UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2019
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 every Interactive Data File required to be submitted 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 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 ¨ | Smaller reporting company x |
| 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, 2019, the last business day of the registrant’s most recently completed second fiscal quarter was $60,900,574.
As of March 6, 2020, there were 29,421,736 shares of common stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.
TABLE OF CONTENTS
2
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.
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 (as 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$” or “NTD”), the currency of Taiwan, Hong Kong Dollars (“HK$” or “HKD”), the currency of Hong Kong, and RMB, the currency of China, respectively, and our financial statements are presented in United States dollars (“USD”, “US$” 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).
3
Corporate History and Structure Overview
Our Company is a Delaware corporation organized on June 4, 2010 and has been quoted on various tiers of the OTC Markets since August 2012. We provide our customers brokerage and related services with respect to life insurance and property and casualty insurance products. 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”).
Taiwan Segment- Law Broker and GHFL
The history of our Company dates back to October 9, 1992, when Law Broker was established.
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 two other 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”). Law Management and Law Agent ceased operations, and they were dissolved on April 20, 2016 and April 12, 2016, respectively.
| · | Acquisition of AHFL |
Action Holdings Financial Limited (“AHFL”) was incorporated in the British Virgin Islands with limited liability on April 30, 2012. AHFL holds a 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.
4
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 a public offering in connection with the listing of our Company’s shares on a national stock market, where the Company aimed to raise net proceeds through such public offering of at least $10.0 million; (ii) our Company committed to distribute a cash payment in the amount of NT$22.5 million, on a pro rata basis, to the selling shareholders of AHFL and to issue 5,000,000 common shares to select employees of AHFL pursuant to its employee stock/option plan, and (iii) failure to timely complete either of the above-mentioned criteria would be deemed a material breach by the Company under Article 8 of the Acquisition Agreement, and the non-breaching parties would 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 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.
5
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.
On March 27, 2019, a sixth Amendment to the Acquisition Agreement (the “Sixth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named therein. Pursuant to the Sixth Amendment to the AHFL Acquisition Agreement, our Company agreed to distribute cash payment in the amount of NT$15 million to the selling shareholders of AHFL named therein on or prior to March 31, 2021.
| · | 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, the then sole shareholder of GHFL, entered into an acquisition agreement (the “GHFL Acquisition Agreement”). Pursuant to the GHFL Acquisition Agreement, our Company issued Mr. Chwan Hau Li 352,166 fully paid and non-assessable shares of AHFL common stock (the “AHFL Shares”) together with put options to sell 352,166 shares of common stock of our Company (the “Put Option”), in exchange for 704,333 shares of common stock of GHFL previously held by Mr. Chwan Hau Li, which constituted all of the then issued and outstanding capital stock of GHFL. The Put Option was exercisable within six months of the closing date of the acquisition. The holder of the Put Option would need to forfeit the AHFL Shares to 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 Co., Ltd. (“GIC”), 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 GIC 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 March 31, 2015, Mr. Chwan Hau Li exercised the Put Option, pursuant to which Mr. Chwan Hau Li transferred 352,166 shares of AHFL to our Company and received 352,166 shares of common stock of our Company in exchange. After the exercise of the Put Option, the Company became the sole shareholder of GHFL and AHFL.
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 a public offering with net proceeds of at least $10 million and listing of our Company’s securities on a national stock market on or prior to February 28, 2016. However, as of the date of this annual report, our Company’s securities had not been listed on a national stock exchange.
6
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.
In July of 2018, the Company acquired Joint Broker Co., Limited (“JIB”), a Taiwan Insurance brokerage company, previously known as Kao Te Insurance Broker (“KT Broker”), through GIC. On July 1, 2018, GIC entered into an acquisition agreement (“KT Broker Acquisition Agreement”) with the selling shareholder of KT Broker, Ms. Ma. Pursuant to the KT Broker Acquisition Agreement, GIC agreed to pay $29,545 (NT$ 900,000) in exchange for the insurance brokerage licenses issued to KT Broker by the Taiwanese government, along with right to the KT Broker’s company name and $13,131 (NT$ 400,000) of legal deposits, which were required by the Taiwanese insurance regulations. The Company has no intention of operating the KT Broker existing brokerage business nor retaining any of its sales personnel, therefore the Company recognized for accounting purposes only the acquisition of assets as part of this transaction. The Taiwanese laws do not allow a legal entity to transfer its brokerage license. In order to obtain the desired licenses that KT Broker had, we acquired KT Broker and renamed KT Broker as Joint Insurance Broker Co., Limited to serve as a holding entity for the brokerage licenses. The change of control due to KT Broker Acquisition Agreement and name change did not affect the effectiveness of the insurance brokerage license owned by JIB in Taiwan.
| · | Recent Development- Uniwill Insurance Broker Co., Ltd. |
On November 15, 2019, the Company, through one of its subsidiaries, entered into a joint venture agreement (the “Joint Venture Agreement”) with Cyun-Jhan Enterprise Co., Ltd. (“Cyun-Jhan”) and Jian-Zao International Industrial Co., Ltd. to contribute funds, human resources, and technology into Uniwill Insurance Broker Co., Ltd. (“Uniwill”), a wholly owned subsidiary of the Company incorporated in Taiwan, according to the Joint Venture Agreement. Under the terms of the Joint Venture Agreement, a total of $13.3 million (NTD 400 million) will be injected to Uniwill if and when all of the conditions are met as set forth in the Joint Venture Agreement no later than December 31, 2021. For more information, please see a current report on Form 8-K filed on November 21, 2019.
PRC Segment- Anhou
On July 12, 2010, ZLI Holdings Limited (“CU Hong Kong”), a wholly owned subsidiary of our Company, was established under the laws of 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 an insurance agency businesses in China, 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”) increased 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.
7
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 filed a dissolution application to the local Bureau of Administration and Commerce and made a public announcement published in local newspaper in October 2017. As Sichuan Kangzhuang ceased operations, it was dissolved on October 8, 2018.
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 in Jiangsu Province. 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 million on or prior to October 1, 2012, the CIRC or its local agency, 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.
8
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 and Jiangsu Law (collectively, the “Consolidated Affiliated Entities”, each a “Consolidated Affiliated Entity”). We do not directly 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 March 12, 2019, the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) passed the Foreign Investment Law, which replaced the three existing laws over foreign investment. From January 1, 2020, foreign individuals, enterprises and other organizations that directly or indirectly make investment activities in China are subject to the Foreign Investment Law. However, it remains unclear as to how these changes will affect entities currently operating in China, particularly foreign controlled variable interest entities.
Our Consolidated Affiliated Entities in China are variable interest entities through which all of our insurance services in China are operated. These VIE Agreements 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:
9
| 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 renewal 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. |
Hong Kong Segment Reinsurance Brokerage- PFAL
Prime Financial Asia Ltd. (“PFAL”) is a re-insurance broker company incorporated in Hong Kong and is a majority-owned subsidiary of the Company due to the fact that AHFL owns 51% of PFAL. On April 23, 2014, AHFL and Chun Kwok Wong (“Mr. Wong”) entered into a Capital Increase Agreement, pursuant to which Mr. Wong increased PFAL’s registered capital from HK$500,000 to HK$1,470,000 and AHFL contributed HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital increase on April 30, 2014, Mr. Wong and AHFL owned 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.
Revenue Generation
As a holding company with no business other than holding equity interest of our operating subsidiary, CU WFOE in China and the Taiwan Segment, we rely principally on dividends to be paid by CU WFOE in China and the Taiwan Segment. 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, 2019, Anhou was operating at a profit, but since Anhou remains a growing company that requires financial resources to support further expansion, the decision as to a dividend payment will be decided in the future depending on the financial circumstances, including maintaining prudent cash reserves. 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.
10
For the year ended December 31, 2018, 85.82 %, 13.31% and 0.87% of our revenues in our consolidated financial statements were derived from our Taiwan Segment, PRC Segment, and Hong Kong Segment, respectively. For the year ended December 31, 2019, 91.14 %, 8.87% and 0.30% of our revenues in our consolidated financial statements were derived from our Taiwan Segment, PRC Segment, and Hong Kong Segment, 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 AIA International Limited Taiwan Branch.
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.
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 AHFL 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, 2019.
11
The following flow chart illustrates our Company’s organizational structure as of March 6, 2020:
Products and Services
The Taiwan and PRC Segments 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 the Taiwan and PRC Segments 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, Anhou 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.
The Taiwan and PRC Segments 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 and the particular insurance company that issues the particular insurance products.
12
Life Insurance Products
The Taiwan Segment
The life insurance products the Taiwan segment distributes can be broadly classified into the categories set forth below. Due to continuous product innovation by insurance companies, some of the insurance products Taiwan segment distributes combine features of one or more of the categories listed below. Total net revenues from life insurance products distributed by Taiwan segment in the fiscal year of 2019 was approximately $81.54 million, accounted for approximately 93.96% of Taiwan segment’s total net revenues and approximately 85.01% of our total net revenues for the fiscal year ended December 31, 2019, respectively.
| · | Individual Whole Life Insurance. The individual whole life insurance products the Taiwan segment 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 the Taiwan segment 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 the Taiwan segment 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 the Taiwan segment 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 the Taiwan segment 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 the Taiwan segment 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 the Taiwan segment distributes provide accident coverage for accidental death, bodily injury, and other travel injuries. The premium is based on the number of travel days and the insured amount. |
The life insurance products the Taiwan segment distributed in the year ending December 31, 2019 were primarily underwritten by, in alphabetical order, AIA International Limited Taiwan Branch, Farglory Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc. Among them, Taiwan Life Insurance Co., Ltd., Farglory Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc. accounted for 19.35%, 17.15%, and 13.96% of our total net revenues in the fiscal year ending December 31, 2019, respectively.
13
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 fiscal year of 2019 was approximately $ 8.03 million, accounting for approximately 94.25% of Anhou’s total net revenues and approximately 8.37% of our total net revenues for the year ending December 31, 2019, 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. |
| · | 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. |
14
The life insurance products Anhou distributed in the year ending December 31, 2019 were primarily underwritten by, in alphabetical order, Aegon THTF Life Insurance Co., Ltd., AVIVA Life Insurance Co., Ltd., Evergrande Life Assurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., Huaxia Insurance Co., Ltd., and Tianan Life 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, 2019.
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 the Taiwan Segment 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 on developing our capability to distribute individual life insurance products with periodic payment schedules since the inception of Anhou and the Taiwan Segment. We expect that sales of life insurance products will continue to be our primary source of revenue in the next several years.
15
Property and Casualty Insurance Products
The Taiwan Segment
The Taiwan Segment’s main property and casualty insurance products are automobile insurance, casualty insurance, and liability insurance. The Taiwan Segment commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Our total net revenues from property and casualty insurance products in the fiscal year of 2019 year was approximately $5.25 million, accounted for approximately 6.04% of the Taiwan Segment’s total net revenues and approximately 5.47% of our total net revenues in the year ending December 31, 2019, respectively.
The property and casualty insurance products the Taiwan Segment distributes can be further classified into the following categories:
| · | Automobile Insurance. The Taiwan Segment distributes both standard automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies the Taiwan Segment sells generally have a term of one year and cover damages of the insured vehicle caused by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. The Taiwan Segment also sells standard third party liability insurance policies, which cover bodily injury and property damages caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders the Taiwan Segment 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 the Taiwan Segment distributes are primarily designed to insure any losses or damages to properties caused directly by accidents. The policy period is usually one year and the premium is generally calculated based on the insured amount. |
| · | Liability Insurance. The liability insurance products the Taiwan Segment 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, third party injuries or negligence. The policy period is usually one year and the premium is generally calculated based on the insured amount. |
The property and casualty insurance products the Taiwan Segment distributed in the year ending December 31, 2019 were primarily underwritten by, in alphabetical order, Fubon Insurance Co., Ltd., Hotai Insurance Co., Ltd., Shinkong Insurance Co., Ltd., Taiwan Insurance Co. Ltd. and TLG Insurance Co. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2019.
16
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 developed its automobile insurance business in 2010. The total net revenues from property and casualty insurance products distributed by Anhou in the 2019 fiscal year was approximately $0.49 million, accounted for approximately 5.75% of Anhou’s total net revenues and approximately 0.51% of our total net revenues for the fiscal year ending December 31, 2019.
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 damages to the insured property caused by fire, explosion and thunder and lightning. Comprehensive commercial property insurance policies generally cover damages 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, 2019 were primarily underwritten by, in alphabetical order, China Pacific (Group) Co., Ltd., Huatai P&C Insurance Co., Ltd., PICC Property and Casualty Co., Ltd., Ping An Insurance (Group) Company of China, 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, 2019.
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 Taiwan by insurance agency companies or insurance brokerage companies affiliated with AHFL or CUII. 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 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, which is an indicator of how long customers stay with their policies.
17
On September 30, 2014, AHFL entered into an Amendment to the Alliance Agreement (the “First Amendment to the Alliance Agreement”) with AIATW. Pursuant to the First Amendment to the 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 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 No. 2 to the Alliance Agreement (the “Second Amendment to the 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 the 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 are to: (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.
On June 14, 2017, AHFL entered into an Amendment No. 3 to the Alliance Agreement (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 to the Alliance Agreement, 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 to the Alliance Agreement. 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 the Second Amendment to the Alliance Agreement is removed under the Third Amendment to the Alliance Agreement 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 to the Alliance Agreement.
18
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 has obtained the ISO 27001 certification of Information Security Management System (ISMS) and BS 10012 certification of Personal Information Management System since June 20, 2017. Our online business in Taiwan was still at a nascent stage with the majority of the sales still being completed by off-line agents as of the date of this annual report.
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. |
19
The Unified Operating Platform has proved to be an efficient and streamlined operating system which has contributed to the successful expansion and growth of Law Broker into one of the leading insurance brokerage companies in Taiwan, with 35 sales and service outlets (including the headquarters) across Taiwan and 2,857 insurance sales professionals as of December 31, 2019. Law Broker, Uniwill Insurance Broker Co., Ltd. (“Uniwill Insurance Broker”) and Joint Insurance Broker Co., Ltd. (“Joint Insurance”) have a total of 51 sales and service outlets (including the headquarters) across Taiwan and 4,161 insurance sales professionals as of December 31, 2019.
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
The Taiwan Segment had a total of 51 sales and service outlets (including the headquarters) across Taiwan as of December 31, 2019, among which, 17 were located in the northern region, 25 in the central region, 7 in the southern region and 2 in the eastern region. As of December 31, 2019, Law Broker, Uniwill Insurance Broker and Joint Insurance together had 250 administrative staff members.
20
The Taiwan Segment 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 in the PRC. Anhou has targeted its distribution and service network in provinces with most population in China, such as Henan, Jiangsu, Sichuan, Fujian, and Guangdong. As of December 31, 2019, Anhou had one insurance agency and one insurance brokerage firm, with 1,856 sales professionals and 100 administrative staff members operating across 37 cities within these five provinces.
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
Due to its extensive line of insurance products underwritten by the insurance companies in Taiwan, the Taiwan Segment managed to offer a variety of insurance products to customers of different ages or professions. Despite relatively healthy government-sponsored retirement and medical programs, more and more Taiwanese, especially those with stable financial means and desire for high-end retirement life, have been focusing on endowment and medical commercial insurance products, while the investment insurance products have been playing a less significant role since the economic downturn.
In addition, from time to time, the Taiwan Segment 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 the Taiwan Segment 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.
The Taiwan Segment sells automobile insurance and casualty insurance primarily to individual customers and liability insurance to institutional customers.
Anhou sells automobile insurance and individual accident insurance primarily to individual customers and 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 sector, 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.
21
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. Both the Taiwan Segment and Anhou have formed strategic relationships with numerous insurance companies in Taiwan and China, respectively.
In the fiscal year ended December 31, 2019, the Taiwan Segment’s major insurance company partners in Taiwan, after aggregating the business conducted between the Taiwan Segment and the various local branches of the insurance companies, were AIA International Limited Taiwan Branch, Farglory 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, Taiwan Life Insurance Co., Ltd., Farglory Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc., accounted for approximately 19.35%, 17.15%, and 13.96% of the Company’s total net revenues for the year ended December 31, 2019, respectively.
In the fiscal year ended December 31, 2019, 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., Evergrande Life Insurance Company Limited, Funde Sino Life Insurance Co., Ltd., Huaxia Insurance Co., Ltd., and Tianan 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, 2019.
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. |
22
Law Broker is one of the leading insurance brokerage firms in Taiwan. The Taiwan Segment had a total of 51 sales and service outlets (including the headquarters) across Taiwan as of December 31, 2019, among which, 17 were located in the northern region, 25 in the central region, 7 in the southern region and 2 in the eastern region. As of December 31, 2019, Law Broker, Uniwill Insurance Broker and Joint Insurance together had 250 administrative staff members. Other than insurance companies and commercial banks, the Taiwan Segment’s primary competitors are Taiwan insurance brokerage companies of relatively large size, such as Everpro Insurance Brokers Co., Ltd.
During the past 16 years, Anhou has expanded its business across 37 cities within Henan, Sichuan, Jiangsu, Fujian, and Guangdong provinces with 1,856 sales professionals and 100 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.
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 |
| 2019 |
Eighth Taiwan Insurance Excellence Award Excellence in Talent Training Award–Gold Medal Excellence in Corporate Social Responsibility Award–Gold Medal Excellence in Digital Application Award–Silver Medal Excellence in Customer Service–Silver Medal
|
| 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 |
23
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, independent contractors and others.
Law Enterprise and Law Broker jointly own the following trademarks registered 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;
24
the logo of Law (錠嵂) under the registration number 01462328, with a 10-year validity from June 16, 2011 to June 15, 2021;
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.
25
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
the logo of SARACARES under the registration number 01876419 , with a 10 year validity from October 16, 2017 to October 15, 2027
26
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, 2018 to November 30, 2028;
the logo of Law Insurance Broker under the registration 01340565, with a 10-year validity from December 1, 2018 to November 30, 2028;
the logo of Law Blue Magpie under
the registration number 01340566, with a 10-year validity from December 1, 2018 to November 30, 2028;
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, 2018 to June 30, 2028;
27
the logo of Education Training Blue Magpie under the registration number 01313467, with a 10-year validity from June 1, 2018 to May 31, 2028;
the logo of Cartoon Blue Magpie under the registration number 01313464, with a 10-year validity from June 1, 2018 to May 31, 2028;
28
the logo of Little Blue Magpie under the registration number 01313468, with a 10-year validity from June 1, 2018 to May 31, 2028;
the logo of Triumph Blue Magpie under the registration number 01313465, with a 10-year validity from June 1, 2018 to May 31, 2028;
the logo of Blue Magpie Fleet Picture under the registration number 01310350 , with a 10-year validity from May 1, 2018 to April 30, 2028; and
29
the logo of Fighting Blue Magpie under the registration number 01313466, with a 10-year validity from June 1, 2018 to May 31, 2028.
Jiangsu Law has one registered trademark in China, the logo of Jiangsu Law:
30
Employees
As of December 31, 2019, Law Broker, Uniwill Insurance Broker and Joint Insurance together had 250 administrative staff members and Anhou has 100 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.
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.
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.
Taiwan Insurance Law
The current principal regulation governing insurance in Taiwan is the Insurance Law, most recently amended on January 16, 2019 by Legislative Yuan, which provided the basic framework for regulating the insurance industry.
The Taiwan 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 and life insurance. The Taiwan Insurance Law distinguishes insurance between fire disaster, marine, land and air, liability, surety, and other casualty and property insurance on one hand, and life insurance, health insurance, casualty insurance and annuity on the other. Unless permitted by the FSC, insurance companies are not allowed to engage in both types of insurance businesses.
31
The insurers, insurance agencies, insurance brokerages and insurance adjustors must join the related industry associations, or they are prohibited from conducting business operation. An insurance agency company or broker company of certain sizes shall establish internal control and audit systems as well as business solicitation systems and procedures.
Taiwan FSC
The Taiwan 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, including 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 November 18, 2019 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.
32
There are special requirements for Taiwan insurance 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 is valid for 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.
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 year prior to 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, 2016 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.
33
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. |
34
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 loans of longer than one-year terms 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.
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 June 29, 2018; |
| · | 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 June 25, 2018. |
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.
35
Rates of Income Tax
The individual comprehensive income tax exemption threshold is NT$120,000 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 a progressive tax rate ranging from 18% to 20% on its taxable income.
Sale of goods or services, 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 Chinese 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. |
| (b) | Separation of property and casualty insurance and life insurance. 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. |
36
| (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. |
37
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. |
| (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, hereinafter 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.
38
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) | take enforcement actions against improper behaviors or misconducts of an insurance company or an insurance intermediary. |
Regulations 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.
39
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 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.
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.
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.
40
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 a Chinese 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.
41
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.
42
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 longer 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.
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.
43
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.
44
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 |
| · | 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 Chinese dollars or 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.
45
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 March 12, 2019, MOFCOM passed the Foreign Investment Law, which replaced the three existing laws over foreign investment. From January 1, 2020, foreign individuals, enterprises and other organizations that directly or indirectly make investment activities in China are subject to the Foreign Investment Law. However, it remains unclear as to how these changes will affect entities currently operating in China, particularly foreign controlled variable interest entities.
PRC Regulations on Tax
PRC Enterprise Income Tax (“EIT”)
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.
46
PRC Business Tax and Implementation of Value-Added Tax “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, 2019, 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.
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, the SEC filed a complaint (the “Complaint”) at U.S. District Court for the Southern District of New York (the “Court”) against Company and Cheng-Hsiung Huang (“Mr. Huang”), one of the Company’s former employees, alleging potential violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder based on the alleged manipulative trading scheme of the Company’s common stock, such as wash trades, from approximately December 2013 to March 2018. Neither the Company nor Mr. Huang realized any financial gain from the alleged scheme and both the Company and Mr. Huang substantially cooperated with the SEC’s investigation regarding the alleged manipulative trading scheme. On November 29, 2018, without admitting or denying the allegations in the Complaint, the Company agreed to the entry of a final judgment (the “Final Judgment”) that permanently enjoined it from violating Section 10(b), Rule 10b-5 and Section 17(a) of the Securities Act, ordered the Company to comply with its undertaking to retain an independent compliance monitor for a period of not less than one year to help the Company stay in compliance with the U.S. securities law. On December 6, 2018, without admitting or denying the allegations in the Complaint, Mr. Huang agreed to the entry of the Final Judgment that permanently enjoined him from violating Section 10(b), Rule 10b-5 and Section 17(a) of the Securities Act, ordered Mr. Huang to pay a civil penalty of $30,000 in installments. On January 18, 2019, the Court issued the Final Judgment on this case. Although the Company settled the SEC fraud charges with no economic loss, we suspect that our reputation may suffer as a result of the SEC investigation.
47
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 the date of this annual report (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.
An occurrence of the COVID-19 pandemic is likely to negatively affect our operations.
The occurrence of the COVID-19 pandemic, an uncontrollable event, is likely to negatively affect our operations. A pandemic typically results in social distancing, travel bans and quarantine, and this has limited our business travel and regular business activities, such as access to our facilities, customers, management, support staff and professional advisors. These, in turn, will not only impact our operations, financial condition and demand for our services but our overall ability to react timely to mitigate the impact of this pandemic. Also it may substantially hamper our efforts to provide our investors with timely information and comply with our filing obligations with the Securities and Exchange Commission during and shortly after the pandemic.
We are subject to extensive regulations for our insurance brokerage business and operations.
We conduct our insurance brokerage business primarily in Taiwan, mainland China and Hong Kong and our business operations are subject to vigorous regulations in these jurisdictions. Our operating subsidiaries are licensed insurance brokers in Taiwan and mainland China and therefore need to comply with the relevant insurance laws and regulations in Taiwan and mainland China, respectively. Any failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our licenses as insurance brokers in the jurisdiction where such failure occurs. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation and impede our ability to retain customers and develop new customer relationships, which may reduce our revenues.
From time to time, the regulatory landscape in the insurance industry in Taiwan and mainland China involves and changes. We face the risk of significant intervention by regulatory authorities, including increased registered capital requirements, extended training of the insurance agencies’ personnel, and adoption of costly or restrictive new regulations and judicial or administrative proceedings. If any restrictive or costly new regulations and rules become effective and applicable to our business, these regulations may materially limit our activities and operational profitability.
International operations expose us to currency exchange and repatriation risks, and we cannot predict the effect of future exchange rate fluctuations on its business and operating results.
We have our primary business operations in Taiwan, mainland China and Hong Kong. Substantial amounts of revenues are received and expenses are incurred in Taiwanese, Chinese and U.S. dollars. Thus, we have exposure to currency fluctuations. We cannot assure you that the effect of currency exchange fluctuations will not materially affect ourrevenues and net income in the future.
Because our primary business activities are conducted in Taiwan, mainland China and Hong Kong, we are subject to the risks of doing business internationally, including periodic foreign economic downturns and political instability, which may adversely affect our revenue and cost of doing business.
