officers include a surplus bonus based on a percentage of income after tax and other performance bonuses such as retention and non-competition. For the years ended December 31, 2020 and 2019, the bonus expenses to Law Broker’s officers under the compensation plans were $919,053 and $824,213, respectively. As of December 31, 2020 and 2019, the Company had accrued bonus of $1,906,331 and $903,808 payable within next 12 months, and noncurrent accrued bonus of $237,440 and $471,466, respectively, related to the compensation plans for Law Broker’s officers. See Note 20 for additional information of agreements with Law Broker’s officers.
According to the term of the JV Agreement, the Labor Parties shall be entitled of 9,608 preferred stock if the following milestones are met: (a) the registered number of insurance business professional sales of Uniwill is more than 200, (b) the business performance shall reach FYB NTD 5 million or more, and (c) one of two employees of the Labor Parties designated by AIlife shall join Uniwill within 6 months after the paid-in capital of Uniwill increased to NTD100 million (hereinafter refer to the “performance target”). The preferred stock shall provide for (a) the right to receive a distribution of 50% of the net-income of Uniwill, (b) the right to convert such preferred stock into common stock at 1 to 1000 after the date when the registered number of sales reaches 1,000 and FYC reaches NT$250 million, (c) the right to elect directors, (d) the voting rights owned by the Company and the Labor Parties should be 51:49 due to 1,000 voting right per preferred stock, and (e) the number of the preferred stock to the Labor Parties shall be issued along with the proportion when the paid-in capital of Uniwill increases to NTD 400 million once the registered number of sales reaches 1,000.
Each incremental preferred stock (the “incremental preferred stock”) to be issued along with the proportion of the paid-in capital has a value of approximately $16 (NTD 437). Compensation cost of $447,137 was recorded in December 2020 since the Labor Parties are entitled of the incremental preferred stock of 28,823 due to the registered number of sales reached 1,000. For the year ended December 31, 2020, a total of the compensation cost related to the JV agreement was $1,427,603, which was considered as the Labor Parties’ contributions to Uniwill (see Note 15).
The Company had 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) issued and outstanding as of December 31, 2020 and 2019. The Series A Stock has the following rights and preferences:
According to Taiwan accounting rules and corporation regulations, the Company’s subsidiaries in Taiwan must appropriate 10% of net income to statutory reserves until the accumulated reserve reaches registered capital. The reserve can be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting to share capital. As of December 31, 2020 and 2019, the Company had statutory reserves in responding to the regulation requirements in Taiwan in the amount of $9,463,903 and $8,228,904, respectively.
Pursuant to the PRC regulations, the Company’s CAE are required to transfer 10% of net profits, as determined under the PRC accounting regulations, to a Statutory Common Reserve Fund (“Reserve Fund”). Appropriation to the Reserve Fund may cease when the fund equals 50% of a company’s registered capital or when a company has accumulated losses. The transfer to this reserve must be made before distribution of dividends to shareholders. The Company’s CAE did not appropriate such reserve due to as the accumulated deficit as of December 31, 2020 and 2019.
Noncontrolling interests consisted of the following as of December 31, 2020 and 2019:
On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “First Amendment to the Alliance Agreement”) with AIATW. In the First Amendment to the Alliance Agreement, the performance targets and the provision about refunding the Execution Fee on a pro rata basis when the performance targets are not met were revised.
The following table presents the amounts recognized as revenue and refund for each contract year:
6) For the year ended December 31, 2020, the Company estimated to recognize the sixth contract year’s revenue amount of $380,864 (NTD11,213,344), net of VAT, and refund the amount of $686,615 (NTD 20,215,227), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency.
The revenue recorded and refund amounts were trued up to $415,186 (NTD 12,223,829) , net of VAT, and $652,294 (NTD 19,204,743) , net of VAT, respectively, for the year ended December 31, 2020 based on notice received from AIATW.
The Company recognized revenue of $415,186 (NTD12,223,829) and $306,961 (NTD 9,481,371), net of VAT, for the years ended December 31, 2020 and 2019 related to this agreement.
Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As of December 31, 2020 and 2019, operating lease right-of-use assets and lease liabilities were as follows:
The minimum future lease payments as of December 31, 2020 are as follows:
The Company’s income tax expense is mainly generated by its subsidiaries in Taiwan. The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and subject to a statutory tax rate on income reported in the statutory financial statements at 20% and a tax on undistributed earnings at 5%. The Company had no plan to distribute earnings earned for the years ended December 2020 and 2019, and the tax on undistributed earnings of 5% was estimated. During the year 2020, the Company received an assessment letter from National Taxation Bureau of Taiwan, which requires the Company to remit a supplementary tax payment of $281,605 related to a withholding tax matters, and the amount was fully paid in September 2020. The Company recognized interest and penalties of approximately $145,000, in general and administrative expenses for the year ended December 31, 2020. As of December 31, 2020 and 2019, the Company had current tax payable of $2,978,617 and $2,230,793 for Taiwan income tax, respectively.
