Form 10-K/A China United Insurance For: Dec 31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K /A
(Amendment No. 1)
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-54884
CHINA
UNITED INSURANCE SERVICE, INC.
(Exact name of registrant as specified in its charter)
|
Delaware (State or other jurisdiction of incorporation) |
- |
30-0826400 (I.R.S Employer Identification No.) |
7F, No. 311 Section 3
Nan-King East Road
Taipei City, Taiwan
(Address of principal executive offices, with zip code)
+8862-87126958
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | - | None |
Securities registered under Section 12(g) of the Act:
| Title of each class | - | Common Stock, par value of $0.00001 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer x |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter was $120,755,943.
As of March 14, 2018, there were 29,452,669 shares of common stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.
TABLE OF CONTENTS
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EXPLANATORY NOTE REGARDING AMENDMENT
This Amendment No. 1 on Form 10-K/A (this “10K/A”) amends and restates certain items noted below in the Annual Report on Form 10-K of China United Insurance Service, Inc. (the “Company”) for the fiscal year ended December 31, 2017, as originally filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2018 (the “Original Filing”). This Form 10-K/A amends the Company’s Controls and Procedures and related disclosures as of and for the year ended December 31, 2017 to reflect the discovery of certain facts relating to the manipulation of the Company’s common stock trading volume, subsequent charges against the Company brought by the SEC, and the entry of a final judgment with regard thereto (the “SEC Settlement”). For further information, please see the Company’s current report, as amended, filed on form 8-K/A on January 22, 2019 (the “Amended Current Report”). The Amended Current Report and exhibits thereto and incorporated by reference into this 10-K/A.
Items Amended in This Filing
For the convenience of the reader, this Form 10-K/A sets forth the Original Filing, as amended, in its entirety. Except as noted below, this Amendment does not affect any other parts of the Original Filing, nor does it reflect events occurring after the date of the Original Filing or amend or otherwise update any information in the Original Filing. The following Items have been amended:
| · | Part I, Item 1A. Risk Factors |
| · | Part I, Item 3. Legal Proceedings |
| · | Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| · | Part II, Item 9A. Controls and Procedures |
This Form 10-K/A also includes information (See Part III, Items 10 through 14) that was not included in the Original Filing, as we did not file our definitive proxy statement within 120 days after the end of our fiscal year ended December 31, 2017.
In addition, pursuant to the rules of the SEC, the exhibit list included in Item 15 of Part IV of the Original Filing has been amended to contain currently dated certifications from the Company's Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. These certifications are included with this Form 10-K/A as Exhibits 31.1, 31.2, 32.1, and 32.2, respectively.
EXPLANATORY NOTE REGARDING RESTATEMENT
On January 23, 2018, the Audit Committee of the Board of Directors of China United Insurance Service, Inc., based on the recommendations of the company’s management and after consultation with, Simon & Edward LLP, our independent registered public accounting firm, concluded that our consolidated financial statements as of and for the years ended December 31, 2016 and 2015, and as of and for each of the interim periods ended March 31, 2017, June 30, 2017 and September 31, 2017 should no longer be relied upon.
Within this report, we have included restated audited results as of and for the years ended December 31, 2016 and 2015, as well as restated unaudited condensed consolidated financial information for the quarterly periods as of and for the interim periods ended March 31, 2017, June 30, 2017 and September 31, 2017, which we refer to as the Restatement. Our consolidated financial statements as of and for the years ended December 31, 2016 and 2015 included in this Annual Report on Form 10-K (the “Restated Audited Financial Statements”) have been restated from the consolidated financial statements included on our Annual Report on Form 10-K for the year ended December 31, 2016 and for the year ended December 31, 2015 (the “Original Audited Financial Statements”).
The Restatement corrects a material error related to the accounting for the acquisition of Genius Holdings Financial Limited (the “GHFL Acquisition”) in 2015 The GHFL Acquisition has been accounted for as the acquisition of a business but, upon further analysis, we have come to the conclusion that it would be more accurately accounted for as an asset acquisition. Our independent registered accounting firm has concurred with this revised approach.
The Company has determined that this change in accounting for the GHFL Acquisition had the impact set forth below as of and for the years ended December 31, 2015 and 2016 and for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 (the “Restated Periods”) on the following key balance sheet and income statement line items included in the financial statements for each of the Restated Periods, which the Company believes are of particular significance for investors. Please note that the Key Balance Sheet Items in each of the Restated periods set forth below changed as a result of the restatement, while Key Statement of Operations and Other Comprehensive Income (Loss) Items were affected by the Restatement only with respect to 2015 results, all subsequent Restated Periods remaining unchanged.
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Key Balance Sheet Items
Goodwill: Reported Goodwill as of the end of each annual and interim reporting period (December 31, 2015 and 2016 and March 31, 2017, June 30, 2017 and September 30, 2017) of $2,071,491 has been restated to total $31,651 as at each such date, representing a reduction of $2,039840 (or 98.5%).
Total Assets: Reported Total Assets as of December 31, 2015 of $39,401,816 has been restated to total $37,361,976 as at such date, representing a reduction of $2,039,840 (or 5.2%); while reported Total Assets as of December 31, 2016 of $51,407,543 has been restated to total $49,367,703 as at such date, representing a reduction of $2,039,840 (or 4.0%). Reported Total Assets as of March 31, 2017 of $49,227,142 has been restated to total $47,187,302 as at such date, representing a reduction of $2,039,840 (or 4.1%), reported Total Assets as of June 30, 2017 of $48,983,681 has been restated to total $46,943,841 as at such date, representing a reduction of $2,039,840 (or 4.2%); and reported Total Assets as of September 30, 2017 of $51,132,862 has been restated to total $49,093,022 as at such date, representing a reduction of $2,039,840 (or 4.0%).
Retained Earnings: Reported Retained Earnings as of December 31, 2015 of $1,808,665 has been restated to total $(231,175) as at such date, representing a reduction of $2,039,840 (or 112.8%); while reported Retained Earnings as of December 31, 2016 of $3,286,562 has been restated to total $1,246,722 as at such date, representing a reduction of $2,039,840 (or 61.2%). Reported Retained Earnings as of March 31, 2017 of $4,152,250 has been restated to total $2,112,410 as at such date, representing a reduction of $2,039,840 (or 49.1%), reported Retained Earnings as of June 30, 2017 of $5,804,053 has been restated to total $3,764,213 as at such date, representing a reduction of $2,039,840 (or 35.1%); and reported Retained Earnings as of September 30, 2017 of $6,663,807 has been restated to total $4,623,967 as at such date, representing a reduction of $2,039,840 (or 30.6%).
Stockholders’ Equity Attributable to Parent’s Shareholders: Reported Stockholders’ Equity Attributable to Parent’s Shareholders as of December 31, 2015 of $11,671,676 has been restated to total $9,631,836 as at such date, representing a reduction of $2,039,840 (or 17.5%); while reported Stockholders’ Equity Attributable to Parent’s Shareholders as of December 31, 2016 of $14,575,988 has been restated to total $12,536,148 as at such date, representing a reduction of $2,039,840 (or 14.0%). Reported Stockholders’ Equity Attributable to Parent’s Shareholders as of March 31, 2017 of $16,701,244 has been restated to total $14,661,404 as at such date, representing a reduction of $2,039,840 (or 12.2%), reported Stockholders’ Equity Attributable to Parent’s Shareholders as of June 30, 2017 of $18,721,318 has been restated to total $16,681,478 as at such date, representing a reduction of $2,039,840 (or 10.9%); and reported Stockholders’ Equity Attributable to Parent’s Shareholders as of September 30, 2017 of $20,077,289 has been restated to total $18,037,449 as at such date, representing a reduction of $2,039,840 (or 10.2%).
Key Statement of Operations and Other Comprehensive Income (Loss) Items
General and Administrative Expense: Reported General and Administrative Expense for the year ended December 31, 2015 of $12,675,171 has been restated to total $14,715,011, representing an increase of $2,039,840 (or 16.1%); while reported General and Administrative Expense or the year ended December 31, 2016 of $13,852,277 as restated remained unchanged as at such date. Reported General and Administrative Expense for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $3,352,440, $7,006,304 and $10,714,341, respectively, as restated each remained unchanged as at such date.
Net Income (Loss): Reported Net Income for the year ended December 31, 2015 of $2,701,125 has been restated to total $661,285, representing a reduction of $2,039,840 (or 75.5%); while reported Net Income for the year ended December 31, 2016 of $5,019,583 as restated remained unchanged. Reported Net Income for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $2,020,799, $4,509,827 and $6,486,964, respectively, as restated each remained unchanged as at such date.
Net Income (Loss) Attributable to Parent’s Shareholders: Reported Net Income (Loss) Attributable to Parent’s Shareholders for the year ended December 31, 2015 of $1,077,927 has been restated to total $(961,913), representing a reduction of $2,039,840 (or 189.2%); while reported Net Income for the year ended December 31, 2016 of $2,892,155 as restated remained unchanged. Reported Net Income Attributable to Parent’s Shareholders for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $1,336,345, $3,324,733 and $4,632,380, respectively, as restated each remained unchanged as at such date.
Earnings per Share: Reported Earnings per Share (Basic) for the year ended December 31, 2015 of $0.037 has been restated to $(0.033); while reported Earnings per Share (Basic) for the year ended December 31, 2016 of $0.098 as restated remained unchanged as at such date. Reported Earnings per Share (Diluted) for the year ended December 31, 2015 of $0.035 has been restated to $(0.033); while reported Earnings per Share (Basic) for the year ended December 31, 2016 of $0.095 as restated remained unchanged as at such date. Reported Earnings per Share (Basic) and reported Earnings per Share (Diluted) for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 of $0.045 and $0.044, $0.113 and 0.109, and 0.157 and $0.152, respectively, as restated each remained unchanged as at such date.
All applicable amounts relating to this Restatement have been reflected in the consolidated financial statements and disclosed in the notes to the consolidated financial statements in this 2017 Form 10-K. For discussion of the restatement adjustments, see Item 8 of Part II, “Financial Statements and Supplementary Data—Note 27—Restatement” and “Note 28—Quarterly Financial Data (Unaudited)”. Additionally, see Item 1A of Part I, “Risk Factors”, Item 6 of Part II, “Selected Financial Data”, and Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
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In addition, we have identified material weaknesses related to our internal control over financial reporting for the year ended December 31, 2017. Disclosure related to these matters are included in Part II, Item 9A of this Form 10-K.
We believe that presenting all of this information regarding the Restated Periods in this Annual Report allows investors to review all pertinent data in a single presentation. We have not filed amendments to (i) our Quarterly Reports on Form 10-Q for the three interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017 or for the comparable interim periods in 2015 or 2016, or (ii) our Annual Report on Form 10-K for the years ended December 31, 2015 or 2016 (collectively, the “Affected Reports”). Accordingly, investors should rely only on the financial information and other disclosures regarding the Restated Periods in this Annual Report on Form 10-K, and not on the Affected Reports or any reports, earnings releases or similar communications relating to those periods.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward- looking statements. These risks and uncertainties include, but are not limited to, the factors described under Item 1 “Description of Business,” Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward- looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. In addition, you are invited to pay particular attention to the effect of the Restatement of our previously issued financial statements for the years ended December 31, 2015 and 2016 and each of the interim periods of 2017, as described in Item 8 of Part II, “Financial Statements and Supplementary Data—Note 27—Restatement” and “Note 28—Quarterly Financial Data (Unaudited)” to the restated financial statements, and any claims, investigations, or proceedings arising as a result; and well as our ability to remediate the material weaknesses in our internal controls over financial reporting described in Item 9A of this Annual Report and our ability to maintain effective internal controls and procedures in the future.
Forward-looking statements represent our estimates and assumptions only as of the date of this annual report. You should read this annual report and the documents that we reference in this annual report, or that we filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
OTHER PERTINENT INFORMATION
References in this annual report to “we,” “us,” “our” and the “Company” and words of like import refer to China United Insurance Service, Inc., its subsidiaries and variable interest entities.
References to China or the PRC refer to the People’s Republic of China (excluding Hong Kong, Macao and Taiwan). References to Taiwan refer to Republic of China.
Unless context indicates otherwise, reference to the “Company” in this annual report refers to China United Insurance Service, Inc. and its subsidiaries. Reference to “AHFL” refers to the combined operations of Action Holdings Financial Limited and its Taiwan Subsidiaries (defined below). Reference to “Anhou” refers to the combined operations of Law Anhou Insurance Agency Co., Ltd. and its subsidiaries.
Our business is conducted in Taiwan and China using New Taiwanese Dollars (“NT$”), the currency of Taiwan, Hong Kong Dollars (“HK$”), the currency of Hong Kong, and RMB, the currency of China, respectively, and our financial statements are presented in United States dollars (“USD”, “US$” or “$”). In this annual report, we refer to assets, obligations, commitments and liabilities in our financial statements in USD. These dollar references are based on the exchange rate of NT$, HK$ and RMB to USD, determined as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of USD which may result in an increase or decrease in the amount of our obligations (expressed in USD) and the value of our assets, including accounts receivable (expressed in USD).
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Corporate History and Structure Overview
Our Company is a Delaware corporation organized on June 4, 2010 and was quoted on the OTCQB® Venture Market (“OTCQB”). We provide our customers life insurance and property and casualty insurance intermediary and related services. We operate our Taiwan business primarily through Law Insurance Broker Co., Ltd. (“Law Broker”) and our PRC business primarily through Law Anhou Insurance Agency Co., Ltd. (“Anhou”).
Law Broker
The history of our Company dates back to 1992, when Law Broker was established on October 9, 1992.
Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares and incorporated under the laws of Taiwan, holds 100% interest in Law Broker, a company limited by shares and incorporated under the laws of Taiwan on October 9, 1992. Law Enterprise used to operate another two subsidiaries during the past three fiscal years, namely Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares and incorporated under the laws of Taiwan on December 5, 1987, and Law Insurance Agent Co., Ltd., a company limited by shares and incorporated under the laws of Taiwan on June 3, 2000 (“Law Agent”, collectively with “Law Enterprise”, “Law Broker” and “Law Management”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”). As Law Management and Law Agent are not in active operation, they were dissolved on April 20, 2016 and April 12, 2016, respectively.
Acquisition of AHFL
Action Holdings Financial Limited (“AHFL”) was incorporated in British Virgin Islands with limited liability on April 30, 2012. AHFL holds 65.95% interest in Law Enterprise and certain of our other subsidiaries as more fully described below.
On August 24, 2012, an acquisition agreement (the “AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the AHFL Acquisition Agreement, our Company acquired 100% interest in AHFL and its subsidiaries in Taiwan and our Company agreed to pay NT$15.0 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments. 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. Upon closing of the transaction, we acquired 100% interest in AHFL and its subsidiaries in Taiwan.
On March 14, 2013, an Amendment to the AHFL Acquisition Agreement (the “First Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the First Amendment to AHFL Acquisition Agreement, (i) the deadline for cash payment under the AHFL Acquisition Agreement was extended to March 31, 2015; and (ii) in lieu of the 2,000,000 employee stock option pool, our Company agreed to create an employee stock pool consisting of up to 4,000,000 shares of the common stock of our Company, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares shall be granted to employees of affiliated entities of our Company (including Law Broker employees).
On March 13, 2015, a second Amendment to the AHFL Acquisition Agreement (the “Second Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Second Amendment to AHFL Acquisition Agreement, the deadline for cash payment under the AHFL Acquisition Agreement was further extended to March 31, 2016.
On February 17, 2016, a third Amendment to the AHFL Acquisition Agreement (the “Third Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Third Amendment to AHFL Acquisition Agreement, on or prior to June 30, 2016, (i) our Company committed to complete the listing of our Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least $10.0 million; (ii) our Company committed to distribute the cash payment in the amount of NT$22.5 million, on a pro rata basis, to the selling shareholders of AHFL and issue 5,000,000 common shares to its selected employees pursuant to its employee stock/option plan, and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of our Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by us and restore the status quo of our Company and the selling shareholders of AHFL as if the said acquisition had never happened.
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On August 8, 2016, a fourth Amendment to the AHFL Acquisition Agreement (the “Fourth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Fourth Amendment to AHFL Acquisition Agreement, (i) the Third Amendment to AHFL Acquisition Agreement was terminated with immediate effect on August 8, 2016, and (ii) our Company agreed to pay to the selling shareholders of AHFL NT$15.0 million on or prior to March 31, 2017 and NT$4.8 million on July 21, 2016. On July 21, 2016, our Company arranged for the payment of NT$4.8 million to the selling shareholders of AHFL.
On March 12, 2017, a fifth Amendment to the Acquisition Agreement (the “Fifth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Fifth Amendment to AHFL Acquisition Agreement, our Company agreed to distribute the cash payment in the amount of NT$15 million to the selling shareholders of AHFL named therein on or prior to March 31, 2019.
Acquisition of GHFL
Genius Holdings Financial Limited (“GHFL”) is a wholly owned subsidiary of AHFL. On February 13, 2015, our Company, AHFL and Mr. Chwan Hau Li, being the selling shareholder of GHFL, entered into an acquisition agreement (the “GHFL Acquisition Agreement”). Pursuant to the GHFL Acquisition Agreement, our Company agreed to issue 352,166 fully paid and non-assessable shares of AHFL common stock (the “AHFL Shares”) together with a granted put option for 352,166 shares of common stock of our Company (the “Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the selling shareholder of GHFL would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of our Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a company limited by shares and incorporated under the laws of Taiwan, which in turn holds approximately 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares and incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. Mr. Chwan Hau Li was the sole shareholder of GHFL and he is a director and shareholder of our Company. On March 31, 2015, Mr. Chwan Hau Li exercised the Put Option, pursuant to which, 352,166 shares of AHFL held by Mr. Chwan Hau Li were transferred back to our Company as the consideration for 352,166 shares of common stock of our Company, which were issued to Mr. Chwan Hau Li on April 29, 2015.
On February 17, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into an Amendment 2 to the GHFL Acquisition Agreement (the “Second Amendment to GHFL Acquisition Agreement”), pursuant to which our Company agreed to complete the listing of our Company in a major capital market on or prior to February 28, 2016 where the net proceeds raised through such public offering financing shall be at least $10.0 million.
On August 8, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into an Amendment 3 to the GHFL Acquisition Agreement (the “Third Amendment to GHFL Acquisition Agreement”), pursuant to which, the Second Amendment to GHFL Acquisition Agreement was terminated.
Anhou
On July 12, 2010, ZLI Holdings Limited (“CU Hong Kong”), a wholly owned subsidiary of our Company, was established in Hong Kong. On October 20, 2010, Zhengzhou Zhonglian Hengfu Consulting Co., Ltd., a wholly foreign owned enterprise (“CU WFOE”), a wholly owned subsidiary of CU Hong Kong, was established in Henan province of the PRC. On January 16, 2011, our Company issued 20,000,000 shares of common stock to several non-U.S. persons for their investment of $300,000 in CU WFOE. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended.
Zhengzhou Anhou Insurance Agency Co., Ltd., the predecessor entity of Anhou, was founded in Henan province of the PRC on October 9, 2003. Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors. Able Capital Holding Co., Ltd., a company established with limited liability in Hong Kong, delegated four PRC individuals, namely Yanyan Wang, Zhaohui Chen, Weizhe Hou and Yong Zhang, to invest in Anhou on its behalf.
On September 26, 2013, Yanyan Wang, Zhaohui Chen, Jing Yue, Weizhe Hou, Yong Zhang, Li Chen (“Anhou New Investors”) and Shuqin Zhu, Qun Wei, Qunlei Fang and Yanxia Chen (“Anhou Original Shareholders”) agreed to increase the registered capital of Anhou to RMB50 million, among which, (i) Yanyan Wang agreed to invest RMB10 million, accounting for 20% of registered capital in Anhou, (ii) Zhaohui Chen agreed to invest RMB10 million, accounting for 20% of registered capital in Anhou, (iii) Jing Yue agreed to invest RMB7.5 million, accounting for 15% of registered capital in Anhou, (iv) Weizhe Hou agreed to invest RMB5 million, accounting for 10% of registered capital in Anhou, (v) Yong Zhang agreed to invest RMB4.5 million, accounting for 9% of registered capital in Anhou, and (vi) Li Chen agreed to invest RMB3 million, accounting for 6% of registered capital in Anhou, respectively.
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The registered capital increase of Anhou was in response to the promulgations of certain regulations by the China Insurance Regulatory Commission (“CIRC”). On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC 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 Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (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. To better implement the expansion strategies of our Company, Anhou increased its registered capital to RMB50 million to meet the requirement of CIRC so that it is able set up new branches in any province beyond its current operations in the PRC.
On October 24, 2013, Anhou Original Shareholders transferred their interests in Anhou to Changrong Hu, a PRC citizen (“Mr. Hu,” together with Anhou New Investors, “Anhou Existing Shareholders”), for an aggregate consideration of RMB10 million. Mr. Hu is currently the legal representative, General Manager and the sole director of Anhou.
On November 17, 2016, Li Chen transferred his interests in Anhou to Chunyan Lu for an aggregate consideration of RMB3 million.
Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”), a wholly owned subsidiary of Anhou, was established with limited liability on September 4, 2006 in Sichuan province of the PRC. On September 6, 2010, shareholders of Sichuan Kangzhuang transferred their interest in Sichuan Kangzhuang to Anhou for an aggregate consideration of RMB532,622. For the purpose of procuring certain economic benefits and enabling a centralized control over the business operations in Sichuan province, the Company commenced the dissolution process of Sichuan Kangzhuang, a wholly owned subsidiary of Anhou 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 and Commerce and made a public announcement published in local newspaper in October 2017. On June 22, 2017, the Sichuan Branch of Anhou obtained its business license to conduct insurance agency business. As of this date, Sichuan Kangzhuang is undergoing tax closure procedure, which involves multiple rounds of communication with the relevant tax authorities before obtaining the official approval for tax deregistration. Mr. Wen Yuan Hsu, the general manger of Sichuan Kangzhuang is the general manager of the Sichuan branch office of Anhou.
Jiangsu Law Insurance Brokers Co., Ltd. (“Jiangsu Law”), a wholly owned subsidiary of Anhou, was established with limited liability on September 19, 2005 in Jiangsu province of the PRC. Jiangsu Law is licensed to provide insurance brokerage services. On September 28, 2010, Anhou and the shareholders of Jiangsu Law entered into an equity transfer agreements. Pursuant to Provisions on the Supervision and Administration of Insurance Brokerage Institution, effective on October 1, 2009, if an insurance brokerage entity fails to bring its registered capital to no less than RMB10,000,000 on or prior to October 1, 2012, the CIRC or its local counterpart, as applicable, may determine not to extend the insurance brokerage license. To meet such minimum registered capital requirement, on February 11, 2011, Anhou invested RMB4.82 million in Jiangsu Law to increase the registered capital to RMB10 million.
Our Consolidated Affiliated Entities
Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, we operate our PRC business primarily through Anhou, Sichuan Kangzhuang and Jiangsu Law (collectively, the “Consolidated Affiliated Entities”, each a “Consolidated Affiliated Entity”). We do not hold equity interests in our Consolidated Affiliated Entities. However, through the VIE Agreements (defined as below), we effectively control, and are able to derive substantial economic benefits from, these Consolidated Affiliated Entities. On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, however, how these changes will affect entities currently operating in China, particularly foreign controlled variable interest entities, is not entirely clear. See “Risks Related to Our Corporate Structure in the PRC”.
Our Consolidated Affiliated Entities in China are variable interest entities through which all of our insurance services in China are operated. These VIE Agreements that give us effective control over our Consolidated Affiliated Entities in China and allow us to consolidate the financial results of our Consolidated Affiliated Entities in our financial statements.
On January 17, 2011, CU WFOE, Anhou and Anhou Original Shareholders entered into a series of agreements (the “Old VIE Agreements”) pursuant to which CU WFOE exercises effective control over Anhou. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date, except that the Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. The VIE Agreements now in effect include:
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| 1. | An exclusive Business Cooperation Agreement, pursuant to which CU WFOE is appointed as the exclusive services provider to Anhou of complete technical support, business support and related consulting services in exchange for 90% of the net profits of Anhou. The Exclusive Business Cooperation Agreement was effective on January 17, 2011 with a term of ten years subject to extension at the discretion of CU WFOE. CU WFOE may terminate the agreement at any time with 30 days’ written notice but Anhou may only terminate the agreement if CU WFOE commits gross negligence or a fraudulent act against Anhou; |
| 2. | a Power of Attorney, pursuant to which the shareholders of Anhou have vested their collective voting control in Anhou to CU WFOE; |
| 3. | an Option Agreement, pursuant to which the shareholders of Anhou granted to CU WFOE the irrevocable right and option to acquire all of their equity interests in Anhou. The Option Agreement was effective on October 24, 2013 with a term of ten years subject to renewal at CU WFOE’s election; and |
| 4. | a Share Pledge Agreement, pursuant to which the shareholders of Anhou have pledged all of their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the Exclusive Business Cooperation Agreement. |
Please refer to “Item 13. Certain Relationships and Related Transactions, and Director Independence” for further information on the VIE Agreements.
PFAL
Prime Financial Asia Ltd. (“PFAL”) is a re-insurance broker company incorporated in Hong Kong. On April 23, 2014, AHFL and Chun Kwok Wong (“Mr. Wong”) entered into a Capital Increase Agreement, pursuant to which Mr. Wong agreed to increase PFAL’s registered capital from HK$500,000 to HK$1,470,000 and AHFL agreed to contribute HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital increase on April 30, 2014, Mr. Wong and AHFL own 49% and 51% of PFAL’s equity interest, respectively.
On August 7, 2015, Max Key Investment Ltd. (“MKI”) was incorporated with limited liability in the British Virgin Islands. On August 15, 2015, Prime Management Consulting (Nanjing) Co., Ltd. (“PTC Nanjing”) was incorporated with limited liability in Nanjing province of the PRC. On September 3, 2015, Prime Asia Corporation Limited. (“PTC Taiwan”), a company limited by shares, was incorporated in Taiwan. Each of MKI, PTC Nanjing and PTC Taiwan is a wholly owned subsidiary of PFAL.
As a holding company with no business other than holding equity interest of our operating subsidiary, CU WFOE in China and Law Broker in Taiwan, we rely principally on dividends to be paid by CU WFOE in China and Law Broker in Taiwan. CU WFOE, being the exclusive service provider to Anhou, relies on the service fees to which it is entitled from Anhou. Pursuant to the Exclusive Cooperation Agreement (the “Cooperation Agreement”) between CU WFOE and Anhou, CU WFOE has the right to collect 90% of the net profits of Anhou. Anhou has been paying service fees according to the Cooperation Agreement, but has not paid any dividend to CU WFOE to date. As of December 31, 2017, Anhou was operating at a profit, but since Anhou remains a growing company that requires financial resources to support further expansion, the dividend payment will be decided later on depending on the financial circumstances. Our capability to receive dividends from CU WFOE, convert them into USD and make the repatriation out of China is subject to the applicable PRC restrictions on the payment of dividends by PRC companies, laws and regulations on foreign exchange and restrictions on foreign investment. For the year ended December 31, 2015, 88.45%, 10.71% and 0.84% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and PFAL, respectively. For the year ended December 31, 2016, 87.52%, 12.10% and 0.38% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and PFAL, respectively. For the year ended December 31, 2017, 85.31%, 14.37% and 0.32% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and PFAL, respectively. Revenues in our consolidated financial statements are composed of commissions earned from insurance companies according to the terms of each insurance company service agreement, as well as revenues earned in association with the Strategic Alliance Agreement with AIATW.
Reclassification of Shares
On January 28, 2011, our Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock. On July 2, 2012, our board of directors and stockholders approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Mr. Yi Hsiao Mao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000 common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification. Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of our Company; while each holder of Series A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of our Company.
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2017 Long Term Incentive Plan
On May 12, 2017, the Company’s 2017 Long Term Incentive Plan (the “2017 Plan”) was approved by the shareholders at the 2017 Annual Meeting of Stockholders of China United Insurance Service, Inc. Up to 10,000,000 shares of our Common Stock may be granted under the 2017 Plan (the “Share Pool”), provided that 2,000,000 shares of the Share Pool is reserved for issuance to eligible participants providing services to Action Holdings Financial Limited and its subsidiaries. Eligibility to participate is open to officers, directors and employees of, and other individuals (including sales agents who are exclusive agents of the Company or its subsidiaries or derive more than 50% of their income from those entities) who provide bona fide services to or for, us or any of our subsidiaries. Given that metrics for evaluating performance goals are rather complex and exhaustive, and that the Company’s management and Board of Directors are still working to develop a series of reward policies that specify various performance target levels and the size of the award or payout of performance shares with respect to each different target level attained, no awards were granted under the 2017 Plan as of December 31, 2017.
The following flow chart illustrates our Company’s organizational structure as of March 14, 2018:
Products and Services
Law Broker and Anhou market and sell to customers two broad categories of insurance products: life insurance products and property and casualty insurance products, both focused on meeting the particular insurance needs of individuals. The insurance products that Law Broker and Anhou sell are underwritten by some of the leading insurance companies in Taiwan and China, respectively.
Through Anhou’s wholly-owned insurance brokerage firm Jiangsu Law, it also closely interacts with insurance companies and actively locates and introduces the right customers in Anhou’s database matching the insurance products offered by such insurance companies to them.
Law Broker and Anhou are compensated primarily by commissions and fees paid by insurance companies, typically based on a percentage of the premium paid by the insured or a percentage of the amount recovered from insurance companies. Commission and fee rates generally depend on the type of insurance products, the particular insurance company.
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Life Insurance Products
Law Broker
The life insurance products Law Broker distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products Law Broker distributes combine features of one or more of the categories listed below. Total net revenues from life insurance products distributed by Law Broker in the 2017 fiscal year was approximately $55.96 million, accounted for approximately 93.43% of Law Broker’s total net revenues and approximately 76.81% of our total net revenues for the fiscal year ended December 31, 2017, respectively.
| · | Individual Whole Life Insurance. The individual whole life insurance products Law Broker distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interest is paid upon the death of the insured. |
| · | Individual Term Life Insurance. The individual term life insurance products Law Broker distributes provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years. Term life insurance policies generally expire without value if the insured survives the coverage period. |
| · | Individual Health Insurance. The individual health insurance products Law Broker distributes pay the insured amount of reasonable hospitalization cost, or certain death benefit in case of the death of the insured, due to illness, accident or childbirth. Individual health insurance policies expire when the premium is not paid or a certain age is attained. |
| · | Accidental Injury Insurance. The accidental injury insurance products Law Broker distributes provide benefits when the insured is dead or disabled because of accidental injury, which is unforeseen by the injured or against his will. |
| · | Investment-Oriented Insurance. The investment-oriented insurance products Law Broker distributes are market linked insurance plans which also provide life coverage, combining advantages of investment and protection. The premium amount (after deduction of certain charges) is invested into different funds. The performance of the fund will depend on the market conditions. A growing upward trend in market will increase the fund value. Every investment-oriented insurance policy has market risk exposure depending on the fund invested and such investment risk is solely borne by the policyholder. Depending on the death benefit, investment-oriented insurance policies are categorized into two broad categories: (1) the death benefit is equal to the higher of insured amount or fund value; (2) the death benefit is equal to the insured amount plus fund value. |
| · | Foreign Currency Insurance Commodities. The foreign currency insurance commodities Law Broker distributes are life insurance policies in which policy benefits are paid in foreign currencies. The foreign currency policy provides insurance for the insured person’s life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interest, is paid upon the death of the insured. |
| · | Travel Accident Insurance. The travel accident insurance products Law Broker distributes provide accident coverage for accidental death and dismemberment and other travel injuries. The premium is based on the number of travel days and the insured amount. |
The life insurance products Law Broker distributed in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, AIA International Limited Taiwan Branch, Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc. Among them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc. accounted for approximately 25.41%, 12.45%, and 11.18% of our total net revenues in the fiscal year ending December 31, 2017, respectively.
Anhou
The life insurance products Anhou distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products Anhou distributes combine features of one or more of the categories listed below. Total net revenues from life insurance products in the 2017 fiscal year was approximately 9.67 million, accounted for approximately 92.33% of Anhou’s total net revenues and approximately 13.27% of our total net revenues for the fiscal year ending December 31, 2017, respectively.
| · | Individual Whole Life Insurance. The individual whole life insurance products Anhou distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interest is paid upon the death of the insured. |
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| · | Individual Term Life Insurance. The individual term life insurance products Anhou distributes provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years. Term life insurance policies generally expire without value if the insured survives the coverage period. |
| · | Individual Endowment Life Insurance. The individual endowment products Anhou distributes generally provide maturity benefits if the insured reaches a specified age, and provide to a beneficiary designated by the insured guaranteed benefits upon the death of the insured within the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period, generally ranging from five to 25 years. |
| · | Individual Annuity Insurance. The individual annuity insurance products Anhou distributes provide annual benefit payments after the insured attains a certain age, or for a fixed time period, and provide a lump payment at the end of the coverage period. In addition, the beneficiary designated in the annuity contract will receive guaranteed benefits upon the death of the insured during the coverage period. In return, the purchaser of the annuity products makes periodic payment of premiums during a pre-determined accumulation period. |
| · | Individual Health Insurance. The individual health insurance products Anhou distributes primarily consist of critical illness insurance products, which provide guaranteed benefits for specified critical illnesses during the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period. |
The life insurance products Anhou distributed in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, Aegon THTF Life Insurance Co., Ltd., AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., Huaxia Insurance Co., Ltd., and Taikang Life Insurance Company. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
In addition to the periodic premium payment schedules described above, most of the individual life insurance products we distribute also allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured, a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time. This means that once Anhou or Law Broker sells a life insurance policy with a periodic premium payment schedule, they will be able to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years. Because of this feature and the expected sustainable growth of life insurance sales in China and Taiwan, we have focused significant resources ever since the inception of Anhou and Law Broker on developing our capability to distribute individual life insurance products with periodic payment schedules. We expect that sales of life insurance products will continue to be our primary source of revenue in the next several years.
Property and Casualty Insurance Products
Law Broker
Law Broker’s main property and casualty insurance products are automobile insurance, casualty insurance, and liability insurance. Law Broker commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenues from property and casualty insurance products in the 2017 fiscal year was approximately $3.93 million, accounted for approximately 6.57% of Law Broker’s total net revenues and approximately 5.40% of our total net revenues in the fiscal year ending December 31, 2017, respectively.
The property and casualty insurance products Law Broker distributes can be further classified into the following categories:
| · | Automobile Insurance. Law Broker distributes both standard automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies Law Broker sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. Law Broker also sells standard third party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Law Broker distributes cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches. |
| · | Casualty Insurance. The casualty insurance Law Broker distributes are primarily designed to insure any losses or damages to properties caused by direct accidents. The policy period is usually one year and the premium is generally calculated based on the insured amount. |
| · | Liability Insurance. The liability insurance Law Broker distributes are primarily designed to protect an individual or business from the risk that they may be sued and held legally liable for something such as malpractice, injury or negligence. The policy period is usually one year and the premium is generally calculated based on the insured amount. |
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The property and casualty insurance products Law Broker distributed in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, Fubon Insurance Co., Ltd., Hotai Insurance Co., Ltd., Shinkong Insurance Co., Ltd., TLG Insurance Co., Ltd. and Union Insurance Company. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
Anhou
Anhou’s main property and casualty insurance products are automobile insurance and commercial property insurance. Anhou commenced its sale of commercial property insurance in 2009 and had developed its automobile insurance business since 2010. Total net revenues from property and casualty insurance products distributed by Anhou in the 2017 fiscal year was approximately $0.8 million, accounted for approximately 7.67% of Anhou’s total net revenues and approximately 1.10% of our total net revenues for the fiscal year ending December 31, 2017.