Our primary places of business are in Taiwan, mainland China and Hong Kong and we have almost all of our employees and management team in those jurisdictions. Foreign economic downturns may affect our results of operations in the future. Additionally, other facts relating to the operation of the Company’s business outside of the U.S. may have a material adverse effect on the Company’s business, financial condition and results of operations, including:
| ● | international economic and political changes; |
| ● | the imposition of governmental controls or changes in government regulations, including tax laws, regulations and treaties; |
| ● | changes in, or impositions of, legislative or regulatory requirements regarding the display screen and power bank industries; |
| ● | compliance with U.S. and international laws involving international operations, including the Foreign Corrupt Practices Act and export control laws; |
| ● | difficulties in achieving headcount reductions due to unionized labor and works councils; |
| ● | restrictions on transfers of funds and assets between jurisdictions; |
| ● | China- U.S. political instability; | |
| ● | Mainland China and Taiwan political tension; and | |
| ● | Outbreaks of diseases and the fears of a pandemic disease. |
As we continue to operate our business internationally, our success will depend in part, on our ability to anticipate and effectively manage these risks. The impact of any one or more of these factors could materially adversely affect our business, financial condition and results of operations.
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.
On December 20, 2018, we agreed to settle certain fraud charges brought by the SEC relating to an alleged scheme to manipulate the appearance market demand for our common stock and as a result the historical market prices of our common stock might not be reflective of the actual value of our common stock at such time. Even though such alleged fraudulent activities and the SEC settlement did not result in a profit for the Company or any of its employees, these activities may have affected our common stock market prices and as such the 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 an active public market will develop for our common stock or that our common stock will ever be approved for trading on a national stock exchange.
There is no active public trading market for our securities and any historic trading activity indicating that an established trading market might have existed cannot be relied upon. Our shares of common stock are currently quoted on the OTC Pink Market and have not been listed on any national stock exchange. We cannot assure you that an active trading market for our common stock will develop or that if developed, will be sustained. In the absence of an active trading market of our common stock, you may not be able to liquidate your investment in our common stock at all or as soon as desired.
48
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
Law Broker’s headquarters is located at 5th Floor, No. 311 3rd Section, Nanjing East Road, Taipei City, Taiwan, with approximately 753.29 square meters (equivalent to 8,105 square feet) of office space. Law Broker renewed the office lease with Pon-Chen Co., Ltd. for additional two years commencing from June 1, 2019 to May 31, 2021 and with a monthly rent of NT $373,251. Law Broker has also entered into 41 leases for each of its sales and service outlets and training centers (excluding headquarter), for an aggregate monthly fee (untaxed) of NT$5,403,805 (equivalent to approximately $180,213).
Anhou’s current registered address is located at Room 2008-2010, No. 215 Jiangzhong Middle Road, Jianye District, Nanjing, Jiangsu Province, China, with 553.26 square meters (equivalent to approximately 5,955 square feet) of office space. The lease agreement is by and among Zheng Yong Xiang, Zhang Guo Qiang and Anhou. The term is from November 3, 2018 to November 2, 2024. Anhou paid the rent of its office space in Nanjing in the total amount of RMB 4,530,579 or approximately $647,799 during the fiscal year ended December 31, 2019.
Jiangsu Law’s office is located at Room 2006-2010, No. 215 Jiangdong Middle Road, Jian'ou District, Nanjing City, Jiangsu Province, China, with 5,955 square feet (equivalent to 553.26 square meters) of office space. The lease is between Zheng Guoxiang and Zhang Guoqiang. The lease term is for six years from November 3, 2018 to November 2, 2024, with rent of RMB4,530,579 (equivalent to $652,210) per year, payable every year during the term of the lease.
On December 20, 2018, the SEC filed a complaint (the “Complaint”) at U.S. District Court for the Southern District of New York (the “Court”) against Company and Cheng-Hsiung Huang (“Mr. Huang”), one of the Company’s former employees, alleging potential violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder based on the alleged manipulative trading scheme of the Company’s common stock, such as wash trades, from approximately December 2013 to March 2018. Neither the Company nor Mr. Huang realized any financial gain from the alleged scheme and both the Company and Mr. Huang substantially cooperated with the SEC’s investigation regarding the alleged manipulative trading scheme.
49
On November 29, 2018, without admitting or denying the allegations in the Complaint, the Company agreed to the entry of a final judgment (the “Final Judgment”) that permanently enjoined it from violating Section 10(b), Rule 10b-5 and Section 17(a) of the Securities Act, ordered the Company to comply with its undertaking to retain an independent compliance monitor for a period of not less than one year to help the Company stay in compliance with the U.S. securities law.
On December 6, 2018, without admitting or denying the allegations in the Complaint, Mr. Huang agreed to the entry of the Final Judgment that permanently enjoined him from violating Section 10(b), Rule 10b-5 and Section 17(a) of the Securities Act, ordered Mr. Huang to pay a civil penalty of $30,000 in installments.
On January 18, 2019, the Court issued the Final Judgment on this case. For further information, please see the Company’s current report on Form 8-K/A filed on January 22, 2019 (“Amended Current Report Re SEC Action”).
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 various tiers of the OTC Market under the symbol “CUII” since August 2012. The latest available closing price of our common stock prior to January 22, 2020 was US$2.20.
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, 2019 | ||||||||
| Low | High | |||||||
| First Quarter ended March 31, 2019 | $ | 2.90 | $ | 2.90 | ||||
| Second Quarter ended June 30, 2019 | $ | 2.80 | $ | 2.80 | ||||
| Third Quarter ended September 30, 2019 | $ | 2.50 | $ | 2.80 | ||||
| Fourth Quarter ended December 31, 2019 | $ | 2.25 | $ | 2.50 | ||||
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 Re SEC Action set forth in Item 3 of this annual report.
50
Shareholders
As of December 31, 2019, there were 722 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 104, 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 operating 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 (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, 2019.
51
Options and Warrants
As of March 10, 2020, we had no outstanding options or warrants exercisable for shares of our Common Stock.
The following selected consolidated statement of operations data for the years ended December 31, 2019, and 2018 and the selected consolidated balance sheet data as of December 31, 2019, and 2018 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K.
Our historical results 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, 2019 and 2018 is derived in part from, and should be read in conjunction with the Company’s Consolidated Financial Statements and related notes.
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
| Years Ended December 31 | ||||||||
| 2019 | 2018 | |||||||
| Revenue | $ | 95,919,338 | $ | 78,667,731 | ||||
| Cost of revenue | 65,342,976 | 49,314,709 | ||||||
| Gross profit | 30,576,362 | 29,353,022 | ||||||
| Operating expenses: | ||||||||
| Selling | 2,707,176 | 3,560,840 | ||||||
| General and administrative | 20,214,659 | 17,854,923 | ||||||
| Total operating expense | 22,921,835 | 21,415,763 | ||||||
| Income from operations | 7,654,527 | 7,937,259 | ||||||
| Other income (expenses): | ||||||||
| Interest income | 453,184 | 446,859 | ||||||
| Interest expenses | (208,008 | ) | (130,523 | ) | ||||
| Dividend income | 367,557 | 354,224 | ||||||
| Other - net | 333,826 | 418,999 | ||||||
| Total other income(expenses), net | 946,559 | 1,089,559 | ||||||
| Income before income tax | 8,601,086 | 9,026,818 | ||||||
| Income tax expense | (2,704,297 | ) | (3,610,172 | ) | ||||
| Net income | 5,896,789 | 5,416,646 | ||||||
| Less: net income attributable to the noncontrolling interests | (2,837,941 | ) | (3,045,241 | ) | ||||
| Net income attributable to parent’s shareholders | 3,058,848 | 2,371,405 | ||||||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation gain (loss) | 1,010,688 | (1,217,733 | ) | |||||
| Other | (4,999 | ) | 542 | |||||
| Other comprehensive income (loss) | 1,005,689 | (1,217,191 | ) | |||||
| Comprehensive income | 6,902,478 | 4,199,456 | ||||||
| Less: comprehensive income attributable to noncontrolling interests | (3,255,297 | ) | (2,615,388 | ) | ||||
| Comprehensive income attributable to parent’s shareholders | $ | 3,647,181 | $ | 1,584,068 | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 29,429,448 | 29,452,669 | ||||||
| Diluted | 29,429,448 | 29,452,669 | ||||||
| Earnings per share attributable to parent’s shareholders: | ||||||||
| Basic | $ | 0.101 | $ | 0.078 | ||||
| Diluted | $ | 0.101 | $ | 0.078 | ||||
52
Selected Consolidated Balance Sheet Data
| Year Ended December 31 | ||||||||
| 2019 | 2018 | |||||||
| Total assets | $ | 89,242,422 | $ | 68,881,844 | ||||
| Total current liabilities | 37,397,111 | 26,263,014 | ||||||
| Total long-term liabilities | 6,093,819 | 3,676,000 | ||||||
| Total shareholders 'equity | 45,751,492 | 38,942,830 | ||||||
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. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months and periods of those fiscal years.
We are a Delaware corporation, incorporated 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). Our common stock trades over the counter under the ticker symbol “CUII” on the OTC Pink market. The Company primarily engages in brokerage and insurance agency services by providing two broad categories of insurance products, life insurance products and property and casualty insurance products, and conducts its business primarily in three geographic operating segments, Taiwan, PRC, and Hong Kong. The insurance products that the Company’s subsidiaries sell are underwritten by certain leading insurance companies in Taiwan, the PRC and regions and countries near the PRC.
53
We have three operating subsidiaries in our Taiwan Segment and conduct brokerage and insurance agency services through the subsidiaries across Taiwan. Among the three operating subsidiaries, two of which were acquired through making capital contributions or an acquisition agreement during the years of 2018 and 2019. Furthermore, the Company through one of its subsidiaries entered into a joint venture agreement (the “Joint Venture Agreement”) with two parties in November 2019. Under the terms of the joint venture agreement, all parties agreed to contribute funds, human resources, and technology into Uniwill Insurance Broker Co., Ltd. (“Uniwill”, a wholly owned subsidiary incorporated in Taiwan). Under the terms of the agreement, a total of $13.3 million (NTD 400 million) will be injected to Uniwill if and when all of the conditions are met as set forth in the Joint Venture Agreement no later than December 31, 2021. On August 15, 2019, AIlife increased and completed the capital injections in Uniwill to the amount of $3.3 million. However, as of December 31, 2019, certain necessary regulatory approvals and legal procedures were to be completed. The procedures for changing the legal representative of Uniwill have been passed on January 6, 2020, but other procedures have not been completed yet as of the date of this report. Our goal in the Taiwan Segment is to enable synergies among group companies and generate revenues from marketing and making the technologies available to insurance intermediary companies through the new subsidiaries. Our revenue from the Taiwan Segment is about 90.8% of the total revenue of the Company for the year ended December 31, 2019. As of December 31, 2019, we had 51 sales and service outlets (including the headquarters) with 4,161 sales professionals and 250 administrative staff in the Taiwan segment.
Through our consolidated affiliated entities, we had two insurance agencies, one brokerage and 47 service outlets with 2,589 full-time sales professionals and 139 administrative staff in Nanjing, Henan, Sichuan, Jiangsu, Fujian and Guangdong Provinces in the PRC Segment as of December 31, 2019. Our PRC segment contributed 8.9% of total revenue of the Company for the year ended December 31, 2019.
Our Hong Kong Segment mainly consists of one operating subsidiary, which acts as a broker for reinsurance products and earns commissions on sales of insurance products from other insurers. As of December 31, 2019, we had one sales and service outlet (including the headquarters) with no sales professionals and one administrative staff in Hong Kong segment.
A lot of countries, including the PRC, Japan, South Korea, have been affected by the outbreak of the coronavirus (“COVID-19”) since January 2020. We may expect that COVID-19 would have an adverse impact on our business in the PRC Segment in the short run and have taken actions, which include stimulations of our salesforce through online meetings and cloud-based trainings as well as our commitments to make timely commissions to sales professionals. Furthermore, we have developed effective communication channels with insurance companies to pass on individual customers’ information and upgraded our services to individuals. The Government of the PRC is providing businesses with certain incentive policies and programs, such as tax cuts and relief on the social security insurance. We plan to fully resume our regular operations no later than the end of April 2020 and expect to reach peak sales of health insurances soon; although we cannot guaranty we will resume the full operation within the expected timeframe. Any potential impacts of COVID-19 remain highly uncertain and cannot be predicted with confidence.
54
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with Accounting Principles generally accepted in the United States of America (“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.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with GAAP and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. In accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Company consolidates any variable interest entity (“VIE”), of which it is the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary. The Company evaluates its relationships with all the VIEs on an ongoing basis to ensure that it continues to be or becomes the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Noncontrolling Interest
The Company follows FASB 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. NCIs may 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.
55
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, 2019 and 2018.
Long-Term Investments
Long-term investments include government bonds held as available-for-sale, investment in real estate investment trusts (“REITs”) measured at fair value through net income, and equity investments under cost method. Available-for-sale investments are carried at fair value and unrealized gains and losses as a result of changes in the fair value are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.
The Company measures equity investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% using cost method, and no changes in fair value is recognize in net income for those equity investments.
56
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, 2019 and 2018.
Revenue Recognition
We adopted the new revenue standard ASC Topic 606, Revenue from Contracts with Customers, at the beginning of 2018, which requires that recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company’s revenue is derived from insurance agency and brokerage services. The Company, through its subsidiaries and variable interest entities, sells insurance products provided by insurance companies to individuals, and is compensated in the form of commissions from the respective insurance companies, according to the terms of each service agreement made by and between the Company and the insurance companies.
We recognize revenue when control over services provided by the Company is transferred to the respective insurance company, whereby the transfer of control is considered complete when a policy becomes effective. When a policy is effective, the insurance company is obligated to pay the agreed-upon commission to the Company under the terms of its service agreement with the Company and such commission is recognized as revenue. Variable or contingent consideration is recognized when we conclude that is it probable that a significant reversal of revenue will not probably occur in subsequent periods.
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.
57
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).
Leases
We adopted the new lease standard as of January 1, 2019 using a modified retrospective transition with no adjustment to its comparative periods in the year of transition. The Company has operating leases for its offices. We determine if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides us the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, we consider it to be, or contain, a lease. For leases with an initial term greater than 12 months, we record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments. The lease term used in the calculation of right-of-use assets and lease liabilities renewal and termination options that are reasonably certain to be exercised. Our leases do not provide an implicit borrowing rate, and we estimate the Company’s incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Results of Operations
Overview of the years ended December 31, 2019 and 2018
The following table shows the results of operations for the years ended December 31, 2019 and 2018:
| Year Ended December 31 | ||||||||||||||||
| 2019 | 2018 | Change | Percent | |||||||||||||
| Revenue | $ | 95,919,338 | $ | 78,667,731 | $ | 17,251,607 | 21.9 | % | ||||||||
| Cost of revenue | 65,342,976 | 49,314,709 | 16,028,267 | 32.5 | % | |||||||||||
| Gross profit | 30,576,362 | 29,353,022 | 1,223,340 | 4.2 | % | |||||||||||
| Gross profit margin | 32 | % | 37 | % | (5.4 | )% | (14.6 | )% | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 2,707,176 | 3,560,840 | (853,664 | ) | (24.0 | )% | ||||||||||
| General and administrative | 20,214,659 | 17,854,923 | 2,359,736 | 13.2 | % | |||||||||||
| Total operating expenses | 22,921,835 | 21,415,763 | 1,506,072 | 7.0 | % | |||||||||||
| Income from operations | 7,654,527 | 7,937,259 | (282,732 | ) | (3.6 | )% | ||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | 453,184 | 446,859 | 6,325 | 1.4 | % | |||||||||||
| Interest expenses | (208,008 | ) | (130,523 | ) | (77,485 | ) | 59.4 | % | ||||||||
| Dividend income | 367,557 | 354,224 | 13,333 | 3.8 | % | |||||||||||
| Other - net | 333,826 | 418,999 | (85,173 | ) | (20.3 | )% | ||||||||||
| Total other income(expenses), net | 946,559 | 1,089,559 | (143,000 | ) | (13.1 | )% | ||||||||||
| Income before income tax | 8,601,086 | 9,026,818 | (425,732 | ) | (4.7 | )% | ||||||||||
| Income tax expense | (2,704,297 | ) | (3,610,172 | ) | 905,875 | (25.1 | )% | |||||||||
| Net income | 5,896,789 | 5,416,646 | 480,143 | 8.9 | % | |||||||||||
| Less: Net income attributable to the noncontrolling interests | (2,837,941 | ) | (3,045,241 | ) | 207,300 | (6.8 | )% | |||||||||
| Net income attributable to parent’s shareholders | 3,058,848 | 2,371,405 | 687,443 | 29.0 | % | |||||||||||
58
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. We conduct our insurance brokerage business in 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.
The Company’s majority revenues derived from the commissions from sales of life insurance products. Total commission revenue from sales of life insurance products accounted for 93.6% and 92.6% of total revenue for the year ended December 31, 2019 and 2018, respectively; whereas commission revenue from sales of property and casualty insurance products only contributed 6.1% and 6.8% of total revenue for the year ended December 31, 2019 and 2018, respectively.
Most of the individual life insurance products we distribute allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term or make installment payments. If an insured chooses to pay for the life insurance by installment, a life insurance policy can generate periodic payments of fixed premiums for the insurance company for a period of time and as a result generate commissions and fee incomes for our Company 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, we have placed significant resources to expand and sell the life insurance products with periodic payment schedules. We expect that sales of life insurance products will continue to be our primary source of revenue in the next several years.
Our total revenue reached approximately $95.9 million for the year ended December 31, 2019, increased by approximately $17 million (or 21.9%) compared to the total revenue of $78.7 million for the year ended December 31, 2018. The increase in our total revenue was attributable primarily to the constant business growth in the Taiwan Segment. During the years ended December 31, 2019 and 2018, the revenues generated from the Taiwan, PRC and Hong Kong Segments were as follows:
| Geographic Areas | For the Years Ended December 31, | |||||||||||||||
| 2019 | 2018 | Change | Percent | |||||||||||||
| Revenue | ||||||||||||||||
| Taiwan segment | $ | 87,117,945 | $ | 67,483,660 | $ | 19,634,285 | 29.1 | % | ||||||||
| Percentage of revenue | 90.8 | % | 85.8 | % | ||||||||||||
| PRC segment | 8,517,475 | 10,465,147 | (1,947,672 | ) | (18.6 | )% | ||||||||||
| Percentage of revenue | 8.9 | % | 13.3 | % | ||||||||||||
| Hong Kong segment | 283,918 | 718,924 | (435,006 | ) | (60.5 | )% | ||||||||||
| Percentage of revenue | 0.3 | % | 0.9 | % | ||||||||||||
| Total revenue | $ | 95,919,338 | $ | 78,667,731 | $ | 17,251,607 | 21.9 | % | ||||||||
59
Overall revenue from our Taiwan segment increased by $19.6 million from $67.5 million for the year ended December 31, 2018 to $87.1 million for the year ended December 31, 2019. The increase was mainly due to the combined effects of discontinuities of the long-term care products and an interest rate reduction in insurance liability reserves of life and saving insurances by Financial Supervisory Commission Taiwan. The long-term care products provided more favorable terms to individual customers was discontinued in the year of 2019 and the individual customers took advantage of the opportunity to lock in the policy prior to the discontinuities of the long-term care products. In the fourth quarter of 2019, Financial Supervisory Commission Taiwan announced to reduce the interest rate of life and saving insurance liability reserves starting in the year of 2020, leading to a market expectation that insurance premiums of the life and saving insurance would increase more than 5% compared to that in 2018 and therefore boosting the customers’ demand to purchase and lock in in insurance policies before the expected premium adjustment next year.
Overall revenue from our PRC segment decreased by $1.9 million (or 18.6%) to $8.5 million for the year ended December 31, 2019 from $10.5 million for the year ended December 31, 2018. Such decrease in revenue of the PRC segment was mainly due to the effect of the China Insurance Regulatory Commission’s Notice on Regulating Product Development and Design Behavior of Insurance Company (Circular 134), in which the benefit payments of endowment insurance and annuity insurance products were stipulated. The lower yield along with macroeconomic downturn decreased consumers’ demand of these products, which resulted in the negative growth in the insurance market. Under the circumstance, the Company made a more conservative business approach in the year of 2019 that further impacted the operating activities in our PRC segment.
In the year of 2018, one of our subsidiaries in the Hong Kong Segment became one of the brokers for reinsurance products of Taiwan Life Insurance Co., Ltd. (“Taiwan Life”). In the reinsurance arrangement, the Company earns commissions on sales of insurance products from other insurers to Taiwan Life for risk management. Starting in mid-year 2019, the economy in Hong Kong was affected by anti-government protests and resulted in a recession. Overall revenue from our Hong Kong segment decreased by $0.4 million (or 60.5%) from $0.7 million for the year ended December 31, 2018 to $0.3 million for the year ended December 31, 2019 as a result of the political and economic conditions in Hong Kong.
60
Cost of revenue and gross profit
The cost of revenue mainly consists of commissions paid to our sales professionals. The Company initiated new incentive schemes and performance measures that are more aligned with the company’s long-term objectives in late 2017. Under the 2017 commission program, sales targets are divided into smaller and more attainable targets to improve the achievement rate.
The cost of revenue for the year ended December 31, 2019 increased by $16.0 million (or 32.5%) to $65.3 million compared to $49.3 million for the year ended December 31, 2018. This increase in the cost of revenue was due to the increase of the direct commission cost as a result of first year commission earned from insurance companies and the 2017 commission policy. In addition, the growth in the revenue also resulted in increasing indirect commission cost due to the high achievement rate of the sales target.
Consequently, the cost of revenue increased more than the proportional increase of revenue, causing a decrease in the gross profit margin by 5.4% from 37.3% for the year ended December 31, 2018 to 31.9% for the year ended December 31, 2019.
61
Selling expenses
Selling expenses were mainly incurred by Law Broker, in connection with online marketing and advertising. The selling expense for the year ended December 31, 2019 decreased by $0.9 million (or 24.0%) to $2.7 million, compared to $3.6 million for the year ended December 31, 2018. The selling expense decreased primarily because the Company sponsored an online reality show and provided an incentive program of Apple I-Pad for sales professionals to facilitate deeper brand engagement and attract young candidates in the year of 2018. The Company did not incur such expenses in the year of 2019.
General and administrative expenses
General and administrative (“G&A”) 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, 2019, G&A expenses were $20.2 million, an increase of $2.3 million (or 13.2%), compared with $17.9 million for the year ended December 31, 2018. The increase in G&A expenses was attribute to the increasing performance bonus to employees and the sales taxes as a result of the sales growth in 2019 and additional professional service fees to our outside counsel and SEC-appointed monitor to enhance the Company’s governance and compliance.
Other income (expenses)
Net other income of $0.9 million for the year ended December 31, 2019 decreased 0.1 million (or 13.1%) compared to $1.1 million net other income for the year ended December 31, 2018. Net total other income mainly consists of interest income, interest expenses, dividend income, other income, gain on valuation of financial assets and gain on foreign exchange. Net other income decreased due to the increase of interest expense resulting from increased borrowings from bank loans.
Income tax
For the year ended December 31, 2019, income tax expense was $2.7 million, a decrease of $0.9 million (or 25.1%), compared with $3.6 million for the year ended December 31, 2018. The decrease was mainly due to the recognition of a one-time transition tax of $1,199,195 imposed on accumulated earnings of foreign subsidiaries by the 2017 Tax Cuts and Jobs Act in the year of 2018.
Our subsidiaries in Taiwan segment are governed by the Income Tax Law of Taiwan and are generally subject to tax at 20% 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 5% on any undistributed earnings to its shareholders.
62
WFOE and the CAE in the PRC segment 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%.
Our subsidiaries in Hong Kong segment 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, our net income increased by $0.5 million (or 8.9%) from $5.4 million for the year ended December 31, 2018 to $5.9 million for the year ended December 31, 2019.
Liquidity and Capital Resources
Cash requirements
Our primary sources of liquidity are cash and cash equivalents, time deposits, marketable securities, and cash generated from operations. Cash available from operations, including our cash, time deposits, and borrowing on our revolving line of credit, will be sufficient for our working capital needs, including commissions payable to sales professionals, performance bonus payable to management, payments of tax liabilities, marketing and advertising needs to promoting sales, as well as purchase of equipment. However, future business opportunities may cause a change in our estimate.
Cash flows
The following table represents a comparison of our cash flows for the years ended December 31, 2019 and 2018:
| For the Years Ended December 31, | ||||||||||||||||
| 2019 | 2018 | Change | Percent | |||||||||||||
| Net cash provided by operating activities | $ | 5,411,846 | $ | 3,907,452 | $ | 1,504,395 | 38.5 | % | ||||||||
| Net cash used in investing activities | (13,137,888 | ) | (4,301,227 | ) | (8,836,661 | ) | 205.4 | % | ||||||||
| Net cash (used in) provided by financing activities | (354,454 | ) | 5,487,587 | (5,842,041 | ) | (106.5 | )% | |||||||||
Operating activities
Net cash provided by operating activities for the year ended December 31, 2019 was $5.4 million in comparison with net cash of $3.9 million provided by operating activities for the year ended December 31, 2018. The increase of $1.5 million (or 38.5%) was mainly due to a strong business performance, resulting in higher net income for the year ended December 31, 2019 compared with that of the same period in 2018.
63
Investing activities
Net cash used in investing activities was $13.1 million for the year ended December 31, 2019 in comparison with net cash of $4.3 million used in investing activities for the year ended December 31, 2018. The increase in the cash flows used in investing activities resulted from the Company’s investment of its excess cash in time deposits in the year of 2019, leading to cash outflows from investing activities.
Financing activities
Net cash used in financing activities was $0.4 million for the year ended December 31, 2019 in comparison with net cash of $5.5 million provided by financing activities for the year ended December 31, 2018. The cash outflows from the financing activities was mainly due to the net repayments of revolving bank loans during the year ended December 31, 2019.
Contractual Obligations
The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of December 31, 2019:
| Payments due by period | ||||||||||||||||||||
| Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Debt obligations (1) | $ | 8,100,000 | $ | 8,100,000 | $ | - | $ | - | $ | - | ||||||||||
| Operating lease | 5,532,268 | 2,373,613 | 2,435,120 | 723,535 | - | |||||||||||||||
| Contractual obligations (2) | 4,707,289 | 2,685,783 | 2,021,506 | - | - | |||||||||||||||
| Capital commitment (3) | 10,015,643 | - | 10,015,643 | - | - | |||||||||||||||
| $ | 28,355,200 | $ | 13,159,396 | $ | 14,472,269 | $ | 723,535 | $ | - | |||||||||||
| (1) | Debt obligations include our revolving credit facilities from banks. |
| (2) | Contractual obligations include obligations related to compensation plans with Law Broker’s officers, amount due to previous shareholders of AHFL, and a Strategic Alliance Agreement with AIATW. |
| (3) | Capital commitment related to the Joint Venture Agreement (the “JV Agreement”) with Cyun-Jhan Enterprise Co., Ltd. and Jian-Zao International Industrial Co., Ltd. through AIlife International Investment Co., Limited (“AIlife”, formerly known as “Ilife”). |
Off Balance Sheet Arrangements
As of December 31, 2019, our Company had no off balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
64
 |
3230 Fallow Field Drive Diamond Bar, CA 91765 Tel: +1 (909) 839-0188 Fax: +1 (909) 839-1128 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of:
China United Insurance Service, Inc.
Opinion on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of China United Insurance Service, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019, 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, 2019, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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 company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding the Company has yet established effective entity-level controls at group level in application of Internal Control-Integrated Framework (2013), has been identified and described in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 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.
Adoption of New Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion 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 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
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
We have served as the Company's auditor since 2014.
Diamond bar, California
March 20, 2020
F-1
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 12,615,008 | $ | 16,663,942 | ||||
| Time deposits | 38,731,658 | 25,740,164 | ||||||
| Restricted cash equivalents | - | 3,320,802 | ||||||
| Accounts receivable | 22,541,558 | 15,332,355 | ||||||
| Other current assets | 2,101,115 | 1,155,678 | ||||||
| Total current assets | 75,989,339 | 62,212,941 | ||||||
| Property and equipment, net | 1,402,866 | 1,195,695 | ||||||
| Intangible assets, net | 518,264 | 575,985 | ||||||
| Operating lease assets | 5,522,665 | - | ||||||
| Long-term investments | 2,693,082 | 2,477,558 | ||||||
| Restricted cash – noncurrent | 43,492 | 655,027 | ||||||
| Other assets | 3,072,714 | 1,764,638 | ||||||
| TOTAL ASSETS | $ | 89,242,422 | $ | 68,881,844 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Commissions payable to sales professionals | $ | 12,545,730 | $ | 8,014,480 | ||||
| Short-term loans | 8,100,000 | 8,435,587 | ||||||
| Income tax payable – current | 2,389,304 | 1,599,146 | ||||||
| Operating lease liabilities - current | 2,242,034 | - | ||||||
| Due to related parties | 462,859 | 398,934 | ||||||
| Other current liabilities | 11,657,184 | 7,814,867 | ||||||
| Total current liabilities | 37,397,111 | 26,263,014 | ||||||
| Operating lease liabilities | 3,048,632 | - | ||||||
| Income tax payable - noncurrent | 815,451 | 1,007,323 | ||||||
| Other liabilities | 2,229,736 | 2,668,677 | ||||||
| TOTAL LIABILITIES | 43,490,930 | 29,939,014 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS EQUITY | ||||||||
| Preferred stock, $0.00001 par value, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | 10 | ||||||
| Common stock, $0.00001 par value, 100,000,000 authorized, 29,421,736 and 29,452,669 issued and outstanding as of December 31, 2019 and 2018, respectively | 294 | 295 | ||||||
| Additional paid-in capital | 8,190,449 | 8,190,449 | ||||||
| Statutory reserves | 8,228,904 | 7,299,123 | ||||||
| Retained earnings | 9,402,294 | 7,273,227 | ||||||
| Accumulated other comprehensive income (loss) | 417,015 | (171,318 | ) | |||||
| Total stockholders' equity attributable to parent’s shareholders | 26,238,966 | 22,591,786 | ||||||
| Noncontrolling interests | 19,512,526 | 16,351,044 | ||||||
| TOTAL STOCKHOLDERS' EQUITY | 45,751,492 | 38,942,830 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 89,242,422 | $ | 68,881,844 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-2
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
|
Years Ended December 31, |
||||||||
| 2019 | 2018 | |||||||
| Revenue | $ | 95,919,338 | $ | 78,667,731 | ||||
| Cost of revenue | 65,342,976 | 49,314,709 | ||||||
| Gross profit | 30,576,362 | 29,353,022 | ||||||
| Operating expenses: | ||||||||
| Selling | 2,707,176 | 3,560,840 | ||||||
| General and administrative | 20,214,659 | 17,854,923 | ||||||
| Total operating expenses | 22,921,835 | 21,415,763 | ||||||
| Income from operations | 7,654,527 | 7,937,259 | ||||||
| Other income (expenses): | ||||||||
| Interest income | 453,184 | 446,859 | ||||||
| Interest expenses | (208,008 | ) | (130,523 | ) | ||||
| Dividend income | 367,557 | 354,224 | ||||||
| Other - net | 333,826 | 418,999 | ||||||
| Total other income, net | 946,559 | 1,089,559 | ||||||
| Income before income tax | 8,601,086 | 9,026,818 | ||||||
| Income tax expense | (2,704,297 | ) | (3,610,172 | ) | ||||
| Net income | 5,896,789 | 5,416,646 | ||||||
| Less: net income attributable to noncontrolling interests | (2,837,941 | ) | (3,045,241 | ) | ||||
| Net income attributable to parent’s shareholders | 3,058,848 | 2,371,405 | ||||||
| Other comprehensive income (loss) | ||||||||
| Foreign currency translation gain (loss) | 1,010,688 | (1,217,733 | ) | |||||
| Other | (4,999 | ) | 542 | |||||
| Other comprehensive income (loss) | 1,005,689 | (1,217,191 | ) | |||||
| Comprehensive income | 6,902,478 | 4,199,456 | ||||||
| Less: comprehensive income attributable to noncontrolling interests | (3,255,297 | ) | (2,615,388 | ) | ||||
| Comprehensive income attributable to parent’s shareholders | $ | 3,647,181 | $ | 1,584,068 | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 29,429,448 | 29,452,669 | ||||||
| Diluted | 29,429,448 | 29,452,669 | ||||||
| Earnings per share attributable to common parent’s shareholders: | ||||||||
| Basic | $ | 0.101 | $ | 0.078 | ||||
| Diluted | $ | 0.101 | $ | 0.078 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-3
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 Income (Loss) |
Retained Earnings |
Total | Noncontrolling Interests |
Total Equity |
||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 1,518,115 | - | (1,518,115 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | - | (787,695 | ) | - | (787,695 | ) | (430,038 | ) | (1,217,733 | ) | |||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | 358 | - | 358 | 184 | 542 | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 2,371,405 | 2,371,405 | 3,045,242 | 5,416,647 | |||||||||||||||||||||||||||||||||
| Balance December 31, 2018 | 29,452,669 | 295 | 1,000,000 | 10 | 8,190,449 | 7,299,123 | (171,318 | ) | 7,273,227 | 22,591,786 | 16,351,044 | 38,942,830 | ||||||||||||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 929,781 | - | (929,781 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Dividends | - | - | - | - | - | - | - | - | - | (93,815 | ) | (93,815 | ) | |||||||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | - | - | 591,630 | - | 591,630 | 419,058 | 1,010,688 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (3,297 | ) | - | (3,297 | ) | (1,702 | ) | (4,999 | ) | |||||||||||||||||||||||||||||
| Retirement of common stock | (30,933 | ) | (1 | ) | - | - | - | - | - | - | (1 | ) | - | (1 | ) | |||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 3,058,848 | 3,058,848 | 2,837,941 | 5,896,789 | |||||||||||||||||||||||||||||||||
| Balance December 31, 2019 | 29,421,736 | $ | 294 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 8,228,904 | $ | 417,015 | $ | 9,402,294 | $ | 26,238,966 | $ | 19,512,526 | $ | 45,751,492 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
F-4
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended December 31, |
||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 5,896,789 | $ | 5,416,646 | ||||
| Adjustment to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 693,459 | 636,980 | ||||||
| Pension plan | (4,611 | ) | - | |||||
| Amortization of bond premium | 261 | 569 | ||||||
| Loss on debt forgiveness | - | 12,645 | ||||||
| Change on fair value of financial assets | (160,193 | ) | 125,714 | |||||
| (Gain) loss on disposals of financial assets | (19,059 | ) | 36,279 | |||||
| Gain on disposals of property and equipment | 9,676 | - | ||||||
| Deferred income tax | (162,575 | ) | (163,631 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (6,710,665 | ) | (2,421,663 | ) | ||||
| Other current assets | (902,894 | ) | (486,314 | ) | ||||
| Other assets | (1,289,087 | ) | 106,662 | |||||
| Income tax payable | 565,522 | (726,379 | ) | |||||
| Commissions payable to sales professionals | 4,249,355 | 1,826,478 | ||||||
| Other current liabilities | 3,734,476 | 2,539,087 | ||||||
| Other liabilities | (488,608 | ) | (2,995,621 | ) | ||||
| Net cash provided by operating activities | 5,411,846 | 3,907,452 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of time deposits | (59,492,618 | ) | (49,535,273 | ) | ||||
| Proceeds from maturities of time deposits | 47,404,072 | 44,555,966 | ||||||
| Purchases of structured deposits | - | (13,696,531 | ) | |||||
| Proceeds from maturities of structured deposits | - | 14,993,795 | ||||||
| Purchases of marketable securities | (598,676 | ) | - | |||||
| Proceeds from sales of marketable securities | 366,451 | - | ||||||
| Proceeds from repayment of loan made to RFL | - | 1,486,485 | ||||||
| Purchase of long-term investments - REITs | - | (1,327,505 | ) | |||||
| Purchase of property and equipment | (660,011 | ) | (696,028 | ) | ||||
| Purchase of intangible assets | (192,719 | ) | (82,136 | ) | ||||
| Proceeds from disposals of property and equipment and intangible assets | 35,613 | - | ||||||
| Net cash used in investing activities | (13,137,888 | ) | (4,301,227 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term loans | 31,818,847 | 34,300,000 | ||||||
| Repayment of short-term loans | (32,153,385 | ) | (28,450,000 | ) | ||||
| Proceeds from related party borrowings | 73,899 | 475,273 | ||||||
| Repayment to related party borrowing | - | (637,686 | ) | |||||
| Repayment of convertible bonds | - | (200,000 | ) | |||||
| Dividends paid to noncontrolling interests | (93,815 | ) | - | |||||
| Net cash (used in) provided by financing activities | (354,454 | ) | 5,487,587 | |||||
| Foreign currency translation | 99,225 | (397,605 | ) | |||||
| Net (decrease) increase in cash, cash equivalents and restricted cash equivalents | (7,981,271 | ) | 4,696,207 | |||||
| Cash, cash equivalents and restricted cash equivalents, beginning balance | 20,639,771 | 15,943,564 | ||||||
| Cash, cash equivalents and restricted cash equivalents, ending balance | $ | 12,658,500 | $ | 20,639,771 | ||||
| SUPPLEMENTARY DISCLOSURE: | ||||||||
| Interest paid | $ | 215,945 | $ | 264,845 | ||||
| Income tax paid | $ | 2,064,231 | $ | 3,561,329 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-5
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Overview
China United Insurance Service, Inc. (“China United”, “CUII”, 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’s common stock currently trades over the counter under the ticker symbol “CUII” on the OTC Pink market. The Company primarily engages in brokerage and insurance agency services by providing two broad categories of insurance products, life insurance products and property and casualty insurance products, and manages its business through aggregating them into three geographic operating segments, Taiwan, PRC, and Hong Kong.
