Law Broker’s headquarter 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, 2017 to May 31, 2019 and with a monthly rent of NT $373,251 ($12,279). Law Broker has also entered into 38 leases for each of its sales and service outlets and training centers (excluding headquarter), with an aggregate office size of 19,291 square meters for an aggregate monthly fee of NT$4,159,470 ($136,832).
As described in “Explanatory Note Regarding Restatement” above and in Item 8 of Part II, “Financial Statements and Supplementary Data-Note 27-Restatement”, the Company has restated its consolidated financial statements as of and for the years ended December 31, 2016 and 2015 to correct errors related the accounting for the GHFL Acquisition. The Company also restated the unaudited interim financial data as of and for each of the interim periods ended March 31, 2017, June 30, 2017 and September 30 2017. See Item 8 of Part II, “Financial Statements and Supplementary Data-Note 28-Quarterly Financial Data (Unaudited).” The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the Restatement. Historical results, including those that have been restated, are not necessarily indicative of the results to be expected in future periods.
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.
During the year ended December 31, 2017, 85.31%, 14.37% and 0.32% of our revenues were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and Hong Kong, respectively. 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.
The accompanying consolidated financial statements include the accounts of our Company and our subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
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, 2017 and 2016.
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, 2017, 2016 and 2015, policy cancellations were $227,901, $340,086 and $291,325, respectively.
Our Company pays commissions to its sales professional when an insurance product is sold by the sales professional and accepted by the insurance company. Our Company recognizes commission revenue on a gross basis. The commissions paid by us to our sales professional are recorded as costs of revenue.
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 that 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 measured as 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 are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of operations and other comprehensive income (loss).
The following table shows the results of operations for the years ended December 31, 2017 and 2016:
Please note that our results of operations in 2016 were not affected by the restatement.
a) The revenue of TransGlobe Life Insurance Inc. (“TransGlobe”) increased in 2017. The main reason for this increase was the launch of TransGlobe’s top seller product that offers better disability support insurance coverages with an affordable insurance premium. This selling package drew more attention from the Company’s customers and boosted the sales performance in the year ended December 31, 2017.
c) On June 14, 2017, with AIATW’s consent, the 2016 Letter has been revoked in order to conform with the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in a third amendment (Amendment No. 3). As result, the Company recognized AIATW’s business promotion revenue in each contract year based on the performance milestones set for each contract year.
d) The revenue increase in the PRC was primarily due to increases in sales of retirement and critical illness insurance in Sichuan for the year ended December 31, 2017. In light of individuals’ need to make personal provisions or old age and illness, as strongly encouraged by the Chinese government, demand for such policies increased accordingly. In addition, the China Insurance Regulatory Commission (“CIRC”) required insurance companies to make adjustments to policy designs, driving insurance companies to provide innovative products to better meet market needs and led to increase in revenue.
Cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the year ended December 31, 2017 decreased by $3,753,488 or 8%, to $42,801,007 compared with $46,554,495 for the year ended December 31, 2016. This decrease was primarily due to the decrease in indirect commission cost, which included special allowance, high-performance awards, practicing bonus, etc. The Company cancelled high-performance awards and reduced recruitment referral bonus in September 2017, and certain special allowances were reduced in July 2017.
Selling expenses mainly occurred in Law Broker, representing the expense for marketing promotion and selling related expense. The selling expense for the year ended December 31, 2017 decreased by $498,111 or 18%, to $2,344,633 compared with $2,842,744 for the year ended December 31, 2016. The decrease was mainly due to decreased advertising expense. The advertising expense decreased because the Company strategically adopted social media as a means for brand promotion.
Total other income (expenses) for the year ended December 31, 2017 was $948,162, compared with net other income for the year ended December 31, 2016 of $454,691. Other income (expense) mainly consists of interest income, interest expenses, dividend income and other income, net. Other income (expenses) increased by over $493,471 primarily due to the exchange rate fluctuations and other income as well as a 63% increase in interest income.
Our subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. Also, the Income Tax Law of Taiwan provides that a company is taxed an additional 10% on any undistributed earnings to its shareholders.