The property and casualty insurance products Anhou distributes can be further classified into the following categories:
| · | Automobile Insurance. Automobile insurance is the largest segment of property and casualty insurance in the PRC in terms of gross written premiums. Anhou distributes both standard automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies Anhou sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. Anhou also sells standard third party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Anhou distributes cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches. |
| · | Commercial Property Insurance. The commercial property insurance products Anhou distributes include basic, comprehensive and all risk policies. Basic commercial property insurance policies generally cover damage to the insured property caused by fire, explosion and thunder and lightning. Comprehensive commercial property insurance policies generally cover damage to the insured property caused by fire, explosion and certain natural disasters. All risk commercial property insurance policies cover all causes of damage to the insured property not specifically excluded from the policies. |
The property and casualty insurance products Anhou distributed in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, China Life Property and Casualty Insurance Co., Ltd., China Pacific (Group) Co., Ltd., Huatai P&C Insurance Co., Ltd., PICC Property and Casualty Co., Ltd., and Tianan Property Insurance Co., Ltd. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
Strategic Alliance with AIATW
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”), the purpose of which is to promote life insurance products provided by AIATW within the in Taiwan by insurance agency companies or insurance brokerage companies affiliated with AHFL or CUIS. The original term of the Alliance Agreement was from June 1, 2013 to May 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW was required to pay AHFL an execution fee of $8,326,700 (NT$ 250,000,000) to be recorded as revenue upon fulfilling sales target over the next five years. As of September 23, 2013, AHFL had received $8,326,700 (NT$250,000,000) from AIATW under the Alliance Agreement. Pursuant to the Alliance Agreement, AHFL was entitled to the payment of the execution fee, subject to certain terms and conditions therein, including the satisfaction of the performance targets and the threshold 13-month persistency ratio. The execution fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFL entered into an Amendment to Strategic Alliance Agreement (the “First Amendment to Alliance Agreement”) with AIATW. Pursuant to the First Amendment to Alliance Agreement, the expiration date of the Alliance Agreement was extended from May 31, 2018 to December 31, 2020. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, including the downward adjustment of the performance targets as well as the mechanism and formula calculating the execution fee to be refunded, if any.
On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Second Amendment to Alliance Agreement”) with AIATW to further revise certain provisions in the Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW.
Pursuant to the Second Amendment to Alliance Agreement, the expiration date of the Alliance Agreement was extended from May 31, 2018 to December 31, 2021, and the effect of the Alliance Agreement during the period from October 1, 2014 to December 31, 2015 was suspended. In addition, both AHFL and AIATW agree to adjust certain terms and conditions set forth in the Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of execution fees. On March 15, 2016, AHFL unilaterally issued a confirmation letter to AIATW (the “2016 Letter”), where it emphasized its commitment to achieve certain sales targets within a specific time frame and covenanted to refund a certain portion of execution fees calculated based on the formula therein upon failure to achieve such sales target, as applicable.
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On June 14, 2017, AHFL entered into an Amendment 3 (the “Third Amendment”) to the Alliance Agreement with AIATW to further revise certain provisions in the Alliance Agreement and the previous amendments to the Alliance Agreement entered into by and between AHFL and AIATW.
Pursuant to the Third Amendment, except for the first contract year (April 15, 2013 to September 30, 2014), the sales targets for the remaining contract term under the Alliance Agreement shall be changed by reference to (i) the amount of the value of new business (“VONB”) and (ii) the 13-month persistency ratio as set forth therein, provided that to the extent any underlying insurance contract is revoked, invalid or terminated and premiums is refunded to such policyholder, the amount of the related VONB shall be correspondingly reduced. Both AHFL and AIATW agreed to calculate the business promotion fees (equivalent to the “execution fee” referred above) to be returned in case of failure to achieve the sales targets or the fees to be increased in case of exceeding the sales targets, as the case may be, based on two formulas specified in the Third Amendment. The primary factor under formula one focuses on the annual and/or accumulated achievement rate(s), while the primary factor under formula two focuses on the 13-month persistency ratio(s), subject to terms and conditions therein. The expanded scope of services to be provided by AHFL to AIATW as set forth in Section 4 of New Second Amendment is removed under the Third Amendment as well.
On June 14, 2017, with AIATW's consent, the 2016 Letter was revoked in order to conform to the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in the Third Amendment.
Online Business
In recent years, the online insurance business has experienced rapid growth. Many insurance companies, portal websites and professional insurance intermediaries have begun launching its e-commerce platforms, providing real-time information to consumers and allowing consumers to directly complete transactions online. Law Broker began developing its online platform in 2016, and became the first brokerage company to receive formal approval from the Financial Supervisory Commission of Taiwan (“FSC”) to commence online business on May 9, 2016. The platform, SARAcares (website: https://www.saracares.com.tw), was launched on January 26, 2017. It offers a broad range of insurance products underwritten by multiple insurance companies, policy comparison features, and post-sale services that are backed by our online service staffs and nationwide sales network. As required by the relevant laws and regulations regarding e-commerce provided by the FSC, Law Broker obtained the ISO 27001 certification of Information Security Management System (ISMS) and BS 10012 certification of Personal Information Management System on June 20, 2017. Our online business in Taiwan is still at a nascent stage with the majority of the sales still being completed by off-line agents.
Unified Operating Platform
Law Broker has self-constructed a Unified Operating Platform, an information technology infrastructure that serves to enhance operational, sales processes, and administrative efficiency. Since Law Broker’s establishment in 1992, it has successfully implemented the following components of its operating platform across its branch offices in Taiwan through a hub center located in Taipei:
| · | A centralized client and insurance policy management and analysis system, which encompasses our life insurance unit and property and casualty insurance unit, that will better support business operations and facilitate risk control; |
| · | A centralized client relations management system, that manages and analyzes client interactions to drive sales growth; |
| · | An integrated administrative and information system, that increases the management efficiency among the subsidiaries, branches and sales departments; |
| · | A centralized and computerized accounting and financial management system, that improves the efficiency of commission distribution and enforcement; |
| · | A human resources management and performance tracking system; and |
| · | An e-training system to provide online trainings to sales professionals. |
The Unified Operating Platform has proved to be an efficient and streamlined operating system which has contribute to the successful expansion and growth of Law Broker into one of the leading insurance brokerage companies in Taiwan, with 30 sales and service outlets (including the headquarters) across Taiwan and 2,609 employees and insurance sales professionals as of December 31, 2017.
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In accordance with our growth strategy in China, Anhou has made significant effort to adapt the Unified Operating Platform utilized by Law Broker to better meet the operational need in China. Since September 2010, Anhou has successfully implemented the tailored operating platform across the PRC subsidiaries through a hub center located in Nantong, Jiangsu province. We expect that this tailored operating platform will make selling easier for sales agents in China, facilitate standardized business and financial management, enhance risk control and increase operational efficiency for the PRC subsidiaries.
Anhou has tailored and refined the platform on the basis of Law Broker’s well-developed operating platform in Taiwan and believes that it is difficult for our competitors in China, particularly new market entrants, to reproduce a similar platform without substantial financial resources, time and operating experience.
Because the various systems, policies and procedures under both of operating platforms utilized by Law Broker and Anhou can be rolled out quickly as we enter new regions or make acquisitions, we believe we can expand our distribution network rapidly and efficiently while maintaining the quality of our services.
Distribution and Service Network and Marketing
Since Law Broker’s establishment in 1992, it has devoted substantial resources to building up its distribution and service network. Law Broker currently has 30 sales and service outlets spread across Taiwan (including the headquarters), among which, 10 are located in the northern region, 13 are located in the central region, 5 are located in the southern region and 2 are located in the eastern region. As of December 31, 2017, Law Broker had 2,414 sales professionals and 195 administrative staff members.
The following table sets forth some additional information of Law Broker’s distribution and service network by region as of December 31, 2017:
| Region | Number of Sales and Service Outlets | Number of Sales Professionals | ||||||
| Northern region (including the headquarter) | 10 | 703 | ||||||
| Southern region | 5 | 507 | ||||||
| Central region | 13 | 1,162 | ||||||
| Eastern region | 2 | 42 | ||||||
| Total | 30 | 2414 | ||||||
Law Broker markets and sells life insurance products, property and casualty insurance products directly to the targeted customers through the sales professionals, who are independent contractors, not its employees.
Since Anhou’s establishment in 2003, it has devoted substantial resources in building up its distribution and service network. Anhou has targeted its distribution and service network in provinces with most population in China, such as Henan, Jiangsu, Sichuan, Fujian, Guangdong, Yunnan. As of December 31, 2017, Anhou had two insurance agencies and one insurance brokerage firm, with 2,715 sales professionals and 116 administrative staff members operating across 43 cities within these six provinces.
The following table sets forth some additional information of Anhou’s distribution and service network by province as of December 31, 2017:
| Province | Number of Sales and Service Outlets | Number of Sales Agents | ||||||
| Henan | 30 | 1,536 | ||||||
| Sichuan | 7 | 572 | ||||||
| Jiangsu | 3 | 392 | ||||||
| Fujian | 1 | 203 | ||||||
| Guangdong | 1 | 12 | ||||||
| Yunnan | 1 | - | ||||||
| Total | 43 | 2,715 | ||||||
Anhou markets and sells life insurance products, property and casualty insurance products directly to the targeted customers through the sales agents, who are independent contractors, not its employees.
Customers
As of December 31, 2017, Law Broker had approximately 545,292 customers, among which approximately 81.6% purchased life insurance products and approximately 18.4% purchased property and casualty insurance products from Law Broker.
Due to its extensive line of insurance products underwritten by the insurance companies in Taiwan, Law Broker managed to offer a variety of insurance products to customers of different ages or professions. However, as an aging population in Taiwan has gradually become a more recognized social issue, despite relatively healthy government-sponsored retirement and medical programs, more and more Taiwanese, especially those with stable financial means and aiming for high-end retirement and medical treatment, have been focusing on endowment and medical type of commercial insurance products, while the investment type of insurance products have been playing a less significant role since the economic downturn.
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In addition, from time to time, Law Broker has been, either voluntarily or upon request of insurance companies, advising insurance companies or providing feedback on particular types of insurance products before they are put on the market. This interaction with insurance companies has not only enhanced the close cooperation between Law Broker and the insurance companies, but also gives it an edge in understanding the in-depth features of such insurance products for marketing and distribution purposes.
Law Broker sells automobile insurance and casualty insurance primarily to individual customers. Law Broker sells liability insurance to institutional customers.
As of December 31, 2017, Anhou had 47,257 customers, among which 99% purchased life insurance products and 1% purchased property and casualty insurance products from Anhou.
Anhou sells automobile insurance and individual accident insurance primarily to individual customers. Anhou sells commercial property insurance to institutional customers.
The revenues of Anhou are primarily generated from the sale of life insurance products and we expect the continuous growth in this regard, as more and more customers in China realized the insufficiency of the mandatory social insurance coverage and the necessity to supplement it with commercial insurance.
Insurance Company Partners
We are selective in terms of choosing insurance companies as our partners. We take into consideration a variety of factors, such as the reputation and integrity of the insurance company, the quality and competitiveness of insurance products offered, the prudence and health of the financial standing of the insurance company as well as the complexity and efficiency of claim adjustment and settlement. During years of operation, both Law Broker and Anhou have formed strategic relationships with numerous insurance companies in Taiwan and China, respectively, as of December 31, 2017, Law Broker had established business relationships with 23 insurance companies in Taiwan and Anhou had established business relationships with 34 insurance companies in China.
In the fiscal year ended December 31, 2017, Law Broker’s major insurance company partners, after aggregating the business conducted between Law Broker and the various local branches of the insurance companies were AIATW, Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc., arranged in alphabetical order. Among them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc., accounted for approximately 25.41%, 12.45% and 11.18% of the Company’s total net revenues for the year ended December 31, 2017, respectively.
In the fiscal year ended December 31, 2017, Anhou’s major insurance company partners, after aggregating the business conducted between Anhou and the various local branches of the insurance companies were Aegon THTF Life Insurance Co., Ltd., AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., Huaxia Insurance Co., Ltd., and Taikang Life Insurance Co., Ltd., arranged in alphabetical order. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
Competition
A number of industry players are involved in the distribution of insurance products in Taiwan and PRC. We compete for customers on the basis of product offerings, customer services and reputation. Because we primarily distribute individual insurance products, our principal competitors include:
| · | Professional insurance intermediaries. Life insurance is our core business and has a strong regional feature. Through years of business development, we believe that we can compete effectively with other insurance intermediary companies as we have a longer operational history and over the years have assembled a strong and stable team of managers and sales professionals. With the implementation of our unified operating platform, we believe that we could strengthen our lead in our developed local regions and expand our operation to our newly selected areas. However, with increasing consolidation expected in the insurance intermediary sector in the coming years, we expect competition within this sector to intensify. |
| · | Insurance companies. The distribution of individual life insurance products in Taiwan and China historically has been dominated by insurance companies, which usually use both in-house sales force and exclusive sales agents to distribute their own products. We believe that we can compete effectively with insurance companies because we focus only on distribution and offer our customers a broad range of insurance products underwritten by multiple insurance companies. |
| · | Other business entities. In recent years, business entities that distribute insurance products as an ancillary business, primarily commercial banks and postal offices have been playing an increasingly important role in the distribution of insurance products, especially life insurance products. However, the insurance products distributed by these entities are usually confined to those related to their main lines of business, such as investment-related life insurance products. We believe that we can compete effectively with these business entities because we offer our customers a broader variety of products. |
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Law Broker is one of the leading insurance brokerage firms in Taiwan. During the past two decades, Law Broker has expanded its business across Taiwan, with 30 sales and service outlets (including the headquarters) and 2,414 sales professionals and 195 administrative staff members spread over the four regions of Taiwan as of December 31, 2017. Other than insurance companies and commercial banks, Law Broker’s primary competitors are Taiwan insurance brokerage companies of relatively large size, such as Everpro Insurance Brokers Co., Ltd.
Awards and Recognitions
Through years of operation, Law Broker has been recognized by various organizations and government entities for its best practices in the industry. Especially noteworthy is the “Taiwan Insurance Excellence Award”, the highest acclaim in the Taiwan insurance industry, co-sponsored by the Taiwan Insurance Institute, FSC and Taiwan Consumer Protection Committee.
| Year of Award | Award/Recognition | |
| 2017 | Seventh Taiwan Insurance Excellence Award Excellence in Talent Training Award–Gold Medal Excellence in Corporate Social Responsibility Award–Silver Medal Excellence in Digital Application Award–Silver Medal Excellence in Customer Service–Silver Medal | |
| 2015 | Sixth Taiwan Insurance Excellence Award Excellence in Talent Training Award–Silver Medal Excellence in Customer Service–Silver Medal | |
| 2013 | Fifth Taiwan Insurance Excellence Award Excellence in Digital Application Award–Gold Medal Excellence in Talent Training Award–Silver Medal Excellence in Customer Service–Silver Medal | |
| 2011 | Fourth Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in Customer Service | |
| 2009 | Third Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in E-Commerce Excellence in Customer Service–Nomination | |
| 2007 | Second Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in Corporate Social Responsibility–Merit Award | |
| 2005 | First Taiwan Insurance Excellence Award Talent Training Excellence Award |
During the past 14 years, Anhou has expanded its business across 43 cities within Henan, Sichuan, Jiangsu, Fujian, Guangdong and Yunnan provinces with 2,715 sales professionals and 116 administrative staff members. Based on the insurance products Anhou is offering and the geographic areas of its branch offices, Anhou’s primary competitors are small-sized and middle-sized insurance agency companies. Anhou is relatively larger in terms of the number of salesmen as well as the sales revenue comparing to those competing insurance agency companies. On April 20, 2012, Anhou obtained the nationwide license from CIRC, pursuant to which Anhou may set up its branch office across the PRC to carry out the insurance agency business with no further approval requirement from CIRC other than filing with the local CIRC at the provincial level.
On March 26, 2012, CIRC issued the Notice on Suspension of Market Entry Approval of Regional Insurance Agencies and Certain Part-time Insurance Agencies (“2012 Notice”). Pursuant to the 2012 Notice, CIRC and its local counterparts will suspend granting any new license to full-time insurance agencies operating on a regional basis (“Regional Insurance Agencies”) as well as to branch offices of existing Regional Insurance Agencies. In addition, no new license for part-time insurance agency businesses will be granted unless such applicant is a financial institution or a China Post office. However, CIRC emphasized in the 2012 Notice that its local counterparts shall continue to support the establishment of insurance intermediary groups and full-time insurance agencies operating on a nationwide basis, as well as continue to support their respective branch offices.
As indicated in the 2012 Notice, it appears that CIRC is aiming to increase the entry thresholds of Regional Insurance Agencies and part-time insurance agencies with a view to reducing the number, as well as, enhancing the quality of insurance agencies in the market. CIRC has also indicated in the 2012 Notice that it intends to further amend related rules and regulations to improve the market entry and exit mechanism for insurance agencies, and promote the professionalism as well as enhance the quality of insurance agencies in the market.
On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (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.
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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 continuously operate 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.
With the promulgation and implementation of the above-mentioned regulations, we expect a better regulated insurance agency market in China with orderly competition and pursuit for professional excellence, which will accentuate our competitive advantage due to our continuous commitment to quality service. On October 24, 2013, Anhou increased its registered capital to RMB50 million. We believe that we will be in a better position to obtain the full support expressly provided in the 2013 Notice from the local CIRC on our expansion strategy nationwide.
Intellectual Property
To protect our intellectual property, we rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees, sales agents, contractors and others.
Law Enterprise and Law Broker jointly own the following registered trademarks in Taiwan:
the Service Mark of Law Insurance Broker Co., Ltd. under the registration number 01462327, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law Insurance Broker Co., Ltd. under the registration number 01604254, with a 10-year validity from October 16, 2013 to October 15, 2023;
the logo of Blue Magpie (藍鵲), under the registration number 01462329, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (錠嵂) under the registration number 01462328, with a 10-year validity from June 16, 2011 to June 15, 2021;
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the logo of Law (錠嵂) under the registration number 01611772, with a 10-year validity from December 1, 2013 to November 30, 2023;
the logo of Bao Xian Tong and INS under the registration number 01580261, with a 10-year validity from May 16, 2013 to May 15, 2023; and
the logo of Magpie Baby under the registration number 01518573, with a 10-year validity from May 16, 2012 to May 15, 2022.
the logo of Magpie Baby 2.0 under the registration number 01763557, with a 10 year validity from April 1, 2016 to March 31, 2026; and
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the logo of SARACARES under the registration number 01876419, with a 10 year validity from October 16, 2017 to October 15, 2027
Law Broker has the following registered trademarks in Taiwan. All of the trademarks will be renewed for another 10-year before their respective expiry:
the logo of Blue Magpie Cycling Team Fleet, under the registration number 01340567, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Insurance Broker under the registration 01340565, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Blue Magpie under the registration number 01340566, with a 10-year validity from December 1, 2008 to November 30, 2018;
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the logo of Symbiosis, Co-cultivation Co-Prosperity and Law Blue Magpie Picture under the registration number 01317020, with a 10-year validity from July 1, 2008 to June 30, 2018;
the logo of Education Training Blue Magpie under the registration number 01313467, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Cartoon Blue Magpie under the registration number 01313464, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Little Blue Magpie under the registration number 01313468, with a 10-year validity from June 1, 2008 to May 31, 2018;
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the logo of Triumph Blue Magpie under the registration number 01313465, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Blue Magpie Fleet Picture under the registration number 01310350, with a 10-year validity from May 1, 2008 to April 30, 2018; and
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the logo of Fighting Blue Magpie under the registration number 01313466, with a 10-year validity from June 1, 2008 to May 31, 2018.
Jiangsu Law has one registered trademark in China, the logo of Jiangsu Law:
Segments
The Company currently operates as three reporting segments. Revenues, net income and total assets can be found in Item 8 of Part II, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Employees
As of December 31, 2017, Law Broker has a total of 195 full-time employees and Anhou has 116 full-time employees. Our employees are not represented by any collective bargaining agreement. We believe that we have good relations with our employees and we have never experienced a work stoppage.
Regulation
Taiwan Regulations of the Insurance Industry
The insurance industry in Taiwan is highly regulated. The FSC, is the regulatory authority responsible for the supervision of the insurance industry in Taiwan. Insurance activities undertaken within Taiwan are primarily governed by the Insurance Law and the related rules and regulations.
Insurance Law
The current principal regulation governing insurance in Taiwan is the Insurance Law, most recently amended on January 31, 2018 by Legislative Yuan, which provided the basic framework for regulating the insurance industry.
The Insurance Law defines several participants in the insurance industry, such as insurer, insurance agency, insurance brokerage and insurance adjustor. It established requirements for form of organization, and qualifications and procedures to establish an insurance organization as well as separation of property insurance businesses and life insurance businesses. The Insurance Law distinguishes insurance between fire disaster, marine, land and air, liability, surety, and other casualty and property insurance businesses on the one hand, and life insurance, health insurance, casualty insurance and annuity businesses on the other. Unless permitted by the FSC, insurance companies are not allowed to engage in both types of insurance businesses.
The insurers, insurance agencies, insurance brokerages and insurance adjustors must join the related industry associations, or they are prohibited from conducting business operation.
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FSC
The FSC is in charge of the financial market and financial service industries, among the insurance industry and has the power to control the following items:
| 1. | Financial system and supervision policy. |
| 2. | The preparation, amendment and abolishment of financial laws and regulations. |
| 3. | Supervision and management of the financial institutions, include its establishment, revocation, abolishment, change, merger, dissolution, and business scope. |
| 4. | Development, supervision and management of financial market. |
| 5. | Inspection of financial institution. |
| 6. | Inspection on public listing company related to their securities market-related matters. |
| 7. | Foreign financial matters. |
| 8. | Protection of financial customers. |
| 9. | Dealing and penalizing the violation of related laws and regulations of finance. |
| 10. | Collection of and analysis on relevant statistic data related to financial supervision, management and inspection. |
| 11. | Other matters related to financial supervision, management and inspection. |
Regulation of Insurance Brokers and Brokerage Companies
The current principal regulation governing insurance brokers and brokerage companies is the Regulations Governing Insurance Brokers last amended on June 27, 2017 by Insurance Bureau of FSC (the “Broker Rule”). An insurance broker stipulated under the Insurance Law refers to a person who negotiates to conclude an insurance contract on behalf of the insured and charges fees from the insured. Depending on their focused insurance areas, i.e. property or life insurance, insurance brokers can be divided into property insurance brokers and life insurance brokers. No matter what insurance industry an insurance broker is engaged in, it must have one of the following qualifications: (1) have passed the insurance brokerage examination for professional and technical staff; (2) have passed the insurance brokerage qualification test; or (3) have obtained the insurance brokerage practitioner certificate and practiced the same business.
Those who have brokerage qualifications required by the Broker Rule may conduct business after they obtain the practitioner certificates under their own name or the company they work for. A brokerage company must hire more than one broker to act as signatory(ies), and registered with the administrative authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If necessary, the administrative authority may, in its discretion, require the company to add signatories. An insurance broker may only work for one insurance brokerage company as signatory at one time.
There are special requirements for brokerage companies, such as the name of an brokerage company must contain the words “insurance broker”; when an brokerage company applies to operate brokerage business, the minimum registered capital must be at least NT$5 million ($157,953) fully paid up in cash, according to which, insurance brokerage companies with business license obtained prior to the implementation of this latest Broker Rule shall adjust their registered capital within five years upon the its implementation.
The Practitioner Certificate
The insurance broker practitioner certificate has a validation duration of five years, and must be renewed before expiration. In case a broker has the qualifications for both property insurance and life insurance, he may obtain both insurance brokerage practitioner certificates.
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Education and Training
There are two types of education and training for an insurance broker, pre-vocational and on-the-job education and training. An insurance broker must attend pre-vocational education and training for at least 32 hours during the one year before applying for practicing insurance broker business and on-the-job education and training for at least 16 hours with law courses for no less than 8 hours per year, commencing after one year from the issuance of this latest Broker Rule.
Management of Insurance Brokerages
The rules describing how to conduct brokerage business concentrate on the concept that the brokerages must take care of customers' matters in good faith. To ensure that this concept is properly carried out, the rules require insurance brokerage companies must have legal compliance officers who have one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories; (2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) have graduated from college and university departments related to insurance or law with more than three years working experience in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance Salespersons
The current principal regulation governing individual insurance salespersons is the Rules on the Administration of Insurance Salespersons latest amended on April 6, 2017 by Insurance Bureau of FSC (the “Salesperson Rule”). An insurance salesperson falling under the Insurance Law refers to a person who is engaged in attracting insurance business for insurance companies, insurance brokerage companies and insurance agency companies. A salesperson is not allowed to attract business for the company he belongs to unless he has completed the registration in accordance with the Salesperson Rules and has obtained the registration certificate. In order to obtain the registration certificate, an insurance salesperson must be at least 20 years old and has at least graduated from a senior high school or a senior vocational school or have an equivalent educational background. In addition, the salesperson must meet one of the following requirements: (1) passed the salesperson qualification examination held by relevant associations; or (2) have a valid the registration certificate. Once the salespersons passed the qualification examination, the relevant association will notify the company where the salesperson works, then the company will issue a registration certificate for the salesperson and file such registration certificate with the relevant authorities. The registration certificate is valid for five years and must be renewed before expiration. The salesperson must present the registration certificate before they start attracting insurance business. Unless approved by the company, the salesperson may not work for any other insurance company, insurance brokerage company or insurance agency company. The company supervises the work of the salesperson and is joint and severally liable for any damage caused by its salesperson.
Education and Training
Salespersons must attend in education and training held by their companies every year, or the companies shall revoke the registration certificates of those who fail to attend such education and training.
The Salesperson Rule also stipulates the proper ways and manners to be followed by the salespersons in conducting their businesses and specifies the penalties in case of their violation of the Salesperson Rule.
Taiwan Regulations on Foreign Exchange
Foreign exchange regulation in Taiwan is primarily governed by the Ordinance of Foreign Exchange Administration, latest amended on April 29, 2009 (the “Foreign Exchange Ordinance”). Under the Foreign Exchange Ordinance, foreign exchange refers to foreign currency, bills and marketable securities. The authority managing the administration of foreign exchange is Ministry of Finance of Republic of China, while the authority managing the practical operation of foreign exchange business is Central Bank of Republic of China. The Foreign Exchange Ordinance also specifies the allocated power of Ministry of Finance and Central Bank, respectively. To the extent that any foreign exchange receipts, payments or transactions reach the threshold of NT$500,000 ($16,653) or equivalent in foreign currency, it must be reported to the Central Bank or its designated authorities. Upon incurrence of any of the following events, the State Council of Republic of China may determine and announce that for a period of time, to close the foreign exchange market, suspend or restrict all or partial foreign exchange payment, order a mandatory sale or deposit of all or partial foreign exchange into a designed bank, or dispose in any other manner as it deems necessary:
| · | the disorder in domestic or international economy to the detriment of the stability of Taiwan’s economy; or |
| · | Taiwan suffers serious trade deficit. |
Taiwan Regulation on Foreign Investment
The current principal regulation governing foreign investment is Statute For Investment By Foreign Nationals latest amended on November 19, 1997 (the “Investment Statute”). Under the Investment Statute, investment refers to any activities involving (1) holding share capital of a company incorporated in Taiwan; (2) establishing branches, wholly-owned or partnership enterprises in Taiwan; or (3) providing more than one-year term loan to the above-mentioned investee enterprises. The authority in charge of foreign investment is Ministry of Economic Affairs of Republic of China. The industries in Taiwan are categorized into permitted, restricted and prohibited foreign investment areas. Investors may apply for settlement of exchange in accordance with the annual yield of their investment or the allocation of surplus.
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Eminent Domain
When the investment made by an investor constitutes less than 45% of the total amount of capital of the investee enterprise, and the investee enterprise has been expropriated or acquired by the government for the purpose of national defense, reasonable government compensation shall be paid to the investors. However, if the capital contribution made by the investor constitutes at least 45% of the total amount of capital of the investee enterprise and continues remaining above 45% for two decades since its establishment, then the government may not exercise its eminent domain power over such investee enterprise.
Taiwan Regulations on Tax
The current principal regulations governing tax in Taiwan include the following:
| · | Income Tax Law, latest amended on February 7, 2018; |
| · | The Implementation Rules of Income Tax Law, latest amended on September 30, 2014; |
| · | Value-Added and Non-Value-Added Business Tax Law, latest amended on June 14, 2017; and |
| · | The Enforcement Rules of Value-Added And Non-Value-Added Business Tax Law, latest amended on May 1, 2017. |
Under the Income Tax Law, there are two kinds of income tax, comprehensive income tax for individuals and income tax for enterprises operating for profit, respectively.
Individuals who have income with a source within Taiwan must pay comprehensive income tax on their income sourced within Taiwan; while non-resident individuals having income with a source within Taiwan, except otherwise provided in the Income Tax Law, shall pay tax based on the amount attributable to the sources of their income.
The enterprise with head office located in Taiwan shall pay profit-seeking income tax on its global income both within and outside Taiwan; while the enterprises with head office outside Taiwan shall only pay profit-seeking income tax on its business income sourced from within Taiwan.
Rate of Income Tax
The individual comprehensive income tax exemption threshold is NT$60,000 per person per year. Any income beyond such exemption threshold is subject to a progressive tax rate ranging from 5% to 40%.
With respect to enterprises operating for profit, the exemption threshold is NT$120,000. Any income beyond such exemption threshold is subject to 20% tax rate on its taxable income.
Sale of goods or service, import of goods in Taiwan are subject to a Value-Added or Non-Value-Added Business Tax. The Rate of business tax, except as otherwise stipulated in the relevant tax law, ranges from 5% to 10% as determined by the State Council of Taiwan.
PRC Regulations of the Insurance Industry
The insurance industry in the PRC is highly regulated. CIRC is the regulatory authority responsible for the supervision of the Chinese insurance industry. Insurance activities undertaken within the PRC are primarily governed by the Insurance Law and the related rules and regulations.
Initial Development of Regulatory Framework
The Chinese Insurance Law was enacted in 1995. This original insurance law, which we refer to as the 1995 Insurance Law, provided the initial framework for regulating the domestic insurance industry. Among the steps taken under the 1995 Insurance Law were the following:
| (a) | Licensing of insurance companies and insurance intermediaries, such as agencies and brokerages. The 1995 Insurance Law established requirements for minimum registered capital levels, form of organization, qualification of senior management and adequacy of the information systems for insurance companies, insurance agencies and brokerages. |
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| (b) | Separation of property and casualty insurance and life insurance businesses. The 1995 Insurance Law distinguished insurance between property, casualty, liability and credit insurance businesses, on the one hand, and life, accident and health insurance businesses on the other, and prohibited insurance companies from engaging in both types of businesses. |
| (c) | Regulation of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and other unlawful conduct by insurance companies, agencies and brokerages. |
| (d) | Substantive regulation of insurance products. The 1995 Insurance Law gave insurance regulators the authority to approve the policy terms and premium rates for certain insurance products. |
| (e) | Financial condition and performance of insurance companies. The 1995 Insurance Law established reserve and solvency standards for insurance companies, imposed restrictions on investment powers and established mandatory reinsurance requirements, and put in place a reporting regime to facilitate monitoring by insurance regulators. |
| (f) | Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory authority, then the People’s Bank of China, was given broad powers under the 1995 Insurance Law to regulate the insurance industry. |
Establishment of the CIRC and 2002 Amendments to the Insurance Law
China’s insurance regulatory regime was further strengthened with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement reform in the insurance industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was amended in 2002 and the amended insurance law, which we refer to as the 2002 Insurance Law, became effective on January 1, 2003. The major amendments to the 1995 Insurance Law include:
| (a) | Authorizing the CIRC to be the insurance supervisory and regulatory body nationwide. The 2002 Insurance Law expressly grants the CIRC the authority to supervise and administer the insurance industry nationwide. |
| (b) | Expanding the permitted scope of business of property and casualty insurers. Under the 2002 Insurance Law, property and casualty insurance companies may engage in the short-term health insurance and accident insurance businesses upon the CIRC’s approval. |
| (c) | Providing additional guidelines for the relationship between insurance companies and insurance agents. The 2002 Insurance Law requires an insurance company to enter into an agent agreement with each insurance agent that will act as an agent for such insurance company. The agent agreement sets forth the rights and obligations of the parties to the agreement as well as other matters pursuant to law. An insurance company is responsible for the acts of its agents when the acts are within the scope authorized by the insurance company. |
| (d) | Relaxing restrictions on the use of funds by insurance companies. Under the 2002 Insurance Law, an insurance company may use its funds to make equity investments in insurance-related enterprises, such as asset management companies. |
| (e) | Allowing greater freedom for insurance companies to develop insurance products. The 2002 Insurance Law allowed insurance companies to set their own policy terms and premium rates, subject to the approval of, or a filing with, the CIRC. |
2009 Amendments to the Insurance Law
The 2002 Insurance Law was amended again in 2009 and the amended insurance law, which we refer to as the 2009 Insurance Law, became effective on October 1, 2009. The major amendments to the 2002 Insurance Law include:
| (a) | Strengthening protection of the insured’s interests. The 2009 Insurance Law added a variety of clauses such as incontestable clause, abstained and estoppel clause, common disaster clause and amending immunity clause, claims-settlement prescription clause, reasons for claims rejection and contract modification clause. |
| (b) | Strengthening supervision on the qualification of the shareholders of the insurance companies and setting forth specific qualification requirements for the major shareholders, directors, supervisors and senior managers of insurance companies. |
| (c) | Expanding the business scope of insurers and further relaxing restriction on the use of fund by insurers. |
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| (d) | Strengthening supervision on solvency of insurers with stricter measures. |
| (e) | Tightening regulations governing the administration of insurance intermediary companies, especially those relating to behaviors of insurance agents. |
According to the 2009 Insurance Law, the minimum registered capital required to establish an insurance agency or insurance brokerage as a company must comply with the PRC Company Law. The registered capital or the capital contribution of insurance agencies or insurance brokerages must be paid-up capital in cash. The 2009 Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage practitioners. The senior managers of insurance agencies or insurance brokerages must meet specific qualification requirements, and their appointments are subject to approval of the CIRC. Personnel of an insurance agency or insurance brokerage engaging in the sales of insurance products must meet the qualification requirements set by the CIRC and obtain a qualification certificate issued by the CIRC. Under the 2009 Insurance Law, the parties to an insurance transaction may engage insurance adjusting firms or other independent appraisal firms that are established in accordance with applicable laws, or persons who possess the requisite professional expertise, to conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance Law specifies additional legal obligations for insurance agencies and brokerages.
The 2009 Insurance Law was revised again on April 24, 2015, the 2015 Insurance Law, with an aim to further eliminate various administrative approvals as well as grant more market discretion to participants, among which, (i) the requirement of prior approval by CIRC to establish an insurance agency or an insurance brokerage; (ii) the requirement on personnel or senior managers of an insurance agency or an insurance brokerage to obtain certain relevant qualification certificate; or (iii) the requirement of prior approval for split, merger or change of organizational form of an insurance agency company or an insurance brokerage company.
On October 14, 2015, Legislative Affairs Office of the State Council circulated the Provisions on Amendment to Insurance Law (Draft) (the “2015 Draft Insurance Law”)for public opinion until November 14, 2015, with an aim to further grant market discretion to participants while strengthen supervision afterwards, among which, (i) allows insured funds to be invested in equity, insurance assets management products as well as financial derivative products for the purposes of risk management, (ii) allows pension insurance products to be provided, (iii) eliminate the limit on self-reserved insurance premiums of property insurance company, (iv) perfect the relevant rules and regulations, especially those on insurance solvency supervision, (v) strengthen the crackdown of illegal insurance activities, including substantially increased penalty fines, and (vi) impose certain measures for the protection of the insured, including a mandatory requirement of at least 20-day hesitation period for any life insurance with a term over one year and prohibition of any illegal disclosure, sale or otherwise provision of the insured’s personal information by insurance companies and intermediaries.
The CIRC
The CIRC has extensive authority to supervise insurance companies and insurance intermediaries operating in the PRC, including the power to:
| (a) | promulgate regulations applicable to the Chinese insurance industry; |
| (b) | investigate insurance companies and insurance intermediaries; |
| (c) | establish investment regulations; |
| (d) | approve policy terms and premium rates for certain insurance products; |
| (e) | set the standards for measuring the financial soundness of insurance companies and insurance intermediaries; |
| (f) | require insurance companies and insurance intermediaries to submit reports concerning their business operations and condition of assets; order the suspension of all or part of an insurance company or an insurance intermediary’s business; |
| (g) | approve the establishment, change and dissolution of an insurance company, an insurance intermediary or their branches; |
| (h) | review and approve the appointment of senior managers of an insurance company, an insurance intermediary or their branches; and |
| (i) | punish improper behaviors or misconducts of an insurance company or an insurance intermediary. |
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Regulation of Insurance Agencies
The principal regulation governing insurance agencies is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. According to the Agency Provisions, the establishment of an insurance agency is subject to minimum registered capital requirement and other requirements and the approval of the CIRC. The term “insurance agency” refers to an entity that engages in insurance agency business within the authorization of, and collects commissions from, insurance companies, including the professional insurance agency companies and their branches. The insurance agency shall meet the qualification requirements specified by the CIRC, obtain the license to conduct an insurance agency business with the approval of the CIRC. An insurance agency may take any of the following forms: (i) a limited liability company; or (ii) a joint stock limited company. An insurance agency must have a registered capital of at least RMB2 million ($313,332). Where it is established as a nationwide company, its registered capital must be at least RMB10 million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions (the “2013 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 ($8.1 million). On October 19, 2015, CIRC issued the Decision on Revising Eight Regulations including Provisions on Insurance Companies Setting up Offshore Insurance Organizations, which made certain revisions to the 2013 Agency Provisions (the “2015 Agency Provisions”), among which, (i) eliminate the requirement of prior approval by CIRC to establish an insurance agency; (ii) eliminate the requirement on personnel or senior managers of an insurance agency to obtain certain relevant qualification certificate; or (iii) eliminate the requirement of prior approval by CIRC on split, merger or change of organizational form of an insurance agency company.
On May 16, 2013, CIRC issued the 2013 Notice, pursuant to which, professional insurance agency established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million ($8.1 million), can operate 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 September 17, 2015, CIRC issued Opinions on Deepening the Reformation of Insurance Intermediary Market (the “Reformation Opinions”), pursuant to which, CIRC will take further actions to simplify unnecessary administrative procedures, among which, the elimination of 8 administrative approvals, including the cancellation of previously required qualification certificate for insurance salesperson, the previously required approval for the split, merger, organizational change, set-up of branch office and exit of insurance agency and brokerage company. CIRC will also focus on (i) improving management over entry into and exit from insurance intermediary market and setting up a multilayered service system; (ii) encouraging and pushing forward reformation and innovation to improve intermediary service; (iii) strengthening self-management and supervision and promoting the improvement of industrial quality; (iv) placing stronger supervision and management and improving the comprehensive administrative efficiency; (v) focusing more on organizational construction and industrial self-control; and (vi) consummating information disclosure system and making better use of social supervision.
On September 29, 2016, CIRC circulated the Notice on Issuance of Business License to Insurance Intermediaries. In order to promote the sound and steady development of insurance intermediary market, CIRC instructed its local counterparts to focus on the followings factors while managing the business licenses of insurance intermediaries: (i) capital contributions to be self-owned, genuine and legal; (ii) registered capital to be deposited into an escrow account set up with qualified commercial bank; (iii) to maintain sufficient and valid professional liability insurance; (iv) reasonable and viable business model; (v) established corporate governance; and (vi) to undergo mandatorily required risk assessment.
An insurance agency may engage in the following insurance agency businesses:
| (a) | selling insurance products on behalf of the insurer principal; |
| (b) | collecting insurance premiums on behalf of the insurer principal; and |
| (c) | conducting loss surveys and handling claims of insurance businesses on behalf of the insurer principal; and other business activities specified by the CIRC. |
The name of an insurance agency must contain the words “insurance agency” or “insurance sales.” The license of an insurance agency company is valid for a period of three years and may be renewed with due application 30 days prior to its expiration. An insurance agency must report to the CIRC when it (i) changes its registered name or the name of its branches; (ii) changes its registered address or the operating address of its branches; (iii) the sponsors or major shareholders change their respective name; (iv) changes its major shareholders; (v) changes its registered capital; (vi) materially changes its equity structure; (vii)changes its organizational form; (viii) split, merger; (ix) amends its articles of association; or (x) sets up or closes its branches. The senior managers of an insurance agency including its branches must meet specific qualification requirements set forth in the Agency Provisions. The appointment of the senior managers of an insurance agency including its branches is subject to review and approval of the CIRC.
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Regulation of Insurance Brokerages
The principal regulation governing insurance brokerages is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. According to this Brokerage Provisions, the establishment of an insurance brokerage is subject to the approval of the CIRC. The term “insurance brokerage” refers to an entity provides brokerages service on the execution of the insurance contract between the insured and the insurance company based on the interests of the insured and collects commission as agreed, including the insurance brokerage companies and their branches, The insurance brokerage shall meet the qualification requirements specified by the CIRC and obtain the license to operate an insurance brokering business with the approval of the CIRC. Insurance brokering business includes both direct insurance brokering, which refers to brokering activities on behalf of insurance applicants or the insured in their dealings with the insurance companies, and reinsurance brokering, which refers to brokering activities on behalf of insurance companies in their dealings with reinsurance companies. An insurance brokerage may take any of the following forms: (i) a limited liability company; or (ii) a joint stock limited company. An insurance brokerage company must have a registered capital or capital contribution of at least RMB10 million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Brokerage Provisions (the “2013 Brokerage Provisions”), pursuant to which, CIRC has mandated any insurance brokerage established subsequent to the 2013 Brokerage Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).On October 19, 2015, CIRC issued the Decision on Revising Eight Regulations including Provisions on Insurance Companies Setting up Offshore Insurance Organizations, which made certain revisions to the 2013 Agency Provisions (the “2015 Brokerage Provisions”), among which, (i) eliminate the requirement of prior approval by CIRC to establish an insurance brokerage company; (ii) eliminate the requirement on personnel or senior managers of an insurance brokerage company to obtain certain relevant qualification certificate; or (iii) eliminate the requirement of prior approval by CIRC on split, merger or change of organizational form of an insurance brokerage company.
On May 16, 2013, CIRC issued the 2013 Notice, pursuant to which, professional insurance brokerage established prior to the issuance of the Decision on Revising the Brokerage Provisions, with registered capital less than RMB50 million ($8.1 million), can operate 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 September 17, 2015, CIRC issued Opinions on Deepening the Reformation of Insurance Intermediary Market (the “Reformation Opinions”), pursuant to which, the following targets were erected for future reformation of insurance intermediary market: (i) improve management over entry into and exit from insurance intermediary market and set up a multilayered service system; (ii) encourage and push forward reformation and innovation and improve intermediary service; (iii) strengthen self-management and supervision and promote the improvement of industrial quality; (iv) place stronger supervision and management and improve the comprehensive administrative efficiency; (v) pay more attention to organizational construction and industrial self-control; and (vi) consummate information disclosure system and make better use of social supervision. The Reformation Opinions will be beneficial to both the improvement of reformation and development conducted by insurance intermediaries on their own and transformation and upgrading of the insurance intermediary market.
An insurance brokerage may conduct the following insurance brokering businesses:
| (a) | making insurance proposals, selecting insurance companies and handling the insurance application procedures for the insurance applicants; |
| (b) | assisting the insured or the beneficiary to claim compensation; |
| (c) | reinsurance brokering business; and |
| (d) | providing consulting services to clients with respect to disaster and damage prevention, risk assessment and risk management; and other business activities specified by the CIRC. |
The name of an insurance brokerage must contain the words “insurance brokerage.” The license of an insurance brokerage company is valid for three years and may be renewed with due application 30 days prior to its expiration. An insurance brokerage must report to the CIRC when it (i) changes its registered name or the name of its branches; (ii) change its registered address or the operating address of its branches; (iii) the sponsors or the major shareholders change their respective name; (iv) changes its major shareholders; (v) changes its registered capital; (vi) materially changes its equity structure; (vii)changes its organizational form; (viii) split, merger; (ix) amends its articles of association; or (x) sets up or closes its branches. The senior managers of an insurance brokerage including its branches must meet specific qualification requirements set forth in the Brokerage Provisions. Appointment of the senior managers of an insurance brokerage including its branches is subject to review and approval by the CIRC.
On February 9, 2018, the CIRC issued the Provisions on the Regulation of Insurance Brokers (the “Provisions”), effective as of May 1, 2018. With a total of 109 articles in eight chapters, the Provisions highlight the improved market access and exit, the effective management of matters no long requiring licensing, the promotion of specialized and well-regulated operations, and the increased protection of consumers’ rights and interests. In particular, the Provisions make adjustments to optimize licensing procedures for insurance brokerage and tighten examination of shareholders of insurance brokerage firms; also, the Provisions set forth explicit requirements in respect of the source of capital contributed by shareholders, custodian of the registered capital, corporate governance and internal control, and information system, and standardize the requirements on qualifications of senior executives in brokerage firms.
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Regulation of Insurance Salespersons
The principal regulation governing individual insurance salespersons is the Measures on the Supervision of Insurance Salespersons issued by the CIRC on January 6, 2013 and effective on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons promulgated on April 6, 2006 and effective on July 1, 2006. Under this regulation, the term “insurance salesperson” refers to an individual who sells insurance products for an insurance company, including those who are engaged by insurance companies or by insurance agencies. To engage in insurance sales activities as an insurance salesperson, a person first must pass the qualification examination for the insurance agency practitioners organized by the CIRC to obtain a “Qualification Certificate of Insurance Agency Practitioners”. The person must have a junior high school education or above to be qualified for the examination. In addition to the qualification certificate, a person must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Salespersons” issued by the insurance company or insurance agency to which he or she belongs in order to conduct insurance sales activities. On August 3, 2015, CIRC issued the Notice on Relevant Issues to Management of Insurance Intermediary Practitioners (the “2015 Notice”), pursuant to which, the qualification certificate is no more a pre-requisite condition for insurance intermediary practitioners to practice, instead, the insurance intermediary companies where such practitioners work shall complete the practitioners registration for them and conduct professional training. CIRC branches shall not accept any application for qualification approval of insurance salesperson (including insurance agency practitioners) any more.
Regulation of Insurance Brokerage Practitioner and Insurance Adjustment Practitioners
The principal regulation governing insurance brokerage practitioners and insurance adjustment practitioners is the Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners issued by the CIRC on January 6, 2013 and effective on July 1, 2013. To engage in the insurance brokerage activities as an insurance brokerage practitioner, or in the insurance adjustment activities as an insurance adjustment practitioner, a person first must pass the qualification examination organized by the CIRC for the insurance brokerage practitioners or for the insurance adjustment practitioners to obtain a “Qualification Certificate of Insurance Brokerage Practitioners” or a “Qualification Certificate of Insurance Adjustment Practitioners”. The person must have a tertiary education or above to be qualified for the examination. In addition to the qualification certificate, a person also must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Brokerage Practitioners” or “Practice Certificate of Insurance Adjustment Practitioners” issued by the insurance brokerage firm or insurance claims adjusting company to which he or she belongs in order to conduct insurance brokerage or claims adjustment activities. An insurance brokerage practitioner is not allowed to conduct insurance brokerage activities on behalf of himself or herself. On August 3, 2015, CIRC issued the 2015 Notice, pursuant to which, the qualification certificate is no more a pre-requisite condition for insurance intermediary practitioners (including insurance adjustment practitioners) to practice, instead, the insurance intermediary companies where such practitioners work shall complete the practitioners registration for them and conduct professional training. CIRC branches shall not accept any application for qualification approval of insurance brokerage practitioners any more.
Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO
According to the Circular of the CIRC on Distributing the Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO, for the life insurance sector, within three years of China’s accession to the WTO on December 11, 2001, geographical restrictions were to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity services to Chinese citizens and foreign citizens, and no other restrictions allowed except those on the proportion of foreign investment (no more than 50%) and establishment conditions. For the non-life insurance sector, within three years of China’s accession, the geographical restrictions were to be lifted and no restrictions allowed other than establishment conditions. For the insurance brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded subsidiary companies was to be allowed, and no restrictions allowed other than establishment conditions and restrictions on business scope.
According to the latest Catalogue of Industries for Guiding Foreign Investment (2015 Revision) issued by Ministry of Commerce on March 10, 2015 with effective date on April 10, 2015, both the insurance agency and insurance brokerage do not fall into the prohibited or restricted category any more. On January 12, 2017, the State Council issued the Notice on Certain Measures to Strengthen Opening up and Utilization of Foreign Investment, pursuant to which, restrictions on foreign investors entry into the industry of insurance institutions and insurance intermediaries within China will be further relaxed. However, as these regulations are still relatively new, local CIRC counterparts may have different interpretations. Based on the consultation by the Company with the relevant local counterparts of CIRC, they are of the view that the proportion of foreign investment in insurance intermediaries shall not exceed 24.9%.
PRC Regulations on Foreign Exchange
Foreign Currency Exchange
Foreign exchange regulation in China is primarily governed by the following rules:
| · | Foreign Currency Administration Rules (2008 Revision), as amended or revised, or the Exchange Rules; and |
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| · | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), as amended or revised, or the Administration Rules. |
Under the Exchange Rules, the RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE or relevant authorities.
Under the Administration Rules, foreign-invested enterprises may only buy, sell or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Development and Reform Commission.
On June 9, 2016, SAFE issued the Notice on Reforming and Regulating Management Policies of Settlement of Foreign Exchange under Capital Accounts, pursuant to which, the domestic entity may, depending on its actual operation need, settle its revenue in foreign currency with the bank, provided such revenue falls into those under capital accounts with explicit policy on settlement by willingness; while for those revenue under capital accounts still subject to restrictive regulations, such applicable policies shall prevail.
On January 26, 2017, SAFE issued the Notice on Further Promoting the Reform of Foreign Exchange Management and Strengthening Verification on Authenticity and Legality, pursuant to which, banks are mandated to strengthen verification on authenticity and legality on foreign exchange conversion and remittance offshore.
PRC Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned companies include:
| · | Wholly Foreign-Owned Enterprise Law (2016), as amended or revised; and |
| · | Wholly Foreign-Owned Enterprise Law Implementing Rules (2016 Revision), as amended or revised. |
Under these regulations, wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards. In addition, these wholly foreign-owned companies are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital. These reserve funds are not distributable as cash dividends. On January 19, 2015, MOFCOM published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, including the Foreign-Invested Enterprise Law.
PRC Regulations on Tax
PRC Enterprise Income Tax
The PRC EIT is calculated based on the taxable income determined under the PRC accounting standards and regulations, as well as the EIT law. On March 16, 2007, the National People’s Congress of China enacted the EIT Law, a new EIT law which became effective on January 1, 2008. On December 6, 2007, the State Council promulgated the Implementation Rules which also became effective on January 1, 2008. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, or the Transition Preferential Policy Circular, which became effective simultaneously with the EIT Law. The EIT Law imposes a uniform EIT rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain exceptions. Under the EIT Law, as further clarified by the Implementation Rules, the Transition Preferential Policy Circular and other related regulations, enterprises that were established and already enjoyed preferential tax treatments before March 16, 2007 will continue to enjoy them in the following manners: (i) in the case of preferential tax rates, for a five-year period starting from January 1, 2008, during which the tax rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a specified term, until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet because of its failure to make a profit, its term for preferential treatment will be deemed to start from 2008.
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PRC Business Tax and Implementation of VAT
Taxpayers providing taxable services in China were required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided. According to the Announcement on the VAT Reform Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State Tax Bureau in July 2012, the transportation and some selected modern service sectors, including research and development and technical services, information technology services, cultural creative services, logistics support services, tangible personal property leasing services, and assurance and consulting service sectors, should pay value-added tax instead of business tax based on a predetermined timetable (hereinafter referred to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and October 1, 2012 for entities in Jiangsu. In March 2016, the PRC State Council further expanded the application of VAT to several other key sectors, including real estate, construction, financial services and lifestyle services, effective May 1, 2016.
As of December 31, 2017, all of our Consolidated Affiliated Entities have been requested to convert into the VAT system.
Dividend Withholding Tax
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises are exempt from PRC withholding tax. Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are under a 5% withholding tax subject to PRC laws and regulations, provided that we are determined by the relevant PRC tax authorities to be a “non-resident enterprise” under the EIT Law.
AVAILABLE INFORMATION
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and other filings made with the Securities and Exchange Commission, are available free of charge through our Web site (http://cuis.asia/cuis_en, under the Investor Relations section) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The inclusion of our Web site address in this report does not include or incorporate by reference into this report any information contained on, or accessible through, such Web sites.
You should carefully consider the risks described below together with all of the other information included in this Form 10-K. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.” If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.
Risks Relating to Our Business
We have been charged with fraud for manipulating the Company's trading volume.
On December 20, 2018, we agreed to settle fraud charges brought by the SEC relating to a scheme to manipulate the Company's trading volume and the Company substantially cooperated with the SEC’s investigation into the activities that led the SEC to bring the fraud charges. Based upon the Company's substantial cooperation with the SEC’s investigation, the SEC is not seeking a monetary penalty against the Company. While the Company did not realize any financial gain from this scheme and settled the SEC fraud charges with no economic loss, we can make no assurances that there will be not be more serious consequences were we to be accused of engaging in this scheme in the future.
We have restated our prior consolidated financial statements, which may lead to additional risks and uncertainties.
This Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2017, includes restatement of our previously filed consolidated financial statements and the related consolidated statements of operations, shareholders' equity and cash flows as of and for the fiscal years ended December 31, 2016 and 2017, as well as restated unaudited condensed consolidated financial information as of and for the interim periods ended March 31, 2017, June 30, 2017 and September 30, 2017. The determination to restate these financial statements was made by our Audit Committee upon management's recommendation. As a result of these events, we have become subject to a number of additional risks and uncertainties, including substantial unanticipated costs for accounting and legal fees in connection with or related to the restatement. Likewise, such events might cause a diversion of our management's time and attention.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial conditions and results of operations in a timely and accurate manner, result in material misstatements in our financial statements and cause current and potential shareholders to lose confidence in our financial reporting, which in turn could adversely affect the trading price of our common stocks.
We have concluded that there are material weaknesses in our internal control over financial reporting, such as 1) the process to hire qualified employees who have proficient knowledge of US GAAP, and can identify unusual transactions timely and appropriately assessed for financial report impact was not maintained, 2) the structure, authority, and responsibilities to ensure the objective of internal control over financial reporting were adequately achieved was not maintained, and 3) the design of our internal control did not include a precise review of the completeness of the bonus revenue at the period end. These material weaknesses resulted in material misstatements of our historical financial statements, which necessitated a restatement of our consolidated financial statements for the years ended December 31, 2015 and 2016 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2017. Disclosure related to the restatement adjustment are included in Part II, Item 8, Note 27 and 28 of this From 10-K.
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Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The existence of this issue could adversely affect us, our reputation or investor perceptions of us. We have and will continue to take additional measures to remediate the underlying causes of the material weaknesses noted above. As we continue to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address the control deficiencies. Also, see Item 9A in Part II of this Form 10-K. We expect to incur additional costs remediating these material weaknesses.
Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our measure may not prove to be successful in remediating these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occurred in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. In addition, if we are unable to successfully remediate these material weaknesses and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected.
If we are unable to obtain and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely affected.
We operate our businesses with approvals and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial condition and results of operations, as well as our prospects, will suffer.
On February 9, 2018, the CIRC issued the Provisions on the Regulation of Insurance Brokers (the “Provisions”), effective as of May 1, 2018. As an insurance broker, Jiangsu Law, may potentially be impacted by the Provisions, given that the Provisions grant regulatory authorities greater discretionary power over approval of license renewal request, which may increase the risk of non-renewal.
We face substantial political risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between Taiwan and the People’s Republic of China, which could adversely affect our financial condition and results of operations.
Law Broker’s executive office and substantial assets are located in Taiwan and most of our revenues are derived from our operations in Taiwan currently. Accordingly, our business, financial condition and results of operations and the market price of our common shares may be affected by changes in Taiwan governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The PRC claims it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established between Taiwan and the PRC, such as the engagement of Economic Cooperation Framework Agreement (“ECFA”) in 2010 and Cross-strait Investment Protection and Promotion Agreement in 2012, relations may become strained again. On June 21, 2013, Association for Relations Across the Taiwan Straits of the PRC and Straits Exchange Foundation of Taiwan entered into the Cross-Strait Agreement on Trade in Services, with the aim of smoothing and extending the cooperation between the PRC and Taiwan accordingly. However, as of the date of this Annual Report on Form 10-K, the Taiwan government has not approved Cross-Strait Agreement on Trade in Services. The PRC government has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations between the Taiwan and the PRC have on occasion depressed the market prices of the securities of companies in Taiwan. Relations between the Taiwan and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship between the Taiwan and PRC require companies involved in cross-strait business operations to carefully monitor its actions and manage its relationships with both Taiwan and PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the Taiwan and PRC governments for our cross-strait business operations, which could have an adverse effect on our ability to expand our business and conduct cross-strait business operations.
Sales of our products are concentrated in a few select markets. Adverse developments in these markets could have a material and disproportionate impact on us.
Our revenues are highly concentrated in a few select markets, including Taiwan and PRC. Net revenues generated from sales to customers in Taiwan and PRC, in the aggregate, accounted for approximately 100% of the Company’s net revenues for the years ended December 31, 2017 and 2016, respectively. As a result of the concentration of our revenues in these markets, economic downturns, changes in governmental policies and increased competition in these markets could have a material and disproportionate impact on our revenues, operating results, business and prospects.
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If we fail to attract and retain productive sales professionals or agents, our business could suffer.
Our entire sales of life, property and casualty insurance products are conducted through our individual sales professionals or agents, who are independent contractors, not our employees. Some of these sales professionals or sales agents are significantly more productive than others in generating sales. If we are unable to attract and retain the core group of highly productive sales professionals or sales agents, our business could be materially and adversely affected. Competition for sales personnel from insurance companies and other insurance intermediaries may also force us to increase the compensation of our sales professionals or sales agents, which would increase operating costs and reduce our profitability.
Our business and prospects could be materially and adversely affected if we are not able to manage our growth successfully.
Law Broker commenced its insurance intermediary business in 1992. During the past two decades, Law Broker has expanded its distribution and service networks across Taiwan, with 30 sales and service outlets (including the headquarters) and 2,609 employees and sales professionals as of December 31, 2017. Anhou commenced its insurance intermediary business in 2003 and has expanded its operations substantially in recent years. Anhou’s distribution and service networks expanded from one company in one province to two insurance agencies and one brokerage in six provinces and 43 service outlets as of December 31, 2017. Meanwhile, we broadened our service offerings from the distribution of only life insurance products to cover a wide variety of property and casualty insurance and automobile insurance products. We anticipate continued growth in the future through multiple means. Our expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. To manage and support our continued growth, we must continue to improve our operational, administrative, financial and technological systems, procedures and controls, and expand, train and manage our growing employee and agent base. Furthermore, our management will be required to maintain and expand our relationships with insurance companies, other insurance intermediaries, regulators and other third parties. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to effectively and efficiently manage our expansion could materially and adversely affect our ability to capitalize on new business opportunities, which in turn could have a material adverse effect on our results of operations.
We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.
We expect our future growth to come from acquisitions of high-quality independent insurance agencies and brokerages as well as establishment of new insurance agencies and brokerages. There is no assurance we can successfully identify suitable acquisition candidates, especially in those areas where we do not yet have a presence. Even if we identify suitable candidates, we may not be able to complete an acquisition on terms that are commercially acceptable to us. In addition, we compete with other entities to acquire high-quality independent insurance agencies and brokerages. Many of our competitors may have substantially greater financial resources than we do and may be able to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth strategy may be impeded and our earnings or revenue growth may be negatively affected.
If we fail to integrate acquired companies efficiently, or if the acquired companies do not perform to our expectations, our business and results of operations may be adversely affected.
Even if we succeed in acquiring other insurance agencies and brokerages, our ability to integrate an acquired entity and its operations is subject to a number of factors. These factors include difficulties in the integration of acquired operations and retention of personnel, especially the sales professionals and sales agents who are not employees of the acquired company, entry into unfamiliar markets, unanticipated problems or legal liabilities, and tax and accounting issues. The need to address these factors may divert management’s attention from other aspects of our business and materially and adversely affect our business prospects. In addition, costs associated with integrating newly acquired companies could negatively affect our operating margins.
Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the insurance products in which a company specializes, the loss of key clients after the acquisition closes, general economic factors that impact a company in a direct way and the cultural incompatibility of an acquired company’s management team with us. If an acquired company cannot be operated at the same profitability level as our existing operations, the acquisition would have a negative impact on our operating margin. Our inability to successfully integrate an acquired entity or its failure to perform to our expectations may materially and adversely affect our business, prospects, results of operations and financial condition.
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Because the commission and fee revenue we earn on the sale of insurance products is based on premiums and commission and fee rates set by insurance companies, any decrease in these premiums or commission and fee rates may have an adverse effect on our results of operations.
We are engaged in the insurance agency and brokerage business and derive revenues primarily from commissions and fees paid by the insurance companies whose policies our customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation-related and competitive factors that affect insurance companies. These factors, which are not within our control, include the ability of insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of alternative insurance products such as government benefits and self-insurance plans, as well as the tax deductibility of commissions and fees and the consumers themselves. In addition, premium rates for certain insurance products, such as the mandatory automobile liability insurance that each automobile owner in Taiwan and the PRC is legally required to purchase, are tightly regulated by Insurance Bureau of FSC in Taiwan and CIRC in PRC.
Because we do not determine, and cannot predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes may have on our operations. Intense competition among insurance companies has led to a gradual decline in premium rate levels of some property and casualty insurance products. Although such decline may stimulate demand for insurance products and increase our total sales volume, it also reduces the commissions and fees we earn on each policy sold. Any decrease in premiums or commission and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital expenditures and other expenditures may be disrupted by unexpected decreases in revenues caused by decreases in premiums or commission and fee rates, thereby adversely affecting our operations.
Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.
The insurance intermediary industry in Taiwan and China is highly competitive, and we expect competition to persist and intensify. In insurance product distribution, we face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their products, and from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal offices and automobile dealerships, as well as from other professional insurance intermediaries. We sell insurance products through our exclusive sales professionals and sales agents pursuant to agency contracts entered into with our subsidiaries or Consolidated Affiliated Entities in Taiwan and China, as applicable. The term of these agency contracts with Law Broker generally is for three years and will be re-signed upon expiration, while the term of these agency contracts with Anhou generally is for one year with automatic extension in case neither party objects at the end of the term. These sales professionals and sales agents are not our employees and we cannot assure you that they will continue their services subsequent to the expiration of such agency contracts. We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial results may be negatively affected.
Quarterly and annual variations in our commission and fee revenue may have unexpected impacts on our results of operations.
Our commission and fee revenue is subject to both quarterly and annual fluctuations as a result of the seasonality of its business, the timing of policy renewals and the net effect of new and lost business. Historically, Law Broker’s commission and fee revenue, particularly revenue derived from distribution of life insurance products, for the second and fourth quarters of any given year have been higher than the first and third quarters. Anhou’s commission and fee revenue, particularly revenue derived from distribution of life insurance products, for the fourth quarter of any given year has been the highest among all four quarters, while Anhou’s commission and fee revenue for the first quarter of any given year has been the lowest among all four quarters. The factors that cause the quarterly and annual variations are not within our control. Specifically, consumer demand for insurance products can influence the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations. As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future performance.
If our contracts with insurance companies are terminated or changed, our business and operating results could be adversely affected.
We primarily act as agents for insurance companies in distributing their products to retail customers. Our relationships with the insurance companies are governed by agreements between Law Broker or Anhou and the insurance companies. See “Corporate History and Structure - Insurance Company Partners.” These contracts establish, among other things, the scope of authority, the pricing of the insurance products we distributes and its fee rates. These contracts typically have a term of one year and will be automatically extended for successive one-year term unless terminated earlier with at least 30 days or 60 days advance notice prior to its expiration.
In the fiscal year ended December 31, 2017, Law Broker’s major insurance company partners, after aggregating the business conducted between Law Broker and the various local branches of the insurance companies were AIATW, Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc., arranged in alphabetical order. Among them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc. accounted for approximately 25.41%, 12.45%, and 11.18% of our total net revenues in the fiscal year ending December 31, 2017, respectively.
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In the fiscal year ended December 31, 2017, Anhou’s major insurance company partners, after aggregating the business conducted between Anhou and the various local branches of the insurance companies, were Aegon THTF Life Insurance Co., Ltd., AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., Huaxia Insurance Co., Ltd., and Taikang Life Insurance Co., Ltd., arranged in alphabetical order. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
The termination of our contracts with insurance companies that in aggregate account for a significant portion of our business, or changes to material terms of these contracts, could adversely affect our business and operating results.
Our future success depends on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior management team and other key personnel, in particular Mr. Yi Hsiao Mao, the Chief Executive Officer, Ms. Yung Chi Chuang, the Chief Financial Officer. If one or more of our senior executives or other key personnel, are unable or unwilling to continue in their present positions, we may not be able to replace them easily, or at all. As such, our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and key personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. As is customary in the PRC and Taiwan, we do not have insurance coverage for the loss of our senior management team or other key personnel.
In addition, if any member of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive trade information and key professionals and staff members. Most of our executive officers and key employees have entered into an employment agreement with our subsidiaries or Consolidated Affiliated Entities, respectively. If any disputes arise between any of our senior executives or key personnel and us, we cannot assure you of the extent to which any of these agreements may be enforced.
Sales professionals or sales agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs.
Sales professionals or sales agent and employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:
| · | making misrepresentation when marketing or selling insurance products to customers; |
| · | hindering insurance applicants from making full and accurate mandatory disclosures or inducing applicants into making misrepresentations; |
| · | hiding or falsifying material information in relation to the insurance contracts; |
| · | fabricating or altering insurance contracts without authorization from relevant parties, selling false policies, or providing false documents on behalf of the applicants; |
| · | falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions; |
| · | colluding with applicants, insured, or beneficiaries to obtain insurance benefits; |
| · | engaging in false claims; or |
| · | otherwise not complying with laws and regulations or our control policies or procedures. |
We cannot always deter sales professionals or sales agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective in all cases. We cannot assure you, therefore, that sales professionals or sales agent or employee misconduct will not lead to a material adverse effect on our business, results of operations or financial condition.
All of our personnel engaging in insurance agency or brokering are required under relevant regulations to have a qualification certificate issued by the relevant government authorities in Taiwan. If these qualification requirements are strictly enforced in the future, our business may be materially and adversely affected.
All of Law Broker’s personnel who engage in insurance agency and brokering are required under relevant Taiwan regulations to obtain a registration certificate. To obtain the registration certificate, the sale professionals have to pass the insurance sales professionals qualification test sponsored by the Life Insurance Association of the Republic of China or Property Insurance Association of the Republic of China (collectively the “Associations”, each a “Association”). Once the applicants passed such test, the Associations will notify Law Broker of those applicants who passed the test and Law Broker is obligated to issue the registration certificate to them. The registration certificate is valid for five years and the holder shall renew the registration certificate prior to its expiration date. See “Corporate History and Structure —Regulation.” As of December 31, 2017, all of Law Broker’s sales professionals had received and held a valid registration certificate.
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Any significant failure in our information technology systems could have a material adverse effect on our business and profitability.
Our business is highly dependent on the ability of our information technology systems to timely process a large number of transactions across different markets and products at a time when transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. The proper functioning of our financial control, accounting, customer database, customer service and other data processing systems, together with the communication systems of our Taiwan Subsidiaries and Consolidated Affiliated Entities and our main offices in Taiwan and Jiangsu are critical to our business and to our ability to compete effectively. We cannot assure you that our business activities would not be materially disrupted in the event of a partial or complete failure of any of these primary information technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks or conversion errors due to system upgrading. In addition, a prolonged failure of our information technology system could damage our reputation and materially and adversely affect our future prospects and profitability.
If we are unable to respond in a timely and cost-effective manner to rapid technological change in the insurance intermediary industry, there may be a resulting adverse effect on business and operating results.
The insurance industry is increasingly influenced by rapid technological change, frequent new product and service introductions and evolving industry standards. For example, the insurance intermediary industry has increased use of the Internet to communicate benefits and related information to consumers and to facilitate information exchange and transactions. We believe that our future success will depend on our ability to continue to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a timely and cost-effective basis. There is a risk that we may not successfully identify new product and service opportunities or develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities that our competitors develop or introduce may render our products and services uncompetitive. As a result, we can give no assurances that technological changes that may affect our industry in the future will not have a material adverse effect on our business and results of operations.
Our Company’s affiliates have significant control over matters requiring approval by shareholders.
The affiliates of our Company hold 100% of our Company’s outstanding preferred shares, approximately 31.4% of our Company’s outstanding common shares, and approximately 44.6% of the voting power of our Company as of March 14, 2017 (calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended). As a result, our Company’s affiliates, in view of their ownership percentage of our common stock and voting power, have significant control over matters requiring approval by our shareholders, including the selection of our board of directors, approval or rejection of mergers, sales or licenses of all or substantially all of our assets, or other business combination transactions. The interests of our Company’s affiliates may not always coincide with the interests of our other shareholders and as such our Company may take action in advancement of its affiliates’ interests to the detriment of our other shareholders, including you. Accordingly, you may not be able to influence any action we take or consider taking, even if it requires a shareholder vote.
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The change in value of the RMB against the U.S. dollar, the Euro and other currencies is affected by changes in China's political and economic conditions, among other things. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against certain foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. As a portion of our costs and expenses is denominated in RMB, the revaluation in July 2005 and potential future revaluation has and could further increase our costs. In addition, any significant revaluation of the RMB may have a material adverse effect on our financial condition. For example, to the extent that we need to convert U.S. dollars we receive from financings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
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We are a holding company and depend upon the earnings of our subsidiaries.
We are a holding company and conduct all our operations through our subsidiaries. All of our operating income is generated by our operating subsidiaries. We primarily rely on dividends and other advances and transfers of funds from our subsidiaries, to provide the funds necessary to meet our debt service obligations or to pay dividends. Although we are the majority stockholder, directly or indirectly, of each of our operating subsidiaries and therefore able to control their respective declaration of dividends, applicable laws may prevent our operating subsidiaries from being able to pay such dividends. In addition, such payments may be restricted by claims against our subsidiaries by their creditors, such as suppliers, vendors, lessors, and employees, and by any applicable bankruptcy, reorganization, or similar laws applicable to our operating subsidiaries. The availability of funds, and therefore the availability of our operating subsidiaries to pay dividends or make other payments or advances to us, will depend upon their operating results.
Risks Related to Our Corporate Structure in the PRC
If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
We conduct our operations in China principally through contractual arrangements among our wholly-owned PRC subsidiary, CU WFOE and our operating company in the PRC, namely, Anhou and its shareholders, where Anhou directly holds 100% equity interests in one PRC insurance agency, namely Sichuan Kangzhuang and one insurance brokerage, namely Jiangsu Law. Anhou, Sichuan Kangzhuang and Jiangsu Law hold the licenses and permits necessary to conduct our insurance intermediary business and related businesses in China.
Our contractual arrangements with Anhou and its shareholders enable us to:
| · | exercise effective control over Anhou and its subsidiaries; |
| · | receive a substantial portion of the economic benefits of Anhou and its subsidiaries in consideration for the services provided by our wholly- owned subsidiary in China; and |
| · | have an exclusive option to purchase all or part of the equity interests in Anhou when and to the extent permitted by PRC law. |
Because of these contractual arrangements, we are the primary beneficiary of Anhou and its subsidiaries and have consolidated them into our consolidated financial statements. Although we believe that these agreements are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future, such as the Draft Foreign Investment Law described below.
On January 19, 2015, MOFCOM published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. This Draft Foreign Investment Law, once promulgated, will replace and integrate the three existing laws over foreign investment, the Law of the PRC on Chinese-Foreign Equity Joint Ventures, the Wholly Foreign-owned Enterprise Law and the Law of the PRC on Sino-foreign Cooperative Enterprises. The Draft Foreign Investment Law was formulated with a view to opening wider to the outside, promoting and regulating foreign investment, protecting the legitimate rights and interests of foreign investors, safeguarding national security and public interests, and facilitating the healthy development of the socialist market economy. MOFCOM has requested comments from the public on the draft Law by February 17, 2015.
Some of the more significant concepts in the Foreign Investment Law include the following:
Effective Control
The proposed law has adopted the concept of effective control in the foreign investment area. The Draft Foreign Investment Law stipulates that a company established in China but controlled by foreign investors shall be deemed a foreign investor and foreign entities controlled by Chinese investors can, under some circumstances, be deemed Chinese domestic investors. According to Draft Foreign Investment Law, “control” refers to several circumstances including the contractual control by exercising decisive influences on the operation, finance, personnel or technology of the enterprise by contract, trust or other means.
Negative List Management
Most foreign investments will not need pre-approval as was previously required. It means that the Chinese market could be more open and efficient in some sectors to set up foreign invested companies. However, the Draft Foreign Investment Law sets out a Negative List, or Catalogue of Prohibitions. Foreign investors are not allowed to invest in any sector set out in the Catalogue of Prohibitions. Further, a Catalogue of Restrictions will set forth those sectors with restrictions imposed on foreign investors. The use of Negative lists represents a method of management or administration of foreign investments.
How domestic VIEs, potentially deemed to be foreign enterprises under the Draft Foreign Investment Law and currently operating in Negative List sectors, will be treated is unclear.
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National Security Reviews
The Draft Foreign Investment Law also establishes a united foreign investment national security review system which will conduct examinations on the foreign investments that endangers or may endanger the national security.
Information Reporting System
The Draft Foreign Investment Law establishes a foreign investment information reporting system. The new rules include submission of a foreign investment report (such as when setting up a company), a report of any Changes of Foreign Investment (any adjustments of investment) and an annual report. Generally, reporting obligations arise when a foreign investor purchases not less than 10% of the stock of a domestic entity, or less than 10% but the purchase results in a change of control of the domestic entity.
Supervision and Inspection
The Draft Foreign Investment Law establishes a mechanism for the supervision and inspection of foreign investors and foreign invested enterprises from industrial and commercial, taxation, foreign exchange, auditing and other administrative departments. The government’s focus on foreign investments and foreign investment management has shifted from the approval prior to a foreign invested company being established to the supervision and inspection after it is set up.
PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that our contractual arrangements do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.
If the PRC government finds that we, our PRC subsidiary and Consolidated Affiliated Entities do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
If we, our Consolidated Affiliated Entity, Anhou or any of the existing and future subsidiaries of Anhou are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the CIRC, will have broad discretion in dealing with such violations, including:
| · | revoking the business and operating licenses of our PRC subsidiary and Consolidated Affiliated Entities; |
| · | restricting or prohibiting any related-party transactions among our PRC subsidiary and Consolidated Affiliated Entities; |
| · | imposing fines or other requirements with which we, our PRC subsidiary or our Consolidated Affiliated Entities may not be able to comply; |
| · | requiring us, our PRC subsidiary or our Consolidated Affiliated Entities to restructure the relevant ownership structure or operations; or |
| · | restricting or prohibiting us from providing additional funding for our business and operations in China. |
The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business in the PRC.
We rely on contractual arrangements with Anhou and its shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.
We have relied and expect to continue to rely on contractual arrangements with our PRC Consolidated Affiliated Entity, Anhou, and its shareholders to operate our business in China. For a description of these contractual arrangements, see “Corporate History and Structure”. These contractual arrangements may not be as effective in providing us with control over Anhou and its subsidiaries as direct ownership. We have no direct or indirect equity interests in Anhou or any of its subsidiaries.
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Though subsequent to PRC’s accession to WTO, the restrictions on foreign investment in insurance intermediaries have been relaxed, except those on qualifications as well as capital requirement of the investors, the interpretations of local counterparts of CIRC have not been clear and consistent, especially on the proportion of foreign investment. We rely on contractual arrangements with Anhou to operate our business in China. If we had direct ownership of Anhou and its subsidiaries, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Anhou and its subsidiaries, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on Anhou and its shareholders’ performance of their contractual obligations to exercise effective control. In addition, our contractual arrangements generally have a term of ten-year with an automatic extension of another ten-year term unless our PRC subsidiary, CU WFOE, determines otherwise. Though neither Anhou nor its shareholders has any right under these agreements to terminate such agreements prior to the expiration date, we may not be able to strictly enforce these agreements in case they choose to do so, due to the uncertainty associated with PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable outside PRC. Certain affiliates of our Company are also directors and executive officers of our Consolidated Affiliated Entities. In addition, though Anhou is under the effective control of CU WFOE through these contractual arrangements, the shareholders and officers of Anhou may not act in the best interests of our company or may not perform their obligations under these agreements, including the obligation to renew these agreements when their initial ten-year term expires. Furthermore, as all of Anhou’s assets are located in China, if Anhou or its shareholders determine to terminate the VIE Agreements, the unaffiliated investors will have little or no recourse against them. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with Anhou. Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control over these Consolidated Affiliated Entities.
If Anhou and its shareholders fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs and other resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders and officers of Anhou were to refuse to transfer their equity interest in Anhou to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual obligations. However, due to the uncertainty associated with PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable against Anhou outside PRC, we may not be able to effectively enforce our right under these agreements.
All of our contractual arrangements with Anhou and shareholders are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our Consolidated Affiliated Entities, and our ability to conduct our business in the PRC may be negatively affected.
Contractual arrangements we have entered into with Anhou may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Since both of CU WFOE and Anhou are under our common control, either under direct ownership or through contractual arrangements, and certain our officers and directors used to be and are currently the employees of Anhou and its subsidiaries, the VIE Agreements are likely to be deemed as arrangements between related parties. In addition, CU WFOE has been granted substantial unilateral right under the VIE Agreements. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our PRC subsidiary and Anhou are not on an arm’s-length basis and adjust the income of Anhou in the form of a transfer pricing adjustment, where the relevant PRC tax authorities may, in their discretion, disregard the tax filing of Anhou and impose a different tax amount payable by Anhou. A transfer pricing adjustment could among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by Anhou, which could in turn increase their respective tax liabilities. Moreover, the PRC tax authorities may impose interest and other penalties on Anhou for underpayment of taxes. Though we have not encountered any challenge or transfer pricing adjustment by the PRC tax authorities so far, we could not assure you that the PRC tax authorities will not do so in the future. Our consolidated net income may be materially and adversely affected by the occurrence of any of the foregoing.
PRC regulation of direct investment by offshore holding companies to PRC entities may delay or prevent us from making additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC subsidiary and Consolidated Affiliated Entities. In order to provide additional funding to our PRC subsidiary and Consolidated Affiliated Entities, we may make additional capital contributions to our PRC subsidiary.
Any capital contribution we make to our PRC subsidiary, shall be filed with the PRC Ministry of Commerce or its local counterparts and settled with banks where we have opened capital account and registered with the SAFE or its local counterparts. Such filings and settlement shall depend on the efficiency the relevant government authority and banks and might be time consuming while their outcomes would be uncertain. The registered capital of CU WFOE is $300,000 and has been contributed.
We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
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It may be difficult to effect service of process and enforcement of legal judgments upon us and our officers and directors because they reside outside the United States.
To better operate our business, some of our directors and officers reside in the PRC or Taiwan, our service of process on such directors and officers may be difficult to effect within the United States. Also, with respect to the assets for overseas operation, any judgment obtained in the United States against us may not be enforceable outside the United States.
Risks Related to Doing Business in Taiwan
Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.
Subsequent to our acquisition of AHFL on August 24, 2012, we operate our insurance agency and brokerage business in Taiwan through our operating entity Law Broker. As an insurance agency and brokerage service provider in Taiwan, Law Broker is subject to extensive regulation. See “Item 1.Business—Regulation” for a discussion of the regulatory environment applicable to Law Broker. As revenue generated by Law Broker constitutes a substantial part of our revenue, any changes in the regulatory environment applicable to Law Broker may adversely affect our business, financial condition and results of operations.
Currently, Law Broker’s principal regulator is the FSC, which was formed on July 1, 2004 in accordance with the Financial Supervisory Organization Act, which was intended to grant regulatory authority over the Taiwan insurance industry to the FSC.
Our operations and financial results could be severely harmed by natural disasters.
Law Broker’s executive office is located in Taiwan, which suffered a severe earthquake during fiscal year of 2000. We did not experience significant disruption to our operations as a result of that earthquake. Taiwan is also exposed to typhoons and tsunamis. If a major earthquake, typhoon, tsunami or other natural disaster were to affect our operations, our business would suffer serious harm.
Stockholders may have more difficulty protecting their interests under the laws of the Taiwan than they would under the laws of the United States.
Our corporate affairs are governed by our articles of incorporation, the Company Law, and by the laws governing corporations incorporated in Taiwan. In addition, our corporate affairs may remain governed by the Statute of Law Broker. The rights of stockholders and the responsibilities of management and the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated in the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority stockholders. As a result, holders of our common shares may have more difficulty in protecting their interests in connection with actions taken by our management or members of our board of directors than they would as public stockholders of a United States corporation.
Fluctuation in the value of the New Taiwanese Dollar may have a material adverse effect on your investment.
The value of the New Taiwanese Dollar (“NTD” or “NT$”) against the US dollar (“US$”) and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. As of December 31, 2017, the exchange rate of NT$ to the US$ was NT$1=US$0.03372.
In Taiwan, our revenues and costs are denominated in the NT$, and a significant portion of our financial assets are also denominated in NT$. We rely substantially on dividends and other fees paid to us by our Taiwan Subsidiary. Any significant appreciation or depreciation of the NT$ against the USD may affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our shares in USD. For example, a further appreciation of the NT$ against the USD would make any new NT$-denominated investments or expenditures more costly to us, to the extent that we need to convert USD into the NT$ for such purposes. An appreciation of the NT$ against the USD would also result in foreign currency translation losses for financial reporting purposes when we translate our USD denominated financial assets into the NT$, as the NT$ is our reporting currency in Taiwan. Conversely, a significant depreciation of the NT$ against the USD may significantly reduce the USD equivalent of our reported earnings, and may adversely affect the price of our shares.
Sensitivity analysis
The following table indicates the instantaneous change in our Company's (loss) / profit after tax (and accumulated losses) that would arise if foreign exchange rates at the reporting date had changed at that date, assuming all other risk variables remained constant.
| For the year ended December 31, 2017 | ||||||||||
| Depreciation in NTD | Decrease in net income | Decrease in retained earnings | ||||||||
| 3 | % | $ | 309,438 | $ | 163,542 | |||||
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The weakening of the US Dollar against the above currencies by the same percentages would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by our Company which expose our Company to foreign currency risk at the reporting date. The analysis excludes differences that would result from the translation of the financial statements of foreign operations into our Company's presentation currency.
Risks Related to Doing Business in China
Our limited operating history in China, especially our limited experience in distributing property and casualty insurance products may not provide an adequate basis to judge our future prospects and results of operations.
We have a limited operating history in China. Anhou commenced our insurance intermediary business in 2003 by distributing life insurance products and expanded our offerings to other types of property and casualty insurance products in 2009. Anhou started distributing automobile insurance business in 2010. Life insurance products distributed by Anhou accounted for approximately 92.33% of Anhou’s total net revenues in the fiscal year ending December 31, 2017. Property and casualty insurance products distributed by Anhou accounted for approximately 7.67% of Anhou’s total net revenues in the fiscal year ending December 31, 2017. While life insurance and property and casualty insurance distribution are two major areas of our future growth strategy in China, we cannot assure you that our efforts to further develop these businesses will be successful. If Anhou’s life insurance distribution and property and casualty insurance distribution fail to grow, our future growth in China will be significantly affected. In addition, our limited operating history in China, especially our limited experience in selling property and casualty insurance products, may not provide a meaningful basis for you to evaluate our business, financial performance and prospects.
Our businesses in China are highly regulated, and the administration, interpretation and enforcement of the laws and regulations currently applicable to us involve uncertainties, which could materially and adversely affect our business and results of operations.
Anhou operates in a highly regulated industry. The CIRC has authority to supervise and regulate the insurance industry in China. In exercising its authority, the CIRC has wide discretion, and the administration, interpretation and enforcement of the laws and regulations applicable to us involve uncertainties that could materially and adversely affect our business and results of operations. Although we have not had any material violations to date, we cannot assure you that our operations will always be consistent with the interpretation and enforcement of the laws and regulations by the CIRC from time to time.
The principal regulation governing insurance agencies in China is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009 (restated on October 19, 2015), which replaced the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. The Agency Provisions have not only set forth the market entrance standards for applicants to establish an insurance agency, but also stipulate the qualification criteria of senior management for such insurance agency. The Agency Provisions have also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. The principal regulation governing insurance brokerages in China is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009 (restated on October 19, 2015), which replaced the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. The Brokerage Provisions have not only set forth the market entrance standards for applicants to establish a brokerage firm, but also stipulate the qualification criteria of senior management for such brokerage firm. The Brokerage Provisions have also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. On January 6, 2013, CIRC issued Measures on the Supervision of Insurance Salespersons and Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, which sets forth a higher academic requirement for candidates to take the qualification examination for the insurance agency and brokerage practitioners organized by the CIRC. On August 3, 2015, CIRC issued the 2015 Notice, pursuant to which, in lieu of the qualification examination/test previously required for insurance salesperson, insurance agency practitioners and insurance brokerage practitioners, CIRC only requires their companies to complete such practitioner registrations on their behalves and conduct professional training on them. The enactment of any new laws and regulations in replacement of the above-mentioned laws or the change of interpretations of any such current laws and regulations may have a significant impact on the operation and financial results of our Company.
For an expanded discussion of the material regulations affecting our Company, please review the discussion located under the “Regulation” heading in the “Corporate History and Structure” section of this annual report.
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Further development of regulations in China may impose additional costs and restrictions on our activities.
China’s insurance regulatory regime is undergoing significant changes. Some of these changes and the further development of regulations applicable to us may result in additional restrictions on our activities or more intensive competition in this industry. For example, under the provisions for administration of professional insurance agencies and brokerages promulgated on September 25, 2009, insurance agencies and brokerage companies are required to increase their guaranty deposit, which generally cannot be withdrawn without the CIRC’s approval, when they open any new branches. Furthermore, pursuant to the provisions, the minimum registered capital requirements for insurance agencies and brokerages were increased substantially. Under the provisions for administration of professional insurance agencies and brokerages promulgated on October 19, 2015, CIRC now allows professional insurance agency companies and insurance brokerage companies to more freely use their guaranty deposit under the following circumstances, among which: (i) reduction in their registered capital; (ii) cancellation of their licenses; (iii) purchase of qualified professional liability insurance; or (iv) other circumstances as set forth by CIRC, provided that a written report be submitted within 5 days of such use. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions and Decision on Revising the Brokerage Provisions, pursuant to which, CIRC has mandated any insurance agency and insurance brokerage established subsequent to the Decisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million). On May 16, 2013, CIRC issued the 2013 Notice, pursuant to which, professional insurance agencies and insurance brokerages established prior to the issuance of the above Decisions, with registered capital less than RMB50 million($8.1 million), can continuously operate 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. See “Corporate History and Structure - Regulation.” In addition, the CIRC issued an Opinion of CIRC on Reforming and Improving the Management System of Insurance Salespersons in September 2010 (the “Reforming Opinion”), which requires the insurance companies and insurance intermediaries to build up a clear legal relationship with the insurance salespersons, improve the fundamental protection rights of the insurance salespersons, and encourage the insurance companies and insurance intermediaries to actively explore new models and marketing channels for insurance sales system. On September 14, 2012, CIRC issued another opinion to reiterate and push forward the Reforming Opinion above.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
We conduct our business in China primarily through our PRC subsidiary and Consolidated Affiliated Entities. Accordingly, our results of operations, financial condition and prospects in China are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 40 years or so, growth has been uneven across different regions and among various economic sectors of China and has been slowed down during the past few years. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, the PRC government still owns a substantial portion of productive assets in China. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Actions and policies of the PRC government could materially affect our ability to operate our business.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business in China primarily through our PRC subsidiary and Consolidated Affiliated Entities. The business conducted by our PRC subsidiary and Consolidated Affiliated Entities in China are governed by PRC laws and regulations. Our PRC subsidiary is generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
Although, since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
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Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. But approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions, and the recent drop in foreign exchange reserve of PRC has made it more likely to impose tighter control on foreign currency conversion and remittance offshore. Under our current corporate structure in the PRC, the primary source of our income at the holding company level from our PRC operations is dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary and our Consolidated Affiliated Entities to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange control system in China prevents us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be able to pay dividends in foreign currencies to our shareholders.
We rely principally on dividends and other distributions on equity paid by our subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and in the PRC we rely principally on dividends from our PRC subsidiary in China and service, license and other fees paid to our PRC subsidiary by our Consolidated Affiliated Entities for our cash requirements, including any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profits each year as reported in its PRC statutory financial statements, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and our PRC subsidiary that is considered foreign-invested enterprises is required to further set aside a portion of its after-tax profits as reported in its PRC statutory financial statements to fund the employee welfare fund at the discretion of the board. These reserves are not distributable as cash dividends. However, according to the Draft Foreign Investment Law, which may replace the Wholly Foreign-owned Enterprise Law once promulgated, no such reserve is required. Furthermore, if our PRC subsidiary and Consolidated Affiliated Entities in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our PRC subsidiary’s ability to pay dividends and other distributions to us.
The PRC subsidiary has not made any profits to date and as a result has no accumulated profits available for the purposes of dividend distribution. Even though we expect the PRC subsidiary to become profitable in 2017, we intend to use any profits to fund our business operations or expansion of our business.
Any limitation on the ability of our subsidiary and Consolidated Affiliated Entities to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
The PRC Labor Contract Law and its implementing rules may adversely affect our business and results of operations.
On June 29, 2007, the Standing Committee of the National People’s Congress of China promulgated the Labor Contract Law, which became effective on January 1, 2008 and revised in 2012. On September 18, 2008, the State Council promulgated the implementing rules for the Labor Contract Law, which became effective upon adoption. This new labor law and its implementing rules have reinforced the protection for employees, who, under the existing PRC Labor Law, already have certain rights, such as the right to have written labor contracts, the right to enter into labor contracts with indefinite terms under specific circumstances, the right to receive overtime wages when working overtime, and the right to terminate in the labor contracts. In addition, the Labor Contract Law and its implementing rules have made some amendments to the existing PRC Labor Law and added some clauses that could increase cost of labor to employers. In the event that we decide to significantly reduce our workforce, the Labor Contract Law and its implementing rules could adversely affect our ability to effect these changes cost-effectively or in the manner we desire, which could lead to a negative impact on our business and results of operations in the PRC.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. Currently, we do not have any employees that are formally trained in US GAAP or in ICFR in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards.
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We may have limited legal recourse under the PRC laws if disputes arise under our contracts with parties in China.
The Chinese government has enacted significant laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. Our Company faces the risk that the parties to contracts may seek ways to terminate the transactions. For example, management of our Consolidated Affiliated Entities may hinder or prevent us from accessing important information regarding the financial and business operations of the Consolidated Affiliated Entities or refuse to pay us contractual consideration due under the VIE Agreements. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under the PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Although legislation in China over the past 40 years or so has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and our stockholders. The inability to enforce or obtain a remedy under any of our existing or future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our operations.
Certain affiliates of ours are also directors and executive officers of our Consolidated Affiliated Entities. PRC laws provide that a director or certain members of senior management owes a fiduciary duty to the company he/she directs or manages. These individuals must therefore act in good faith and in the best interests of the relevant PRC company pursuant PRC laws and must not use their respective positions for personal gains. These laws do not require them to consider our best interests when making decisions as a director or member of management of the relevant PRC company. For example, it may be possible for management of Anhou to breach the VIE agreements and while their actions may be in violation of US laws they could be legal in the PRC. Any judgment for violation of fiduciary duty under U.S. law may not be enforceable outside the United States. It may not be possible to effect service of process within the United States or elsewhere outside China upon certain our directors or senior executive officers residing in China, irrespective of matters arising under U.S. federal securities laws or applicable state securities laws. Any court judgment of United States for violation of fiduciary duty under U.S. law may not be enforceable in the PRC due to the lack of bilateral treaties between PRC and the United States providing for the reciprocal recognition and enforcement of civil judgment of courts.
Risks Relating to Ownership of Our Shares
The value of your investment might not accurately reflect the actual market value of such investment as a result of deceitful historical practices relating to the appearance of greater market demand for our common stock than factually accurate.
We have previously engaged in the manipulation of the appearance market demand for our common stock and as a result historical market prices of our common stock might not be reflective of the actual market price of our common stock at such time and should not be relied upon for purposes of an evaluation of the market value of your investment. Even though such activities did not result in a profit for the Company or any of its employees, these activities may have affected the our common stock market prices and as such the market value of your investment in our common stock might be less than otherwise presumed.
You may not be able to liquidate your investment since there is no assurance that a public market will develop for our common stock, that our common stock will ever be approved for trading on a recognized exchange and you may not rely on historic trading activity for our common stock as an indication of our common stock price, that a public market will develop or we will be approved for trading on a recognized exchange.
There is no established public trading market for our securities and any historic trading activity indicating that an established trading market might have existed cannot be relied upon. Though we have engaged a market maker to apply for a quotation on the OTCQB in the United States and obtained the approval for trading, our shares are not and have not been listed on any recognized exchange. We cannot assure you that a regular trading market will develop or that if developed, will be sustained. In the absence of a regular trading market, you may be unable to liquidate its investment, which will result in the loss of your investment.
We have no plans to declare any dividends to shareholders in the near future.
We currently intend to retain our future earnings, if any, to support our operations and to finance expansion. The declaration, and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as our board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. If you require dividend income, you should not rely on an investment in our Company. Income received from an investment in our Company will only come from a rise in the market price in our Company’s stock, which is uncertain and unpredictable.
Item 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
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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).
Anhou’s current registered address is located at Room 1906-1910, No. 215 Jiangzhong Middle Road, Jianye District, Nanjing, Jiangsu Province, China, with 6,458 square feet (600 square meters) of office space. The lease agreement is between Qing Tian and Anhou. The term is from February 1, 2014 to January 31, 2019 with rent of first year being RMB $750,000 ($110,996), second year being RMB 795,000 ($117,656), third year being RMB 842,700 ($124,715), the fourth year being RMB $893,262 ($132,198), and the fifth year being RMB 946,857 ($140,130).
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 current lease term is from September 1, 2017 to August 31, 2020, for three years, with rent of RMB $41,606 ($6,157) per month, to be increased by 5% per annum commencing from September 1, 2018, payable every three months.
Jiangsu Law’s office is located at No. 888 Jintong Road, Xingren County, Tongzhou District, Nantong City, Jiangsu province, China, with 21,527 square feet (2,000 square meters) of office space. The lease was between Xiangriya Industrial (Nantong) Co., Ltd., which is an affiliate of Mao Yi Hsiao. The lease term is from January 1, 2014 to December 31, 2019 for five years, with rent of RMB $85,000 ($12,580) per year, payable every year.
On December 20, 2018, the Company and Cheng-Hsiung Huang (“Mr. Huang”), one of the Company’s former employees, agreed to settle fraud charges brought by the SEC relating to a scheme to manipulate the Company's trading volume. Neither the Company nor Mr. Huang realized financial gain from the scheme and both the Company and Mr. Huang substantially cooperated with the SEC’s investigation into the activities that led the SEC to bring the fraud charges. For further information, please see the Company’s Amended Current Report.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock has been quoted on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “CUII” since August 2012 and further uplisted from OTCBB to OTCQB in October 2016. The latest available closing price of our common stock prior to March 14, 2017 was US$4.90.
The following table sets forth for the respective periods indicated the high and low closing prices for our common stock. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
| Fiscal Year Ended December 31, 2017 | ||||||||
| Low | High | |||||||
| First Quarter ended March 31, 2017 | $ | 4.55 | $ | 6.79 | ||||
| Second Quarter ended June 30, 2017 | $ | 4.10 | $ | 5.20 | ||||
| Third Quarter ended September 30, 2017 | $ | 2.10 | $ | 5.04 | ||||
| Fourth Quarter ended December 31, 2017 | $ | 3.52 | $ | 5.10 | ||||
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| Fiscal Year Ended December 31, 2016 | ||||||||
| Low | High | |||||||
| First Quarter ended March 31, 2016 | $ | 6.90 | $ | 11.90 | ||||
| Second Quarter ended June 30, 2016 | $ | 5.00 | $ | 11.90 | ||||
| Third Quarter ended September 30, 2016 | $ | 8.05 | $ | 9.80 | ||||
| Fourth Quarter ended December 31, 2016 | $ | 5.06 | $ | 10.25 | ||||
The above stock prices may not be reflective of the actual market value thereof on the dates listed. For further information please, see the Company’s Amended Current Report.
Shareholders
As of December 31, 2017, there were 641 record owners of our common stock and one record owner of our preferred stock.
Transfer Agent
Our transfer agent is Island Stock Transfer, at the address of 15500 Roosevelt Blvd., Suite 301, Clearwater, FL33760.
Dividends
We have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain our future earnings, if any, to support operations and to finance future growth and expansion and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Pursuant to the provisions of the AHFL Acquisition Agreement dated August 24, 2012 and its amendments on March 14, 2013, March 13, 2015, February 17, 2016 and August 8, 2016, in lieu of the 2 million employee stock option pool (the “ESOP”) described in the AHFL Acquisition Agreement, our Company is committed to create an employee stock pool or similar plan consisting of up to 5 million shares of common stock to be granted to employees of affiliated entities of our Company (including Law Broker employees). Law Broker, being the only actively operated subsidiary in Taiwan, primarily engages in insurance brokerage and insurance agency service business across Taiwan. Upon satisfaction of respective performance criteria of Law Broker employees, the board of directors of Law Broker may submit its recommendation to our Company for its approval and issuance of such options under the ESOP. Details of terms and conditions on the said ESOP shall be set forth in separate ESOP documents duly approved by our Company.
On May 12, 2017, the Company’s 2017 Long Term Incentive Plan was approved by the shareholders at the 2017 Annual Meeting of Stockholders of China United Insurance Service, Inc. Up to 10,000,000 shares of our Common Stock may be granted under the 2017 Plan is equal to 10,000,000, provided that 2,000,000 shares of the Share Pool is reserved for issuance to eligible participants providing services to Action Holdings Financial Limited and its subsidiaries. Eligibility to participate is open to officers, directors and employees of, and other individuals (including sales agents who are exclusive agents of the Company or its subsidiaries or derive more than 50% of their income from those entities) who provide bona fide services to or for, us or any of our subsidiaries. Given that metrics for evaluating performance goals are rather complex and exhaustive, and that the Company’s management and Board of Directors are still working to develop a series of reward policies that specify various performance target levels and the size of the award or payout of performance shares with respect to each different target level attained, no awards were granted under the 2017 Plan as of December 31, 2017.
Options and Warrants
As of March 14, 2018, we had no outstanding options or warrants exercisable for shares of our Common Stock.
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the selected consolidated balance sheet data as of December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K.
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.
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Our historical results, including those that have been restated, are not necessarily indicative of the results that may be expected in the future. You should read the following selected financial data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements, related notes, and other financial information included elsewhere in this Form 10-K.
The following selected consolidated financial and other data is as of and for the years ended December 31 and is derived in part from, and should be read in conjunction with the Company’s Consolidated Financial Statements and related notes. Amounts as of and for years ending December 31, 2015 and 2016 have been restated from previously reported results to correct for material and certain other errors from prior periods. Refer to Item 8 of Part II, “Financial Statements and Supplementary Data—Note 27—Restatement” for further detail. The following table presents the selected financial data as of and for the year ended December 31, 2017 and adjustments implemented to produce the restated selected financial data as of and for years ending December 31, 2015 and 2016:
CHINA UNITED INSURANCE SERVICE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Restated) | ||||||||||||
| Revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 55,023,766 | ||||||
| Cost of revenue | 42,801,007 | 46,554,495 | 35,423,762 | |||||||||
| Gross profit | 30,047,437 | 23,379,511 | 19,600,004 | |||||||||
| Operating expenses: | ||||||||||||
| Selling | 2,344,633 | 2,842,744 | 3,084,408 | |||||||||
| General and administrative | 14,959,384 | 13,852,277 | 14,715,011 | |||||||||
| Total operating expense | 17,304,017 | 16,695,021 | 17,799,419 | |||||||||
| Income from operations | 12,743,420 | 6,684,490 | 1,800,585 | |||||||||
| Other income (expenses): | ||||||||||||
| Interest income | 339,169 | 208,665 | 230,509 | |||||||||
| Interest expenses | (35,375 | ) | (19,722 | ) | (654 | ) | ||||||
| Dividend income | 332,302 | 273,873 | - | |||||||||
| Other – net | 312,066 | (8,125 | ) | 150,071 | ||||||||
| Total other income (expenses) | 948,162 | 454,691 | 379,926 | |||||||||
| Income before income tax | 13,691,582 | 7,139,181 | 2,180,511 | |||||||||
| Income tax expense | 3,513,717 | 2,119,598 | 1,519,226 | |||||||||
| Net income | 10,177,865 | 5,019,583 | 661,285 | |||||||||
| Net income attributable to the noncontrolling interests | 3,023,227 | 2,127,428 | 1,623,198 | |||||||||
| Net income attributable to parent's shareholders | 7,154,638 | 2,892,155 | (961,913 | ) | ||||||||
| Other comprehensive items | ||||||||||||
| Foreign currency translation gain | 1,241,081 | (30,045 | ) | (329,562 | ) | |||||||
| Other | 42,914 | 42,202 | 310 | |||||||||
| Other comprehensive income attributable to parent's shareholder | 1,283,995 | 12,157 | (329,252 | ) | ||||||||
| Other comprehensive items attributable to noncontrolling interests | 940,887 | 147,487 | (477,738 | ) | ||||||||
| Comprehensive income attributable to parent's shareholders | $ | 8,438,633 | $ | 2,904,312 | $ | (1,291,165 | ) | |||||
| Comprehensive income attributable to noncontrolling interests | $ | 3,964,114 | $ | 2,274,915 | $ | 1,145,460 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 29,452,669 | 29,452,669 | 29,365,834 | |||||||||
| Diluted | 30,509,552 | 30,462,097 | 29,365,834 | |||||||||
| Net income per share attributable to parent's shareholder: | ||||||||||||
| Basic | $ | 0.243 | $ | 0.098 | (0.033 | ) | ||||||
| Diluted | $ | 0.235 | $ | 0.095 | (0.033 | ) | ||||||
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Selected Consolidated Balance Sheet Data
| As of December 31, | ||||||||||||
| 2017 | 2016 (Restated) | 2015 (Restated) | ||||||||||
| Total assets | $ | 59,273,243 | $ | 49,367,703 | $ | 37,361,976 | ||||||
| Total current liabilities | 19,438,643 | 21,289,779 | 13,560,879 | |||||||||
| Total long-term liabilities | 5,091,226 | 5,770,234 | 6,594,530 | |||||||||
| Total shareholders’ equity | 34,743,374 | 22,307,690 | 17,206,567 | |||||||||
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
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.
We are a Delaware corporation, organized on June 4, 2010 by Mr. Mao as a holding company for both ZLI Holdings Limited (“CU Hong Kong”) and Action Holdings Financial Limited (“AHFL,” a company incorporated in the British Virgin Islands), which is quoted on the Over the Counter Bulletin Board. As of December 31, 2017, through our Consolidated Affiliated Entities, we had two insurance agencies, one brokerage and 43 service outlets with 2,715 full-time sales professionals and 116 administrative staff in Nanjing, 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 2,414 sales professionals and 195 administrative staff in Taiwan.
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.
Restatement
The Company has restated our consolidated financial statements as of and for years ended December 31, 2016 and 2015 contained in our Annual Reports on Form 10-K for the years ended December 31, 2016 and 2015, and unaudited interim consolidated financial statements contained in our Quarterly Reports on Form 10-Q as of and for each of the quarters ended March 31, 2017, June 30, 2017 and September 30, 2017. 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. The Restatement corrects a material error related to the method of accounting for the GHFL Acquisition in 2015, which was erroneously accounted for as the acquisition of a business but which the Company has determined should have been accounted for as an acquisition of assets. This change in accounting has required corrections which included adjustments to, certain 2015 and 2016 consolidated balance sheets line items, including goodwill, total assets, retained earnings, stockholders’ equity attribute to parent’s shareholders, total stockholders’ equity, total liabilities and stockholders’ equity and certain 2015 consolidated statement of operations and other comprehensive income line items, such as general and administrative, total operating expense, income from operations, income before income taxes, net income, net income attributable to parent’s shareholders and comprehensive income attributable to parent’s shareholder. In the aggregate, these corrections decreased fiscal year 2015 net income by $2.0 million to $661,285 and decreased the December 31, 2015 and 2016 balance of (accumulated deficit) retained earnings by $2.0 million to $(231,175) and $1,246,722, respectively. For discussion of the restatement adjustments, see “Explanatory Note Regarding Restatement,” “Item 8. Financial Statements and Supplementary Data,” “Note 9 – Goodwill,” “Note 27 – Restatement” and “Note 28 – Quarterly Financial Data (Unaudited)” to our consolidated financial statements included elsewhere. Additionally, see “Item 6. Selected Financial Data.” Our 2016 consolidated statements of operations and other comprehensive income were not impacted.
The Company had material weaknesses in adequate procedures and controls to appropriately account for asset acquisition and the impact resulted in restatement of our previously filed consolidated financial statements for 2016 and 2015. We are working to remediate the material weaknesses by taking steps to enhance our internal control environment and strengthen our internal review of accounting standards and pronouncements to ensure transactions are properly accounted for. See Item 9A (c) of Part II, “Remediation of Material Weaknesses.”
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Critical Accounting Policies
The preparation of financial statements in conformity with Accounting Principles generally accepted in the United States of America (“U.S. 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.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of our Company and our subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Accounts Receivable and Allowance for Doubtful Accounts
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.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, “Property, Plant and Equipment”, we review the carrying values of long-lived assets when circumstances warrant in order to determine whether their carrying value has become impaired. We consider assets to be impaired if the carrying value of an asset exceeds the present value of future net undiscounted cash flows from related operations. No impairment was recognized for the years ended December 31, 2017, 2016 and 2015.
Goodwill and Intangible Assets
Goodwill represent the excess of acquisition cost over the fair value of the net assets in the acquisition of business. Goodwill is not amortized but instead is tested for impairment annually or more frequently if events or charges 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.
On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with the sole shareholder of GHFL, Mr. ChwanHau Li, under the terms of which the Company issued 352,166 fully paid and non-assessable shares of AHFL Common Stock and granted an option to purchase 352,166 shares of common stock of CUIS (the “Option”), in exchange for all of the issued and outstanding 704,333 shares of common stock of GHFL. On February 13, 2015, the acquisition was completed; the selling shareholder transferred 100% of the shares in GHFL to AHFL. The Option was exercised by the selling shareholder on March 31, 2015. The GHFL Acquisition was accounted for as the acquisition of a business in the Company’s consolidated financial statements as of and for the year ended December 31, 2015 and 2016, but upon reflection and further analysis, the Company has come to the conclusion that it would be more accurately accounted for as an asset acquisition. As a result of the restatement of these financial statements. The effect of restatement reduced our goodwill in each year was reduced from $2,071,491 to $31,651. Please refer to Note 27 of the Notes to the Consolidated Financial Statements for additional information.
Revenue recognition
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.
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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.
Income taxes
The Company records income tax expense using the asset-and-liability method of accounting for deferred income taxes. Under this method, deferred taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that the deferred tax assets will not be realized.
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).
Results of Operations
Overview of the years ended December 31, 2017 and 2016
The following table shows the results of operations for the years ended December 31, 2017 and 2016:
| Years Ended December 31, | ||||||||||||||||
| 2017 | 2016 | Change | Percent | |||||||||||||
| Revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 2,914,438 | 4 | % | ||||||||
| Cost of revenue | 42,801,007 | 46,554,495 | (3,753,488 | ) | (8 | )% | ||||||||||
| Gross profit | 30,047,437 | 23,379,511 | 6,667,926 | 29 | % | |||||||||||
| Gross profit margin | 41 | % | 33 | % | 229 | % | 725 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 2,344,633 | 2,842,744 | (498,111 | ) | (18 | )% | ||||||||||
| General and administrative | 14,959,384 | 13,852,277 | 1,107,107 | 8 | % | |||||||||||
| Income from operations | 12,743,420 | 6,684,490 | 6,058,930 | 91 | % | |||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | 339,169 | 208,665 | 130,504 | 63 | % | |||||||||||
| Interest expense | (35,375 | ) | (19,722 | ) | (15,653 | ) | 79 | % | ||||||||
| Dividend income | 332,302 | 273,873 | 58,429 | 21 | % | |||||||||||
| Other - net | 312,066 | (8,125 | ) | 320,191 | (3941 | )% | ||||||||||
| Total other income (expenses) | 948,162 | 454,691 | 493,471 | 109 | % | |||||||||||
| Income before income taxes | 13,691,582 | 7,139,181 | 6,552,401 | 92 | % | |||||||||||
| Income tax expense | 3,513,717 | 2,119,598 | 1,394,119 | 66 | % | |||||||||||
| Net income | 10,177,865 | 5,019,583 | 5,158,282 | 103 | % | |||||||||||
| Net income attributable to the noncontrolling interests | 3,023,227 | 2,127,428 | 895,799 | 42 | % | |||||||||||
| Net income attributable to parent's shareholders | 7,154,638 | 2,892,155 | 4,262,483 | 147 | % | |||||||||||
Please note that our results of operations in 2016 were not affected by the restatement.
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Revenue
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 among Taiwan, PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales professionals in our distribution and service network. Revenue in the year ended December 31, 2017 totaled over $72.8 million, an increase of approximately $2.9 million (or slightly over 4%) compared with approximately $69.9 million in the previous year. This increase was attributable primarily to growth of our business in Taiwan and the PRC. For the years ended December 31, 2017 and 2016, the revenue generated respectively from Taiwan, PRC and Hong Kong was as follows:
| For the year ended December 31, | ||||||||
| Geographical Areas | 2017 | 2016 | ||||||
| Revenue | ||||||||
| Taiwan | $ | 62,147,136 | $ | 61,208,145 | ||||
| PRC | 10,467,488 | 8,461,511 | ||||||
| Hong Kong | 302,096 | 325,408 | ||||||
| Elimination adjustment | (68,276 | ) | (61,058 | ) | ||||
| Total Revenue | $ | 72,848,444 | $ | 69,934,006 | ||||
During the year ended December 31, 2017, 85.31%, 14.37% and 0.32% of our revenue in our audited consolidated financial statements were derived from Taiwan, Consolidated Affiliated Entities (“CAE”) in PRC and Hong Kong, respectively. 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, CAE in PRC and Hong Kong, respectively. Total revenue increased by $2,914,438, or 4%, from $69,934,006 for the year ended December 31, 2016 to $72,848,444 for the year ended December 31, 2017, mainly due to the increase of the revenue in Taiwan and PRC for the following reasons:
| (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. |
| (b) | The revenue of Taiwan Life Insurance Co., Ltd (“Taiwan Life”) increased in 2017, primarily due to the increase in sales of the disability support insurance and full medical expense reimbursement insurance. This selling package drew more attention from the company’s customers and raised 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 and gross profit
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.
The gross profit for the year ended December 31, 2017 increased by $6,667,926 or 29%, to $30,047,437 compared with $23,379,511 for the year ended December 31, 2016. The gross profit ratio increased to 41% for the year ended December 31, 2017 from 33% for the year ended December 31, 2016. The increase was primary due to the increase in AIATW’s promotion revenue in year 2017, and indirect commission cost also decreased in year 2017.
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Selling expenses
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.
General and administrative expenses
General and administrative expenses are principally comprised of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees.
For the year ended December 31, 2017, G&A expenses were $14,959,384, an increase of $1,107,107, or 8%, compared with $13,852,277 for the year ended December 31, 2016, which was mainly due the expanded number of branches, increased personnel costs in China, increased personnel costs, rent and pension in Taiwan and professional fees.
Other income (expenses)
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.
Income tax
For the year ended December 31, 2017, income tax expense was $3,513,717, an increase of $1,394,119, or 66%, compared with $2,119,598 for the year ended December 31, 2016. The increase was mainly due to increased income before income tax for the year ended December 31, 2017, which increased by $6.5 million compared with that for the year ended December 31, 2016.
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.
CU WFOE and the CAE in the PRC are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. According to the requirement of local tax authorities, the taxable income of Jiangsu Law was deemed to be 10% of total revenue, instead of actual income before income tax. The tax rate of Jiangsu Law is also 25%.
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.
Our 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.
As a result of all these factors, net income increased by $5.16 million to almost $10.2 million in the year ended December 31, 2017, from just over $5.0 million in the previous fiscal year.
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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:
| Years Ended December 31, | ||||||||||||||||
| 2016 | 2015 | Change | Percent | |||||||||||||
| (Restated) | ||||||||||||||||
| Revenue | $ | 69,934,006 | $ | 55,023,766 | $ | 14,910,240 | 27 | % | ||||||||
| Cost of revenue | 46,554,495 | 35,423,762 | 11,130,733 | 31 | % | |||||||||||
| Gross profit | 23,379,511 | 19,600,004 | 3,779,507 | 19 | % | |||||||||||
| Gross profit margin | 33 | % | 36 | % | 25 | % | 70 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 2,842,744 | 3,084,408 | (241,664 | ) | (8 | )% | ||||||||||
| General and administrative | 13,852,277 | 14,715,011 | (862,734 | ) | (6 | )% | ||||||||||
| Income from operations | 6,684,490 | 1,800,585 | 4,883,905 | 271 | % | |||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | 208,665 | 230,509 | (21,844 | ) | (9 | )% | ||||||||||
| Interest expense | (19,722 | ) | (654 | ) | (19,068 | ) | (2916 | )% | ||||||||
| Dividend income | 273,873 | - | 273,873 | 100 | % | |||||||||||
| Other - net | (8,125 | ) | 150,071 | (158,196 | ) | (105 | )% | |||||||||
| Total other income (expenses) | 454,691 | 379,926 | 74,765 | 20 | % | |||||||||||
| Income before income taxes | 7,139,181 | 2,180,511 | 4,958,670 | 227 | % | |||||||||||
| Income tax expense | 2,119,598 | 1,519,226 | 600,372 | 40 | % | |||||||||||
| Net income | 5,019,583 | 661,285 | 4,358,298 | 659 | % | |||||||||||
| Net income attributable to the noncontrolling interests | 2,127,428 | 1,623,198 | 504,230 | 31 | % | |||||||||||
| Net income attributable to parent's shareholders | 2,892,155 | (961,913 | ) | 3,854,068 | (401 | )% | ||||||||||
Revenue
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:
| For the year ended December 31, | ||||||||
| Geographical Areas | 2016 | 2015 | ||||||
| (Restated) | ||||||||
| Revenue | ||||||||
| Taiwan | $ | 61,208,145 | $ | 48,669,261 | ||||
| PRC | 8,461,511 | 5,892,928 | ||||||
| Hong Kong | 325,408 | 461,577 | ||||||
| Elimination adjustment | (61,058 | ) | - | |||||
| Total Revenue | $ | 69,934,006 | $ | 55,023,766 | ||||
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.
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 restated audited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. Total revenue increased by $14,910,240, or over 27%, from $55,023,766, as restated, 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:
| (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. |
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| (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 and gross profit
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.
Gross profit for the year ended December 31, 2016 increased by $3,779,507, or 19%, to $23,379,511 compared with $19,600,004 for the year ended December 31, 2015. The gross profit ratio decreased to 33% for the year ended December 31, 2016 from 36% for the year ended December 31, 2015. The primary cause of the heightened cost of revenue was the portion notable increase of first-year commission (FYC) revenue over total revenue increased noticeably. Based primarily on the increase in revenue in year 2016, other indirect commission cost, also increased in year 2016, such as high-performance awards, practicing bonus, etc. Since the commission rate of FYC revenue was comparatively higher than any other type of commission revenue, the cost of revenue increased accordingly.
Selling expenses
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.
General and administrative expenses
General and administrative expenses principally comprise salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees.
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.
Other income (expenses)
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.
Income tax
For the year ended December 31, 2016, the income tax expense was $2,119,598, an increase of $600,372, or 40%, compared with $1,519,226 for the year ended December 31, 2015. The increase was mainly due to the increased income before income tax for the year ended December 31, 2016 compared with that for the year ended December 31, 2015.
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.
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%.
Our 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.
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Liquidity and Capital Resources
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, 2017 and 2016:
| Years Ended December 31, | ||||||||||||||||
| 2017 | 2016 | Change | Percent | |||||||||||||
| Net cash provided by operating activities | $ | 5,655,491 | $ | 7,544,382 | (1,888,891 | ) | (25 | )% | ||||||||
| Net cash used in investing activities | (14,435,727 | ) | (89,341 | ) | (14,346,386 | ) | 16058 | % | ||||||||
| Net cash provided by (used in) financing activities | 2,506,795 | (376,473 | ) | 2,883,268 | (766 | )% | ||||||||||
Operating activities
Net cash provided by operating activities during the year ended December 31, 2017 was $5,655,491, slightly decreased in comparison with $7,544,382, net cash provided by operating activities during the year ended December 31, 2016. The decrease was mainly due to decrease commissions payable to sales professionals for the year ended December 31, 2017 compared with that for the year ended December 31, 2016.
Investing activities
Net cash used in investing activities was $14,435,727 during the year ended December 31, 2017, which was mainly due to purchase of structured deposit, marketable securities and time deposits of approximately $39 million less proceeds from maturities of time deposits of approximately $17 million and disposals of marketable securities of approximately $8 million. Net cash used in investing activities was $89,341 during the year ended December 31, 2016, which was mainly due to purchase of property, plant and equipment and intangible assets of approximately $1 million, loan made to RFL amount of approximately $1.5 million and purchases of time deposits of approximately $7 million less proceeds from maturities of time deposits of approximately $10 million.
Financing activities
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:
| Years Ended December 31, | ||||||||||||||||
| 2016 | 2015 | Change | Percent | |||||||||||||
| (Restated) | ||||||||||||||||
| Net cash provided by operating activities | $ | 7,544,382 | $ | 1,770,017 | 5,774,365 | 326 | % | |||||||||
| Net cash provided by (used in) investing activities | (89,341 | ) | 609,777 | (699,118 | ) | (115 | )% | |||||||||
| Net cash provided by (used in) financing activities | (376,473 | ) | 706,145 | (1,082,618 | ) | (153 | )% | |||||||||
Operating activities
Net cash provided by operating activities during the year ended December 31, 2016 was $7,544,382, significantly increased in comparison with $1,770,017, net cash provided by operating activities during the year ended December 31, 2015. The increase was mainly due to increased net income and other current liabilities for the year ended December 31, 2016 compared with that for the year ended December 31, 2015.
Investing activities
Net cash used in investing activities was $89,341 during the year ended December 31, 2016, which was mainly due to purchase of property, plant and equipment and intangible assets of approximately $1 million, loan made to RFL amount of approximately $1.5 million and purchases of time deposits of approximately $7 million less proceeds from maturities of time deposits of approximately $10 million. Net cash provided by investing activities was $609,777 during the year ended December 31, 2015, which was mainly due to purchase of property, plant and equipment, intangible assets amount of approximately $0.6 million and purchases of time deposits amount of approximately $9.6 million less dividend received in excess of earnings as reductions of cost of the investment amount of approximately $0.2 million and proceeds from maturities of time deposit amount of approximately $10.6 million.
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Financing activities
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. Net cash provided by financing activities was $706,145 during the year ended December 31, 2015, which was mainly due to the loan borrowed from related parties and third parties.
Related Party Loan and Loans to Unrelated Third Parties
Anhou Registered Capital Increase
On April 27, 2013, the CIRC issued the Decision on Revising the Agency Provisions, pursuant to which, CIRC mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million (approximately $8 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 (approximately $8 million) can continue to operate its existing business within the provinces where they have a registered office or branch office, but shall not set up any new branches in any provinces where it has no registered office or a branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, used to have a registered capital of RMB10 million (approximately $1.6 million). The branch offices of Anhou currently were all in Henan province. To better implement its expansion strategies, Anhou intended to increase its registered capital to RMB50 million (approximately $8 million) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in Mainland China.
Due to certain restrictions on direct foreign investment in insurance agency business under current PRC legal regime, Anhou has sought certain investments made by the Investor Borrowers and they may need funds through individual loans. Upon the completion of the contemplated increase of registered capital of Anhou, each Investor Borrower shall, or cause their designated persons to, enter into the Variable Interest Entities Agreement with CU WFOE, Anhou and other parties so as to consolidate any additional VIE interest generated from the said registered capital increase into the Company.
On June 9, 2013, AHFL entered into a Loan Agreement (the “Company Loan Agreement”) with CU Hong Kong.
Under the Company Loan Agreement, AHFL agreed to provide a loan to the CU Hong Kong with the principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such was ten years which could be extended upon the agreement of the parties. The amount of such loan was remitted to the account of CU Hong Kong on August 30, 2013.
In August 2013, the CU Hong Kong entered into several Loan Agreements (collectively, the “Investor Loan Agreements”) with the following unrelated parties: Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, Mr. Li Chen and Ms. Jing Yue, both PRC citizens (collectively, the “Investor Borrowers”).
Under the Investor Loan Agreements, the Investor Borrowers loaned cash from CU Hong Kong for their investment in Anhou and CU Hong Kong agreed to provide certain loans to each of the Investor Borrowers with an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such loans was ten years which could be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers covenants to enter into certain Variable Interest Entities Agreements with Anhou, CU WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers shall be solely used to increase the registered capital of Anhou, and CU Hong Kong may determine the repayment methods including transferring of the Investor Borrowers’ corresponding registered capital in Anhou or through other manner as full payment of the loans subject to terms and conditions therein in the event that the Investor Borrowers fails to repay the loan in currency to CU Hong Kong.
The specific amounts loaned to the Investor Borrowers were as follows:
Able Capital Holding Co., Ltd.: RMB29,500,000 ($4,712,570)
Ms. Chunyan Lu: RMB3,000,000 ($479,244)
Ms. Yue: RMB7,500,000 ($1,198,111)
On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925).
Loan Receivable
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.
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Short-term Loans
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.
On November 17, 2017, the Company entered into a line of credit agreement with CTBC, pursuant to which the Company has a credit facility of $1,000,000 from November 17, 2017 to July 31, 2018. Borrowings under the agreement bear interest at the CTBC’s cost of fund plus a margin of 1%. On December 28, 2017, the Company draw down a borrowing of $950,000 with interest at a rate of 3.30% per annum and the principal amount was due on January 29, 2018. Law Broker is the guarantor of the credit facility. On January 29, 2018, the Company paid off the entire principal and interest of Loan C.
Total interest expense of short-term loans was $1,531 for the year ended December 31, 2017.
Long-term Loans
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 (RMB850,000) and $144,055 (RMB850,000) 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.
On July 20, 2016, Anhou entered into a loan agreement (“Loan B”) with an individual third party. The long-term Loan Agreement provided for approximately $118,345 (RMB 770,000) and $110,892 (RMB 770,000) as of December 31, 2017 and 2016, respectively, loan to the Company. The long-term Loan B bears an interest rate of 8% per annum and interest is payable annually. The principal and the accrued interest will be due on July 20, 2019.
Total interest expense for these long-term loans was $20,737 and $11,755, for the year ended December 31, 2017 and 2016, respectively.
Convertible Bonds
On June 23, 2016, our Company 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, 2017 and 2016, our Company had an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $12,000 and 6,363, for the year ended December 31, 2017 and 2016, respectively.
Due to related parties
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:
| December 31, 2017 | December 31, 2016 | |||||||
| Due to Mr. Mao (CEO of the Company) | $ | 409,054 | $ | 361,379 | ||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li*) | - | 32,374 | ||||||
| Due to Mr. Zhu (Legal Representative of Jiangsu) | 2,128 | 1,994 | ||||||
| Ms. Lu (Shareholder of Law Anhou) | 161,380 | - | ||||||
| Due to Yuli Broker (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to Yuli Investment (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to I Health Management Corp*** | 17,703 | 3,724 | ||||||
| Total | $ | 590,265 | $ | 400,001 | ||||
* Chwan Hau Li is a Director of the Company
** Mr. Lee is the Director of Law Broker
*** 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.
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On a going forward basis, our primary requirements for cash over the next 12 months consist of:
| · | providing insurance agency services to its existing clients in its existing branches; |
| · | developing new clients; |
| · | promoting sales activities; |
| · | opening more branches in China; and |
| · | expanding business scale in China, through mergers & acquisitions. |
Debt Forgiveness – Related Parties
Xude Investment was owned by Mr. Chwan Hau Li, a 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.
Lease Agreements
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. We recorded rent income of $564 and $279, respectively, for the years ended 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.
Advisory Agreements
On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $42,000 (NTD1,275,000). For the year ended December 31, 2017, The Company had cost of revenue related to I Health amounted $13,315. The Company has cost of revenue and due to I Health totaled $25,130 and $3,724, respectively, for the year ended and as of December 31, 2016.
On December 7, 2016, the Company entered into an advisory agreement with Fu Chang Li (“Mr. Li,” the Director of the Company). Pursuant to this Advisory Agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. On December 7, 2017, both parties agreed to extend this advisory agreement from December 7, 2017 to December 6, 2018. The total advisory fee was approximately $59,000 (NTD1,800,000). The Company had general and administrative expense related to this advisory agreement amounted $59,214 and $0 for the year ended December 31, 2017 and 2016, respectively.
Consulting Agreement
On November 1, 2016, the Company entered into a consulting agreement with Apex Biz Solution Limited. (“Apex,” was formerly known as Prime Technology Corp.) According to the Agreement, the Company would provide administrative operational consulting services to Apex from November 1, 2016 through December 31, 2021. As of December 31, 2017 and 2016, the Company had account receivable of $17,231 and $6,660, respectively. The Company also had revenue of $50,053 and $6,356 for the years ended December 31, 2017 and 2016, respectively.
Contractual Obligations
Operating Leases
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:
| Twelve months ending December 31, 2018 | $ | 2,022,510 | ||
| Twelve months ending December 31, 2019 | 877,362 | |||
| Twelve months ending December 31, 2020 | 197,971 | |||
| Twelve months ending December 31, 2021 | 50,461 | |||
| Twelve months ending December 31, 2022 | 14,199 | |||
| Thereafter | - | |||
| Total | $ | 3,162,503 |
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Off Balance Sheet Arrangements
As of December 31, 2017, our Company had no off balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
This Annual Report includes an attestation report of our independent registered public accounting firm regarding internal control over financial, which states that, in their opinion, we did not maintain in all material respects, effective internal control over financial reporting as of December 31, 2017. Please refer to Item 8 of Part II, “Financial Statements and Supplementary Data—Report of Independent Registered Public Accounting Firm” for details.
Interest Rate Sensitivity
As of December 31, 2017, we had cash of RMB9.0 million, approximately $1.4 million, and NT$411.5 million, approximately $13.9 million, and HK$0.7 million, approximately $0.1 million. We hold our cash for working capital purposes. Declines in interest rates would reduce future interest income. For the year ended December 31, 2017, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.
Foreign Currency Risk
The functional currency for the subsidiaries in Taiwan is NT$ and the functional currency for the subsidiaries and Consolidated Affiliated Entities in the PRC is RMB. Our financial statements are in USD. The fluctuation of NT$ and RMB will affect our operating results expressed in USD. We review our foreign currency exposures. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. The management does not consider its present foreign exchange risk to be significant.
We performed a sensitivity analysis assuming a hypothetical 100 basis point increase in foreign currency exchange rates applied to our historical fiscal 2017 results of operations. For the year ended December 31, 2017, the analysis indicated that a decrease of 1% in exchange rates would have decreased our revenues by approximately $721,273.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and shareholders of China United Insurance Service, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
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.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Restatement
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.
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Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Simon & Edward, LLP
Los Angeles, California
March 15, 2018
We have served as the Company’s auditor since 2014.
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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2017 | December 31, 2016 | |||||||
| (Restated) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 15,473,949 | $ | 20,169,455 | ||||
| Time deposits | 21,470,113 | 5,352,347 | ||||||
| Marketable securities | 33,381 | 2,426,870 | ||||||
| Structured deposit | 1,248,340 | - | ||||||
| Accounts receivable, net | 13,301,006 | 15,774,159 | ||||||
| Other current assets | 2,193,086 | 1,831,318 | ||||||
| Total current assets | 53,719,875 | 45,554,149 | ||||||
| Property, plant and equipment, net | 946,302 | 926,905 | ||||||
| Intangible assets | 775,778 | 784,219 | ||||||
| Goodwill | 31,651 | 31,651 | ||||||
| Long-term investments | 1,399,762 | 1,285,064 | ||||||
| Other assets | 2,399,875 | 785,715 | ||||||
| TOTAL ASSETS | $ | 59,273,243 | $ | 49,367,703 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Taxes payable | $ | 3,508,790 | $ | 2,249,869 | ||||
| Short-term loans | 2,350,000 | - | ||||||
| Convertible bonds | 200,000 | - | ||||||
| Due to related parties | 590,265 | 400,001 | ||||||
| Other current liabilities | 12,789,588 | 18,639,909 | ||||||
| Total current liabilities | 19,438,643 | 21,289,779 | ||||||
| Convertible bonds - noncurrent | - | 200,000 | ||||||
| Long-term loans | 248,986 | 254,907 | ||||||
| Long-term liabilities | 4,842,240 | 5,315,327 | ||||||
| TOTAL LIABILITIES | 24,529,869 | 27,060,013 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | 10 | ||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding | 295 | 295 | ||||||
| Additional paid-in capital | 8,190,449 | 8,157,512 | ||||||
| Statutory reserves | 5,781,008 | 3,799,585 | ||||||
| Retained earnings | 6,419,937 | 1,246,722 | ||||||
| Accumulated other comprehensive gain/(loss) | 616,019 | (667,976 | ) | |||||
| Stockholders' equity attribute to parent’s shareholders | 21,007,718 | 12,536,148 | ||||||
| Noncontrolling interests | 13,735,656 | 9,771,542 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 34,743,374 | 22,307,690 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 59,273,243 | $ | 49,367,703 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Restated) | ||||||||||||
| Revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 55,023,766 | ||||||
| Cost of revenue | 42,801,007 | 46,554,495 | 35,423,762 | |||||||||
| Gross profit | 30,047,437 | 23,379,511 | 19,600,004 | |||||||||
| Operating expenses: | ||||||||||||
| Selling | 2,344,633 | 2,842,744 | 3,084,408 | |||||||||
| General and administrative | 14,959,384 | 13,852,277 | 14,715,011 | |||||||||
| Total operating expense | 17,304,017 | 16,695,021 | 17,799,419 | |||||||||
| Income from operations | 12,743,420 | 6,684,490 | 1,800,585 | |||||||||
| Other income (expenses): | ||||||||||||
| Interest income | 339,169 | 208,665 | 230,509 | |||||||||
| Interest expenses | (35,375 | ) | (19,722 | ) | (654 | ) | ||||||
| Dividend income | 332,302 | 273,873 | - | |||||||||
| Other - net | 312,066 | (8,125 | ) | 150,071 | ||||||||
| Total other income (expenses) | 948,162 | 454,691 | 379,926 | |||||||||
| Income before income tax | 13,691,582 | 7,139,181 | 2,180,511 | |||||||||
| Income tax expense | 3,513,717 | 2,119,598 | 1,519,226 | |||||||||
| Net income | 10,177,865 | 5,019,583 | 661,285 | |||||||||
| Net income attributable to the noncontrolling interests | 3,023,227 | 2,127,428 | 1,623,198 | |||||||||
| Net income attributable to parent's shareholders | 7,154,638 | 2,892,155 | (961,913 | ) | ||||||||
| Other comprehensive items | ||||||||||||
| Foreign currency translation gain | 1,241,081 | (30,045 | ) | (329,562 | ) | |||||||
| Other | 42,914 | 42,202 | 310 | |||||||||
| Other comprehensive income attributable to parent's shareholders | 1,283,995 | 12,157 | (329,252 | ) | ||||||||
| Other comprehensive items attributable to noncontrolling interests | 940,887 | 147,487 | (477,738 | ) | ||||||||
| Comprehensive income attributable to parent's shareholders | $ | 8,438,633 | $ | 2,904,312 | $ | (1,291,165 | ) | |||||
| Comprehensive income attributable to noncontrolling interests | $ | 3,964,114 | $ | 2,274,915 | $ | 1,145,460 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 29,452,669 | 29,452,669 | 29,365,834 | |||||||||
| Diluted | 30,509,552 | 30,462,097 | 29,365,834 | |||||||||
| Net income per share attributable to parent's shareholders: | ||||||||||||
| Basic | $ | 0.243 | $ | 0.098 | (0.033 | ) | ||||||
| Diluted | $ | 0.235 | $ | 0.095 | (0.033 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
| Common Stock |
Amount | Preferred Stock |
Amount | Additional
Paid -in Capital |
Statutory Reserves |
Accumulated
Other Comprehensive Loss |
Retained Earnings |
Total | Noncontrolling Interests |
Total Equity |
||||||||||||||||||||||||||||||||||
| Balance December 31, 2014 | 29,100,503 | $ | 291 | 1,000,000 | $ | 10 | $ | 4,674,593 | $ | 1,388,014 | $ | (350,881 | ) | $ | 1,717,278 | $ | 7,429,305 | $ | 6,383,427 | $ | 13,812,732 | |||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 997,313 | - | (997,313 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Share exchange to acquire GHFL | 352,166 | 4 | - | - | 3,482,919 | - | - | - | 3,482,923 | - | 3,482,923 | |||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | (329,562 | ) | - | (329,562 | ) | (479,347 | ) | (808,909 | ) | |||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 310 | - | 310 | 1,609 | 1,919 | |||||||||||||||||||||||||||||||||
| Liquidation of subsidiaries | - | - | - | - | - | - | - | 10,773 | 10,773 | 45,844 | 56,617 | |||||||||||||||||||||||||||||||||
| Net income (Restated) | - | - | - | - | - | - | - | (961,913 | ) | (961,913 | ) | 1,623,198 | 661,285 | |||||||||||||||||||||||||||||||
| Balance December 31, 2015 (Restated) | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,157,512 | $ | 2,385,327 | $ | (680,133 | ) | $ | (231,175 | ) | $ | 9,631,836 | $ | 7,574,731 | $ | 17,206,567 | ||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 1,414,258 | - | (1,414,258 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | (30,045 | ) | - | (30,045 | ) | 125,701 | 95,656 | |||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 42,202 | - | 42,202 | 21,786 | 63,988 | |||||||||||||||||||||||||||||||||
| Reduction of cash capital | - | - | - | - | - | - | - | - | - | (78,104 | ) | (78,104 | ) | |||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 2,892,155 | 2,892,155 | 2,127,428 | 5,019,583 | |||||||||||||||||||||||||||||||||
| Balance December 31, 2016 (Restated) | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,157,512 | $ | 3,799,585 | $ | (667,976 | ) | $ | 1,246,722 | $ | 12,536,148 | $ | 9,771,542 | $ | 22,307,690 | |||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 1,981,423 | - | (1,981,423 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | 1,241,081 | - | 1,241,081 | 940,518 | 2,181,599 | |||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 42,914 | - | 42,914 | 369 | 43,283 | |||||||||||||||||||||||||||||||||
| Forgiveness of debt | - | - | - | - | 32,937 | - | - | - | 32,937 | - | 32,937 | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 7,154,638 | 7,154,638 | 3,023,227 | 10,177,865 | |||||||||||||||||||||||||||||||||
| Balance December 31, 2017 | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 5,781,008 | $ | 616,019 | $ | 6,419,937 | $ | 21,007,718 | $ | 13,735,656 | $ | 34,743,374 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Restated) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 10,177,865 | $ | 5,019,583 | $ | 661,285 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
| Depreciation and amortization | 561,184 | 626,028 | 463,201 | |||||||||
| Pension plan | 2,169 | 65,394 | - | |||||||||
| Amortization of bond premium | - | 244 | - | |||||||||
| Compensation on asset acquisition | - | - | 2,039,840 | |||||||||
| Gain on settlement of debt | - | (83,425 | ) | - | ||||||||
| Gain on valuation of financial assets | 64,749 | (16,669 | ) | (16,550 | ) | |||||||
| Loss on disposals of property, plant and equipment | 110,964 | 38,421 | 56,707 | |||||||||
| Deferred income tax | 87,391 | (87,983 | ) | (34,424 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 3,657,114 | (6,095,236 | ) | (2,259,028 | ) | |||||||
| Other current assets | (335,939 | ) | 724,922 | (518,684 | ) | |||||||
| Other assets | (1,528,647 | ) | 80,733 | (236,501 | ) | |||||||
| Tax payable | 1,036,997 | 714,343 | 658,010 | |||||||||
| Other current liabilities | (7,149,596 | ) | 7,954,780 | 1,113,740 | ||||||||
| Long-term liabilities | (1,028,760 | ) | (1,396,753 | ) | (157,579 | ) | ||||||
| Net cash provided by operating activities | 5,655,491 | 7,544,382 | 1,770,017 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Cash from acquisition | - | - | 318 | |||||||||
| Repayments to pervious shareholders | - | (150,959 | ) | - | ||||||||
| Dividend received in excess of earnings as reductions of cost of the investment | 244,058 | |||||||||||
| Purchases of structured deposit | (1,285,882 | ) | - | - | ||||||||
| Purchases of time deposits | (32,699,028 | ) | (7,161,459 | ) | (9,562,553 | ) | ||||||
| Proceeds from maturities of time deposits | 17,437,704 | 9,697,617 | 10,556,173 | |||||||||
| Loan made to RFL | 105,586 | (1,490,040 | ) | - | ||||||||
| Proceeds from disposals of marketable securities | 7,515,680 | - | - | |||||||||
| Purchase of marketable securities | (4,967,359 | ) | - | - | ||||||||
| Purchase of property, plant and equipment | (382,473 | ) | (537,156 | ) | (283,568 | ) | ||||||
| Purchase of intangible assets | (159,955 | ) | (447,344 | ) | (344,651 | ) | ||||||
Net cash provided by (used in) investing activities |
(14,435,727 | ) | (89,341 | ) | 609,777 | |||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from related party borrowings | 464,850 | 86,572 | 794,009 | |||||||||
| Repayment to related parties | (285,856 | ) | (626,852 | ) | (315,443 | ) | ||||||
| Payment to noncontrolling interest as reduction of cash capital | - | (77,425 | ) | - | ||||||||
| Proceeds from third party borrowings | 2,350,000 | 466,445 | 227,579 | |||||||||
| Repayment to third party loans | (22,199 | ) | (225,213 | ) | - | |||||||
| Net cash provided by (used in) financing activities | 2,506,795 | (376,473 | ) | 706,145 | ||||||||
| Foreign currency translation | 1,577,935 | 7,530 | (564,053 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | (4,695,506 | ) | 7,086,098 | 2,521,886 | ||||||||
| Cash and cash equivalents, beginning balance | 20,169,455 | 13,083,357 | 10,561,471 | |||||||||
| Cash and cash equivalents, ending balance | $ | 15,473,949 | $ | 20,169,455 | $ | 13,083,357 | ||||||
| SUPPLEMENTARY DISCLOSURE: | ||||||||||||
| Interest paid | $ | 33,844 | $ | 42,935 | $ | 285 | ||||||
| Income tax paid | $ | 2,307,768 | $ | 1,562,037 | $ | 824,716 | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW FOR NON-CASH TRANSACTION: | ||||||||||||
| Debt forgiveness - related parties | $ | 32,937 | $ | - | $ | - | ||||||
| Issuance of common stock for acquisition of GHFL | $ | - | $ | - | $ | 1,443,083 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 67 |
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
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 Taiwan citizen, as a listing vehicle for both ZLI Holdings Limited (“CU Hong Kong”) and Action Holdings Financial Limited (“AHFL,” a company incorporated in the British Virgin Islands). The Company is quoted on the United States Over the Counter Bulletin Board.
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.
On January 28, 2011, the Company increased the authorized number of common shares from 30,000,000 to 100,000,000 and also authorized 10,000,000 shares of preferred stock.
On January 17, 2011, after approved by the Board of Directors and stockholders of both Companies, the CU WFOE entered a series of agreements (“VIE Agreement”), including Exclusive Business Cooperation Agreement, Option Agreement, and Share Pledge Agreement with Law Anhou Insurance Agency Co., Limited (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Limited or Henan Law Anhou Insurance Agency Co., Limited) in Nanjing City, PRC. These agreements established a Variable Interest Entity (“VIE”) and Primary Beneficiary relationship between the two entities.
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.
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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.
| 69 |
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 April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Mr. Wong, Chun Kwok Johnny (“Mr. Wong”), the owner of Prime Financial Asia Limited (PFAL) which is a re-insurance broker company resided in Hong Kong. Pursuant to the Agreement, Mr. Wong would increase PFAL’s capital contribution from HKD500,000 to HKD1,470,000, and AHFL would contribute HKD1,530,000 to PFAL’s registered capital. Upon the completion of capital contribution by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with a selling shareholder of Genius Holdings Financial Limited (“GHFL”), Mr. Chwan hau Li, to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock together with a granted option for 352,166 shares of common stock of CUIS (“Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. GHFL is a limited liability company established under the laws of British Virgin Islands in July 2013. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of AHFL. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited liability company incorporated under the laws of Taiwan, which in turn holds 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. On February 13, 2015, the acquisition was completed; the selling shareholder transferred 100% shares in GHFL to AHFL. On March 31, 2015, the put option was exercised and Mr. Li received 352,166 shares of common shares of CUIS in exchange for his AHFL shares.
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On August 7, 2015, Max Key Investment Ltd. (“MKI”) was incorporated with limited liability in the British Virgin Islands. On August 15, 2015, Prime Management Consulting (Nanjing) Co., Ltd. (“PTC Nanjing”) was incorporated with limited liability in Nanjing province of the PRC.
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 corporate structure as of December 31, 2017 is as follows:
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
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.
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Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
Noncontrolling Interest
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.
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of noncontrolling interests (“NCI”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
Comprehensive Income
The Company follows FASB ASC Topic 220 (“ASC 220”), “Reporting Comprehensive Income,” which establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC 220 defines comprehensive income as net income and all changes to stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on securities held as available-for-sale.
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Foreign Currency Transactions
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 using the rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the consolidated statements of operations and other comprehensive income (loss).
The Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD, RMB and HKD into U.S. dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for financial statements are as follows:
| Average Rate for the years ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Taiwan dollar (NTD) | NTD | 30.39845 | NTD | 32.21390 | NTD | 31.73010 | ||||||
| China yuan (RMB) | RMB | 6.75701 | RMB | 6.64301 | RMB | 6.21750 | ||||||
| Hong Kong dollar (HKD) | HKD | 7.79223 | HKD | 7.76173 | HKD | 7.75210 | ||||||
| United States dollar ($) | $ | 1.00000 | $ | 1.00000 | $ | 1.00000 | ||||||
| Exchange Rate at | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Taiwan dollar (NTD) | NTD | 29.65568 | NTD | 32.28310 | ||||
| China yuan (RMB) | RMB | 6.50638 | RMB | 6.94370 | ||||
| Hong Kong dollar (HKD) | HKD | 7.81493 | HKD | 7.75434 | ||||
| United States dollar ($) | $ | 1.00000 | $ | 1.00000 | ||||
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, bank deposits, and highly liquid investments with maturities of three months or less at the date of origination.
Marketable Securities
The Company invests part of its excessive cash in equity securities, money market funds, debt and equity funds. Such investments are included in “Marketable securities” in the accompanying consolidated balance sheets. Trading securities represent securities bought and held primarily for sale in the near-term to generate income on short-term price differences and are stated at fair value. Realized and unrealized gains and losses are recorded in other income (expense).
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Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable includes commission receivables and is stated at net realizable values. The Company reviews its accounts receivable regularly to determine if a bad debt allowance is necessary at each quarter-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2017 and 2016.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Upon sale of retirement, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recorded in other income (expense).
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 and Intangible Assets
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.
Impairment of Long-Lived Assets Other than Goodwill
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.
Long-Term Investments
Long-term investments include government bonds held as available-for-sale and equity investments accounted for the cost method. Available-for-sale investments are carried at fair value and unrealized gains and losses as a result of changes in the fair value are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.
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.
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Convertible Bonds
Convertible debt is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20 governs the calculation of an embedded beneficial conversion. The amount of the value of beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. Many of the conversion features embedded in the Company’s notes are variable and are adjusted based on a discount to market prices which could cause an unlimited number of shares of common stock to be issued. In these cases, the Company records the embedded conversion feature as a derivative instrument, at fair value. The embedded conversion features are recorded as discounts when the notes become convertible. The excess of fair value of the embedded conversion feature over the carrying value of the debt is recorded as an immediate charge to operations. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts relating to the initial recording of the derivatives or beneficial conversion features will be amortized over the terms of the convertible bonds.
Revenue Recognition
The Company’s revenue is from insurance agency and brokerage services. The Company, through its subsidiaries and VIEs, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company 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 and brokerage services are considered complete and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of issuance of the policies, in which customers can cancel the contract without any fees. The Company is notified of such cancellations by the insurance companies. For the fiscal years ended December 31, 2017, 2016 and 2015, policy cancellations were $227,901, $340,086 and $291,325, respectively.
The Company pays commissions to its sales professionals when an insurance product is sold by the sales professionals. The Company recognizes commission revenue from insurance companies on a gross basis, and the commissions paid to its sales professionals are recognized as cost of revenue.
Income Taxes
The Company records income tax expense using the asset-and-liability method of accounting for deferred income taxes. Under this method, deferred taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that the deferred tax assets will not be realized.
When tax returns are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in general and administrative expenses in the consolidated statements of operations and other comprehensive income (loss).
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Fair Value of Financial Instruments
Fair value accounting establishes a framework for measuring fair value and expands disclosure about fair value measurements. Fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
· Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
· Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
The carrying amounts of financial assets and liabilities in the consolidated balance sheets for cash and cash equivalents, accounts payable and accrued expense approximate fair value due to the short-term duration of those instruments. See Note 24 for additional information on the fair values related to other financial assets and liabilities.
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Concentration of Risk
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”).
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, time deposits and accounts receivable. As of December 31, 2017 and 2016, approximately $1,512,000 and $1,382,000 of the Company’s cash and cash equivalents and time deposits held by financial institutions, was insured, and the remaining balance of approximately $33,949,000 and $24,312,000, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.
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:
| Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2015 | ||||||||||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 18,617,293 | 26 | % | $ | 23,684,774 | 34 | % | $ | 17,649,359 | 36 | % | ||||||||||||
| Taiwan Life Insurance Co., Ltd. (**) | 9,309,759 | 13 | % | 8,381,587 | 12 | % | 6,112,311 | 13 | % | |||||||||||||||
| TransGlobe Life Insurance Inc. | 8,168,837 | 11 | % | (*) | (*) | 4,729,565 | 10 | % | ||||||||||||||||
| Fubon Life Insurance Co., Ltd. | (*) | (*) | 7,167,163 | 10 | % | 6,744,014 | 14 | % | ||||||||||||||||
(*) Revenue for the year ended had not exceeded 10% or more of the consolidated revenue.
(**) Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.
As of December 31, 2017, 2016 and 2015, the Company’s accounts receivable from these companies were:
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||
| Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | Amount | % of Total Accounts Receivable | |||||||||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 3,430,661 | 26 | % | $ | 6,503,843 | 41 | % | $ | 3,689,404 | 43 | % | ||||||||||||
| Taiwan Life Insurance Co., Ltd. (**) | 2,192,668 | 17 | % | 1,973,410 | 13 | % | 994,978 | 11 | % | |||||||||||||||
| TransGlobe Life Insurance Inc. | 1,811,401 | 14 | % | (*) | (*) | % | 747,993 | 8 | % | |||||||||||||||
| Fubon Life Insurance Co., Ltd | (*) | (*) | 1,660,685 | 11 | % | 990,327 | 11 | % | ||||||||||||||||
(*) The related revenue for the year ended had not exceeded 10% or more of the consolidated revenue.
(**) Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.
The Company’s operations are in the PRC, Hong Kong and Taiwan. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC, Hong Kong and Taiwan, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, Hong Kong and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
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Operating Leases
Leases, where substantially all the rewards and risks of ownership of assets remain with the leasing company, that do not meet the capitalization criteria of FASB ASC Topic 840 “Leases,” are accounted for as operating leases.
Segment Reporting
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.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which could result in a loss to the Company which will be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies arising from legal proceedings pending against the Company or unasserted claims that may rise from such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates it is probable a material loss will be incurred and the amount of the loss can be reasonably estimated, then the estimated loss is accrued in the Company’s financial statements. If the assessment indicates a material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
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Variable Interest Entities
The Company follows FASB ASC Subtopic 810-10-05-8, “Consolidation of VIEs,” states that a VIE is a legal entity in which equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any one of the following three characteristics:
| a. | The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance | |
| b. | The obligation to absorb the expected losses of the legal entity | |
| c. | The right to receive the expected residual returns of the legal entity. |
Due to the PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, the Company operates its insurance agency and brokerage business in PRC primarily through Anhou, a VIE with its two subsidiaries in the PRC.
On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders entered into the VIE Agreements (the “First VIE Agreements”) which included:
| · | Exclusive Business Cooperation Agreement (“EBCA” or the “Agreement”) through which: (1) CU WFOE has the right to provide Anhou with complete technical support, business support and related consulting services during the term of this Agreement; (2) Anhou agrees to accept all the consultations and services provided by CU WFOE. Anhou further agrees that unless with CU WFOE’s prior written consent, during the term of this Agreement, Anhou shall not directly or indirectly accept the same or any similar consultations and/or services provided by any third party and shall not establish similar cooperation relationship with any third party regarding the matters contemplated by this Agreement; (3) Anhou shall pay CU WFOE fees equal to 90% of the net income of Anhou, and the payment is quarterly, and (4) CU WFOE retains all exclusive and proprietary rights and interests in all rights, ownership, interests and intellectual properties arising out of or created during the performance of this Agreement. |
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.
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.
| · | Power of Attorney under which each shareholder of Anhou executed an irrevocable power of attorney to authorize CU WFOE to act on behalf of the shareholder to exercise all of his/her rights as equity owner of Anhou, including without limitation to: (1) attend shareholders’ meetings of Anhou; (2) exercise all the shareholder’s rights and shareholder’s voting rights that he/she is entitled to under the laws of the PRC and Anhou’s Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the shareholder’s shareholding in part or in whole, and (3) designate and appoint on behalf of the shareholder the legal representative, the director, supervisor, the chief executive officer and other senior management members of Anhou. |
| · | Option Agreement under which the shareholders of Anhou irrevocably granted CU WFOE or its designated person an exclusive and irrevocable right to acquire, at any time, the entire portion of Anhou’s equity interest held by each shareholder of Anhou, or any portion thereof, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in Anhou shall be the lower of (i) RMB1 ($0.16) and (ii) the lowest price allowed by relevant laws and regulations. If appraisal is required by the laws of PRC when CU WFOE exercises the Equity Interest Purchase Option (as defined in the Option Agreement), the Parties shall negotiate in good faith and based on the appraisal result make necessary adjustment to the Equity Interest Purchase Price (as defined in the Option Agreement) so that it complies with any and all then applicable laws of the PRC. The term of this Agreement is 10 years, and may be renewed at CU WFOE’s election. |
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| · | Share Pledge Agreement under which the owners of Anhou pledged their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the EBCA. Pursuant to this agreement, if Anhou fails to pay the exclusive consulting or service fees in accordance with the EBCA, CU WFOE shall have the right, but not the obligation, to dispose of the owners of Anhou’s equity interests in Anhou. This Agreement shall be continuously valid until all payments due under the EBCA have been repaid by Anhou or its subsidiaries. |
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:
| 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. |
| b. | The equity investment or some part thereof is returned to the equity investors, and other interests become exposed to expected losses of the legal entity. |
| c. | The legal entity undertakes additional activities or acquires additional assets, beyond those anticipated at the later of the inception of the entity or the latest reconsideration event, that increase the entity’s expected losses. |
| d. | The legal entity receives an additional equity investment that is at risk, or the legal entity curtails or modifies its activities in a way that decreases its expected losses. |
The Company reviews the VIE’s status on an annual basis. For the years ended December 31, 2017, 2016 and 2015, no event including a-d above took place that would change the Company’s primary beneficiary status.
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New Accounting Pronouncements and Other Guidance
Guidance for Accounting Impacts of the Tax Cuts and Jobs Act
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted into law and the new legislation contains several key tax provisions that impact the Company, including a reduction of the corporate income tax rate to 21% effective for tax years beginning after December 31, 2017 and the Transition Tax, among others. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act and provides for a measurement period that should not extend beyond one year from the enactment date of the Tax Reform Act. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting under ASC 740 is complete. Adjustments to incomplete and unknown amounts will be recorded and disclosed prospectively during the measurement period. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Reform 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.
Adoption of New Accounting Standards
Balance Sheet Classification of Deferred Taxes
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.
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Accounting Standards Issued but Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which, when effective, will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of the standard is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance is effective for us in the first quarter of 2018. Two methods of transition are permitted upon adoption: full retrospective and modified retrospective. The Company will adopt this standard in the first quarter of 2018 using a modified retrospective adoption approach. Under this approach, prior periods will not be restated. Rather, revenues and other disclosures for prior periods will be provided in the notes to the financial statements as previously reported under the current revenue standard, and the cumulative effect of initially applying the new standard will be recognized as an adjustment to retained earnings as of January 1, 2018. An assessment to determine the impacts of the new accounting standard has been performed. The Company implemented new accounting and operational processes which were a result of the new guidance and analyzed the impact of these changes. The primary impacts of the new standard to the Company are expected to be as follows:
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.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (Statement of Financial Accounting Standards No. 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements.
Credit Losses
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.
Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash 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. The guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
Simplifying the Test for Goodwill Impairment
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.
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The Company does not believe that new accounting pronouncements other than disclosed above will have a material impact on its financial position, results of operations or cash flows.
NOTE 3 – CASH AND CASH EQUIVALENTS AND TIME DEPOSITS
Cash and cash equivalents and time deposits consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Cash and cash equivalents: | ||||||||
| Cash in banks and on hand | $ | 11,774,489 | $ | 17,713,744 | ||||
| Cash equivalent – re-purchase bonds | 2,697,628 | - | ||||||
| Time deposits – with original maturities less than three months | 1,001,832 | 2,455,711 | ||||||
| 15,473,949 | 20,169,455 | |||||||
| Time deposits – with original maturities over three months but less than one year | 21,470,113 | 5,352,347 | ||||||
| Total cash and cash equivalents and time deposits | $ | 36,944,062 | $ | 25,521,802 | ||||
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.
As of December 31, 2017, the Company had time deposits of approximately $1,686,017 (NTD 50,000,000) pledged as collateral for short-term loans. The amount was recorded in time deposits with original maturities over three months but less than one year. See Note 13 for the information of short-term loans.
NOTE 4 – MARKETABLE SECURITIES
Marketable securities represented investment in equity securities of listed stocks and funds as follows:
| December 31, 2017 | ||||||||||||
| Gross | ||||||||||||
| Unrealized | Total | |||||||||||
| Cost | Gains | Fair Value | ||||||||||
| Trading: | ||||||||||||
| Funds | $ | 33,117 | $ | 264 | $ | 33,381 | ||||||
| $ | 33,117 | $ | 264 | $ | 33,381 | |||||||
| December 31, 2016 | ||||||||||||
| Fair Value at | Gross | Fair Value at | ||||||||||
| December 31, | Unrealized | December 31, | ||||||||||
| 2015 | Gains | 2016 | ||||||||||
| Trading: | ||||||||||||
| Stocks | $ | 28,863 | $ | 9,900 | $ | 38,763 | ||||||
| Funds | 2,340,219 | 47,888 | 2,388,107 | |||||||||
| $ | 2,369,082 | $ | 57,788 | $ | 2,426,870 | |||||||
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NOTE 5 – STRUCTURED DEPOSIT
On July 7, 2017, the Company entered into an agreement with Cathay United Bank to purchase a 185-day structured deposit in effective on July 7, 2017 and mature on January 8, 2018, with principal approximately $1,229,563 (RMB8,000,000). The structured deposit has an embedded foreign exchange option linked to US Dollar to China Yuan offshore exchange rate (“USDCNH”). Strike price of the structured deposit is set at 7.3 USDCNH and the fixing date is on January 4, 2018. Yield rate will be at 4.1% per annum when the USDCNH is above or equal strike price on the fixing date, or at 3.9% per annum when blow. As of December 31, 2017, the Company used 3.9% per annum to calculate the interest because of USDCNH below the strike price.
| December 31, 2017 | ||||||||||||
| Cost | Gross Unrealized Losses | Total Fair Value | ||||||||||
| Structured deposit | $ | 1,278,551 | $ | (30,211 | ) | $ | 1,248,340 | |||||
| $ | 1,278,551 | $ | (30,211 | ) | $ | 1,248,340 | ||||||
NOTE 6 – OTHER CURRENT ASSETS
The Company’s other current assets consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Loan receivable | $ | 1,510,347 | $ | 1,486,846 | ||||
| Prepaid rent and rent deposits | 213,688 | 199,022 | ||||||
| Prepaid expenses | 87,947 | 64,678 | ||||||
| Other receivables | 135,996 | 50,683 | ||||||
| Refundable business tax | 150,221 | 17,441 | ||||||
| Interest receivable | 94,887 | 12,648 | ||||||
| Total other current assets | $ | 2,193,086 | $ | 1,831,318 | ||||
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.
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following, as of December 31, 2017 and 2016:
| December 31, 2017 | December 31,2016 | |||||||
| Office equipment | $ | 1,198,456 | $ | 1,070,061 | ||||
| Office furniture | 103,025 | 168,658 | ||||||
| Leasehold improvements | 761,522 | 581,964 | ||||||
| Transportation equipment | 221,477 | 132,344 | ||||||
| Other equipment | 90,990 | 87,302 | ||||||
| Total | 2,375,470 | 2,040,329 | ||||||
| Less: accumulated depreciation | (1,429,168 | ) | (1,113,424 | ) | ||||
| Total property, plant and equipment, net | $ | 946,302 | $ | 926,905 | ||||
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Depreciation expense was $325,212, $315,344 and $332,715 for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE 8 – INTANGIBLE ASSETS
As of December 31, 2017 and 2016, the Company’s intangible assets consisted the following:
| December 31, 2017 | December 31, 2016 | |||||||
| Software | $ | 1,797,227 | $ | 1,500,339 | ||||
| Less: accumulated amortization | (1,021,449 | ) | (716,120 | ) | ||||
| Total intangible assets | $ | 775,778 | $ | 784,219 | ||||
Estimated future intangible assets amortization as of December 31, 2017 is as follows:
| Years ending December 31, | Amount | |||
| 2018 | $ | 258,824 | ||
| 2019 | 222,200 | |||
| 2020 | 190,875 | |||
| 2021 | 78,270 | |||
| 2022 | 25,609 | |||
| Thereafter | - | |||
| Total | $ | 775,778 | ||
Amortization expense was $235,972, $310,684 and $130,486 for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE 9 – GOODWILL
Goodwill arose from the acquisition of PFAL in April 2014. The fair value of the net identifiable assets of PFAL at acquisition date was $324,871, and 51% of which was $165,684. The Company recorded $31,651 excess of purchase price over the fair value of assets acquired and liabilities assumed as goodwill. No intangible assets were identified as of the acquisition date. As of December 31, 2017 and 2016, there were no indications of the impairment of the goodwill.
NOTE 10 – LONG-TERM INVESTMENTS
As of December 31, 2017 and 2016, the Company’s long-term investments consisted the following:
| December 31, 2017 | December 31, 2016 | |||||||
| Equity investment accounted for the cost method | $ | 1,296,039 | $ | 1,190,558 | ||||
| Government bonds held for available-for-sale | 103,723 | 94,506 | ||||||
| Total long-term investments | $ | 1,399,762 | $ | 1,285,064 | ||||
Equity investment accounted for the cost method
| Type | Investee | Investment Ownership |
December 31, 2017 Amount |
December 31, 2016 Amount |
||||||||||
| Cost Method | Genius Insurance Broker Co., Ltd | 15.64 | % | $ | 1,296,039 | $ | 1,190,558 | |||||||
Government bonds held for available-for-sale
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.
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| December 31, 2017 | ||||||||||||
| Fair Value at | Gross | Fair Value at | ||||||||||
| December 31, | Unrealized | December 31, | ||||||||||
| 2016 | Gains | 2017 | ||||||||||
| Government bonds | 94,506 | 9,217 | 103,723 | |||||||||
| $ | 94,506 | $ | 9,217 | $ | 103,723 | |||||||
| December 31, 2016 | ||||||||||||
| Fair Value at | Gross | Fair Value at | ||||||||||
| December 31, | Unrealized | December 31, | ||||||||||
| 2015 | Gains | 2016 | ||||||||||
| Government bonds | 94,381 | 125 | 94,506 | |||||||||
| $ | 94,381 | $ | 125 | $ | 94,506 | |||||||
NOTE 11 – OTHER ASSETS
The Company’s other assets consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Rental deposits | $ | 508,352 | $ | 445,283 | ||||
| Register capital deposit | 1,075,867 | - | ||||||
| Restricted cash | 469,615 | 248,803 | ||||||
| Prepayments | 140,404 | 5,576 | ||||||
| Deferred tax assets | 123,406 | 84,597 | ||||||
| Other | 82,231 | 1,456 | ||||||
| Total other assets | $ | 2,399,875 | $ | 785,715 | ||||
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.
NOTE 12 – TAXES PAYABLE
The Company’s taxes payable consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| PRC Tax | $ | 270,267 | $ | 163,461 | ||||
| Hong Kong Tax | 5,527 | 14,233 | ||||||
| Taiwan Tax | 3,232,996 | 2,072,175 | ||||||
| Total taxes payable | $ | 3,508,790 | $ | 2,249,869 | ||||
PRC tax represents income tax and other taxes accrued according to PRC tax law by the Company’s subsidiaries and CAE in the PRC. Taiwan tax represents income tax and other taxes accrued according to Taiwan tax law by the Company’s subsidiaries and branches in Taiwan. Hong Kong tax represents income tax accrued according to Hong Kong tax law by the Company’s subsidiaries in Hong Kong.
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NOTE 13 – SHORT-TERM LOANS
The Company’s short-term loans consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Credit facility, O-Bank | $ | 1,400,000 | $ | - | ||||
| Credit facility, CTBC | 950,000 | - | ||||||
| Total short-term loans | $ | 2,350,000 | $ | - | ||||
The Company entered into three credit agreements with several commercial banks during the fiscal year 2017 as follows:
| · | O-Bank Co., Ltd. (“O-Bank”): 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 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. |
| · | CTBC Bank Co., Ltd. (“CTBC”): On November 17, 2017, the Company entered into a line of credit agreement with CTBC, pursuant to which the Company has a credit facility of $1,000,000 from November 17, 2017 to July 31, 2018. Borrowings under the agreement bear interest at the CTBC’s cost of fund plus a margin of 1%. On December 28, 2017, the Company draw down a borrowing of $950,000 with interest at a rate of 3.30% per annum and the principal amount was due on January 29, 2018. Law Broker is the guarantor of the credit facility. On January 29, 2018, the Company paid off the entire principal and interest of the borrowing. |
| · | Far Eastern International Bank(“FEIB”): On September 21, 2017, the Company entered into a line of credit agreement with FEIB for a credit facility of $2,000,000 from September 21, 2017 to September 21, 2018. Borrowings under the agreement bear interest at the higher of the LIBOR rate plus a margin of 1.3% or the TAIFX3 rate plus a margin of 1.25%. As of December 31, 2017, there was no amount drawn on the credit facility. |
Total interest expense of short-term loans was $1,531 for the year ended December 31, 2017.
NOTE 14 – CONVERTIBLE BONDS
The Company intends to issue the convertible bonds during the period commencing on June 23, 2016 and ended on September 30, 2016 with an aggregate principal amount of up to $10,000,000. The convertible bonds shall be sold in units, with each unit being $100,000 in principal amount. The Company would not make any offers or sales of the convertible bonds to U.S. persons and there would be no directed selling efforts in the United States. The bonds would not be convertible until two years from the issuance date and with an annual interest rate of 6% payable on a quarterly basis. The purchaser of the convertible bonds might cause the Company to redeem the convertible bonds before the end of the term, subject to certain penalties depending on the holding period of the convertible bonds when redeemed. Upon the expiration of the term of the convertible bond, the bond holder may, in its sole discretion, choose to collect the payment of full principal amount of the convertible bond together with any interest accrued or convert the convertible bond into common shares of the Company at the conversion price. The conversion price shall be the product of (i) the average closing trading price for the 10 business days immediately prior to the conversion date times (ii) 80%.
On June 23, 2016, the Company had 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, 2017 and 2016, the Company had an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $12,000 and $6,363 for the years ended December 31, 2017 and 2016, respectively.
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NOTE 15 – OTHER CURRENT LIABILITIES
Other current liabilities were as follows, as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Commissions payable to sales professionals | $ | 6,415,071 | $ | 11,869,181 | ||||
| AIATW and Farglory | 1,237,684 | 2,090,718 | ||||||
| Due to previous shareholders of AHFL | - | 480,559 | ||||||
| Accrued business tax | 487,586 | 469,259 | ||||||
| Withholding tax | 347,824 | 362,954 | ||||||
| Accrued tax penalties | - | 370,000 | ||||||
| Accrued bonus | 1,730,278 | 1,935,091 | ||||||
| Salary payable to administrative staff | 1,194,725 | 183,066 | ||||||
| Accrued labor, health insurance and employee retirement plan | 114,556 | 92,085 | ||||||
| Accrued advertisement expense | - | 32,525 | ||||||
| Accrued bonus for Ms. Chao | 210,752 | - | ||||||
| Other accrued liabilities | 1,051,112 | 754,471 | ||||||
| Total other current liabilities | $ | 12,789,588 | $ | 18,639,909 | ||||
Commissions payable to sales professionals, accrued bonus, salaries payable to administrative staff, and accrued advertisement expense are usually settled within 12 months. Accrued business tax, withholding tax, accrued labor, health insurance and employee retirement plan will be paid to the related government departments within one month. Accrued tax penalties are estimated potential penalty in the event of a tax audit. Other accrued liabilities consist of accrued interest, accrued marketing expense and operating expenses payable for training and travelling.
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.
NOTE 16 – LONG-TERM LOANS
The Company’s long-term loans consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Loan A, interest at 8% per annum, maturity date May 15, 2019 | $ | 130,641 | $ | 144,015 | ||||
| Loan B, interest at 8% per annum, maturity date July 20, 2019 | 118,345 | 110,892 | ||||||
| Total long-term loans | $ | 248,986 | $ | 254,907 | ||||
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.
On July 20, 2016, Anhou entered into a loan agreement (“Loan B”) with an individual third party. The long-term Loan Agreement provided for approximately $118,345 (RMB 770,000) and $110,892 (RMB 770,000), as of December 31, 2017 and 2016, respectively, loan to the Company. The long-term Loan B bears an interest rate of 8% per annum and interest is payable annually. The principal and the accrued interest will be due on July 20, 2019.
Total interest expenses for the long-term loans were $20,737 and $11,755, respectively, for the years ended December 31, 2017 and 2016.
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NOTE 17 – LONG-TERM LIABILITIES
The Company’s long-term liabilities consisted of the following as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Unearned revenue – AIATW | $ | 4,239,130 | $ | 4,742,272 | ||||
| Unearned revenue – Farglory | - | 495,615 | ||||||
| Deferred tax liabilities | 122,551 | - | ||||||
| Due to previous shareholders of AHFL | 480,559 | - | ||||||
| Other long-term liabilities | - | 77,440 | ||||||
| Total long-term liabilities | $ | 4,842,240 | $ | 5,315,327 | ||||
Unearned revenue – AIATW
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIATW, the purpose to which is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The original term of the Alliance Agreement was from June 1, 2013 to May 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL an execution fee approximately $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762, the “Execution Fee”), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “Supplemental Agreement”) with AIATW. In the Supplemental Agreement, the performance targets and the provision about refunding the Execution Fee on a pro rata basis when the performance targets are not met were revised.
On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW. To the extent permitted by applicable laws and regulations, AHFL shall assist and encourage any insurance agency company or insurance brokerage company duly approved by the competent government authorities of Taiwan (the “Appointed Broker/Agent”), to cooperate with AIATW for the promotion of life insurance products of AIATW. Pursuant to the Amendment No. 2, the expiration date of the Strategic Alliance Agreement was extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 was suspended. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of Execution Fees. On March 15, 2016, AHFL issued a promise letter (the “2016 Letter”) to AIATW that AHFL is required to (i) fulfill sales targets and (ii) the 13-month persistency ratio.
On June 14, 2017, with AIATW’s consent, the 2016 Letter was 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). Pursuant to the Amendment No. 3, both AHFL and AIATW agreed to adjust certain terms and conditions set forth this amendment, among which (i) except the first contract year (April 15th, 2013 to September 30th, 2014), the sales target of the alliance between the parties shall be changed to (a) value of new business (“VONB”) and (b) the 13-month persistency ratio; and (ii) AIATW will calculate and recognize the VONB and 13-month persistency ratio each contract year and inform the Company the result; and (iii) the Company agrees to return the basic business promotion fees to AIATW within thirty (30) days of receipt of the notice sent by AIATW if the Company fails to meet the targets set forth in Amendment No. 3, AIATW reserves the right to offset such amount against the amount payable by it to the Company; and (iv) upon the termination of the Alliance Agreement and its amendments pursuant to the Section 8.2 of the Alliance Agreement, both parties agreed to calculate the amount to be returned or repaid, as applicable, based on the past and current contract years. The Company shall return the basic business promotion fees at NTD 330,000,000 for each contract years within one month after the termination.
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The Company recognizes AIATW’s revenue when the life insurance products provided by AIATW are met: (i) persuasive evidence of an agreement between the insurance company and insured exists, (ii) insurance brokerage services have been provided, (iii) the fee to be paid by the related insurer to the Company for such services is fixed or determinable, and (iv) the collectability of the fee is reasonably assured. The refund is primarily due to the portion of performance sales targets are not met in that contract year. The following table presents the amounts recognized as revenue and the refunded for each contract year:
Contract Year |
Period | Execution Fees | Revenue Amount |
Revenue VAT Amount |
Refund Amount |
Refund
VAT Amount |
||||||||||||||
| First | 4/15/2013 ~ 9/30/2014 | NTD | 50,000,000 | NTD | 27,137,958 | (1) | NTD | 1,356,898 | NTD | 20,481,090 | (1) | NTD | 1,024,054 | |||||||
| Second | 1/1/2016 ~ 12/31/2016 | NTD | 35,000,000 | NTD | 12,855,000 | (2) | NTD | 642,750 | NTD | 20,478,333 | (2) | NTD | 1,023,917 | |||||||
| Third | 1/1/2017 ~ 12/31/2017 | NTD | 33,000,000 | NTD | 12,628,201 | (3) | NTD | 631,410 | NTD | 18,800,370 | (3) | NTD | 940,019 | |||||||
| Fourth | 1/1/2018 ~ 12/31/2018 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| Fifth | 1/1/2019 ~ 12/31/2019 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| Sixth | 1/1/2020 ~ 12/31/2020 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| Seventh | 1/1/2021 ~ 12/31/2021 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||
| TOTAL | NTD | 250,000,000 | NTD | 52,621,159 | NTD | 2,631,058 | NTD | 59,759,793 | NTD | 2,987,990 | ||||||||||
| (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. | |
| (2) | For the year ended December 31, 2017, the Company recognized the second contract year’s revenue amount of $422,883 (NTD12,855,000), net of VAT, and refunded the amount of $690,537 (NTD20,478,333), net of VAT, for the same contract period. | |
| (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.
Unearned revenue – Farglory
On April 20, 2016, the Company entered into a service agreement (“Service Agreement”) with Farglory Life Insurance Co., Ltd. (“Farglory”). The Company is 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. On January 2, 2018, both parties reached the final agreement and the Company received termination notice from Farglory. Pursuant to the termination notice, the Company should refund approximately $603,729 (NTD17,904,000) to Farglory. As of December 31, 2017 and 2016, the Company had long-term liabilities amount of nil and $495,615, respectively, and amounts in the current liabilities of $603,729 and $123,904, respectively, related to this Service Agreement. For the year ended December 31, 2017, the Company recognized revenue amount of $68,951 (NTD2,096,000) and refund amount of $603,729 related to this Service Agreement.
Due to previous shareholders of AHFL
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.
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Other long-term liabilities
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.
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. Law Broker expects that none of the above-mentioned bonuses are to be paid prior to May 2019, and therefore it has recorded as long-term liabilities representing the corresponding portion of such bonuses accrued. On March 13, 2017, Law Broker and Ms. Chao entered into another amendment to Engagement Agreement dated May 10, 2016 to specify 1) Ms. Chao’s pension calculation assumption and start date, and 2) the non-competition provision start date. As of December 31, 2017 and 2016, the balance of such accrued long-term liabilities was $0 and $77,440, respectively. The Company had current liabilities amounted $210,752 and $0 as of December 31, 2017 and 2016, respectively, related to accrued bonus for Ms. Chao.
NOTE 18 – PREFERRED STOCK
On January 28, 2011, the Company increased the number of authorized shares of common stock from 30,000,000 to 100,000,000 and authorized 10,000,000 shares of preferred stock with $0.00001 par value. It currently has 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) issued and outstanding as of December 31, 2017 and 2016. The Series A Stock has the following rights and preferences:
| · | Voting Rights. Except as otherwise provided by law, the Series A Stock and the common stock vote together on all matters submitted to a vote of the Company’s shareholders. Each holder of Series A Stock is entitled to ten votes for each share of Series A Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Registrant. |
| · | Series A Board Designee and Board Restriction. In addition to the voting rights disclosed above, the holders of the Series A Stock shall be entitled to appoint one director (the “Series A Director”). No Board resolution regarding certain material Company actions can be made without the affirmative vote of the Series A Director. |
| · | 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. |
| · | Liquidation. In the event of a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Registrant, the holders of common stock and the holders of Series A Stock shall be entitled to share equally on a per share basis, in all assets of the Registrant of whatever kind available for distribution. |
| · | Conversion Rights. The holders of the Series A Stock have the right to convert their shares thereof at any time into shares of the Registrant’s common stock. Each share of Series A Stock is convertible into one share of common stock. |
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.
Business Combinations. In any merger, consolidation, reorganization or other business combination, the consideration received per share by the holders the common stock and the holders of the Series A Stock in such merger, consolidation, reorganization or other business combination shall be identical; provided however, that if such consideration consists, in whole or in part, of certain equity interests, the rights and limitations of such equity interests may differ from the extent that the rights and limitations of the common stock and the Series A Stock differ.
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Fully Paid and Nonassessable. All of the Company’s outstanding shares of preferred stock are fully paid and nonassessable.
From the qualitative aspect, the Company notes the following regarding this deemed compensation:
| Ø | Does not violate any debt or other contract covenants; |
| Ø | Does not change any earnings or EPS trends; |
| Ø | Does not affect any previous earnings or EPS guidance; |
| Ø | Does not affect any segment or class of revenue; |
| Ø | Does not affect any regulatory compliance matters; | |
| Ø | Does not affect cash compensation of management; | |
| Ø | Does not involve concealment of an unlawful act |
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.
All 1,000,000 shares of Series A Preferred Stock were reclassified from the 1,000,000 shares of common stock held by Mr. Mao and no additional consideration was paid by Mr. Mao in connection with the Reclassification. The preferred stock has no material quantitative preferences over common stock, such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
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NOTE 19 – STATUTORY RESERVES
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.
Pursuant to the PRC regulations, the Company’s CAE are required to transfer 10% of net profits, as determined under the PRC accounting regulations, to a Statutory Common Reserve Fund (“Reserve Fund”). Appropriation to the Reserve Fund may cease when the fund equals 50% of a company’s registered capital or when a company has accumulated losses. The transfer to this reserve must be made before distribution of dividends to shareholders. The Company’s CAE did not appropriate such reserve as they have accumulated losses.
NOTE 20 – NON-CONTROLLING INTERESTS
Non-controlling interests consisted of the following as of December 31, 2017 and 2016:
| Name of Controlled Entity | % of Non- controlling Interest | As of December 31, 2016 | Net Income of Non-Controlling Interests | Other Comprehensive Gain/(Loss) of Non-Controlling Interests | As of December 31, 2017 | |||||||||||||||
| Law Enterprise | 34.05 | % | $ | 17,386 | $ | (307,217 | ) | $ | 46,591 | $ | (243,240 | ) | ||||||||
| Law Broker | 34.05 | % | 9,621,159 | 3,387,038 | 892,144 | 13,900,341 | ||||||||||||||
| PFAL | 49.00 | % | 232,414 | (3,817 | ) | (518 | ) | 228,079 | ||||||||||||
| MKI | 49.00 | % | (1,569 | ) | (548 | ) | - | (2,117 | ) | |||||||||||
| PA Taiwan | 49.00 | % | (95,448 | ) | (52,169 | ) | 2,175 | (145,442 | ) | |||||||||||
| PTC Nanjing | 49.00 | % | (2,400 | ) | (60 | ) | 495 | (1,965 | ) | |||||||||||
| Total | $ | 9,771,542 | $ | 3,023,227 | $ | 940,887 | $ | 13,735,656 | ||||||||||||
| Name of Controlled Entity | % of Non- controlling Interest | As of December 31, 2015 |
Non-Controlling | Other Comprehensive Gain/(Loss) of Non-Controlling Interests | As of December 31, 2016 | |||||||||||||||
| Law Enterprise | 34.05 | % | $ | 199,699 | $ | (307,583 | ) | $ | 125,270 | $ | 17,386 | |||||||||
| Law Broker | 34.05 | % | 7,197,128 | 2,402,245 | 21,786 | 9,621,159 | ||||||||||||||
| PFAL | 49.00 | % | 206,098 | 26,411 | (95 | ) | 232,414 | |||||||||||||
| MKI | 49.00 | % | (1,065 | ) | (504 | ) | - | (1,569 | ) | |||||||||||
| PA Taiwan | 49.00 | % | (26,292 | ) | (70,341 | ) | 1,185 | (95,448 | ) | |||||||||||
| PTC Nanjing | 49.00 | % | (837 | ) | (904 | ) | (659 | ) | (2,400 | ) | ||||||||||
| Total | $ | 7,574,731 | $ | 2,094,324 | $ | 147,487 | $ | 9,771,542 | ||||||||||||
Restatement did not impact to non-controlling interests, see Note 27 for Restatement.
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NOTE 21 – INCOME TAX
Provision (benefit) for income taxes for the year ended December 31, 2017 consisted of:
| Year ended December 31, 2017 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | - | $ | - | $ | 3,426,326 | $ | 3,426,326 | ||||||||
| Deferred | - | - | 87,391 | 87,391 | ||||||||||||
| Total | $ | - | $ | - | $ | 3,513,717 | $ | 3,513,717 | ||||||||
Provision (benefit) for income taxes for the year ended December 31, 2016 consisted of:
| Year ended December 31, 2016 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | - | $ | - | $ | 2,207,581 | $ | 2,207,581 | ||||||||
| Deferred | - | - | (87,983 | ) | (87,983 | ) | ||||||||||
| Total | $ | - | $ | - | $ | 2,119,598 | $ | 2,119,598 | ||||||||
Provision (benefit) for income taxes for the year ended December 31, 2015 consisted of:
| Year ended December 31, 2015 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | - | $ | - | $ | 1,553,650 | $ | 1,553,650 | ||||||||
| Deferred | - | - | (34,424 | ) | (34,424 | ) | ||||||||||
| Total | $ | - | $ | - | $ | 1,519,226 | $ | 1,519,226 | ||||||||
Significant components of the deferred tax assets and liabilities for income taxes as of December 31, 2017 and 2016 consisted of the following:
| 2017 | 2016 | |||||||
| Deferred tax assets | ||||||||
| Net operating loss carry-forward | $ | 874,934 | $ | 993,050 | ||||
| Others | 123,406 | 84,597 | ||||||
| Total | $ | 998,340 | $ | 1,077,647 | ||||
| Valuation allowance | (874,934 | ) | (993,050 | ) | ||||
| Net deferred tax assets - noncurrent | $ | 123,406 | $ | 84,597 | ||||
| Deferred tax liabilities - noncurrent | $ | 122,551 | $ | - | ||||
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.
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CU WFOE and the VIE in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments, except for Jiangsu. For Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income.
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.
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 profit 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, 2017, 2016 and 2015:
| Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2015 | ||||||||||
| US statutory rate | 34 | % | 34 | % | 34 | % | ||||||
| Tax rate difference | (18 | )% | (20 | )% | (22 | )% | ||||||
| Tax base difference | - | % | 1 | % | (1 | )% | ||||||
| Income tax on undistributed earnings | - | % | 10 | % | 10 | % | ||||||
| Loss in subsidiaries | 3 | % | 5 | % | 15 | % | ||||||
| Un-deductible and non-taxable items | 7 | % | - | % | - | % | ||||||
| Effective tax rate | 26 | % | 30 | % | 36 | % | ||||||
Un-deductible and non-taxable items mainly represent un-deductible expenses according to PRC tax laws and the non-taxable tax income or loss.
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 and the potential penalty was estimated to be $370,000 in the event of a tax audit, which has been accrued in the fiscal year ended December 31, 2013. The Company reversed the tax penalty of $370,000 in the fiscal year ended December 31, 2017 as of a result of the statutes of limitations for examination has expired.
NOTE 22 – RELATED PARTY TRANSACTIONS
Due to related parties
The following summarized the Company’s loans payable related parties as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Due to Mr. Mao (CEO of the Company) | $ | 409,054 | $ | 361,379 | ||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li*) | - | 32,374 | ||||||
| Due to Mr. Zhu (Legal Representative of Jiangsu) | 2,128 | 1,994 | ||||||
| Ms. Lu (Shareholder of Anhou) | 161,380 | - | ||||||
| Due to Yuli Broker (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to Yuli Investment (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to I Health Management Corp*** | 17,703 | 3,724 | ||||||
| Total | $ | 590,265 | $ | 400,001 | ||||
* Chwan Hau Li is a Director of the Company
** Mr. Lee is the Director of Law Broker
*** 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.
| 95 |
Debt Forgiveness – Related Parties
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.
Lease Agreements
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.
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. The Company recorded rent income of $564 and $279, respectively, for the years ended December 31, 2017 and 2016.
Advisory Agreements
On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $42,000 (NTD1,275,000). For the year ended December 31, 2017, The Company had cost of revenue related to I Health amounted $13,315. The Company has cost of revenue and due to I Health totaled $25,130 and $3,724, respectively, for the year ended and as of December 31, 2016.
On December 7, 2016, the Company entered into an advisory agreement with Fu Chang Li (“Mr. Li,” the Director of the Company). Pursuant to this Advisory Agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. On December 7, 2017, both parties agreed to extend this advisory agreement from December 7, 2017 to December 6, 2018. The total advisory fee was approximately $59,000 (NTD1,800,000). The Company had general and administrative expense related to this advisory agreement amounted $59,214 and $0 for the years ended December 31, 2017 and 2016, respectively.
Consulting Agreement
On November 1, 2016, the Company entered into a consulting agreement with Apex Biz Solution Limited. (“Apex,” was formerly known as Prime Technology Corp.) Apex and PFAL are related parties of the Company because they are owned by the Company’s managment. According to the Agreement, the Company would provide administrative operational consulting services to Apex from November 1, 2016 through December 31, 2021. As of December 31, 2017 and 2016, the Company had account receivable amounted $17,231 and $6,660, respectively. The Company also had revenue amounted $50,053 and $6,356 for the years ended December 31, 2017 and 2016, respectively.