In January 2011, through Zhengzhou Zhonglian Hengfu Business Consulting Co., Limited (“WFOE”), a wholly owned Hong Kong based subsidiary of CU Hong Kong, the Company entered a series of agreements (“VIE agreements”) with Law Anhou Insurance Agency Co., Limited (“Anhou”) that established, among other things, an exclusive business cooperation agreement. Prior to the VIE agreements with WFOE, Anhou owned 100% interest of Sichuan Kangzhuang Insurance Agency Co., Limited (“Sichuan Kangzhuang”) and 100% interest of Jiangsu Law Insurance Brokers Co., Limited. Both subsidiaries are also engaged in selling life and property casualty insurance products in the PRC. With the establishment of VIE, the Company expanded business operations into Peoples’ Republic of China (“PRC” or “China”).
Through the acquisition of AHFL in August 2012, the Company indirectly owns 65.95% interest of Law Enterprise Co., Limited (“Law Enterprise”) and Law Insurance Broker Co., Limited (“Law Broker”), which is 100% owned subsidiary of Law Enterprise. Both companies are engaging in business in insurance brokerage and insurance agency services across Taiwan, where the majority of revenue is generated.
In July 2018, the Company completed its acquisition of Kao Te Insurance Broker (“KT Broker”) for its existing brokerage licenses. Under Taiwanese law, the brokerage license is undetachable from the legal entity and the entity itself cannot be dissolved, so the Company renamed KT Broker to Joint Insurance Broker Co., Limited (“JIB”) to serve as a holding entity for the brokerage licenses. The Company has no intention of operating the existing business of KT Broker nor retain any of its sales personnel, therefore the Company accounted the acquisition as assets purchase in accordance with FASB ASC Topic 805.
In May 2019, AHFL entered into an agreement to make capital contributions of $485,909 (NTD15,000,000) to AIlife International Investment Co., Limited (“AIlife”, formerly known as “Ilife”). After the transaction, the Company owned 93.75% of AIlife. In July 2019, AHFL acquired the remaining 6.25% shares of AIlife, which became the Company’s wholly owned subsidiary. The business objective of AIlife is to obtain a non-exclusive license covering certain information technology systems from Law Broker and generate revenues from marketing and making the technologies available to insurance intermediary companies.
O June 4, 2019, AIlife entered into an acquisition agreement with the selling shareholder of Uniwill Insurance Broker Co., Ltd (“Uniwill”), Pursuant to the acquisition agreement, AIlife agreed to pay $14,535 (NTD 450,000) in exchange for the insurance brokerage licenses issued to Uniwill by the Taiwanese government, along with right to the Uniwill company name and $6,455 (NTD 200,000) of legal deposits. The Company has no intention of operating the Uniwill existing brokerage business nor retaining any of its sales personnel. Therefore, the acquisition is accounted as an assets purchase.
On November 15, 2019, AIlife, Cyun-Jhan Enterprise Co., Ltd. (“Cyun-Jhan”), and Jian-Zao International Industrial Co., Ltd. (“Jian-Zao” and, collectively with AIlife and Cyun-Jhan, the “Parties”) entered into a Joint Venture Agreement (the “JV Agreement”). Under the terms of the JV Agreement, the Parties agreed to invest funds, labor and technology into Uniwill. Under the terms of the JV Agreement, the paid-in capital of Uniwill should increase to an aggregate amount of $13.3 million (NTD 400 million) by AIlife, provided that the other parties fulfill their commitments no later than December 31, 2021. On August 15, 2019, AIlife increased and completed the capital injections in Uniwill to the amount of $3.3 million. However, certain necessary regulatory approvals and other procedures of Uniwill were not completed as of December 31, 2019 and are being processed as of the date of this annual report.
F-6
The corporate structure as of December 31, 2019 is as follows:
F-7
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of China United, its subsidiaries and variable interest entities as shown in the corporate structure in Note 1. All significant intercompany transactions and balances have been eliminated in the consolidation. The Company consolidates variable interest entities where it has been determined that the Company is the primary beneficiary of those entities' operations. Certain reclassifications have been made to the consolidated financial statements for prior year to the current year’s presentation. Such reclassifications have no effect on net income as previously reported.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. 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 CUII and acquisition of PFAL by AHFL in August 2012 and April 2014, respectively.
F-8
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, “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.
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 New Taiwan dollar (“NTD”), China yuan (“RMB”) and Hong Kong dollar (“HKD”). The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, “Reporting Comprehensive Income”. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currency are translated at the functional currency using the rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the consolidated statements of operations and other comprehensive income (loss).
The Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD, RMB and HKD into U.S. dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for financial statements are as follows:
| Average Rate for the years ended December 31, | |||||||
| 2019 | 2018 | ||||||
| Taiwan dollar (NTD) | NTD | 30.88782 | NTD | 30.13172 | |||
| China yuan (RMB) | RMB | 6.90721 | RMB | 6.61464 | |||
| Hong Kong dollar (HKD) | HKD | 7.83459 | HKD | 7.83704 | |||
| United States dollar ($) | $ | 1.00000 | $ | 1.00000 | |||
| Exchange Rate at | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| Taiwan dollar (NTD) | NTD | 29.95314 | NTD | 30.56492 | |||
| China yuan (RMB) | RMB | 6.96676 | RMB | 6.87644 | |||
| Hong Kong dollar (HKD) | HKD | 7.78722 | HKD | 7.83125 | |||
| United States dollar ($) | $ | 1.00000 | $ | 1.00000 | |||
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks, bank deposits, and highly liquid investments with maturities of three months or less at the date of origination. These investments are carried at cost, which approximates market value.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents represent amounts held in banks by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies by China Insurance Regulatory Commission and time deposits in financial institutions that are pledged to satisfy the requirements of certain debt agreements.
F-9
Marketable Securities
The Company invests part of its excessive cash in equity securities and money market funds. Such investments are grouped under other current assets in the 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). As of December 31, 2019 and 2018, the Company had marketable securities of $290,153 and $30,800 under other current assets.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable includes commission receivables stated at net realizable values. The Company reviews its accounts receivable regularly to determine if a bad debt allowance is necessary at each quarter-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2019 and 2018.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Upon sale of retirement, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recorded in other income (expense).
Depreciation of office equipment, office furniture, transportation equipment and other equipment is computed using straight-line method based on estimated useful lives ranging from one to ten years with estimated salvage value. Leasehold improvements are depreciated or amortized over the shorter of the estimated useful life of the asset or the remaining expected lease term.
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 evaluated for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using two-step goodwill impairment test. The first step screens for potential impairment of goodwill to determine if the fair value of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied fair value of goodwill to its carrying value. Intangible assets, which primarily consist of software, are stated at cost, less accumulated amortization, and amortized over estimated useful lives ranging from 3 to 5 years.
Impairment of Long-Lived Assets
The Company reviews the carrying values of the long-lived assets when circumstances warrant as to whether the carrying value has become impaired. The Company considers assets to be impaired if the carrying value of an asset exceeds the present value of future net undiscounted cash flows from its related operations. There was no impairment recognized for the years ended December 31, 2019 and 2018.
Long-Term Investments
Long-term investments include government bonds held as available-for-sale, investment in real estate investment trusts (“REITs”) measured at fair value through net income, and equity investments under cost method. Available-for-sale investments are carried at fair value and unrealized gains and losses as a result of changes in the fair value are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.
The Company measures equity investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% using cost method, and no changes in fair value is recognize in net income for those equity investments.
Advertising Costs
The Company expenses all advertising costs, which include promotions and branding, as incurred. The Company incurred $238,648 and $749,563 in advertising and marketing costs during the years ended December 31, 2019 and 2018, respectively.
F-10
Revenue Recognition
The Company adopted FASB ASC Topic 606, Revenue from Contracts with Customers, at the beginning of 2018, which requires that recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company’s revenue is generated from providing insurance agency and brokerage services. The Company, through its subsidiaries and VIEs, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company recognizes revenue when services provided by the Company to customers is transferred to the respective insurance company; whereby the transfer of control is considered complete when the insurance policy becomes effective. The revenue standard includes requirements to estimate variable or contingent consideration to be received and recognize variable consideration to the extent that a significant reversal of revenue will not probably occur in the subsequent periods. Applying the revenue standard requires significant judgment and estimate to be made by the Company.
The Company is obligated to pay commissions to its sales professionals when an insurance policy becomes effective. The Company recognizes commission revenue granted 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. The 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) introduced a new tax on global intangible low-taxed income (“GILTI”) effective as of January 1, 2018. The Company has elected to recognize the tax on GILTI as tax expense in the period the tax is incurred.
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).
Earnings Per Share
Basic earnings per common share (“EPS”) is computed by dividing net income attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted EPS is computed in the same manner as basic EPS, except the number of shares includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued.
As the holders of preferred stock of the Company are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Company as may be declared by the board of directors, the preferred stock is treated as a participating security. When calculating the basic earnings per common share, the two-class method is used to allocate earnings to common stock and participating security as required by FASB ASC Topic 260, “Earnings Per Share.” As of December 31, 2019 and 2018, the Company does not have any potentially dilutive instrument.
F-11
Concentration of Credit Risk
The Company maintains cash and cash equivalents with banks or high credit, quality financial institutions in the USA, PRC, Hong Kong, and Taiwan with balances in excess of the limits insured by various governments. 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, restricted cash and cash equivalents, register capital deposits and accounts receivable. As of December 31, 2019, and 2018, approximately $2,293,000 and $1,751,000 of the Company’s cash and cash equivalents, time deposits, restricted cash and cash equivalents, and register capital deposits held by financial institutions, was insured, and the remaining balance of approximately $50,108,000 and $44,289,000, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have collectability concern.
For the years ended December 31, 2019 and 2018, the Company realized commission revenues granted from insurance company individually more than 10% of the total revenue of the Company were:
| Years ended December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Amount | % of Total Revenue |
Amount | % of Total Revenue |
|||||||||||||
| Taiwan Life Insurance Co., Ltd. | $ | 18,562,429 | 19 | % | $ | 11,024,333 | 14 | % | ||||||||
| Farglory Life Insurance Co., Ltd. | 16,452,723 | 17 | % | 18,432,050 | 23 | % | ||||||||||
| TransGlobe Life Insurance Inc. | 13,391,873 | 14 | % | 10,280,105 | 13 | % | ||||||||||
F-12
As of December 31, 2019, and 2018, the Company’s accounts receivable due from insurance company individually accounted more than 10% of the total account receivable were:
| As of December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Amount | % of Total Accounts Receivable |
Amount | % of Total Accounts Receivable |
|||||||||||||
| TransGlobe Life Insurance Inc. | $ | 4,239,621 | 19 | % | $ | 2,381,181 | 18 | % | ||||||||
| Taiwan Life Insurance Co., Ltd. | 4,012,914 | 18 | % | 2,578,590 | 20 | % | ||||||||||
| Shin Kong Life Insurance Co., Ltd. | 3,586,795 | 16 | % | 1,470,080 | 11 | % | ||||||||||
| Farglory Life Insurance Co., Ltd. | 2,664,140 | 12 | % | 3,139,404 | 24 | % | ||||||||||
| AIA International Limited Taiwan Branch | 2,447,051 | 11 | % | 1,318,114 | 10 | % | ||||||||||
The Company derives its revenue from insurance agency and brokerage services provided and operates their business in the PRC, Hong Kong and Taiwan. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC, Hong Kong and Taiwan, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, Hong Kong and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
Operating Leases
The Company determines if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides us the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, we consider it to be, or contain, a lease. The Company records a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments. The lease term used in the calculation of right-of-use assets and lease liabilities include renewal and termination options that are reasonably certain to be exercised. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. Our leases do not provide an implicit borrowing rate, and we estimate the Company’s incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Segment Reporting
The Company managed and reviewed its business as three operating segments. The business of WFOE, CU Hong Kong and the Company’s Consolidated Affiliated Entities (“CAE”) in PRC was managed and reviewed as the PRC segment. The business of AHFL and its subsidiaries in Taiwan was managed and reviewed as Taiwan segment. The business of PFAL was managed and reviewed as Hong Kong segment. The PRC and Taiwan segments are substantially all of the reported consolidated amounts.
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.
F-13
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.
Variable Interest Entities
The Company follows FASB ASC Subtopic 810-10-05-8, “Consolidation of VIEs”, which 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 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, 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) 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 WFOE. Anhou further agrees that unless with 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 WFOE fees equal to 90% of the net income of Anhou, and the payment is quarterly, and (4) 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 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 WFOE prior to the expiration thereof. The extended term shall be determined by WFOE, and Anhou shall accept such extended term unconditionally.