Beginning in the year ended December 31, 2017 Anhou and its branches elected to file joint tax returns under PRC tax jurisdiction. Due to the adoption of this filing method, operating loss in the branches from the year 2016 and prior years can no longer deduct earnings beginning in the year 2017. However, any loss incurred in any of the branches in the joint tax return will be consolidated and any further loss in the joint tax return can be carried over to five years from the year 2017. Due to the joint filing of tax returns for Anhou, the Company reversed deferred tax assets and related valuation allowance of $67,577 previously recognized as of December 31, 2016.
Overview of the years ended December 31, 2016 and 2015 (Restated)
The following table shows the results of operations for the years ended December 31, 2016 and 2015:
As noted above, 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, PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. For the years ended December 31, 2016 and 2015, the revenue generated respectively from Taiwan, PRC and Hong Kong was as follows:
Revenue in the year ended December 31, 2016 totaled approximately $69.9 million, an increase of $14.9 million (or 27.1%) compared with revenue of $55.0 million in the previous year. This was attributable to the expansion of our business in Taiwan and a significant increase in our PRC operations.
a) The revenue of Farglory Life Insurance Co., Ltd (“Farglory”) increased by $6.0 million (or 34%) in 2016 compared with 2015, primarily because Farglory customized and bundled its life insurance products to better respond to its clients' needs. By combining insurance contracts with the diversified term, premium, and coverage arrangements, the increased flexibility of the products of Farglory drew more attention from customers and thus boosted the sales performance in the year ended December 31, 2016.
b) The revenue of Taiwan Life Insurance Co., Ltd (“Taiwan Life”) increased by $2.2 million (or 37%) in 2016 compared with 2015, primarily due to the launch of Taiwan Life’s top selling product that offers comprehensive life-time insurance coverage with an affordable insurance premium. This selling package drew more attention from the company’s customers and boosted the sales performance in the year ended December 31, 2016.
c) The remaining revenue increase in the Taiwan area was primarily due to the Taiwan central bank’s decreased interest rate, which caused an increase in the demand for both investment-oriented insurance and long-term care insurance.
d) 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 improved our reputation within local markets to generate higher revenue for the year ended December 31,2016.
Cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the year ended December 31, 2016 increased by $11,130,733, or 31%, to $46,554,495 compared with $35,423,762 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. 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 our subsidiary Law Broker, and was mainly due to marketing promotion expenses. 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 Company’s decision to decrease advertising expense to publicize of our brand.
For the year ended December 31, 2016, G&A expenses were $13,852,277, a decrease of $862,734, or 6%, compared with $14,715,011, as restated, for the year ended December 31, 2015. This was mainly due to the compensation expenses recorded in connection with the acquisition of GHFL in 2015. As restated, general and administrative expenses in the year ended December 31, 2015 increased by approximately $2.0 million, or 16.1% compared to the previously reported amount.
Total other income for the year ended December 31, 2016 was $454,691 compared with total other income for the year ended December 31, 2015 of $379,926. Other income (expenses) mainly consists of interest income, interest expenses, dividend income and other income. Compared with the year ended December 31, 2015, other income (expenses) rose due to the increase in dividend income, significantly offset by a decrease in other net income of $158,196 due to the decrease in foreign exchange gain.
CU WFOE and the Consolidated Affiliated Entities 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. According to the requirement of local tax authorities, the taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. The tax rate of Jiangsu Law is also 25%.
Net cash provided by financing activities was $2,506,795 during the year ended December 31, 2017, which was mainly due to the proceeds from related party and third party borrowings of approximately $2.8 million. Net cash used in financing activities was $376,473 during the year ended December 31, 2016, which was mainly due to the repayment to related parties and third parties loan.
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, 2016 and 2015:
On October 24, 2016, our Company entered into a loan agreement with an unaffiliated third party, Rich Fountain Limited (“RFL”), a company incorporated under the laws of Samoa. We provided a short-term loan approximately $1,486,846 (NTD 48,000,000) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest were payable of the loan were payable on April 23, 2017. On April 21, 2017, the Company and RFL entered a supplemental agreement to extend the loan to October 23, 2017. The Company received partial payment of approximately $71,974 (NTD2,134,440) 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 (NTD44,790,360). On March 7, 2018, RFL paid off all outstanding balance of loan to the Company.
The Company entered into a line of credit agreement with O-Bank for a $1,500,000 credit facility from June 22, 2017 to June 21, 2018. Borrowings under the agreement bear interest at the O-Bank’s cost of fund plus a margin of 0.5%. On December 11, 2017, the Company draw down a borrowing of $600,000 on with interest at a rate of 2.35% per annum and the principal are due on March 11, 2018. On December 26, 2017, the Company borrowed $800,000 with interest at a rate of 2.70% per annum and the principal are due on March 26, 2018. The credit facility is secured by a total amount of approximately $1,686,017 (NTD50,000,000) of time deposits.
Total interest expense for these long-term loans was $20,737 and $11,755, for the year ended December 31, 2017 and 2016, respectively.
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, 2017 and 2016:
On July 1, 2016, the Company entered into a lease agreement with Yuli Investment to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $590 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. We recorded rent income of $564 and $279, respectively, for the years ended December 31, 2017 and 2016.
As of December 31, 2017, our Company had no off balance sheet arrangements.
We have audited the accompanying consolidated balance sheets of China United Insurance Service, Inc. and Subsidiaries (collectively the “Company”) as of December 31, 2017 and 2016, 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, 2017 , including 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting existed as of an ineffective control environment, due to (i) not effectively implementing a process to hire qualified employees who has proficient knowledge of US GAAP, and can identify unusual transactions timely and appropriately assessed for financial report impact; (ii) not effectively establishing structure, authority, and responsibilities to ensure the objectives of internal control over financial reporting were adequately achieved, and lacking a strong Internal Audit function to assist management with assessing the effectiveness of internal control over financial reporting; and (iii) not designing and maintaining sufficient controls over revenue recognition to ensure the completeness of commission and bonus revenue at the period end.
As discussed in Note 27 to the consolidated financial statements, the Company has restated its 2016 and 2015 consolidated financial statements to correct for errors.
CU Hong Kong, a wholly owned Hong Kong-based subsidiary was incorporated by China United, on July 12, 2010 under Hong Kong law. On October 20, 2010, CU Hong Kong established a wholly owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Limited (“CU WFOE”) in Henan province in the People’s Republic of China (the “PRC”).
On January 16, 2011, the Company issued 20,000,000 shares of common stock, at par value of $0.00001, to several non-US citizens or residents for $300,000. The issuance was made pursuant to an exemption from registration in Regulation S under the Securities Act of 1933, as amended. The entire $300,000 contribution was wired to CU WFOE’s bank account in PRC.
Anhou was established in October 2003 and obtained its insurance brokerage license in April 2012 in PRC. Its primary business is to sell life and property casualty insurance products in the PRC.
Prior to the entering of VIE agreements with CU WFOE, Anhou acquired the entire interest of Sichuan Kangzhuang Insurance Agency Co., Limited (“Sichuan Kangzhuang”), which was established in September 2006 in Sichuan Province of the PRC, for RMB532,622 or approximately USD78,000. Anhou also acquired the entire interest of Jiangsu Law Insurance Brokers Co., Limited (“Jiangsu”), which was established in September 2005 in Jiangsu Province of the PRC, for RMB518,000 or approximately USD75,470. Both subsidiaries are also engaged in selling life and property casualty insurance products in the PRC. For the purpose of procuring certain economic benefits and establishing a more centralized control over the business operations in Sichuan province, the Company commenced the dissolution process of Sichuan Kangzhuang, a wholly owned subsidiary and set up a branch office of Anhou in Sichuan province. Accordingly, Sichuan Kangzhuang had filed a dissolution application to the local Bureau of Administration. On June 22, 2017, the Sichuan Branch of Anhou obtained its business license to conduct insurance agency business. As of this date, Sichuan Kangzhuang has not received formal approval from relevant government authorities regarding the dissolution.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of AHFL, a limited liability company established in April 2012, under the laws of British Virgin Islands, together with AHFL’s four majority owned subsidiaries in Taiwan in exchange for 8,000,000 common shares of the Company and NTD22.5 million or approximately USD676,000 in two installments. The Company and the selling shareholders of AHFL had entered into a total of five amendments to the Acquisition Agreement since August 24, 2012. Pursuant to the Fifth Amendment entered into on March 12, 2017, the Company is required to pay off the entire remaining balance of NTD15 million no later than March 31, 2019.
As part of the acquisition agreement with AHFL, the Company agreed to issue 2,000,000 common shares to AHFL employees and create an employee stock option pool, consisting of available options, exercisable up to 2,000,000 shares of common stock of the Company. However, as of this date, the Company has not fulfilled this obligation.
Among the four majority owned subsidiaries in Taiwan, AHFL owns 65.95% of interest of Law Enterprise Co., Limited (“Law Enterprise”). Through Law Enterprise, AHFL owns three second tier subsidiaries, including Law Insurance Broker Co., Limited (“Law Broker”) with 100% equity interest, Law Insurance Agent Co., Limited (“Law Agent”) with 96% equity interest, and Law Risk Management & Consultant Co., Limited (“Law Management”) with 97.84% of equity interest. All of these subsidiaries are engaging in business in insurance brokerage and insurance agency services across Taiwan, except that Law Agent and Law Management were dissolved in November 2014 and January 2015, respectively.
On January 17, 2014, the Board of Directors of the Company approved a change in its fiscal year end to December 31 from June 30, retroactively effective July 1, 2013 with a transition period of six months.
On May 10, 2016, Prime Technology Consulting Co., Ltd., (“PTC Taiwan”) changed its name to Prime Asia Corporation, Limited (“PA Taiwan”). PA Taiwan primarily engages in insurance platform establishment and related information technology consulting service business across Taiwan. Each of MKI, PTC Nanjing and PTC Taiwan is a wholly owned subsidiary of PFAL.
The accompanying consolidated financial statements include the accounts of China United, its subsidiaries and VIEs as shown in the corporate structure in Note 1. All intercompany transactions and balances have been eliminated in consolidation. 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. Please see Note 25, Reclassifications.
Noncontrolling interest consists of direct and indirect equity interest in AHFL and its subsidiaries arising from the acquisition of AHFL by CUIS and acquisition of PFAL by AHFL in August 2012 and April 2014, respectively.
Depreciation of office equipment, office furniture, leasehold improvements, transportation equipment and other equipment is computed using the straight-line method based on estimated useful lives ranging from one to ten years with estimated salvage value.
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 tested 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. As of December 31, 2017, and 2016, there were no indications of impairment of goodwill.
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.
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 were no impairment recognized for the years ended December 31, 2017, 2016 and 2015.
The Company applies 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.
The Company maintains cash with banks in the USA, PRC, Hong Kong, and Taiwan. Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. In Taiwan, a depositor has up to NTD3,000,000 insured by Central Deposit Insurance Corporation (“CDIC”). In China, a depositor has up to RMB500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”). In Hong Kong, a depositor has up to HKD500,000 insured by Hong Kong Deposit Protection Board (“DPB”). In the United States, the standard insurance amount is $250,000 per depositor in a bank insured by the Federal Deposit Insurance Corporation (“FDIC”).
For the fiscal years ended December 31, 2017, 2016 and 2015, the Company’s revenues from sale of insurance policies underwritten by these companies were:
(*) The related revenue for the year ended had not exceeded 10% or more of the consolidated revenue.
The Company managed and reviewed its business as three operating segments. The business of CU 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 26 for additional information on the segment reporting.
During the term of this Agreement, unless CU WFOE commits gross negligence, or a fraudulent act, against Anhou, Anhou may not terminate this Agreement. Nevertheless, CU WFOE shall have the right to terminate this Agreement upon giving 30 days prior written notice to Anhou at any time.
As a result of the capital increase and the share transfer, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “Second VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the First VIE Agreements, other than the change of shareholder names and their respective shareholdings. The First 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.
As a result of the agreements among CU WFOE, the shareholders of Anhou and Anhou, CU WFOE is considered the primary beneficiary of Anhou, CU WFOE has effective control over Anhou; therefore, CU WFOE consolidates the results of operations of Anhou and its subsidiaries. Accordingly the results of operations, assets and liabilities of Anhou and its subsidiaries are consolidated in the Company’s financial statements from the earliest period presented. However, the VIE is monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change. These events include:
Guidance for Accounting Impacts of the Tax Cuts and Jobs Act
As of December 31, 2017, there are no material elements of the Tax Reform Act for which the Company’s accounting is complete. While the Company's accounting for the following elements of the Tax Reform Act is incomplete, the Company was able to make reasonable estimates of the tax effect with respect to the reduction of the federal corporate tax rate. The Company has determined that the tax rate reduction does not have any material impact on the current consolidated financial statements.
The Company's accounting for the following law changes of the Tax Reform Act is incomplete, and it is not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustment was recorded. One-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that it previously deferred from U.S. income taxes. The Company has a significant number of foreign subsidiaries and therefore has not yet completed its calculation of the total post-1986 E&P as well as non-U.S. income taxes paid for these foreign subsidiaries. In addition, the Tax Reform Act also creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s net CFC tested income over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. The Company is continuing to evaluate the provision of the Tax Reform Act and the application of ASC 740.
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes and requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The Company applied the guidance retrospectively to all periods presented; as a result, $123,406 and $59,233 were reclassified from current deferred tax assets to non-current deferred tax assets as of December 31, 2017 and 2016, respectively. See Note 25 for additional information on the effect of the reclassifications.
Revenue - The revenue recognition for commissions derived from insurance agency and brokerage services has been accelerated from historical patterns, recognition when the monthly or quarterly remuneration becomes determinable, to the recognition of an estimate of expected commissions upon the policy effective date. Under the new guidance, the Company will also need to defer certain revenues to reflect delivery of services over the contract period. As a result, revenue from certain arrangements will be recognized in earlier periods under the new guidance in comparison to our current accounting policies, and others will be recognized in later periods. This change is anticipated to result in a significant shift in timing of interim revenue.
Contract Costs - The assets recognized for the costs to obtain and/or fulfill a contract will be amortized on a systematic basis that is consistent with the transfer of the services to which the asset relates. These costs, including certain sales commissions and internal costs related to pre-placement broking activities, were previously expensed as incurred. As such, the Company expects the recognition of costs to shift among quarters. For situations where the amortization period of the asset is one year or less, the Company plans to apply a practical expedient and recognize the costs of obtaining a contract as an expense when incurred.
In June 2016, the FASB issued ASC Update No. 2016-13, (Topic 326), Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASC update introduces new guidance for the accounting for credit losses on financial instruments within its scope. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider both historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses and subsequent adjustment to such loss estimates, will be recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. ASC No. 2016-13 also modifies the impairment model for available-for-sale debt securities. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The updated guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. The Company is evaluating the impact of the adoption of ASC Update No. 2016-13 on its financial position and results of operations.
In January 2017 the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (ASU 2017-04), which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350, “Intangibles-Goodwill and Other”. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the current ASC 350 requirement to calculate a goodwill impairment charge using Step 2. ASU 2017-14 will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
Cash and cash equivalents and time deposits consisted of the following as of December 31, 2017 and 2016:
On December 22, 2017, the Company and China Bills Finance Corporation entered into a repurchase agreement to purchase re-purchase bonds of $2,697,628 (NTD 80,000,000) and with 0.38% interest rate per annum. The re-purchase bonds were due in January and February 2018.
Marketable securities represented investment in equity securities of listed stocks and funds as follows:
The Company’s other current assets consisted of the following as of December 31, 2017 and 2016:
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 (NTD48,000,000) 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 (NTD2,134,440) 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 (NTD44,790,360). 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, 2017 and 2016:
Depreciation expense was $325,212, $315,344 and $332,715 for the years ended December 31, 2017, 2016 and 2015, respectively.
Estimated future intangible assets amortization as of December 31, 2017 is as follows:
According to Taiwan Regulations Governing Deposit of Bond and Acquirement of Insurance by Insurance Agents, Insurance Brokers and Insurance Surveyors (“RGDBAI”) Article 3 requirement, Law Broker is required to maintain a minimum of NTD3,000,000 ($101,161 and $92,928 as of December 31, 2017 and 2016, respectively) restricted balance in a separate account. RGDBAI Article 4 is required to deposit a minimum amount in the form of cash or government bond issued by the central government.
According to China Insurance Regulatory Commission No. 82, promulgated on September 29, 2016, the Company should deposit all of its registered capital in a custodian 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. The Company should deposit this amount after six months of the issuance date.
Restricted cash was a deposit in the bank by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, which is not allowed to be withdrawn without the permission of the regulatory commission, and the trust account for Law Broker’s general manager’s bonus plans.
The Company entered into three credit agreements with several commercial banks during the fiscal year 2017 as follows:
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%.
See Note 17 for additional information on current liabilities related to AIA International Limited Taiwan Branch (“AIATW”) and Farglory, due to previous shareholders of AHFL, and accrued bonus for Ms. Chao.
On May 15, 2016, Anhou entered into a loan agreement (“Loan A”) with an individual third party. The long-term Loan Agreement provided for approximately $130,641 (RMB 850,000) and $144,015 (RMB 850,000), as of December 31, 2017 and 2016, respectively, loan to the Company. The long-term Loan A bears an interest rate of 8% per annum and interest is payable annually. The principal and the accrued interest will be due on May 15, 2019.
(1) The revenue recognition for the first contract year is based on the annual first year premium (“AFYP”) set in Alliance Agreement, which is difference from other contract years. From the second contract year to the seventh contract year, the revenue calculation is based on VONB. The Company recognized the first contract year’s revenue amount of $892,742 (NTD27,137,958), net of Value-Added Tax (“VAT”). On December 3, 2015 and February 23, 2016, the Company refunded the amounts of $160,573 (NTD4,761,905), net of VAT, and $530,056 (NTD15,719,185), net of VAT, to AIATW, respectively, due to the portion of performance sales targets not met during the first contract year.
(3) For the year ended December 31, 2017, the Company estimated to recognize the third contract year’s revenue amount of $415,423 (NTD12,628,201), net of VAT, and refund the 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 $1,731,048 (NTD52,621,159), net of VAT, and nil for the years ended December 31, 2017 and 2016 related to this agreement. As of December 31, 2017 and 2016, the Company had non-current portion of unearned revenue of $4,239,130 and $4,742,272, respectively, and amounts in current liabilities of $633,955 and $1,966,814, respectively, related to the Alliance Agreement.
Due to previous shareholders of AHFL is the remaining balance payable of the acquisition cost. The Company and the selling shareholders of AHFL entered into a third Amendment to the Acquisition Agreement (the “Third Amendment”), pursuant to which, the Company committed to distribute the cash payment in the amount approximately $676,466 (NTD 22.5 million) to the selling shareholders of AHFL on or prior to June 30, 2016. On July 21, 2016, the Company arranged for the payment of $153,097 (NTD4,830,514) to the selling shareholders. 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 make the cash payment in the amount of $480,559 (NTD15 million) on or prior to March 31, 2019.
On May 10, 2016, Law Broker entered into an engagement agreement (“Engagement Agreement”) with Hui-Hsien Chao (“Ms. Chao”), pursuant to which, she acts as the general manager of Law Broker for and a term 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.
· Dividends. The holders of Series A Stock 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 Registrant as may be declared by the Board.