NOTE 23 – COMMITMENTS
Operating Leases
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:
| Twelve months ending December 31, 2018 | $ | 2,022,510 | ||
| Twelve months ending December 31, 2019 | 877,362 | |||
| Twelve months ending December 31, 2020 | 197,971 | |||
| Twelve months ending December 31, 2021 | 50,461 | |||
| Twelve months ending December 31, 2022 | 14,199 | |||
| Thereafter | - | |||
| Total | $ | 3,162,503 |
| 96 |
NOTE 24 – FINANCIAL RISK MANAGEMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Risk Management
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 Company’s BOD oversees how management monitors compliance with the Company’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company.
(a) Credit risk
The Company’s credit risk arises principally from accounts and other receivables, pledged deposits and cash and cash equivalents. Management has a credit policy in place and monitors exposures to these credit risks on an ongoing basis. The carrying amounts of trade and other receivables, pledged deposits and cash and cash equivalents represent the Company’s maximum exposure to credit risks. Accounts receivable are due within 30 days from the date of billing.
(b) Liquidity risk
The BOD of the Company is responsible for the overall cash management and raising borrowings to cover expected cash demands. The Company regularly monitors its liquidity requirements, to ensure it maintains sufficient reserves of cash and readily realizable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.
(c) Currency risk
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.
| 97 |
Fair Value of Financial Instruments
The following table presents the fair value and carrying value of the Company’s financial assets and liabilities as of December 31, 2017:
| Fair Value | Carrying | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||
| Assets | ||||||||||||||||
| Time deposits | $ | - | $ | 22,471,945 | $ | - | $ | 22,471,945 | ||||||||
| Marketable securities: | ||||||||||||||||
| Fund | 33,381 | - | - | 33,381 | ||||||||||||
| Structured deposit | - | 1,248,340 | - | 1,248,340 | ||||||||||||
| Loan receivable (Other current assets in Note 6) | - | - | 1,510,347 | 1,510,347 | ||||||||||||
| Long-term investment: | ||||||||||||||||
| Equity investment | - | - | 1,941,800 | 1,296,039 | ||||||||||||
| Government bonds | - | 103,723 | - | 103,723 | ||||||||||||
| Liabilities | ||||||||||||||||
| Short-term loans | $ | - | $ | - | $ | 2,350,000 | $ | 2,350,000 | ||||||||
| Due to related parties | - | - | 590,265 | 590,265 | ||||||||||||
| Convertible bonds | - | - | 200,000 | 200,000 | ||||||||||||
| Long-term loans | - | - | 248,986 | 248,986 | ||||||||||||
The following table presents the fair value and carrying value of the Company’s financial assets and liabilities as of December 31, 2016:
| Fair Value | Carrying | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||
| Assets | ||||||||||||||||
| Time deposits | $ | - | $ | 7,808,058 | $ | - | $ | 7,808,058 | ||||||||
| Marketable securities: | ||||||||||||||||
| Stocks | 38,763 | - | - | 38,763 | ||||||||||||
| Funds | 2,388,107 | - | - | 2,388,107 | ||||||||||||
| Loan receivable (Other current assets in Notes 6) | - | - | 1,486,846 | 1,486,846 | ||||||||||||
| Long-term investment: | ||||||||||||||||
| Equity investment | - | - | 1,288,279 | 1,190,558 | ||||||||||||
| Government bonds | - | 94,506 | - | 94,506 | ||||||||||||
| Liabilities | ||||||||||||||||
| Due to related parties | $ | - | $ | - | $ | 400,001 | $ | 400,001 | ||||||||
| Convertible bonds | - | - | 200,000 | 200,000 | ||||||||||||
| Long-term loans | - | - | 254,907 | 254,907 | ||||||||||||
Time deposits – The carrying amount approximates its fair value due to short-term duration of the bank time deposits.
Marketable securities – The fair value of stocks and funds is generally valued based on quoted market prices in active markets.
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%.
Loan receivable – The Company’s loan receivable is determined based on 4.5% per annum interest rate on the recent lending to Rich Fountain Limited.
Equity investment – The fair value of the Company’s equity investment was arrived at using the “Income Approach.” The calculation assumptions were based on the growth rate, cash discount rate (rate for weighted average cost of capital), and liquidity discount rate.
Government bonds – The fair value of government bonds is valued based on theoretical bond price in Taipei Exchange (formerly the Gre Tai Securities Market.)
Short-term loans – The fair value of the Company’s short-term loans had been determined based on the nature of the interest rates and the proximity to the issuance date.
Due to related parties – The amount due to related parties bears no interest and payable on demand.
Convertible bonds – The Company determined the fair value of the convertible bonds is 80% of the average closing trading price for the ten (10) business days immediately prior to the conversion date.
Long-term loans - The fair value of the long-term loans were determined by discounted cash flows based on the interest rates.
| 98 |
NOTE 25 – RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for prior years to conform to the current year’s presentation. The changes of the presentation were with respect to present time deposits as a line item on the consolidated balance sheets and reclassify deferred current tax assets from other current assets to other assets in accordance with FASB ASU No. 2015-17. The effects of the reclassifications for the prior year were reflected below.
| Consolidated Balance Sheet | December 31, 2016 | |||
| Original: | ||||
| Cash and cash equivalents | $ | 25,521,802 | ||
| Other current assets | 1,890,551 | |||
| Other assets | 726,482 | |||
| Reclassified: | ||||
| Cash and cash equivalents | $ | 20,169,455 | ||
| Time deposits | 5,352,347 | |||
| Other current assets | 1,831,318 | |||
| Other assets | 785,715 | |||
| Consolidated Statements of Cash Flows | Year Ended December 31, 2016 |
Year Ended December 31, 2015 |
||||||
| Original: | ||||||||
| Net cash used in investing activities | $ | (2,625,499 | ) | $ | (383,843 | ) | ||
| Foreign currency translation | 147,568 | (832,294 | ) | |||||
| Net increase in cash and cash equivalents | 4,689,978 | 1,260,025 | ||||||
| Cash and cash equivalents, beginning balance | 20,831,824 | 19,571,799 | ||||||
| Cash and cash equivalents, ending balance | 25,521,802 | 20,831,824 | ||||||
| Reclassified: | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchases of time deposits | $ | (7,161,459 | ) | $ | (9,562,553 | ) | ||
| Proceeds from maturities of time deposits | 9,697,617 | 10,556,173 | ||||||
| Net cash provided by (used in) investing activities | (89,341 | ) | 609,777 | |||||
| Foreign currency translation | 7,530 | (564,053 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 7,086,098 | 2,521,886 | ||||||
| Cash and cash equivalents, beginning balance | 13,083,357 | 10,561,471 | ||||||
| Cash and cash equivalents, ending balance | 20,169,455 | 13,083,357 | ||||||
| 99 |
NOTE 26 – SEGMENT REPORTING
The geographical distributions of the Company’s financial information for the years ended December 31, 2017, 2016 and 2015 were as follows:
| For the years ended December 31, | ||||||||||||
| Geographical Areas | 2017 | 2016 | 2015 | |||||||||
| (Restated) | ||||||||||||
| Revenue | ||||||||||||
| Taiwan | $ | 62,147,136 | $ | 61,208,145 | $ | 48,669,261 | ||||||
| PRC | 10,467,488 | 8,461,511 | 5,892,928 | |||||||||
| Hong Kong | 302,096 | 325,408 | 461,577 | |||||||||
| Elimination adjustment | (68,276 | ) | (61,058 | ) | - | |||||||
| Total revenue | $ | 72,848,444 | $ | 69,934,006 | $ | 55,023,766 | ||||||
| Income (loss) from operations | ||||||||||||
| Taiwan | $ | 12,109,928 | $ | 7,303,616 | $ | 3,073,888 | ||||||
| PRC | 489,017 | (817,914 | ) | (1,525,560 | ) | |||||||
| Hong Kong | 3,065 | 66,356 | 209,373 | |||||||||
| Elimination adjustment | 141,410 | 132,432 | 42,884 | |||||||||
| Total income (loss) from operations | $ | 12,743,420 | $ | 6,684,490 | $ | 1,800,585 | ||||||
| Depreciation and amortization expenses | ||||||||||||
| Taiwan | $ | 466,020 | $ | 541,461 | $ | 366,717 | ||||||
| PRC | 94,877 | 84,279 | 96,172 | |||||||||
| Hong Kong | 287 | 288 | 312 | |||||||||
| Elimination adjustment | - | - | - | |||||||||
| Total depreciation and amortization expenses | $ | 561,184 | $ | 626,028 | $ | 463,201 | ||||||
| Interest income | ||||||||||||
| Taiwan | $ | 422,688 | $ | 234,316 | $ | 208,526 | ||||||
| PRC | 1,696 | 4,464 | 31,047 | |||||||||
| Hong Kong | - | 1 | 2 | |||||||||
| Elimination adjustment | (85,215 | ) | (30,116 | ) | (9,066 | ) | ||||||
| Total interest income | $ | 339,169 | $ | 208,665 | $ | 230,509 | ||||||
| Interest expenses | ||||||||||||
| Taiwan | $ | 98,746 | $ | 38,083 | $ | 9,720 | ||||||
| PRC | 21,844 | 11,755 | - | |||||||||
| Hong Kong | - | - | - | |||||||||
| Elimination adjustment | (85,215 | ) | (30,116 | ) | (9,066 | ) | ||||||
| Total interest expenses | $ | 35,375 | $ | 19,722 | $ | 654 | ||||||
| Income tax | ||||||||||||
| Taiwan | $ | 3,236,264 | $ | 2,095,827 | $ | 1,496,206 | ||||||
| PRC | 282,504 | 13,135 | 16,429 | |||||||||
| Hong Kong | (5,051 | ) | 10,636 | 6,591 | ||||||||
| Elimination adjustment | - | - | - | |||||||||
| Total income tax | $ | 3,513,717 | $ | 2,119,598 | $ | 1,519,226 | ||||||
| Net income (loss) | ||||||||||||
| Taiwan | $ | 10,050,593 | $ | 5,803,241 | $ | 1,963,988 | ||||||
| PRC | 128,052 | (844,778 | ) | (1,531,555 | ) | |||||||
| Hong Kong | (7,790 | ) | 53,900 | 222,665 | ||||||||
| Elimination adjustment | 7,010 | 7,220 | 6,187 | |||||||||
| Total net income (loss) | $ | 10,177,865 | $ | 5,019,583 | $ | 661,285 | ||||||
| 100 |
The geographical distribution of the Company’s financial information as of December 31, 2017 and 2016 were as follows:
| As of December 31, | ||||||||
| Geographical Areas | 2017 | 2016 | ||||||
| (Restated) | ||||||||
| Capital expenditures | ||||||||
| Taiwan | $ | (507,983 | ) | $ | (835,564 | ) | ||
| PRC | (34,445 | ) | (148,936 | ) | ||||
| Hong Kong | - | - | ||||||
| Total capital expenditures | $ | (542,428 | ) | $ | (984,500 | ) | ||
| Long-lived assets | ||||||||
| Taiwan | $ | 1,612,125 | $ | 1,453,772 | ||||
| PRC | 109,597 | 256,704 | ||||||
| Hong Kong | 358 | 648 | ||||||
| Elimination adjustment | - | - | ||||||
| Total long-lived assets | $ | 1,722,080 | $ | 1,711,124 | ||||
| Reportable assets | ||||||||
| Taiwan | $ | 96,399,321 | $ | 90,388,991 | ||||
| PRC | 11,140,124 | 13,325,433 | ||||||
| Hong Kong | 643,881 | 561,708 | ||||||
| Elimination adjustment | (48,910,083 | ) | (54,908,429 | ) | ||||
| Total reportable assets | $ | 59,273,243 | $ | 49,367,703 | ||||
| 101 |
NOTE 27 – RESTATEMENT
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.
The restatement for 2016 consolidated financial statements:
CONSOLIDATED BALANCE SHEET
| As of December 31, 2016 | ||||||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 25,521,802 | $ | (5,352,347 | ) | {b} | $ | 20,169,455 | ||||||||
| Time deposits | - | 5,352,347 | {b} | 5,352,347 | ||||||||||||
| Marketable securities | 2,426,870 | - | 2,426,870 | |||||||||||||
| Accounts receivable, net | 15,774,159 | - | 15,774,159 | |||||||||||||
| Other current assets | 1,890,551 | (59,233 | ) | {b} | 1,831,318 | |||||||||||
| Total current assets | 45,613,382 | (59,233 | ) | {b} | 45,554,149 | |||||||||||
| Property, plant and equipment, net | 926,905 | - | 926,905 | |||||||||||||
| Intangible assets | 784,219 | - | 784,219 | |||||||||||||
| Goodwill | 2,071,491 | (2,039,840 | ) | {a} | 31,651 | |||||||||||
| Long-term investment | 1,285,064 | - | 1,285,064 | |||||||||||||
| Other assets | 726,482 | 59,233 | {b} | 785,715 | ||||||||||||
| TOTAL ASSETS | $ | 51,407,543 | $ | (2,039,840 | ) | {a} | $ | 49,367,703 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Taxes payable | $ | 2,249,869 | $ | - | $ | 2,249,869 | ||||||||||
| Due to related parties | 400,001 | - | 400,001 | |||||||||||||
| Other current liabilities | 18,639,909 | - | 18,639,909 | |||||||||||||
| Total current liabilities | 21,289,779 | - | 21,289,779 | |||||||||||||
| - | ||||||||||||||||
| Convertible bonds | 200,000 | - | 200,000 | |||||||||||||
| Long-term loans | 254,907 | - | 254,907 | |||||||||||||
| Long-term liabilities | 5,315,327 | - | 5,315,327 | |||||||||||||
| TOTAL LIABILITIES | 27,060,013 | - | 27,060,013 | |||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | - | 10 | |||||||||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding | 295 | - | 295 | |||||||||||||
| Additional paid-in capital | 8,157,512 | - | 8,157,512 | |||||||||||||
| Statutory reserves | 3,799,585 | - | 3,799,585 | |||||||||||||
| Retained earnings | 3,286,562 | (2,039,840 | ) | {a} | 1,246,722 | |||||||||||
| Accumulated other comprehensive gain/ (loss) | (667,976 | ) | - | (667,976 | ) | |||||||||||
| Stockholders’ equity attribute to parent’s shareholders | 14,575,988 | (2,039,840 | ) | {a} | 12,536,148 | |||||||||||
| Noncontrolling interests | 9,771,542 | - | 9,771,542 | |||||||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 24,347,530 | (2,039,840 | ) | {a} | 22,307,690 | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 51,407,543 | $ | (2,039,840 | ) | {a} | $ | 49,367,703 | ||||||||
{a} The Company corrected the acquisition method from business acquisition to asset acquisition. The consideration provided in excess of fair market value of the purchased entity cannot be treated as goodwill. The excess payment is restated to compensation on asset acquisition.
{b} See Note 25 for additional information on the reclassifications.
| 102 |
The restatement for 2015 consolidated financial statements:
CONSOLIDATED BALANCE SHEET
| As of December 31, 2015 | ||||||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 20,831,824 | $ | (7,748,467 | ) | {b} | $ | 13,083,357 | ||||||||
| Time deposits | - | 7,748,467 | {b} | 7,748,467 | ||||||||||||
| Marketable securities | 2,369,082 | - | 2,369,082 | |||||||||||||
| Accounts receivable, net | 9,630,993 | - | 9,630,993 | |||||||||||||
| Other current assets | 1,055,015 | - | 1,055,015 | |||||||||||||
| Total current assets | 33,886,914 | - | 33,886,914 | |||||||||||||
| Property, plant and equipment, net | 918,798 | - | 918,798 | |||||||||||||
| Intangible assets | 468,779 | - | 468,779 | |||||||||||||
| Goodwill | 2,071,491 | (2,039,840 | ) | {a} | 31,651 | |||||||||||
| Long-term investment | 1,264,611 | - | 1,264,611 | |||||||||||||
| Other assets | 791,223 | - | 791,223 | |||||||||||||
| TOTAL ASSETS | $ | 39,401,816 | $ | (2,039,840 | ) | {a} | $ | 37,361,976 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Taxes payable | $ | 1,521,962 | $ | - | $ | 1,521,962 | ||||||||||
| Short-term loan | 222,235 | - | 222,235 | |||||||||||||
| Due to related parties | 945,932 | - | 945,932 | |||||||||||||
| Other current liabilities | 10,870,750 | - | 10,870,750 | |||||||||||||
| Total current liabilities | 13,560,879 | - | 13,560,879 | |||||||||||||
| - | ||||||||||||||||
| Long-term liabilities | 6,594,530 | - | 6,594,530 | |||||||||||||
| TOTAL LIABILITIES | 20,155,409 | - | 20,155,409 | |||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | - | 10 | |||||||||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding | 295 | - | 295 | |||||||||||||
| Additional paid-in capital | 8,157,512 | - | 8,157,512 | |||||||||||||
| Statutory reserves | 2,385,327 | - | 2,385,327 | |||||||||||||
| Retained earnings | 1,808,665 | (2,039,840 | ) | {a} | (231,175 | ) | ||||||||||
| Accumulated other comprehensive gain/ (loss) | (680,133 | ) | - | (680,133 | ) | |||||||||||
| Stockholders’ equity attribute to parent’s shareholders | 11,671,676 | (2,039,840 | ) | {a} | 9,631,836 | |||||||||||
| Noncontrolling interests | 7,574,731 | - | 7,574,731 | |||||||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 19,246,407 | (2,039,840 | ) | {a} | 17,206,567 | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 39,401,816 | $ | (2,039,840 | ) | {a} | $ | 37,361,976 | ||||||||
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CONSOLIDATED STATEMENT OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
| For the year ended December 31, 2015 | ||||||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||||||
| Revenue | $ | 55,023,766 | - | $ | 55,023,766 | |||||||||||
| Cost of revenue | 35,423,762 | - | 35,423,762 | |||||||||||||
| Gross profit | 19,600,004 | - | 19,600,004 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 3,084,408 | - | 3,084,408 | |||||||||||||
| General and administrative | 12,675,171 | 2,039,840 | {a} | 14,715,011 | ||||||||||||
| Total operating expense | 15,759,579 | 2,039,840 | {a} | 17,799,419 | ||||||||||||
| Income from operations | 3,840,425 | (2,039,840 | ) | {a} | 1,800,585 | |||||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 230,509 | - | 230,509 | |||||||||||||
| Interest expense | (654 | ) | - | (654 | ) | |||||||||||
| Other - net | 150,071 | - | 150,071 | |||||||||||||
| Total other income (expenses) | 379,926 | - | 379,926 | |||||||||||||
| Income before income taxes | 4,220,351 | (2,039,840 | ) | {a} | 2,180,511 | |||||||||||
| Income tax expense | 1,519,226 | - | 1,519,226 | |||||||||||||
| Net income (loss) | 2,701,125 | (2,039,840 | ) | {a} | 661,285 | |||||||||||
| Net income attributable to the noncontrolling interests | 1,623,198 | - | 1,623,198 | |||||||||||||
| Net income (loss) attributable to parent’s shareholders | 1,077,927 | (2,039,840 | ) | {a} | (961,913 | ) | ||||||||||
| Other comprehensive items | ||||||||||||||||
| Foreign currency translations gain(loss) | (329,562 | ) | - | (329,562 | ) | |||||||||||
| Other | 310 | - | 310 | |||||||||||||
| Other comprehensive income (loss) attributable to parent’s shareholders | (329,252 | ) | - | (329,252 | ) | |||||||||||
| Other comprehensive items attributable to noncontrolling interests | (477,738 | ) | - | (477,738 | ) | |||||||||||
| Comprehensive income attributable to parent’s shareholders | $ | 748,675 | (2,039,840 | ) | {a} | $ | (1,291,165 | ) | ||||||||
| Comprehensive income attributable to noncontrolling interests | $ | 1,145,460 | - | $ | 1,145,460 | |||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 29,365,834 | 29,365,834 | ||||||||||||||
| Diluted | 30,365,834 | 29,365,834 | ||||||||||||||
| Income per share: | ||||||||||||||||
| Basic | $ | 0.037 | $ | (0.033 | ) | |||||||||||
| Diluted | $ | 0.035 | $ | (0.033 | ) | |||||||||||
{a} The Company corrected the acquisition method from business acquisition to asset acquisition. The consideration provided in excess of fair market value of the purchased entity cannot be treated as goodwill. The excess payment is restated to compensation on asset acquisition.
{b} See Note 25 for additional information on the reclassifications.
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NOTE 28 – QUARTERLY INFORMATION (UNAUDITED)
The following quarterly data are derived from the Company’s consolidated balance sheet. See “Note 27—Restatement” for information concerning the Restatement of the Company’s financial statements.
| As of March 31, 2017 | ||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||
| CONSOLIDATED BALANCE SHEET | ||||||||||||
| ASSETS | ||||||||||||
| Goodwill | $ | 2,071,491 | $ | (2,039,840 | ) | $ | 31,651 | |||||
| TOTAL ASSETS | 49,227,142 | (2,039,840 | ) | 47,187,302 | ||||||||
| Retained earnings | 4,152,250 | (2,039,840 | ) | 2,112,410 | ||||||||
| Stockholders’ equity attribute to parent’s shareholders | 16,701,244 | (2,039,840 | ) | 14,661,404 | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 27,792,876 | (2,039,840 | ) | 25,753,036 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 49,227,142 | $ | (2,039,840 | ) | $ | 47,187,302 | |||||
| As of June 30, 2017 | ||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||
| CONSOLIDATED BALANCE SHEET | ||||||||||||
| ASSETS | ||||||||||||
| Goodwill | $ | 2,071,491 | $ | (2,039,840 | ) | $ | 31,651 | |||||
| TOTAL ASSETS | 48,983,681 | (2,039,840 | ) | 46,943,841 | ||||||||
| Retained earnings | 5,804,053 | (2,039,840 | ) | 3,764,213 | ||||||||
| Stockholders’ equity attribute to parent’s shareholders | 18,721,318 | (2,039,840 | ) | 16,681,478 | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 30,295,360 | (2,039,840 | ) | 28,255,520 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 48,983,681 | $ | (2,039,840 | ) | $ | 46,943,841 | |||||
| As of September 30, 2017 | ||||||||||||
| Previously Reported |
Adjustment |
Restated | ||||||||||
| CONSOLIDATED BALANCE SHEET | ||||||||||||
| ASSETS | ||||||||||||
| Goodwill | $ | 2,071,491 | $ | (2,039,840 | ) | $ | 31,651 | |||||
| TOTAL ASSETS | 51,132,862 | $ | (2,039,840 | ) | 49,093,022 | |||||||
| Retained earnings | 6,663,807 | $ | (2,039,840 | ) | 4,623,967 | |||||||
| Stockholders’ equity attribute to parent’s shareholders | 20,077,289 | (2,039,840 | ) | 18,037,449 | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 32,344,226 | (2,039,840 | ) | 30,304,386 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 51,132,862 | $ | (2,039,840 | ) | $ | 49,093,022 | |||||
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NOTE 29 – SUBSEQUENT EVENTS
Taiwan Income Tax Law Amendment become effective in February 2018. Income tax rate of Taiwan has been changed from 17% to 20% staring from 2018. The Company has determined that the change in tax rate will affect the Company’s deferred tax assets and liabilities beginning in the first quarterly consolidated financial statements in 2018.
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.
The Company plans to invest in its Yuli Broker, a related party owned by Ms. Lee. The application of the investment was approved by Investment Commission of the Ministry of Economic Affairs in Taiwan in January 2018.
The Company has evaluated all other subsequent events through the date these consolidated financial statements were issued and determine that there were no other subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
| (a) | Evaluation of Disclosure Controls and Procedures |
As required by SEC Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2018, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2017, our disclosure controls and procedures were not effective at the reasonable assurance level due to the deficiencies and material weaknesses identified and described in this Item 9A(a) and 9A(c), respectively.
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud and our disclosure controls and internal controls have been deficient in preventing recent fraud. For further information, please see our Amended Current Report. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, our principal executive officers have determined that our disclosure controls and procedures are not currently effectively at doing so. Notwithstanding, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
| (b) | Management’s Remediation Plan Regarding Disclosure Controls and Procedures |
We are committed to remediating the control deficiencies described above by implementing changes to our internal control over disclosure controls and procedures. Pursuant to the terms of the SEC Settlement, we have retained an independent corporate monitor who will help us implement changes and improvements in the internal control over disclosure controls and procedures for remediating the control deficiencies. For further information, please see our Amended Current Report.
We are currently evaluating the impact of the deficiency and have taken or are in the process of taking the following actions in conjunction with the independent corporate monitor:
| 1) | A review and consideration of the implementation of our earlier and revised compliance policies and procedures as they relate to trading in securities issued by us; |
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| 2) | A review of our policies and procedures as they relate to the our corporate governance; |
| 3) | A review of our policies and procedures as they relate to preclearances granted by us for trading in shares of our common stock; and, until December 31, 2019, the independent corporate monitor will provide oversight over preclearances; |
| 4) | Determining whether policies and procedures are adequate and properly tailored for us; |
| 5) | A review of the education and training program at our company and a consideration of the sufficient scope and appropriate content; |
| 6) | A Review of our monitoring, testing and reporting mechanisms; |
| 7) | A review of our commitment to compliance, including senior management and board-level awareness of compliance issues; |
| 8) | A review of our allocation of resources for the compliance program, including whether resources are sufficient and properly tailored; |
| 9) | Conduct two rounds of in-person interviews of 15-20 company employees and board members in Taiwan each time; and |
| 10) | Provide an interim written report in 120 to 180 days and final written report to the SEC no later than December 31, 2019 that includes a description of the review performed, the conclusions reached, recommendations for changes in or improvements to our policies and procedures, and a procedure for implementing the recommended changes in or improvements to our policies and procedures. |
However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the control deficiencies we may determine to take additional.
Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are fully implemented and concluded to be operating effectively, the deficiencies described above could continue to exist.
| (c) | Management’s annual report on internal control over financial reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for our Company are provided by executive management's review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial reporting, management has identified control deficiencies that constituted material weaknesses in our internal control over financial reporting as of December 31, 2017, as described below.
| (1) | We did not maintain an effective control environment as we did not effectively implement a process to ensure that the bonus revenue is properly recognized at the period end. |
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| (2) | We did not have qualified individuals to identify unusual transactions and appropriately assess for financial impact, and ensure the consolidation and reporting are in compliance with US GAAP. |
| (3) | We did not establish a strong internal audit function to assist management with assessing the effectiveness of internal control over financial reporting. |
These material weaknesses resulted in material misstatements of our historical financial statements, which necessitated a restatement of our consolidated financial statements for the years ended December 31, 2016 and 2015 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2017. Disclosures related to the restatement adjustments are included in Part II, Item 8, Note 27 and 28 of this Form 10-K.
Additionally, each of the material weaknesses described above could result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Simon & Edward, LLP, an independent registered certified public accounting firm, as stated in their report, which appears in this Annual Report.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
| (d) | Management’s Remediation Plan Concerning Internal Control Over Financial Reporting |
We are committed to remediating the control deficiencies that constitute the material weaknesses described above by implementing changes to our internal control over financial reporting. Our Chief Financial Officer is responsible for implementing changes and improvements in the internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses. We are currently evaluating the impact of the material weaknesses and have taken or are in the process of taking the following actions:
| (1) | We have begun to design our internal controls over the accounting for evaluating the completeness of the bonus revenue at the period end. |
| (2) | We plan to recruit personnel with the appropriate education, experience, and certifications, such as CPA or CIA, who has sufficient knowledge of US GAAP and SOX 404, and can identify unusual transactions timely and appropriately for assessing financial report impact. |
| (3) | We plan to establish structure, authority, and responsibilities to ensure the objectives of internal control over financial reporting were adequately achieved. We also plan to deliver training to control owners regarding risks, controls and maintaining adequate control evidence, as well as dedicate additional resources to support internal audit function. |
However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address the control deficiencies.
Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are fully implemented and concluded to be operating effectively, the material weaknesses described above will continue to exist.
None.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our Board of Directors
We have a Board of Directors that currently consists of seven Directors, of which six were elected by the holders of Common Stock and Series A Preferred Stock voting together as a single class (each, a “Common Stock Director” and collectively, the “Common Stock Directors”), and one was appointed by the holder of Series A Preferred Stock (the “Series A Director”, together with the Common Stock Directors, each a “Director” and collectively, the “Directors”). None of our Directors is a director or executive officer of any company that files reports with the SEC.
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The following sets forth the biographical information of the Directors as of January 24, 2019:
| Name | Age | Position with the Company | ||
| Series A Director | ||||
| Yi Hsiao Mao | 60 | Director and Chief Executive Officer | ||
| Common Stock Directors | ||||
| Fu Chang Li | 63 | Director | ||
| Chwan Hau Li | 59 | Director | ||
| Chih Yuan Lu | 46 | Independent Director | ||
| Lo Tien Hsin | 43 | Independent Director | ||
| Chun Hui Yang | 30 | Independent Director | ||
| Tse Hsun Niu | 50 | Independent Director |
Series A Director
Yi Hsiao Mao, Series A Director and Chief Executive Officer
Mr. Mao has served as a Common Stock Director of our Company from June 2010 to December 2016 when he was appointed as a Series A Director, and has since served at such capacity. Mr. Mao has assumed the position as our Company’s Chief Executive Officer since August 2014, in which he oversees the strategic and operational initiatives of all business segments of our Company. Mr. Mao, with over 30 years of insurance brokerage experience, is the founder of Law Insurance Broker Co., Ltd. (“Law Broker”), a premier insurance brokerage company in Taiwan. In addition, Mr. Mao has served as the supervisor for our Company’s consolidated entity in China, Jiangsu Law Insurance Brokers Co., Ltd. (“Jiangsu Law”), since March 2005. He is also a director of Law Enterprise Co., Ltd. (“Law Enterprise”) in Taiwan. Mr. Mao is a well-seasoned executive with extensive experience and profound knowledge in both the insurance industry and our Company’s operations in the Greater China region.
Mr. Mao received his Bachelor’s degree from Taiwan Soochow University School of Law.
Common Stock Directors
Fu Chang Li, Director
Mr. Li has served as a Director of our Company since January 2011. As one of the pioneering insurance agents in Taiwan, Mr. Li has over 30 years of insurance experience, including 17 years in the insurance brokerage industry. From 1980 to 1992, he served as the head of sales division at Guohua Life Insurance. From 1992 to 1993, Mr. Li assumed the role of general manager for Gongxin Insurance Brokers or KHIB. Mr. Li was the president of Time Insurance Brokers from 1993 to 2003. After serving as the Consultant of Law Anhou Insurance Agency Co., Ltd. (“Law Anhou”), a consolidated entity of our Company in China, from October 2003 to October 2009, he became the Chairman of Law Anhou from October 2009 to May 2012. He is currently the Deputy General Manager of Law Anhou.
Mr. Li received his Bachelor’s degree in Mass Communications from Fu Jen Catholic University in Taiwan.
Chwan Hau Li, Director
Mr. Li has served as a Director of our Company since January 2011. He was a director of Sichuan Kangzhuang, a consolidated entity of our Company in China, from 2006 to 2010. Mr. Li has over 20 years of insurance experience, and has held various managerial positions throughout his career. From 1987 to 2000, he served as a business development manager at Taiwan Life Insurance. In April 2000, he founded Genius Insurance Brokers, and has served as its chairman until the present. Mr. Li is also the chairman of Genius Financial Consultants. He is the former chairman of Insurance Brokerage Association of Taiwan.
Mr. Li received his B.B.A degree from Tamkang University in Taiwan and M.S. degree in Actuarial Science from University of Iowa in the United States.
Chih Yuan Lu, Independent Director
Mr. Lu has served as an independent director of our Company since May 2017. He specializes in developing and implementing financial controls and processes, in addition to productivity improvement and change management. Prior to joining Transcend Information Inc. in 2003, Mr. Lu had served as a public auditor at PricewaterhouseCoopers Taiwan from 1997 to 1999. From 2003 to 2005, he was promoted from a specialist to the manager of the Finance and Shipping departments at Transcend Information Inc. From 2005 to 2009, he joined Transcend Information BV, Rotterdam, where he served as the financial controller, supervising the HR/ACC/CS/Logistic (Cash & Inventory) departments with over 50 employees. From 2009 to 2010, Mr. Lu became the administration director at the Taipei Headquarter, overseeing the HR, LIPO (Legal), and Quality Assurance departments. From 2010 to February, 2017, he served as the Chief Financial Officer and Spokesperson at Transcend Information Inc., in which he was responsible for all administrative, financial, and risk management operations of the company, supervising a 60-member team across 12 worldwide offices. Mr. Lu currently serves as the Chief Financial Officer of EIKEI (Taiwan) Co., Ltd., a position he has assumed since August 2017.
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Mr. Lu received his B.B.A degree in Accounting from Tung-Hai University in Taiwan and M.B.A degree from University of Massachusetts, Dartmouth MA, U.S.A.
Lo Tien Hsin, Independent Director
Ms. Hsin has served as an independent director since May 2017. She possesses strong numerical and operating acumen acquired from years of managerial experience at various renowned multinational companies, and proven reputation and track record of excellence in supply chain and operation management. From 2003 to 2008, she served as the demand manager at Schneider Electric Taiwan Co. Ltd., where she was responsible for leading S&OP process and coordinating demand forecast with input from sales, marketing, finance, sourcing and supply planning. From 2008 to 2013, she served as Sr. Supply Chain Manager at Philips Lighting Taiwan Ltd., where she was responsible for capacity planning, production scheduling, inventory control, warehousing and logistics. From 2013 to 2017, she served as the Customer Service Manager at Nobel Biocare Taiwan Co., Ltd. She is currently the Business Operations Manager at Takeda Pharmaceuticals Taiwan, Ltd., a position she has assumed since August 2017.
Ms. Hsin received her Bachelor’s degree in Public Administration from National Chengchi University in Taiwan.
Chun Hui Yang, Independent Director
Ms. Yang has served as an independent director since May 2017. She is an expert in financial, managerial, and accounting analysis. Ms. Yang is skilled in the production and presentation of consolidated financial statements and in the preparation of payroll, sales, and property tax returns. From September 2012 to September 2015, she served as an auditor at PricewaterhouseCoopers, where she performed external audit on the financial statements and examined company accounts and financial control systems. Since October 2015, she has served as an accountant at CI-FONG Accounting Firm, where she is responsible for providing business clients with tax filing & planning, auditing, and management consulting services.
Ms. Yang received both her Bachelor’s degree in Accounting and her Master’s degree in Accounting from National ChengChi University in Taiwan.
Tse Hsun Niu, Independent Director
Dr. Niu has served as an independent director since May 2017. He is an expert in advertising, political communications, public relations, and electoral strategies. In August 2002, he joined the Department of Advertising at Chinese Culture University in Taiwan, where he has served as an assistant professor from August 2002 to July 2007; associated professor from August 2007 to January 2015, and professor since February 2015. Prior to joining the academia, he was the Associate Section Assistant at the Ministry of Foreign Affairs, R.O.C. from December 1998 to January 2002. Over the course of 25 years of research and studies, he has authored over 13 books, 16 research journals, 22 dissertations, and over 60 news articles related to advertising & strategy and government public relations.
Dr. Niu received his Bachelor’s degree in Diplomacy, Master’s degree in Diplomacy, and Doctoral degree in Political Science from National ChengChi University in Taiwan.
Our Executive Officers
| Name | Age | Principal Position | ||
| Yi Hsiao Mao1 | 60 | Chief Executive Officer | ||
| Yung Chi Chuang | 46 | Chief Financial Officer |
Yung Chi Chuang, Chief Financial Officer
Ms. Chuang has served as the Chief Financial Officer of our Company since July 2012, in which she is responsible for leading and directing our Company’s corporate development, financial planning, treasury, and investor relations functions. She joined Taiwan Law Insurance Broker in December 1996, and is currently the supervisor of the financial department of Law Broker. Prior to joining Taiwan Law Insurance Broker, Ms. Chuang was an executive secretary at Pacific Realty. Ms. Chuang graduated from Ming Chuan University in Taiwan where she received her bachelor’s degree in Risk Management and Insurance.
1 See the sections entitled “Our Board of Directors” above, for a description of the business experience and educational background of Mr. Mao.
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Family Relationships
There are no family relationships by and between or among the members of the Board or other executives.
Governance of Our Company
We seek to maintain high standards of business conduct and corporate governance, which we believe are fundamental to the overall success of our business, serving our stockholders well and maintaining our integrity in the marketplace. Our corporate governance guidelines and code of business conduct, together with our Amended and Restated Certificate of Incorporation, as amended, and our Amended and Restated Bylaws and the charters for each of our Board committees, form the basis for our corporate governance framework. We also are subject to the Sarbanes-Oxley Act, the rules and regulations of the SEC. Our Board has established three standing committees to assist it in fulfilling its responsibilities to the Company and its stockholders: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.
Corporate Governance Guidelines: Our corporate governance guidelines are designed to help ensure effective corporate governance of our Company. Our corporate governance guidelines cover topics including, but not limited to, director qualification criteria, director responsibilities, director compensation, director orientation and continuing education, communications from stockholders to our Board, succession planning and the annual evaluations of our Board and its committees. Our corporate governance guidelines are reviewed by the Nominating and Corporate Governance Committee and amended by our Board when appropriate.
Our Board of Directors: Our Board currently consists of seven members. The number of directors on our Board can be determined from time to time by action of our Board.
The Board has determined that three of our non-employee Directors during 2017, Chih Yuan Lu, Lo Tien Hsin, Chun Hui Yang and Tse Hsun Niu, each meet the independence standards established by the NASDAQ Stock Market and the applicable independence rules and regulations of the SEC, including the rules relating to the independence of the members of our Audit Committee and Compensation Committee, as applicable. Our Board considers that a director is independent when the director is not an officer or employee of the Company or its subsidiaries, does not have any relationship which would, or could reasonably appear to, materially interfere with the independent judgment of such director, and the director otherwise meets the independence requirements under the listing standards of the NASDAQ Stock Market and the rules and regulations of the SEC.
Our Board believes its members collectively have the experience, qualifications, attributes and skills to effectively oversee the management of our Company, including a high degree of personal and professional integrity, an ability to exercise sound business judgment on a broad range of issues, sufficient experience and background to have an appreciation of the issues facing our Company, a willingness to devote the necessary time to their Board and committee duties, a commitment to representing the best interests of the Company and our stockholders and a dedication to enhancing stockholder value.
Board Attendance
The Board of Directors held 7 meetings during the fiscal year ended December 31, 2017. Mr. Yi Hsiao Mao, Mr. Fu Chang Li and Mr. Chwan Hau Li attended all of regularly-scheduled and special meetings of the Board of Directors and the committees on which he or she served. Among these 7 meetings, 4 of which were held after the Independent Directors were elected to be the members of the Board of Directors on May 12, 2017. Each Independent Directors attended all of these 4 board meetings held and all of committee meetings during the fiscal year ended December 31, 2017.
Board Committees
The Board of Directors has established three standing committees: (i) Audit Committee, (ii) Compensation Committee, and (iii) Nominating and Corporate Governance Committee.
Audit Committee
The Audit Committee consists of Chih Yuan Lu, Chun Hui Yang and Lo Tien Hsin. All members of the Audit Committee satisfy the independence requirements set forth under the applicable rules of the NASDAQ Stock Market. Chi Yuan Lu qualifies as the audit committee’s financial expert as defined under applicable SEC rules. The Board of Directors was satisfied that the current members of the Audit Committee are competent in financial matters and have recent and relevant experience. The Audit Committee currently operates under a written charter, which has been approved and adopted by the Board of Directors. The charter is available on our website at www.holdingscuis.com/cuis_en/.
The primary purpose of the Audit Committee is to oversee and monitor (i) our financial statement and other financial information provided to shareholders; (ii) compliance with legal, regulatory and public disclosure requirements; (iii) the independent auditors; (iv) our internal control system; (v) treasury and finance matters; (vi) enterprise risk management, privacy and data security; (vii) the general auditing, accounting, and financial reporting process, as well as to prepare the committee report required by the rules of SEC.
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The primary duties and responsibilities of the Audit Committee include retaining our independent auditor, reviewing its independence, reviewing and approving the planned scope of its audit engagements, reviewing and approving any fee arrangements with our independent auditor, overseeing its audit work, reviewing and pre-approving any non-audit services that may be performed by the independent auditor, reviewing our annual audited financial statements, reviewing the internal audit work, reviewing the adequacy of our internal control over accounting and financial reporting, reviewing and discussing with management and independent auditor regarding the accounting policies, government correspondence and other matters in relation to independent and internal audit, reviewing and discussing with the management the treasury, finance, and statutory reorganization matters and reviewing and discussing with management the business and financial risk, privacy and data security matters.
During 2017, the Audit Committee met in person or by telephone, or acted by unanimous written consent, three times.
Compensation Committee
The Compensation Committee comprises of Chih Yuan Lu, Chun Hui Yang and Lo Tien Hsin. All members of the Compensation Committee satisfy the independence requirements set forth under the applicable rules of the NASDAQ Stock Market and qualify as non-employee directors within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee operates under a written charter, which has been approved and adopted by the Board of Directors. The charter is available on our website at www.holdingscuis.com/cuis_en/.
The primary purpose of the Compensation Committee is to (i) review and approve the compensation of the Company’s executive officers; and (ii) act as the administering committee for equity compensation plans as designated by the Board; and (iii) perform other duties and responsibilities set forth in its charter.
The primary duties and responsibilities of the Compensation Committee include reviewing and approving the benefit policies and salary and bonus earned by the Chief Executive Officer and other executive officers, employees and sales agents, reviewing and approving the compensation arrangements for newly-hired executive officers, reviewing the performance of the Chief Executive Officer and others executive officers and the employment or post-employment agreement applicable to executive officers; reviewing with management the employee and sales agent benefit policies and programs, recommending to the Board the establishment or modification of equity compensation plans and acting as the administering committee of any employee and sales agent bonus and other incentive plans, equity compensation plans and equity arrangements.
During 2017, the Compensation Committee met in person or by telephone, or acted by unanimous written consent, one time.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee comprises of Mr. Chih Yuan Lu and Mr. Tse Hsun Niu. Each member of the Nominating and Corporate Governance Committee satisfies the independence requirements set forth under the applicable rules of the NASDAQ Stock Market. The Nominating and Corporate Governance Committee operates under a written charter, which has been approved and adopted by the Board of Director. The charter is available on our website at www.holdingscuis.com/cuis_en/.
The primary purpose of the Nominating and Corporate Governance Committee is to (i) consider and report periodically to the Board on matters relating to the identification, selection and qualification of Board members and candidates nominated to the Board; and (ii) advise and make recommendations to the Board with respect to corporate governance matters. The primary duties and responsibilities of the Nominating and Corporate Governance Committee are to (i) screen and recommend the selection of nominees to the Board to fill vacancies and newly created directorships; (ii) develop a pool of potential director candidates; (iii) consider and oversee the performance evaluation process of the directors, including incumbent members and their re-election; (iv) consider shareholder nominees for election to the Board; (v) consider and recommend applicable corporate governance principles and compliance mechanisms, including reviewing and monitoring the compliance with the Corporate Code of Business Conduct and Ethics.
While we do not have a formal diversity policy, our Board of Directors believes that our Board should have diversity of knowledge base, professional experience and skills, and takes age, gender and ethnic background into account when considering director nominees.
Pursuant to the terms of its charter, the Nominating and Corporate Governance Committee will consider qualified director candidates suggested by our shareholders.
In addition, shareholders may submit nominations for election of directors in accordance with the requirements of the proxy rules established by the SEC and our bylaws. According to our bylaws, shareholders shall have the right to nominate one director candidate on the basis of each integral 10% of all outstanding common shares of our Company.
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During 2017, the Nominating and Corporate Governance Committee met in person or by telephone, or acted by unanimous written consent, one time.
Compensation Committee Interlocks and Insider Participation
Chih Yuan Lu, Chun Hui Yang, and Lo Tien Hsin became members of the Compensation Committee on August 4, 2017. No member of our Compensation Committee is or has been a current or former officer or employee of our Company or any of our subsidiaries. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity that had one or more executive officers serving as a director or member of our Compensation Committee during the year ended December 31, 2017.
Risk Management
This Annual Report, includes restated audited results as of and for the years ended December 31, 2016 and 2015, as well as restated unaudited condensed consolidated financial information for the quarterly periods as of and for the interim periods ended March 31, 2017, June 30, 2017 and September 31, 2017, (the “Restatement”.) The Restatement corrects a material error related to the accounting for the GHFL Acquisition in 2015. The GHFL Acquisition was accounted for as the acquisition of a business but, upon further analysis, the Company had concluded that it would be more accurately accounted for as an asset acquisition. The determination of the Restatement was made by the Audit Committee of the Board upon management’s recommendation on January 23, 2018. As a result of the Restatement, we have become subject to a number of additional risks and uncertainties, including substantial unanticipated costs for accounting and legal fees in connection with or related to the Restatement.
Furthermore, we had identified several material weaknesses in our internal control over financial reporting, which had led to the Restatement. These material weaknesses include i) the process to hire qualified employees who have proficient knowledge of US GAAP, and can identify unusual transactions timely and appropriately assessed for financial report impact was not maintained; ii) the structure, authority, and responsibilities to ensure the objective of internal control over financial reporting were adequately achieved was not maintained, and iii) the design of our internal control did not include a precise review of the completeness of the bonus revenue at the period end.
The existence of these material weaknesses could adversely affect us, our reputation or investor perceptions of us. We have and will continue to take additional measures to remediate the underlying causes of the material weaknesses noted above. We are committed to remediating the control deficiencies that constitute the material weaknesses described previously by implementing changes to our internal control over financial reporting. Our Chief Financial Officer is responsible for implementing changes and improvements in the internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses.
Our Board is responsible for reviewing and assessing business enterprise risk and other major risks facing the Company, and evaluating management’s approach to addressing such risks. Periodically, our Board reviews key risks our Company is facing, plans for addressing these risks and the Company’s risk management practices overall. In connection with these reviews, our Board members rely on information from external sources as well as on their individual experiences identifying and managing business enterprise risk for other entities both within and outside of our industry. Our senior management team is responsible for day-to-day risk management and regularly reports on risks to our full Board. Our legal and finance staffs serve as the primary monitoring and evaluation function for company-wide policies and procedures, and manage the day-to-day oversight of the risk management strategy for our business. This oversight includes identifying, evaluating, and addressing potential risks that may exist at the enterprise, strategic, financial, operational, compliance and reporting levels.
We believe the division of risk management responsibilities described above is an effective approach for identifying and addressing the risks facing our Company, and that the leadership structure of our Board is effective in implementing this approach.
Insider Transactions Policies and Procedures
We currently do not have an insider transaction policy.
Communications with Directors
Shareholders may communicate with any and all Directors by transmitting correspondence by mail addressed as follows: c/o Corporate Secretary, 7F, No. 311 Section 3, Nan-King East Road, Taipei City, Taiwan.
Director Attendance at Annual Meetings
Attendance by Directors at annual meetings of the shareholders of the Company benefits the Company by giving Directors an opportunity to meet, talk with, and hear the concerns of shareholders who attend those meetings, and by giving those shareholders access to the Company’s Directors that they may not have at any other time during the year. The Company has no specific policy regarding director attendance at its Annual Meeting of Shareholders. Generally, however, Directors are strongly encouraged to attend each annual meeting of the Company’s shareholders.
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Corporate Code of Business Conduct and Ethics
The Board has adopted a Corporate Code of Business Conduct and Ethics that applies to all of our employees, officers and directors. Any waiver of our Corporate Code of Business Conduct and Ethics granted to any of our directors or executive officers, along with reasons for granting such waiver, will be published promptly on our website www.holdingscuis.com/cuis_en/. Please note that the information on our website is not incorporated by reference in this Annual Report.
Item 11. EXECUTIVE COMPENSATION.
Executive Summary
We have formed our Compensation Committee on August 4, 2017. Before the establishment of our Compensation Committee, our Board reviewed and approved relevant compensation to the executives. Our Board has assigned such rights to the Compensation Committee after its establishment.
Our Chief Executive Officer, Mr. Yi Hsiao Mao, and Chief Financial Officer, Ms. Yung Chi Chuang, have not received any form of compensation from the corporate group level since they assumed the roles of the Company’s executive officers; rather, they have been compensated on the subsidiary level for managerial services rendered to the Company’s subsidiaries in Taiwan, Law Broker and Law Enterprise, whereby Mr. Mao has served as the consultant of Law Broker and the president of Law Enterprise, and Ms. Chuang has served as the supervisor of the financial department of Law Broker. As such, the Company’s Compensation Committee currently does not determine or recommend the amount or form of executive or director compensation for the roles of the Company’s executive officers.
Nevertheless, the Company is fully aware of the importance of maintaining effective Committee operations. Our Compensation Committee is thus planning to design and implement a compensation program that include performance goals and objectives for executive officers, as well as guidelines in evaluating the performance of the executive officers in light of such performance goals and objectives.
Detailed Discussion and Analysis
This Compensation Discussion and Analysis (“CD&A”) describes the material elements of compensation paid to the named executive officers (the “NEOs”) during 2017. Following this discussion is a summary compensation table containing specific data about the compensation earned by or granted to the following NEOs in 2017:
| Name | Age | Principal Position | ||
| Yi Hsiao Mao | 60 | Director and Chief Executive Officer | ||
| Yung Chi Chuang | 46 | Chief Financial Officer |
Elements of Executive Compensation for Fiscal Year 2017
Mr. Yi Hsiao Mao and Ms. Yung Chi Chuang have been paid through our subsidiaries for their managerial services rendered to us. Mr. Mao has served as the consultant of Law Broker and the president of Law Enterprise, and Ms. Chuang has served as the supervisor of the financial department of Law Broker. Both Law Broker and Law Enterprises are our Company’s subsidiaries in Taiwan. Other than the compensation received from our Company’s subsidiaries, both of them have not received bonus, stock awards, non-equity incentive plan compensation, nonqualified deferred compensation earnings, or any other form of compensation since being named the executive officers of our Company.
Summary Compensation Table
The following table sets forth information concerning the compensation earned during the fiscal years ended December 31, 2017, 2016 and 2015 by our named executive officers during the fiscal year ended December 31, 2017.
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| Name and principal position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non- Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||
| Yi Hsiao Mao | ||||||||||||||||||||||||||||||||||
| Director and | 2017 | 312,367 | (1) | — | — | — | — | — | — | 312,367 | ||||||||||||||||||||||||
| Chief Executive | 2016 | 314,691 | — | — | — | — | — | — | 314,691 | |||||||||||||||||||||||||
| Officer | 2015 | 305,559 | — | — | — | — | — | — | 305,559 | |||||||||||||||||||||||||
| Yung Chi Chuang | 2017 | 45,000 | (2) | — | — | — | — | — | — | 45,000 | ||||||||||||||||||||||||
| Chief Financial | 2016 | 27,600 | — | — | — | — | — | — | 27,600 | |||||||||||||||||||||||||
| Officer | 2015 | 27,600 | — | — | — | — | — | — | 27,600 | |||||||||||||||||||||||||
| (1) | The salary consists of $12,171, which was paid to Mr. Mao for his service as the president of Law Enterprise, and the remaining amount of $300,196 which was paid to Mr. Mao for his service as the consultant of Law Broker for the provision of consultation, training and promotion to Law Broker in the fiscal year ended December 31, 2017. |
| (2) | The salary in the amount of $45,000 was paid to Ms. Chuang for her service as the supervisor of the financial department of Law Broker. |
In the fiscal years ended December 31, 2015, 2016 and 2017, Mr. Mao also served as the consultant of Law Broker and president of Law Enterprise and received all of his compensation from Law Broker and Law Enterprise. In the fiscal years ended December 31, 2015, 2016 and 2017, Ms. Chuang has served as the supervisor of the financial department of Law Broker. The above table identifies all compensation received by the named officer directly from us.
Outstanding Equity Awards At Fiscal Year End
We currently do not have any outstanding equity awards.
On May 12, 2017, our 2017 Long Term Incentive Plan was approved by the shareholders at the 2017 Annual Meeting of Shareholders of China United Insurance Service, Inc. Up to 10,000,000 shares of our Common Stock may be granted under the 2017 Plan, provided that 2,000,000 shares of the Share Pool is reserved for issuance to eligible participants providing services to Action Holdings Financial Limited and its subsidiaries. Eligibility to participate is open to officers, directors and employees of, and other individuals (including sales agents who are exclusive agents of the Company or its subsidiaries or derive more than 50% of their income from those entities) who provide bona fide services to or for, us or any of our subsidiaries. Given that metrics for evaluating performance goals are rather complex and exhaustive, and that the our management and Board of Directors are still working to develop a series of reward policies that specify various performance target levels and the size of the award or pay-out of performance shares with respect to each different target level attained, no awards were granted under the 2017 Plan as of December 31, 2017.
Potential Payments Upon Termination or Change in Control
None.
Compensation of Directors
Our directors do not currently receive compensation for their service as directors of our Company. Set forth below is the compensation paid to each of our directors during the fiscal year ended December 31, 2017 for compensation not related to their role as Directors. Total compensation for Mr. Mao for services as our Chief Executive Officer is presented in “Summary Compensation Table” in this section.
| Name | Fees Earned or Paid in Cash ($)(1) | All Other Compensation ($) | Total ($) | |||||||||
| Fu Chang Li | — | 59,213 | (2) | 59,213 | ||||||||
| Chwan Hau Li | — | — | — | |||||||||
| Chih Yuan Lu | 658 | — | 658 | |||||||||
| Lo Tien Hsin | 658 | — | 658 | |||||||||
| Chun Hui Yang | 658 | — | 658 | |||||||||
| Tse Hsun Niu | 658 | — | 658 | |||||||||
| (1) | Travel stipends to Independent Directors for attending in-person Board and Committee meetings for the fiscal year ended December 31, 2017. |
| (2) | The compensation paid to Fu Chang Li since he has worked as a consultant of the Company in the fiscal year ended December 31, 2017. |
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Directors’ Compensation
The Company has not paid, and does not intend to pay, any cash or non-cash equity compensation to our directors for their Board services, and does not currently intend to adopt any policies with respect thereto. As such, the Company does not offer additional retainers for Committee membership. However, for in-person Board and Committee meetings, each Independent Director in attendance shall receive NT$10,000 (approximately $328) per meeting.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has discussed and reviewed the foregoing Compensation Discussion and Analysis with management. Based upon this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this 10-K/A for the fiscal year ended December 31, 2017.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information, as of April 2, 2018, concerning, except as indicated by the footnotes below:
| · | Each person whom we know beneficially owns more than 5% of our common stock or Series A Preferred Stock. |
| · | Each of our Directors. |
| · | Each of our named executive officers (see the section titled “Executive Compensation”). |
| · | All of our Directors and executive officers as a group. |
Unless otherwise noted below, the address of each of the persons set forth below is in care of China United Insurance Service, Inc., 7F, No. 311 Section 3, Nan-King East Road, Taipei City, Taiwan.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based on 29,452,669 shares of common stock and 1,000,000 shares of Series A Preferred Stock outstanding at April 2, 2018. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
The information provided in the table is based on our records, information filed with the SEC, and information provided to us, except where otherwise noted.
| Name | Common Shares | Shares Stock % | Beneficially Series A Shares | Owned Preferred Stock % | Total Voting Power % (1) | |||||||||||||||
| Executive Officers and Directors | ||||||||||||||||||||
| Yi Hsiao Mao | 4,640,234 | (2) | 15.8 | 1,000,000 | 100 | 37.1 | ||||||||||||||
| Fu Chang Li | 800,000 | 2.7 | 2.0 | |||||||||||||||||
| Chwan Hau Li | 1,352,166 | 4.6 | 3.4 | |||||||||||||||||
| Chih Yuan Lu | ||||||||||||||||||||
| Lo Hsin Tien | ||||||||||||||||||||
| Chun Hui Yang | ||||||||||||||||||||
| Tse Hsun Niu | ||||||||||||||||||||
| Yung Chi Chuang | 825,131 | 2.8 | 2.1 | |||||||||||||||||
| All executive officers and Directors as a group (eight persons) | 7,617,531 | 25.9 | 1,000,000 | 100 | 44.6 | |||||||||||||||
| Other 5% Beneficial Owners | ||||||||||||||||||||
| Pi Hui Chang | 2,520,000 | 8.6 | 6.4 | |||||||||||||||||
| (1) | Percentage of total voting power represents voting power with respect to all shares of our common stock and Series A Preferred Stock, voting together as a single class. Each holder of common stock is entitled to one vote per share of common stock and each holder of Series A Preferred Stock is entitled to ten votes per share of Series A Preferred Stock on all matters submitted to our shareholders for a vote. |
| (2) | Includes 200,000 shares of common stock held by Shu Fen Lee, Yi Hsiao Mao’s spouse, 200,000 shares of common stock held by Li Chieh Mao, Yi Hsiao Mao’s daughter, 969,322 shares of common stock held by U-Li Investment Consulting Enterprise Co., Ltd. and 100,000 shares of common stock held by U-Link International Co., Ltd, Yi Hsiao Mao and Shu Fen Lee hold 34% and 66% shares of U-Li Investment Consulting Enterprise Co., Ltd. respectively and U-Link International Co., Ltd. is solely owned by Shu Fen Lee. |
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Consultant Agreements with Mr. Yi Hsiao Mao and Mr. Li Fu Chang
The Director and CEO of our Company, Mr. Yi Hsiao Mao, has worked as a consultant of Law Broker. The primary service of Mr. Mao under the consultant agreement is to provide consultation, training and promotion service to Law Broker. The compensation paid to Mr. Mao for his service as a consultant of Law Broker in the fiscal year ended December 31, 2017 is NT$9,495,481 (approximately $312,367).
The Director of our Company, Mr. Fu Chang Li, has worked as a consultant of the Company since December 7, 2014. The primary service of Mr. Li under the consultant agreement is to (i) provide business plan requested by the Company; (ii) provide assessment of potential investors, including but not limited to valuation, credit assessment and eligibility assessment; (iii) assist the Company to negotiate with potential investors about transactional framework, as well as specific transactional conditions and seek to promote cooperation between the Company and potential investors to reach an agreement; (iv) assist the Company and investors to reach formal investment contract and related legal documents; and (v) assist the Company to facilitate the work of any project (including, but not limited to, the execution of letter of intent, formal agreement and other relevant legal documents) until the Company and/or a third party designated by the Company complete the project with the potential investors. The compensation paid to Mr. Fu Chang Li for his service as a consultant of the Company in the fiscal year ended December 31, 2017 is NT$1,800,000 (approximately $59,213).
Related Party Loans
The following summarized the Company’s loans payable related parties as of December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||
| Due to Mr. Mao (CEO of the Company) | $ | 409,054 | $ | 361,379 | ||||
| Due to Xude Investment (Owned by Mr. Chwan Hau Li*) | - | 32,374 | ||||||
| Due to Mr. Zhu (Legal Representative of Jiangsu) | 2,128 | 1,994 | ||||||
| Ms. Lu (Shareholder of Anhou) | 161,380 | - | ||||||
| Due to Yuli Broker (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to Yuli Investment (Owned by Ms. Lee**) | - | 265 | ||||||
| Due to I Health Management Corp*** | 17,703 | 3,724 | ||||||
| Total | $ | 590,265 | $ | 400,001 | ||||
* Chwan Hau Li is a Director of the Company
** Mr. Lee is the Director of Law Broker
*** 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.
Debt Forgiveness – Related Parties
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.
Lease Agreements
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 (NT$18,000). 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.
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 (NT$18,000). 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.
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Advisory Agreements
On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $42,000 (NT$1,275,000). For the year ended December 31, 2017, The Company had cost of revenue related to I Health amounted $13,315. The Company has cost of revenue and due to I Health totaled $25,130 and $3,724, respectively, for the year ended and as of December 31, 2016.
On December 7, 2016, the Company entered into an advisory agreement with Fu Chang Li (“Mr. Li,” the Director of the Company). Pursuant to this Advisory Agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. On December 7, 2017, both parties agreed to extend this advisory agreement from December 7, 2017 to December 6, 2018. The total advisory fee was approximately $59,000 (NT$1,800,000). The Company had general and administrative expense related to this advisory agreement amounted $59,214 and $0 for the years ended December 31, 2017 and 2016, respectively.
Consulting Agreement
On November 1, 2016, the Company entered into a consulting agreement with Apex Biz Solution Limited. (“Apex,” was formerly known as Prime Technology Corp.) Apex and PFAL are related parties of the Company because they are owned by the Company’s management. According to the Agreement, the Company would provide administrative operational consulting services to Apex from November 1, 2016 through December 31, 2021. As of December 31, 2017 and 2016, the Company had account receivable amounted $17,231 and $6,660, respectively. The Company also had revenue amounted $50,053 and $6,356 for the years ended December 31, 2017 and 2016, respectively.
Reclassification of Certain Common Stock into Preferred Shares
On January 28, 2011, our Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock. On July 2, 2012, our Board of Directors and shareholders approved, in connection with the Reclassification, the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000 common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification. Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the applicable Record Date on any matter that is submitted to a vote of the shareholders of our Company; while each holder of Series A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable Record Date on any matter that is submitted to a vote of the shareholders of our Company.
Immediately prior to the Reclassification, the common stock beneficially owned by Mr. Mao, CEO and Director of our Company, represents 17.91% of the voting power of all of our Company’s voting power; immediately subsequent to the Reclassification, the common stock and the Series A Preferred Stock held by Mr. Mao represents approximately 43.3% of the combined voting power of all of our Company’s voting stock. Please refer to the table under Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters section for the current shareholding information of Mr. Mao.
Acquisition of Action Holdings Financial Limited (“AHFL”)
AHFL was incorporated in British Virgin Islands with limited liability on April 30, 2012. AHFL holds 65.95% interest in Law Enterprise and certain of our other subsidiaries as more fully described below.
On August 24, 2012, an acquisition agreement (the “AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein, which include Mr. Mao, our director and CEO, and his spouse, Ms. Lee, who resigned from the Board on December 9, 2016. Pursuant to the AHFL Acquisition Agreement, our Company acquired 100% interest in AHFL and its subsidiaries in Taiwan and our Company agreed to pay NT$15.0 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments. 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. Upon closing of the transaction, we acquired 100% interest in AHFL and its subsidiaries in Taiwan.
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On March 14, 2013, an Amendment to the AHFL Acquisition Agreement (the “First Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the First Amendment to AHFL Acquisition Agreement, (i) the deadline for cash payment under the AHFL Acquisition Agreement was extended to March 31, 2015; and (ii) in lieu of the 2,000,000 employee stock option pool, our Company agreed to create an employee stock pool consisting of up to 4,000,000 shares of the common stock of our Company, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares shall be granted to employees of affiliated entities of our Company (including Law Broker employees).
On March 13, 2015, a second Amendment to the AHFL Acquisition Agreement (the “Second Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Second Amendment to AHFL Acquisition Agreement, the deadline for cash payment under the AHFL Acquisition Agreement was further extended to March 31, 2016.
On February 17, 2016, a third Amendment to the AHFL Acquisition Agreement (the “Third Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Third Amendment to AHFL Acquisition Agreement, on or prior to June 30, 2016, (i) our Company committed to complete the listing of our Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least $10.0 million; (ii) our Company committed to distribute the cash payment in the amount of NT$22.5 million, on a pro rata basis, to the selling shareholders of AHFL and issue 5,000,000 common shares to its selected employees pursuant to its employee stock/option plan, and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of our Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by us and restore the status quo of our Company and the selling shareholders of AHFL as if the said acquisition had never happened.
On August 8, 2016, a fourth Amendment to the AHFL Acquisition Agreement (the “Fourth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Fourth Amendment to AHFL Acquisition Agreement, (i) the Third Amendment to AHFL Acquisition Agreement was terminated with immediate effect on August 8, 2016, and (ii) our Company agreed to pay to the selling shareholders of AHFL NT$15.0 million on or prior to March 31, 2017 and NT$4.8 million on July 21, 2016. On July 21, 2016, our Company arranged for the payment of NT$4.8 million to the selling shareholders of AHFL.
On March 12, 2017, a fifth Amendment to the Acquisition Agreement (the “Fifth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Fifth Amendment to AHFL Acquisition Agreement, our Company agreed to distribute the cash payment in the amount of NT$15 million to the selling shareholders of AHFL named therein on or prior to March 31, 2019.
Acquisition of Genius Holdings Financial Limited (“GHFL”)
GHFL is a wholly owned subsidiary of AHFL. On February 13, 2015, our Company, AHFL and Mr. Chwan Hau Li, being the selling shareholder of GHFL and now a director of our Company, entered into an acquisition agreement (the “GHFL Acquisition Agreement”). Pursuant to the GHFL Acquisition Agreement, our Company agreed to issue 352,166 fully paid and non-assessable shares of AHFL common stock (the “AHFL Shares”) together with a granted put option for 352,166 shares of common stock of our Company (the “Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the selling shareholder of GHFL would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of our Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a company limited by shares and incorporated under the laws of Taiwan, which in turn holds approximately 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares and incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. Mr. Chwan Hau Li is the sole shareholder of GHFL and a director and shareholder of our Company. On March 31, 2015, Mr. Chwan Hau Li exercised the Put Option, pursuant to which, 352,166 shares of AHFL held by Mr. Chwan Hau Li were transferred back to our Company as the consideration for 352,166 shares of common stock of our Company, which were issued to Mr. Chwan Hau Li on April 29, 2015.
On February 17, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into an Amendment 2 to the GHFL Acquisition Agreement (the “Second Amendment to GHFL Acquisition Agreement”), pursuant to which our Company agreed to complete the listing of our Company in a major capital market on or prior to February 28, 2016 where the net proceeds raised through such public offering financing shall be at least $10.0 million.
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On August 8, 2016, our Company, AHFL and Mr. Chwan Hau Li entered into an Amendment 3 to the GHFL Acquisition Agreement (the “Third Amendment to GHFL Acquisition Agreement”), pursuant to which, the Second Amendment to GHFL Acquisition Agreement was terminated.
Other Related Transactions
Anhou Registered Capital Increase
On April 27, 2013, China Insurance Regulatory Commission (“CIRC”) issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (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 ($8,165,895). 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 ($8,165,895), can continue to operate their existing business within the provinces where they have a registered office or branch office, but shall not set up any new branches in any provinces where they do not have a registered office or a branch office.
In August 2013, ZLI Holdings Limited (“CU Hong Kong”) entered into Investor Loan Agreements with the following parties: Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, which is also our 5.1% beneficiary owner, Mr. Chen Li (“Mr. Chen”) and Ms. Yue Jing (“Ms. Yue”), both PRC citizens (collectively, the “Investor Borrowers”). Under the Investor Loan Agreements, the Investor Borrowers loaned cash from CU Hong Kong for their investment in Henan Law Anhou Insurance Agency Co., Ltd. (“Henan Anhou”) and CU Hong Kong agreed to provide certain loans to each of the Investor Borrowers with an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such loans was ten years which could be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers covenants to enter into certain Variable Interest Entities Agreements with Henan Anhou, CU WFOE and certain existing shareholders of Henan Anhou. The proceeds received from the said loans by the Investor Borrowers shall be solely used to increase the registered capital of Henan Anhou, and CU Hong Kong may determine the repayment methods including transferring of the Investor Borrowers’ corresponding registered capital in Henan Anhou or through other manner as full payment of the loans subject to terms and conditions therein in the event that the Investor Borrowers fails to repay the loan in currency to CU Hong Kong.
The specific amounts loaned to the Investor Borrowers were as follows:
Able Capital Holding Co., Ltd.: RMB29,500,000 ($4,712,570)
Ms. Chun Yan Lu: RMB3,000,000 ($479,244)
Ms. Jing Yue: RMB7,500,000 ($1,198,111)
On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925). On October 24, 2013, Anhou completed registration with the local Administration for Industry and Commerce (“AIC”) on the above-mentioned capital increase. The new business license was issued to Anhou on October 25, 2013.
Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu. On November 17, 2016, Li Chen and Chun Yan Lu entered into Share Transfer Agreement, pursuant to which, Li Chen agreed to transfer all of his equity interests in Anhou to Chun Yan Lu. On October 24, 2013, Anhou completed the share transfer registration with the local AIC. At the end of October 2013, Anhou completed its filing with Local CIRC with respect to its previously-conducted share transfer and capital increase.
As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into VIE Agreements in the same form as the previous Old VIE Agreements, other than the shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date, except that the Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect.
Related Party Transaction Policy
The Company is currently working to improve its policies and procedures for approval of transactions between CUIS and its Directors, Director Nominees, Executive Officers, greater than 5% beneficial owners and each of their respective immediate family members, where the amount involved in the transaction exceeds or is expected to exceed $120,000 in a single calendar year and the party to the transaction has or will have a direct or indirect interest.
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When a potential related person transaction is identified, management presents it to the Audit Committee to determine whether to approve or ratify. In the course of its review and approval or ratification of a related person transaction, the Audit Committee may consider the following factors:
| · | The related person’s interest in the related person transaction; |
| · | The approximate dollar value of the amount involved in the related person transaction; |
| · | The approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss; |
| · | Whether the transaction was undertaken in the ordinary course of our business; |
| · | Whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unaffiliated third party; |
| · | The purpose of, and the potential benefits to us of, the transaction; and |
| · | Any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction. |
The Audit Committee may approve or ratify the transaction only if the Committee determines that, under all of the circumstances, the transaction is in or is not inconsistent with the best interests of the Company. In addition, the Audit Committee may impose any conditions on the related person transaction that it deems appropriate.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth the aggregate fees billed to China United Insurance Service, Inc. for the fiscal years ended December 31, 2017 and 2016 by Simon & Edward, LLP:
| Fiscal Year 2017 | Fiscal Year 2016 | |||||||
| Audit fees(1) | $ | 495,750 | $ | 295,750 | ||||
| Audit-related fees(2) | 20,626 | 7,075 | ||||||
| Tax fees(3) | 30,000 | 27,200 | ||||||
| All other fees | — | — | ||||||
| Total | $ | 546,376 | $ | 330,025 | ||||
| (1) | Consists of fees billed for the audit of our transition financial statements, and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. For fiscal year 2017, the audit fees consist of $200,000 billed for professional services rendered for the audit of the effectiveness of the Company's internal control over financial reporting. |
| (2) | Consists of fees billed for all out-of-pocket expenses associated with performing audit and review services. |
| (3) | “Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. |
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our board pre-approved the audit service performed by Simon & Edward, LLP for our consolidated financial statements as of December 31, 2015, 2016 and 2017.
Policy on Audit Committee Pre-Approval of Audit and Permitted Non-Audit Services of Independent Auditors
The Audit Committee has determined that all
services provided by Simon & Edward, LLP to date were compatible with maintaining the independence of such audit firm. The
charter of the Audit Committee requires advance approval of all auditing services and permitted non-audit services (including the
fees and terms thereof) to be performed for the Company by our independent registered public accounting firm, subject to any exception
permitted by law or regulation.
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Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Index of Financial Statements:
| (1) | The financial statements required by Item 15(a) are filed in Item 8 of Part II, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. |
| (2) | Schedules required by Item 15(a) are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto. |
(b) Index of Exhibits:
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| 125 |
| 126 |
| 127 |
| 128 |
| 129 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Yi Hsiao Mao | Chief Executive Officer and Director | January 24, 2019 | ||
| Yi Hsiao Mao | (Principal Executive Officer) | |||
| /s/ Yung Chi Chuang | Chief Financial Officer | January 24, 2019 | ||
| Yung Chi Chuang | (Principal Executive Officer) | |||
| /s/ Fu Chang Li | Director | January 24, 2019 | ||
| Fu Chang Li | ||||
| /s/ Chwan Hau Li | Director | January 24, 2019 | ||
| Chwan Hau Li | ||||
| /s/ Chih Yuan Lu | Independent Director | January 24, 2019 | ||
| Chih Yuan Lu | ||||
| /s/ Lo Tien Hsin | Independent Director | January 24, 2019 | ||
| Lo Tien Hsin | ||||
| /s/ Chun Hui Yang | Independent Director | January 24, 2019 | ||
| Chun Hui Yang | ||||
| /s/ Tse Hsun Niu | Independent Director | January 24, 2019 | ||
| Tse Hsun Niu |
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Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
I, Yi Hsiao Mao, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of China United Insurance Service, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: January 24, 2019 | /s/ Yi Hsiao Mao | |
| Yi Hsiao Mao | ||
| Director and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
I, Yung Chi Chuang, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of China United Insurance Service, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: January 24, 2019 | /s/ Yung Chi Chuang | |
| Yung Chi Chuang | ||
| Chief Financial Officer | ||
Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officer of China United Insurance Service, Inc. (the “Company”), does hereby certify with respect to the Annual Report of the Company on Form 10-K/A for the period ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: January 24, 2019 | /s/ Yi Hsiao Mao | |
| Yi Hsiao Mao | ||
| Director and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officer of China United Insurance Service, Inc. (the “Company”), does hereby certify with respect to the Annual Report of the Company on Form 10-K/A for the period ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: January 24, 2019 | /s/ Yung Chi Chuang | |
| Yung Chi Chuang | ||
| Chief Financial Officer | ||
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