WFOE and the Consolidated Affiliated Entities in the PRC are governed by the Income Tax Law of the PRC concerning private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustments. WFOE and the CAE had no income tax expenses for the years ended December 31, 2020 and 2019 due to the loss positions.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), P.L. 116-136, was passed into law, amending portions of certain relevant US tax laws. The CARES Act includes a number of federal income tax law changes, including, but not limited to: (a) permitting net operating loss carrybacks to offset 100% of taxable income for taxable years beginning before 2021, (b) accelerating alternative minimum tax credit refunds, (c) temporarily increasing the allowable business interest deduction from 30% to 50% of adjusted taxable income, and (d) providing a technical correction for depreciation related to qualified improvement property. The Company does not believe that the CARES Act will have a material impact on the Company's consolidated financial statements.
The Company files income tax returns in the U.S. federal and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, Taiwan, and the PRC income tax examinations by tax authorities for years before 2017, 2015, and 2010, respectively. For the year ended December 31, 2020 and 2019, the Company did not have any unrecognized tax benefits. It is difficult to predict the final timing and resolution of any particular uncertain tax position. Based on the Company’s assessment of many factors, including past experience and complex judgments about future events, the Company did not anticipate significant changes in its uncertain tax positions over the next 12 months.
Amounts due to Mr. Mao were associated with funding provided by Mr. Mao for the formation of our subsidiaries in China in 2011. The Company has paid off all the amount due to Mr. Mao in 2020. As of December 31, 2019, the amount of $373,183 were non-interesting bearing and payable on demand.
Amounts due to Ms. Lu were borrowings from Ms. Lu to support Anhou’s business operation. The amounts were non-interesting bearing and payable on demand.
See time deposits pledged as collateral for short-term loans in Note 9.
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 Stock Market. 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 entered on January 18, 2019 that enjoins them from violating the charged provisions of the federal securities laws, orders the Company to comply with its undertaking to retain an independent compliance monitor for a period of not less than one year. The SEC did not seek a monetary penalty against the Company and there is no financial impact to the Company.
On December 21, 2018, Law Broker entered into an appointment agreement with Shu-Fen, Lee (“Ms. Lee”), pursuant to which, she serves as the president of Law Broker from December 21, 2018 to December 20, 2021. Ms. Lee’s primary responsibilities include 1) overall business planning, 2) implementation of resolution of the shareholders' meeting or the board of directors, 3) the appointment and dismissal of the Law Broker’s employees and sales professionals, except for internal auditors, 4) financial management and application, 5) being the representative of Law Broker, 6) other matters assigned by the board of directors. According to the agreement, Ms. Lee’s compensation plan include: 1) base salary, 2) managerial allowance, 3) surplus bonus based on 1.25% of Law Broker’s income after tax, and 4) annual year-end bonus. For the year ended December 31, 2020 and 2019, the Company has recorded the compensation expense of $200,558 and $160,613 under the appointment agreement, respectively.
On May 10, 2016, Law Broker entered into an engagement agreement with Hui-Hsien Chao (“Ms. Chao”), pursuant to which, she serves as the general manager of Law Broker from December 29, 2015 to December 28, 2018. The engagement agreement with Ms. Chao was renewed in 2019 and her service period has extended to December 20, 2021. Ms. Chao’s primary responsibilities are to assist Law Broker in operating and managing insurance agency business. According to the engagement agreement, Ms. Chao’s Bonus plans include: 1) execution, 2) long-term service fees, 3) pension and 4) non-competition. The payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms in the engagement agreement. Ms. Chao acts as the general manager or equivalent position of Law Broker for a term of at least three years. For the year ended December 31, 2020 and 2019, the Company has recorded the performance bonus expense of $718,495 and $663,601 under the engagement agreement, respectively.
● 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 following table summarize financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019:
The geographical distribution of the Company’s financial information as of December 31, 2020 and 2019 were as follows:
The condensed parent company only financial information for the Company is presented below:
The Company has evaluated all other subsequent events through the date these consolidated financial statements were issued and determine that there were no subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.
As a result of an internal review of Uniwill business projection, the Company and the Labor Parties discovered that the previous business projection did not include a consideration of the retention rate of the sale professionals. In the previous business projection, the Company and the Labor Parties had assumed all the new sales professionals joined through the efforts of the Labor Parties would continue to retain with Uniwill. However, the Company noticed that the actual retention rate of the new sales professionals was about 54% as of December 31, 2020, compared the rate with industry averages, and determined that the previous business projection did not reflect the actual conditions. The Company and the Labor Parties then included the retention rate in the business projection and determined that compensation cost recognized in the interim periods ended March 31, June 30, and September 30, 2020 were overstated. Following the Company’s determination that it would restate its interim consolidated financial statements filed during 2020, the Company also determined that it would correct and establish a valuation allowance against deferred tax assets related to losses carried forward according to the new business projection of Uniwill.
The effect of the restatement on results of operations for the periods ended March 31, June 30, and September 30, 2020 were as follows:
The effect of the restatement on results of financial position as of the periods ended March 31, June 30, and September 30, 2020 were as follows: