Sichuan Kangzhuang’s office is located at A and B areas, 14th Floor Renbao Building, No. 57 Dongyu Street, Jinjiang District, Chengdu City, Sichuan province, China, with 8,353 square feet (776 square meters) of office space. The lease was between People's Insurance Company of China, Sichuan Branch and Sichuan Kangzhuang. The lease term is from September 1, 2006 to August 31, 2011 for four years, with rent of approximately $4,862 (RMB31,040) per month, to be increased by 8% per annum commencing from September 1, 2008, payable every three months. Upon the expiration of the above lease, Sichuan Kangzhuang entered into a new lease with People's Insurance Company of China, Sichuan Branch, which is located at B area, 14th Floor Renbao Building, No.57 Dongyu Street, Chengdu City, Sichuan province, China, with 6,672 square feet (612 square meters) of office space. The lease term is from September 1, 2011 to August 31, 2014 for three years, with rent of $5,313 (RMB33,652) per month in the first year commencing from September 1, 2011, $5,844 (RMB37,017) per month in the second year commencing from September 1, 2012, $6,429 (RMB40,719) per month in the third year commencing from September 1, 2013, payable every three months. On August 8, 2014, the lease was renewed and the term was extended to August 31, 2017 for three years, with rent of $5,992 (RMB41,606) per month payable every three months.
The following selected consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014 and the selected consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K.
We are a Delaware corporation organized on June 4, 2010 by Mr. Mao as a listing vehicle for CU Hong Kong to be quoted on the Over the Counter Bulletin Board. CU Hong Kong, a wholly owned Hong Kong-based subsidiary of our Company, was founded by us on July 12, 2010 under Hong Kong laws. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise CU WFOE in Henan province in the PRC.
Anhou was founded in Henan province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC.
The registered capital increase of Anhou is in response to the promulgations of certain regulations by CIRC. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions, pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million. On May 16, 2013, CIRC issued the 2013 Notice, pursuant to which professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million, can continue operation of their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
On July 2, 2012, our Board of Directors and stockholders approved the Reclassified Shares, par value $0.00001 per share held by Mr. Mao into 1,000,000 shares of Series A Preferred Stock on a share-for-share basis, the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification.
Mr. Mao has extensive experience in the insurance agency and brokerage industry and had acted as the chairman of the board of Law Broker. Under the leadership of Mr. Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades and generated substantial shareholder value for its stockholders. Our management wanted Mr. Mao to apply his years of experience in insurance industry into our expansion and to lead our growth. As a result, we approached Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and operation of our Company and our subsidiaries. To ensure the consistently implementation of our strategies and policies, through mutual discussion and negotiations, both our Company and Mr. Mao (and subsequently a majority of the shareholders) agreed to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for the reclassification, Mr. Mao agreed to be engaged by our Company as our Chief Executive Officer within six months after July 2, 2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief Executive Officer, effective immediately.
On August 24, 2012, our Company acquired all of the issued and outstanding shares of AHFL together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned subsidiary of our Company.
Pursuant to the provisions of the AHFL Acquisition Agreement between our Company and the selling shareholders of AHFL named therein and for all of the issued and outstanding shares of AHFL, our Company was to pay NTD15 million on or prior to March 31, 2013 and NTD7.5 million subsequent to March 31, 2013 in cash in two installments, subject to terms and conditions therein. In addition, our Company agreed to (i) issue 8,000,000 shares of common stock of our Company to the shareholders of AHFL; (ii) issue 2,000,000 shares of common stock of our Company to certain employees of Law Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of our Company.
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent completed the liquidation process in April 2016.
On September 3, 2015, MKI incorporated PTC Taiwan. On May 10, 2016, PTC Taiwan changed its name to PA Taiwan. MKI is a holding company for its operating subsidiaries in Taiwan. PTC Taiwan primarily engages in insurance platform establishment and related information technology consulting service business across Taiwan.
As of December 31, 2016, through our Consolidated Affiliated Entities, we had two insurance agencies, one brokerage and 49 service outlets with 2,557 full-time sales professionals and 111 administrative staff in Henan, Sichuan, Jiangsu, Fujian, Guangdong and Yunnan provinces in China. In addition, through Law Broker, we had 30 sales and service outlets (including the headquarters) with 2,346 sales professionals and 177 administrative staff in Taiwan.
The preparation of financial statements in conformity with Accounting Principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the period. Management makes these estimates using the best information available when they are made. However, actual results could differ materially from those estimates. While there are a number of significant accounting policies affecting our financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments. We have not made any material changes in the methodology used in these accounting polices during the past three years.
The accompanying consolidated financial statements include the accounts of our Company and our subsidiaries. All significant intercompany transactions and balances were eliminated in consolidation.
Goodwill arose from both the acquisition of PFAL and GHFL. Goodwill is the excess of the cost of an acquisition over the fare value of the net assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using the prescribed two-step process under US GAAP. The first step screens for potential impairment of goodwill to determine if the fare 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 fare value of goodwill to its carrying value. As of December 31, 2016, there were no any indications of the impairment of goodwill that arose from the acquisition of PFAL and GHFL.
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). As of December 31, 2016 and 2015, our Company did not have any uncertain tax positions.
Our Company was not subjected to income tax examinations by taxing authorities during the current or past fiscal years. In connection with the acquisition of China entities, our Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). Our Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit, which has been accrued in the fiscal year ended December 31, 2014, and it has not been paid during the year ended December 31, 2016.
During the year ended December 31, 2016, 87.52%, 12.10% and 0.38% of our revenue in our audited consolidated financial statements were derived from Taiwan, Consolidated Affiliated Entities in PRC and Hong Kong, respectively. During the year ended December 31, 2015, 88.45%, 10.71% and 0.84% of our revenue in our audited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively.
Total revenue increased by $14,910,240, or 27%, from $55,023,766 for the year ended December 31, 2015 to $69,934,006 for the year ended December 31, 2016, which was mainly due to the increase of the revenue in Taiwan and PRC for the following reasons:
b) The revenue of Taiwan Life Insurance Co., Ltd (“Taiwan Life”) increased in 2016. The main reason was the launch of Taiwan Life’s top seller product that offers comprehensive life-time insurance coverages with an affordable insurance premium. This selling package drew more attention from the company’s customers and boosted the sales performance for the year ended December 31, 2016.
c) The remaining revenue increased 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.
For the year ended December 31, 2016, G&A expenses were $13,852,277, an increased of $1,177,106, or 9%, compared with $12,675,171 for the year ended December 31, 2015, which was mainly due to 1) the increased number of branches and personnel costs in the year 2016; and 2) the increased amortization expenses of intangible asset.
Net other income for the year ended December 31, 2016 was $454,691 and the net other income for the year ended December 31, 2015 was $379,926. Other income (expense) mainly consists of interest income, interest expenses, dividend income and other income. Compared with the year ended December 31, 2015, other income (expenses) increased due to the increase in dividend income. Compared with the year ended December 31, 2015, other - net decreased due to the decrease in foreign exchange gain.
As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market in Taiwan. For the years ended December 31, 2015 and 2014, the revenue generated respectively from Taiwan and PRC was as follows:
Total revenues increased by $7,573,804, or 16%, from $47,449,962 for the year ended December 31, 2014 to $55,023,766 for the year ended December 31, 2015, which was mainly due to the increase of the revenue in Taiwan and PRC for the following reasons,
a) Direct commission cost: Compared with the comparable period of 2014, the share of the first-year commission revenue in the total revenue increased. Accordingly, the cost matched with the first-year commission revenue increased. Compared with the commission cost of other types of commission revenue, the cost of the first-year commission is higher.
b) Indirect commission cost: With the increase in sales, indirect commission cost, including special allowance, high-performance awards, practicing bonus, etc. increased compared with the comparable period of 2014.
Other income (expense) mainly consists of interest income; gain on change of fair value of marketable securities, loss on disposal of fixed assets and foreign currency exchange gain and loss. Net other income for the year ended December 31, 2015 was $379,926. Net other income for the year ended December 31, 2014 was $594,542. Compared with the year ended December 31, 2014, net other income decreased due to the increase of foreign exchange loss.
For the year ended December 31, 2015, the income tax expense was $1,519,226, decreased by $153,614, or 9%, compared with $1,672,840 for the year ended December 31, 2014. The decrease was mainly due to the company paid additional 10% on any undistributed earnings income tax from prior period for the year ended December 31, 2015 compared with that for the year ended December 31, 2014.
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. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional 10% on any undistributed earnings to its shareholders. On December 31, 2015 and 2014, Law Enterprises decided not to distribute its earnings in 2015 and 2014. Accordingly, additional NTD14,018,314 and NTD9,200,945, approximately $427,000 and $304,000, of income tax was accrued as of December 31, 2015 and 2014.
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 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, 2015 and 2014:
On July 20, 2016, our contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan D”) with third party Guowei Hu. The long-term Loan Agreement provided for a $110,892 loan to our Company. The long-term Loan D bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on July 20, 2019.
On December 25, 2015, our Company entered into a loan agreement (the “Short-term Loan Agreement) with Multiple Capital Enterprise Co., Ltd. The Short-term Loan Agreement provided for a $608,941 (NTD 20,000,000) loan to our Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principle and interest are due on June 30, 2016. The entire loan and interest amount of $598,905 (NT$20,014,795) have been paid off on January 11, 2016. Majority of Multiple Capital Enterprise shareholder are our management level.
**25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise.
On July 1, 2016, our 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 of $559 (NTD18,000). For the year ended and as of December 31, 2016, rent income and advance amount were $279 and $279, respectively.
On May 2, 2016, our Company entered into an Advisory Agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to our Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was $388,031 (NTD1,250,000). Our Company has cost of revenue and due to I Health amount of $25,130 and $3,724, respectively, for the year ended and as of December 31, 2016.
As of December 31, 2016, our Company had no off balance sheet arrangements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2016 and 2015, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
China United Insurance Service, Inc. (“China United”, “CUIS” or the “Company”) is a Delaware corporation organized on June 4, 2010 by Yi-Hsiao Mao, a Taiwanese citizen, as a listing vehicle for ZLI Holdings Limited (“CU Hong Kong”) to be quoted on the United States Over the Counter Bulletin Board.
Mr. Mao has extensive experience in the insurance agency and brokerage industry and had acted as the chairman of the board of Law Broker. Under the leadership of Mr. Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades and generated substantial shareholder value for its stockholders. The management of the Company wanted Mr. Mao to apply his years of experience in insurance industry into the Company’s expansion and to lead its growth. As a result, the Company approached Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and operation of the Company and its subsidiaries. To ensure the consistently implementation of strategies and policies of the Company, through mutual discussion and negotiations, both the Company and Mr. Mao (and subsequently a majority of the shareholders) agreed to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for the reclassification, Mr. Mao agreed to be engaged by the Company as its Chief Executive Officer within 6 months after July 2, 2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief Executive Officer, effective immediately.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. As of August 24, 2012, Law Enterprise held (i) 100% of Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Risk Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent”), an LLC incorporated in Taiwan on June 3, 2000.
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods.
The Company’s financial statements are presented in U.S. dollars ($), which is the Company’s reporting and functional currency. The functional currencies of the Company’s subsidiaries are NTD, RMB and HKD. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC 220. 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 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 statements of operations.
Depreciation for financial reporting purposes is provided using the straight-line method over a useful life of one to ten years with salvage value of 0% to 27%. Property, plant and equipment mainly consist of office furniture, computers, vehicles and leasehold improvements.
The Company classifies its investments as available-for-sale in accordance with ASC 320 “Debt and Equity Securities”, and Investments - Debt and Equity Securities are reported at fair value. Unrealized gains and losses as a result of changes in the fair value of the available-for-sale investments are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.
The Company was not subjected to income tax examinations by taxing authorities during the current or past fiscal years. In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit, which has been accrued in the fiscal year ended December 31, 2014, and it has not been paid during the year ended December 31, 2016.
The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value. It currently has 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of December 31, 2014, which was classified as equity.
Section 480-10-25 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Section 480-10-05-2 classifies all of the following as examples of an obligation:
The fair values of our cash and cash equivalents, accounts receivable, other current assets, taxes payable and other current liabilities approximate fair value because of the short maturity of these instruments.
Loan receivable - The Company’s loan receivable is determined based on 4.5% per annum interest rate on the recent lends to RFL.
Short-term loans - The Company’s short-term loans has been determined based on 1.5% per annum interest rate in year 2015.
Due to related parties - The Company’s due to Multiple Capital Enterprise Co., Ltd, (“Multiple Capital”) had been determined based on 1.5% per annum interest rate in year 2015. Excepted Multiple Capital, the remaining due to related parties bore no interest and payable on demand.
Long-term loans - The Company’s long-term loans is determined based on 8% per annum interest rate in year 2016 in PRC.
The Company maintains cash with banks in the 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 in a bank. In China, a depositor has up to RMB500,000 insured in a bank. In Hong Kong, a depositor has up to HKD500,000 insured in a bank. In the United States, the standard insurance amount is $250,000 per depositor in a bank under the FDIC’s general deposit insurance rules.
For the fiscal years ended December 31, 2016, 2015 and 2014, the Company’s revenues from sale of insurance policies underwritten by these companies were:
ASC-280-10-50-12 states, a public entity shall report separately information about an operating segment that meets any of the following quantitative thresholds:
b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:
In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies and an average exchange rate is used. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows may not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Cash from operating, investing and financing activities is net of the effect of acquisition described in Note 8.
The term of this Agreement is 10 years. Subsequent to the execution of this Agreement, both CU WFOE and Anhou shall review this Agreement on an annual basis to determine whether to amend or supplement the provisions. The term of this Agreement may be extended if confirmed in writing by CU WFOE prior to the expiration thereof. The extended term shall be determined by CU WFOE, and Anhou shall accept such extended term unconditionally.
a. The legal entity’s governing documents or contractual arrangements are changed in a manner that changes the characteristics or adequacy of the legal entity’s equity investment at risk.
The Company reviews the VIE’s status on an annual basis. For the years ended December 31, 2016, 2015 and 2014, no event including a-d above took place that would change the Company’s primary beneficiary status.
The Company follows ASC850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,“Classification of Certain Cash Receipts and Cash Payments (Topic 230) to Statement of Cash Flows.” ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this update is not expected to have a significant impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash” ("ASU 2016-18"), which amends the current accounting guidance. The amendments in this update require the amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of ASU 2016-18 is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual or any interim goodwill tests in fiscal years beginning after December 15, 2019. The adoption is not expected to have a material impact on the consolidated financial statements.
There were other updates recently issued. The management does not believe that other than disclosed above, the recently issued, but not yet adopted, accounting pronouncements will have a material impact on its financial position results of operations or cash flows.
As of December 31, 2016 and 2015, the Company cash and cash equivalents primarily consisted of cash and certificates of deposits. The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents approximate fair value.
As of December 31, 2016 and 2015, the Company’s long-term investment consisted the following:
As of December 31, 2016 and 2015, the Company had the following long-term investment in equity:
The Company’s taxes payable consisted of the following as of December 31, 2016 and 2015:
On December 3, 2015, the Company entered into a loan agreement (“Loan B”) with Yuzhen Chen. The Short-term Loan Agreement provided for a $152,235 (NTD 5,000,000) loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on December 31, 2015. On December 31, 2015, the Company extended this loan agreement to December 31, 2016 with the same conditions. On January 13, 2016, the Company paid an amount of $46,582 (NTD 1,500,000) back. The remaining amount of this Loan B and interest expense were paid off in May 2016.
Other current liabilities are as follows, as of December 31, 2016 and 2015:
Commissions payable to sub-agents, Accrued bonus, Salaries payable to administrative staff, and accrued advertisement expense are usually settled within 12 months. Unearned revenue and Refund to AIATW are described in Note 16. Due to previous shareholders of AHFL is the remaining balance payable of the acquisition cost. Accrued business tax, withholding employee personal tax and accrued labor, health insurance and employee retirement plan will be paid to the related government department within one month. Accrued tax penalties are estimated potential penalty in the event of a tax audit. Other accrued liabilities are mainly for operating expenses payable, such as training and travelling.
On June 23, 2016, the Company has issued two units of its convertible bonds with an aggregate principal amount of $200,000 to a non-US person and the value of the embedded derivatives liabilities is trivial. As of December 31, 2016, the Company has an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $6,363 for the year ended December 31, 2016.
On May 15, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan C”) with third party Guowei Hu. The long-term Loan Agreement provided for a $144,015 loan to the Company. The long-term Loan C bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on May 15, 2019.
On April 20, 2016, the Company entered into a service agreement (“Service Agreement”) with Farglory Life Insurance Co., Ltd. (Farglory). AHFL is going to provide consulting services to Farglory for NTD4,000,000 per year and the aggregate consulting services fee is NTD20,000,000 from May 1, 2016 to April 30, 2021. The Company has not yet booked any revenue because the Company has not provided any service yet. As of December 31, 2016, the Company had long-term liabilities and current liabilities amounts of $495,615 and $123,904, respectively, related to this Service Agreement.
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, and the payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms therein, among which, Ms. Chao acts as the general manager or equivalent position of Law Broker for at least 3 years.
On May 14, 2016, Law Broker and Ms. Chao entered into a Supplementary Agreement (“Supplementary Agreement”) to postpone her pension vesting date to December 29, 2016. Though Law Broker expects that none of the above-mentioned bonuses need to be paid prior to May 2019, it has recorded a long-term liabilities representing the corresponding portion of such bonuses accrued. As of December 31, 2016, the balance of such accrued long-term liabilities is $77,440.
The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value. It currently have 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of December 31, 2014. The Series A Stock has the following rights and preferences:
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.
If the Registrant in any manner subdivides or combines the outstanding shares of common stock, the outstanding shares of the Series A Stock will be subdivided or combined in the same manner.
Significant components of the deferred tax assets and liabilities for federal income taxes as of December 31, 2016 and 2015 consisted of the following:
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. Law Enterprises expected not to distribute its earnings in 2016. Accordingly, NTD20,330,131, approximately $630,000 of additional tax was accrued. Law Enterprises decided not to distribute its earnings in 2015. Accordingly, NTD14,018,314, approximately $427,000 of additional tax was accrued. In December 31, 2014, Law Enterprises decided not to distribute its earnings in 2014. Accordingly, additional NTD9,200,945, approximately $304,000, of income tax was accrued as of December 31, 2014, which is stated as “income tax on undistributed earnings” on the income tax rate reconciliation tables below.
The Company’s subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong, and are generally subject to a profits tax at the rate of 16.5% on the estimated assessable profits.
The following table reconciles the US statutory rates to the Company’s effective tax rate for the year ended December 31, 2016, 2015 and 2014:
*24% of Multiple Capital Enterprise’s shares are owned by the Company’s management level.
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 of $559 (NTD18,000). For the year ended and as of December 31, 2016, rent income and advance amount were $279 and $279, respectively.
On 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 of $559 (NTD18,000). For the year ended and as of December 31, 2016, rent income and advance amount were $279 and $279, respectively.
The Company has operating leases for its offices. Rental expenses for the years ended December 31, 2016, 2015 and 2014 were $2,132,950, $1,735,521and $1,668,571, respectively. At December 31, 2016, total future minimum annual lease payments under operating leases were as follows, by years:
Risk Management and Law Agent were acquired by the Company together with their parent Company, Law Enterprise, on August 24, 2012. The Total Assets and Total Liabilities of Risk Management as of December 31, 2016, 2015 and 2014 were as follows:
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 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 geographical distribution of the Company’s financial information for the years ended December 31, 2016, 2015 and 2014 were as follows:
On April 27, 2013, China Insurance Regulatory Commission mandated any insurance agency have a minimum registered capital requirement of RMB50 million (approximately $ 8 million). At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered capital of RMB10 million (approximately $ 1.6 million). To better implement its expansion strategies, Anhou intends to increase its registered capital to RMB50 million so that it can set up new branches in any province beyond its current operations in Mainland China.