Additional preferred stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors deems appropriate. In the event that the Registrant issues any shares of preferred stock, a certificate of designation containing the rights, privileges and limitations of this series of preferred stock will be filed with the Secretary of State of the State of Delaware. The effect of this preferred stock designation power is that its Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control without further action by its stockholders, and may adversely affect the voting and other rights of the holders of its 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.
Restatement did not impact to non-controlling interests, see Note 27 for Restatement.
Provision (benefit) for income taxes for the year ended December 31, 2016 consisted of:
Provision (benefit) for income taxes for the year ended December 31, 2015 consisted of:
A 100% valuation allowance was provided for the deferred tax assets related to the PRC segment as of December 31, 2017 and 2016. The deferred tax assets of $123,406 and $84,597 related to the Taiwan segment was included in other assets, respectively, on the consolidated balance sheets as of December 31, 2017 and 2016. Deferred tax liabilities were the timing differences of revenue and cost of sales recognized in the year ended December 31, 2017. Deferred tax liabilities of $122,551 and nil, respectively, related to the PRC segment were in other long-term liabilities on the consolidated balance sheets as of December 31, 2017 and 2016.
Beginning for the year ended December 31, 2017 Anhou and its branches elected to file joint tax returns under PRC tax jurisdiction. Due to the adoption of this filing method, operating loss in the branches from the year 2016 and prior years can no longer deduct earnings beginning in the year 2017. However, any loss incurred in any of the branches in the joint tax return will be consolidated and any further loss in the joint tax return can be carried over to the five years from the year 2017. Due to the joint filing of tax returns for Anhou, the Company reversed deferred tax assets and related valuation allowance of $67,577 previously recognized as of December 31, 2016.
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional 10% on any undistributed earnings to its shareholders.
*** 25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise, and 24% of Multiple Capital Enterprise’s shares are owned by members of the Company’s management level.
Xude Investment was owned by Mr. Chwan Hau Li, Director of the Company. The outstanding balance as of December 31, 2016 was primarily related to the set-up fees on behalf of GHFL and GIC. In March 2017, Xude Investment agreed to forgive the Company’s debt. As of December 31, 2017, the Company has debt forgiveness recognized with a total amount of $32,937.
On July 1, 2016, the Company entered into a lease agreement with Yuli Broker to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $590 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. The Company recorded rent income of $564 and $279, respectively, for the years ended December 31, 2017 and 2016.
The Company has operating leases for its offices. Rental expenses for the years ended December 31, 2017, 2016 and 2015 were $2,537,348, $2,132,950 and $1,735,521, respectively. At December 31, 2017, total future minimum annual lease payments under operating leases were as follows, by years:
NOTE 24 - FINANCIAL RISK MANAGEMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has exposure to credit, liquidity and market risks which arise in the normal course of its business. This note presents information about the Company’s exposure to each of these risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.
The Board of Directors (“BOD”) has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
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 consolidated financial statements of the Company are in 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, 2016:
Structured deposit - The fair value of the structured deposit is determined based on present value of the structured deposit, using annum yield of 3.9%.
Government bonds - The fair value of government bonds is valued based on theoretical bond price in Taipei Exchange (formerly the Gre Tai Securities Market.)
Due to related parties - The amount due to related parties bears no interest and payable on demand.
The geographical distributions of the Company’s financial information for the years ended December 31, 2017, 2016 and 2015 were as follows:
The geographical distribution of the Company’s financial information as of December 31, 2017 and 2016 were as follows:
The Company has restated its previously filed 2016 and 2015 consolidated financial statements to correct a material error related to the accounting for the acquisition of GHFL in 2015. The GHFL acquisition has been accounted for the acquisition of a business but upon reflection and further analysis, the Company has concluded that it would be more accurately accounted for as an asset acquisition.
On January 25, 2018, the Company draw down a borrowing of $1,500,000 from the credit agreement with FEIB. This borrowing bears an interest rate of 2.95% per annum and the principal and interest are due on February 23, 2018. The borrowing requires time deposits with a total amount of $2,000,000 as collateral. On February 23, 2018, the Company and FEIB agreed to extend this loan from February 23, 2018 to March 23, 2018.