During the term of this Agreement, unless WFOE commits gross negligence, or a fraudulent act, against Anhou, Anhou may not terminate this Agreement. Nevertheless, WFOE shall have the right to terminate this Agreement upon giving 30 days prior written notice to Anhou at any time.
| · | Power of Attorney under which each shareholder of Anhou executed an irrevocable power of attorney to authorize 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. |
F-14
| · | Option Agreement under which the shareholders of Anhou irrevocably granted WFOE or its designated person an exclusive and irrevocable right to acquire, at any time, the entire portion of Anhou’s equity interest held by each shareholder of Anhou, or any portion thereof, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in Anhou shall be the lower of (i) RMB1 ($0.16) and (ii) the lowest price allowed by relevant laws and regulations. If appraisal is required by the laws of PRC when WFOE exercises the Equity Interest Purchase Option (as defined in the Option Agreement), the Parties shall negotiate in good faith and based on the appraisal result make necessary adjustment to the Equity Interest Purchase Price (as defined in the Option Agreement) so that it complies with any and all then applicable laws of the PRC. The term of this Agreement is 10 years, and may be renewed at WFOE’s election. |
| · | Share Pledge Agreement under which the owners of Anhou pledged their equity interests in Anhou to 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, 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, 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 WFOE, Anhou and Anhou Original Shareholders on the same date. The EBCA executed by and between WFOE and Anhou on January 17, 2011 remains in full effect.
As a result of the agreements among WFOE, the shareholders of Anhou and Anhou, WFOE is considered the primary beneficiary of Anhou, WFOE has effective control over Anhou; therefore, 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, 2019 and 2018, no event including a)-d) above took place that would change the Company’s primary beneficiary status.
F-15
New Accounting Pronouncements and Other Guidance
New Accounting Pronouncements Effective January 1, 2019:
Leases
On January 1, 2019, the Company adopted ASU No. 2016-02, (FASB ASC Topic 842), Leases, which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements.
The Company adopted the standard using a modified retrospective transition with no adjustment to its comparative periods in the year of transition. The Company elected the practical expedients, which allow the Company not to reassess prior conclusions with respect to lease identification, lease classification and initial direct costs under FASB ASC Topic 842. The Company did not elect the hindsight practical expedient to determine the lease term or in assessing the likelihood that a lease purchase option will be exercised. In addition, the Company elected the short-term lease recognition. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet.
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The adoption of FASB ASC Topic 842 resulted in the recognition of operating lease right-of-use assets of $4.0 million and corresponding operating lease liabilities of $3.7 million as of January 1, 2019 on the consolidated balance sheet. See Note 16 for details.
F-16
Accounting Standards Issued but Not Yet Adopted
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, (FASB ASC Topic 326), Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments which amends the current accounting guidance and requires the use of the new forward-looking “expected loss” model, rather than the “incurred loss” model, which requires all expected losses to be determined based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for most financial assets and certain other instruments including trade and other receivables, held-to-maturity debt securities, loans and other instruments.
In November 2019, the FASB issued ASU No. 2019-10 to postpone the effective date of ASU No. 2016-13 for public business entities eligible to be smaller reporting companies defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company believes the adoption of ASU No. 2016-13 will not have a material impact on its financial position and results of operations.
The management does not believe that other than disclosed above, accounting pronouncements the recently issued but not yet adopted will have a material impact on its financial position results of operations or cash flows.
NOTE 3 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
Cash, cash equivalents and restricted cash and cash equivalents consisted of the following as of December 31, 2019 and 2018:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Cash and cash equivalents: | ||||||||
| Cash in banks and on hand | $ | 11,151,816 | $ | 7,439,057 | ||||
| Cash equivalents - commercial paper | - | 654,006 | ||||||
| Time deposits - with original maturities less than three months (see Note 4) | 1,463,192 | 8,570,879 | ||||||
| 12,615,008 | 16,663,942 | |||||||
| Restricted cash equivalents | - | 3,320,802 | ||||||
| Restricted cash – noncurrent | 43,492 | 655,027 | ||||||
| Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 12,658,500 | $ | 20,639,771 | ||||
F-17
On December 14, 2018, the Company purchased a commercial paper of $654,006 (NTD 20.0 million) with a maturity of 25 days and 0.70% interest rate annum.
As of December 31, 2018, restricted cash equivalents of $3,320,802 (NTD101.5 million) were time deposits with original maturities less than three months and pledged to satisfy the requirements of certain debt agreements.
Noncurrent restricted cash includes a mandatory deposit in the bank in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies in PRC, which is not allowed to be withdrawn without the permission of the regulatory commission, and a trust account held for the bonus accrued for Law Broker’s officers.
NOTE 4 – TIME DEPOSITS
| December 31, 2019 |
December 31, 2018 |
|||||||
| Total time deposits | $ | 40,194,850 | $ | 34,311,043 | ||||
| Less: time deposits - original maturities less than three months (see Note 3) | (1,463,192 | ) | (8,570,879 | ) | ||||
| Time deposits - original maturities over three months but less than one year | $ | 38,731,658 | $ | 25,740,164 | ||||
Time Deposits Pledged as Collateral
As of December 31, 2019 and 2018, the Company had time deposits of $11,920,632 (NTD 357.0 million) and $5,404,889 (NTD 165.2 million) pledged as collateral for short-term loans. See Note 8.
F-18
NOTE 5 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following, as of December 31, 2019 and 2018:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Office equipment | $ | 1,442,134 | $ | 1,293,549 | ||||
| Office furniture | 117,767 | 112,366 | ||||||
| Leasehold improvements | 1,197,886 | 910,168 | ||||||
| Transportation equipment | 224,669 | 223,115 | ||||||
| Other equipment | 580,445 | 375,496 | ||||||
| Total | 3,562,901 | 2,914,694 | ||||||
| Less: accumulated depreciation | (2,160,035 | ) | (1,718,999 | ) | ||||
| Total property, plant and equipment, net | $ | 1,402,866 | $ | 1,195,695 | ||||
Depreciation expense was $452,266 and $375,588 for the years ended December 31, 2019 and 2018, respectively.
NOTE 6 – INTANGIBLE ASSETS, NET
As of December 31, 2019 and 2018, the Company’s intangible assets consisted the following:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Software | $ | 2,030,057 | $ | 1,816,449 | ||||
| Less: accumulated amortization | (1,511,793 | ) | (1,240,464 | ) | ||||
| Total intangible assets, net | $ | 518,264 | $ | 575,985 | ||||
F-19
Estimated future assets amortization as of December 31, 2019 is as follows:
| Years ending December 31, | Amount | |||
| 2020 | $ | 262,838 | ||
| 2021 | 131,915 | |||
| 2022 | 66,775 | |||
| 2023 | 44,200 | |||
| 2024 | 12,536 | |||
| Thereafter | - | |||
| Total | $ | 518,264 | ||
Amortization expense was $241,193 and $261,392 for the years ended December 31, 2019 and 2018, respectively.
NOTE 7 – LONG-TERM INVESTMENTS
As of December 31, 2019 and 2018, the Company’s long-term investments consisted the following:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Equity investments under cost method | $ | 1,283,168 | $ | 1,257,485 | ||||
| Government bonds held for available-for-sale | 101,203 | 99,834 | ||||||
| REITs | 1,308,711 | 1,120,239 | ||||||
| Total long-term investments | $ | 2,693,082 | $ | 2,477,558 | ||||
F-20
Equity Investments under Cost Method
| Investee | Investment Ownership |
December 31, 2019 Amount |
December 31, 2018 Amount |
|||||||||
| Genius Insurance Broker Co., Ltd | 15.64 | % | $ | 1,283,168 | $ | 1,257,485 | ||||||
The change in carrying value of equity investment between the two years resulted from the fluctuation of exchange rates. The Company received $311,350 and $354,224 dividend income distributed from the investee for the years ended December 31, 2019 and 2018, respectively.
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 and 4, Law Broker is required to maintain a minimum of NTD 3,000,000 ($100,156 and $98,152 as of December 31, 2019 and 2018, respectively) restricted balance in a separate account or government bonds issued by the central government in order to maintain its insurance license. The government bonds are valued based on theoretical bond price in Taipei Exchange.
| December 31, 2019 | ||||||||||||
| Fair value at December 31, 2018 |
Unrealized gains |
Fair value at December 31, 2019 |
||||||||||
| Government bonds | 99,834 | 1,369 | 101,203 | |||||||||
| $ | 99,834 | $ | 1,369 | $ | 101,203 | |||||||
| December 31, 2018 | ||||||||||||
| Fair value at December 31, 2017 |
Unrealized losses |
Fair value at December 31, 2018 |
||||||||||
| Government bonds | 103,723 | (3,889 | ) | 99,834 | ||||||||
| $ | 103,723 | $ | (3,889 | ) | $ | 99,834 | ||||||
REITs
REITs are valued based on quoted market prices in the active market of Taiwan. The fair value of REITs as of December 31, 2019 and 2018 were $1,308,711 and $1,120,239, respectively. Unrealized gains (losses) included in earnings for assets held at the end of the reporting period were $188,472 and $(220,596) for the years ended December 31, 2019 and 2018, respectively.
F-21
NOTE 8 – SHORT-TERM LOANS
The Company’s short-term loans consisted of the following as of December 31, 2019 and 2018:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Credit facility, O-Bank | $ | 2,600,000 | $ | 3,600,000 | ||||
| Credit facility, FEIB | 2,500,000 | 2,000,000 | ||||||
| Credit facility, CTBC | 1,500,000 | 1,000,000 | ||||||
| Credit facility, KGI | 1,500,000 | 1,600,000 | ||||||
| Total bank loans | 8,100,000 | 8,200,000 | ||||||
| Current portion of long-term loans | - | 235,587 | ||||||
| Total short-term loans | $ | 8,100,000 | $ | 8,435,587 | ||||
The Company entered into the following credit agreements:
O-Bank Co., Ltd. (“O-Bank”)
CUII has a revolving credit facility in amount of $4,000,000 with O-Bank, which matures on October 22, 2020. Borrowings under the revolving credit facility bear interest at the TAIFX3 rate plus a margin of 0.5%. As of December 31, 2019 and 2018, the outstanding balance of the revolving credit facility were $2,600,000 with a weighted average interest rate of 2.83% and $3,600,000 with a weighted average interest rate of 3.63%, respectively. The borrowing is secured by a total amount of $3,038,079 (NTD 91 million) of time deposits.
Law Broker entered into a credit agreement with O-Bank, which matures on October 22, 2020, and the agreement provides for a $3.3 million (NTD 100 million) revolving credit facility. Borrowings under this agreement bear interest at the TAIFX3 rate plus a margin of 0.75%. As of December 31, 2019 and 2018, the outstanding loan under this credit agreement was nil.
Far Eastern International Bank (“FEIB”)
In September 2017, CUII entered into a line of credit agreement with FEIB, which matures on January 8, 2021, and borrowings under the revolving credit facility bear interest at the higher of LIBOR or TAIFX3 rate plus a margin of 0.85%. As of December 31, 2019 and 2018, the outstanding balance of the revolving credit facility were $2,500,000 with an interest rate of 3.05% and $2,000,000 with an interest rate of 3.95%, respectively. The borrowing is secured by a total amount of $3,064,787 (NTD 91.8 million) of time deposits.
Law Broker entered into a credit agreement with FEIB providing for a $2.6 million (NTD 80 million) revolving credit facility, which matures January 8, 2021. As of December 31, 2019 and 2018, the outstanding loan under this credit agreement was nil.
CTBC Bank Co., Ltd. (“CTBC”)
CUII has a revolving credit facility in amount of $1,500,000 with CTBC, which matures on August 31, 2020, and borrowings under the revolving credit facility bear interest at the CTBC’s cost of funds plus a margin of 1%. As of December 31, 2019 and 2018, the outstanding balance of the revolving credit facility were $1,500,000 with an interest rate of 3.20% and $1,000,000 with an interest rate of 3.26%. The borrowing is secured by a total amount of $1,736,045 (NTD 52 million) of time deposits. Law Broker is the guarantor of the credit facility.
Law Broker entered into a credit agreement with CTBC providing for a $3.3 million (NTD 100 million) revolving credit facility, which matures on August 31, 2020. As of December 31, 2019 and 2018, the outstanding loan under this credit agreement was nil.
KGI Commercial Bank Co., Ltd. (“KGI”)
CUII was approved for a line of credit agreement with KGI, which matures on October 2, 2020, pursuant to which CUII has a revolving credit facility of $1,600,000. Borrowings under the agreement bear interest at the LIBOR rate plus a margin of 0.9%. As of December 31, 2019 and 2018, the Company had the outstanding borrowing of $1,500,000 with a weighted interest rate of 3.06% and $1,600,000 with an interest rate of 3.41%, respectively. The borrowing is secured by a total amount of $2,295,061 (RMB 7.6 million and NTD 36 million) of time deposits.
Law Broker entered into another credit agreement with KGI providing for a $1.6 million (NTD 50 million), and the agreement matures on October 2, 2020. The borrowing is secured by a total amount of $1,786,660 (RMB 12 million) of time deposits. As of December 31, 2019 and 2018, the outstanding loan under this credit agreement was nil.
Total interest expenses of bank loans incurred were $199,979 and $105,536 for the years ended December 31, 2019 and 2018, respectively.
Current Portion of Long-Term Loans
On May 15, 2016, Anhou entered into a loan agreement (“Loan A”) with an individual third party with an interest rate of 8% per annum and interest is payable annually. The outstanding balance of Loan A was $123,611 (RMB 850,000) as of December 31, 2018 and the Company paid off the total outstanding loan balance and accrued interest in May 2019.
On July 20, 2016, Anhou entered into another loan agreement (“Loan B”) with an individual third party. Loan B bears an interest rate of 8% per annum and interest is payable annually. The outstanding balance of Loan B was $111,976 (RMB 770,000) as of December 31, 2018 and the Company paid off the total outstanding loan balance and accrued interest in May 2019.
Total interest expenses for the long-term loans were $7,066 and $18,450, respectively, for the years ended December 31, 2019 and 2018.
F-22
NOTE 9 – COMMISSIONS PAYABLE TO SALES PROFESSIONALS
Commissions payable to professionals consisted of the following as of December 31, 2019 and 2018:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Taiwan | $ | 12,123,149 | $ | 7,602,595 | ||||
| PRC | 422,581 | 411,885 | ||||||
| Hong Kong | - | - | ||||||
| Total commissions payable to sales professionals | $ | 12,545,730 | $ | 8,014,480 | ||||
Commissions payable to sales professionals are usually settled within twelve months.
NOTE 10 – OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of December 31, 2019 and 2018:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Unearned revenue - AIATW | $ | 1,781,975 | $ | 1,028,256 | ||||
| Payroll payable and other benefits | 1,317,367 | 1,360,790 | ||||||
| Accrued bonus | 4,961,323 | 2,918,076 | ||||||
| Accrued business tax and tax withholdings | 1,262,570 | 893,391 | ||||||
| Other accrued expenses | 2,333,949 | 1,614,354 | ||||||
| Total other current liabilities | $ | 11,657,184 | $ | 7,814,867 | ||||
Unearned Revenue – AIATW
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”), the purpose to which is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The original term of the Alliance Agreement was from June 1, 2013 to May 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL an execution fee approximately $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762, the “Execution Fee”), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “First Amendment to the Alliance Agreement”) with AIATW. In the First Amendment to the Alliance Agreement, the performance targets and the provision about refunding the Execution Fee on a pro rata basis when the performance targets are not met were revised.
On January 6, 2016, AHFL entered into an Amendment No. 2 to the Alliance Agreement (the “Second Amendment to the Alliance Agreement”) 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 Second Amendment to the Alliance Agreement, the expiration date of the Strategic 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 agreed 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 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 an Amendment No. 3 to the Alliance Agreement (the “Third Amendment to the Alliance Agreement”). Pursuant to the Third Amendment to the Alliance Agreement, 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 the Third Amendment to the Alliance Agreement, 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 execution fees at NTD50 million for the first contract year, NTD35 million for the second contract year, and NTD33 million for each contract year thereafter within one month after the termination.
The following table presents the amounts recognized as revenue and refund for each contract year:
| Contract Year |
Period | Execution Fees | Revenue Amount |
Revenue VAT Amount |
Refund Amount |
Refund VAT Amount |
||||||||||||||||
| First | 04/15/2013 - 09/30/2014 |
NTD | 50,000,000 | NTD | 27,137,958 | (1) | NTD | 1,356,898 | NTD | 20,481,090 | (1) | NTD | 1,024,054 | |||||||||
| Second | 01/01/2016 - 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 | 01/01/2017 - 12/31/2017 |
NTD | 33,000,000 | NTD | 12,628,201 | (3) | NTD | 631,410 | NTD | 18,800,370 | (3) | NTD | 940,019 | |||||||||
| Fourth | 01/01/2018 - 12/31/2018 |
NTD | 33,000,000 | NTD | 11,228,600 | (4) | NTD | 561,429 | NTD | 20,199,971 | (4) | NTD | 1,010,000 | |||||||||
| Fifth | 01/01/2019 - 12/31/2019 |
NTD | 33,000,000 | NTD | 9,481,371 | (5) | NTD | 474,069 | NTD | 21,947,200 | (5) | NTD | 1,097,360 | |||||||||
| Sixth | 01/01/2020 - 12/31/2020 |
NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||||
| Seventh | 01/01/2021 - 12/31/2021 |
NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||||
| TOTAL | NTD | 250,000,000 | NTD | 73,331,130 | NTD | 3,666,556 | NTD | 101,906,964 | NTD | 5,095,350 | ||||||||||||
| 1) | The revenue recognition for the first contract year is based on the annual first year premium (“AFYP”) set in Alliance Agreement, which is different 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 (NTD 27,137,958), net of Value-Added Tax (“VAT”) in 2017 due to uncertainty resolved after Amendment 3 went effective. Besides, 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 based on original agreement and earlier amendments. |
| 2) | For the year ended December 31, 2016, the Company recognized the second contract year’s revenue amount of $422,883 (NTD 12,855,000), net of VAT, and refunded the amount of $690,537 (NTD 20,478,333), net of VAT, due to uncertainty resolved after Amendment 3 went effective. |
| 3) | For the year ended December 31, 2017, the Company recognized the third contract year’s revenue amount of $415,423 (NTD12,628,201), net of VAT, and refund amount of $633,955 (NTD18,800,370), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency. |
| 4) | For the year ended December 31, 2018, the Company recognized the fourth contract year’s revenue amount of $372,650 (NTD11,228,600), net of VAT, and refund amount of $670,389 (NTD 20,199,971), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency. |
| 5) | For the year ended December 31, 2019, the Company estimated to recognize the fifth contract year’s revenue amount of $313,868 (NTD9,694,701), net of VAT, and refund the amount of $703,638 (NTD 21,733,861), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency. The revenue recorded and refund amounts were trued up to $322,310 (NTD 9,555,440) and $746,073 (NTD 23,044,560), respectively, for the year ended December 31, 2019 based on notice received from AIATW. |
The Company recognized revenue of $306,961 (NTD 9,481,371) and $372,650 (NTD 11,228,600), net of VAT, for the years ended December 31, 2019 and 2018 related to this agreement. As of December 31, 2019 and 2018, the Company had non-current portion of unearned revenue of $1,049,258 and $2,056,513, respectively, and amounts in current liabilities of $1,781,975 and $1,028,256, respectively, related to the Alliance Agreement.
Accrued Bonus
The Company’s foreign subsidiaries have various bonus plans, which provide cash awards to employees based upon their performance, and had accrued bonus of $4,057,515 and $2,320,445, respectively, related to cash awards to employees as of December 31, 2019 and 2018.
The Company has other compensation plans solely provided by Law Broker to its officers.
The compensation plans eligible to Law Broker’s officers include a surplus bonus based on a percentage of income after tax and other performance bonuses such as retention and non-competition. For the years ended December 31, 2019 and 2018, the bonus expenses to Law Broker’s officers under the compensation plans were $824,213 and $682,554, respectively. As of December 31, 2019 and 2018, the Company had accrued bonus of $903,808 and $597,631 payable within next 12 months, and noncurrent accrued bonus of $471,466 and nil, respectively, related to the compensation plans for Law Broker’s officers. See Note 19 for additional information of appointment and engagement agreements with Law Broker’s officers.
F-23
NOTE 11 – OTHER LIABILITIES
The Company’s other liabilities consisted of the following as of December 31, 2019 and 2018:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Unearned revenue – noncurrent (Note 10) | $ | 1,049,258 | $ | 2,056,513 | ||||
| Due to previous shareholders of AHFL | 500,782 | 480,559 | ||||||
| Accrued bonus - noncurrent (Note 10) | 471,466 | - | ||||||
| Net defined benefit liability | 208,230 | 131,605 | ||||||
| Total other liabilities | $ | 2,229,736 | $ | 2,668,677 | ||||
Due to Previous Shareholders of AHFL
Due to previous shareholders of AHFL is the entire remaining balance payable of the 2012 acquisition cost. On March 27, 2019, the Company and the selling shareholders of AHFL entered into a sixth amendment to the acquisition agreement, pursuant to which, the Company will make the cash payment in the amount of NTD15 million on or prior to March 31, 2021. As of December 31, 2019 and 2018, the amount due to previous shareholders of AHFL were $500,782 and $480,559, respectively.
Defined Benefit Pension Plan
Law Broker has a defined benefit retirement plan for eligible employees and the benefits are based on years of service and average service. The plan was underfunded by $208,230 and $131,605 as of December 31, 2019 and 2018, respectively.
NOTE 12 – 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, 2019 and 2018. 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. |
F-24
| · | 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.
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:
| · | Does not violate any debt or other contract covenants; |
| · | Does not change any earnings or EPS trends; |
| · | Does not affect any previous earnings or EPS guidance; |
| · | Does not affect any segment or class of revenue; |
| · | Does not affect any regulatory compliance matters; |
| · | Does not affect cash compensation of management; |
| · | 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.
F-25
NOTE 13 – 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 reaches registered capital. The reserve can be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting to share capital. As of December 31, 2019 and 2018, the Company had statutory reserves in responding to the regulation requirements in Taiwan in the amount of $8,228,904 and $7,299,123, respectively.
Pursuant to the PRC regulations, the Company’s CAE are required to transfer 10% of net profits, as determined under the PRC accounting regulations, to a Statutory Common Reserve Fund (“Reserve Fund”). Appropriation to the Reserve Fund may cease when the fund equals 50% of a company’s registered capital or when a company has accumulated losses. The transfer to this reserve must be made before distribution of dividends to shareholders. The Company’s CAE did not appropriate such reserve due to as the accumulated deficit as of December 31, 2019 and 2018.
F-26
NOTE 14 – NONCONTROLLING INTERESTS
Noncontrolling interests consisted of the following as of December 31, 2019 and 2018:
| Name of Entity | % of Non- Controlling Interests |
December 31, 2018 |
Net Income (Loss) |
Other Comprehensive Income (Loss) |
Dividends | December 31, 2019 |
||||||||||||||||||
| Law Enterprise | 34.05 | % | $ | (72,557 | ) | $ | (147,948 | ) | $ | 15,541 | $ | - | $ | (204,964 | ) | |||||||||
| Law Broker | 34.05 | % | 16,149,662 | 2,985,723 | 400,719 | - | 19,536,104 | |||||||||||||||||
| PFAL | 49.00 | % | 436,742 | 7,086 | 1,265 | (93,815 | ) | 351,278 | ||||||||||||||||
| MKI | 49.00 | % | (2,630 | ) | 2,913 | - | - | 283 | ||||||||||||||||
| PA Taiwan | 49.00 | % | (157,762 | ) | (9,694 | ) | (75 | ) | - | (167,531 | ) | |||||||||||||
| PTC Nanjing | 49.00 | % | (2,411 | ) | (139 | ) | (94 | ) | - | (2,644 | ) | |||||||||||||
| Total | $ | 16,351,044 | $ | 2,837,941 | $ | 417,356 | $ | (93,815 | ) | $ | 19,512,526 | |||||||||||||
| Name of Entity | % of Non- Controlling Interests |
December 31, 2017 |
Net Income (Loss) |
Other Comprehensive Loss |
December 31, 2018 |
|||||||||||||||
| Law Enterprise | 34.05 | % | $ | (243,240 | ) | $ | 193,308 | $ | (22,625 | ) | $ | (72,557 | ) | |||||||
| Law Broker | 34.05 | % | 13,900,341 | 2,655,344 | (406,023 | ) | 16,149,662 | |||||||||||||
| PFAL | 49.00 | % | 228,079 | 208,918 | (255 | ) | 436,742 | |||||||||||||
| MKI | 49.00 | % | (2,117 | ) | (513 | ) | - | (2,630 | ) | |||||||||||
| PA Taiwan | 49.00 | % | (145,442 | ) | (11,789 | ) | (531 | ) | (157,762 | ) | ||||||||||
| PTC Nanjing | 49.00 | % | (1,965 | ) | (26 | ) | (420 | ) | (2,411 | ) | ||||||||||
| Total | $ | 13,735,656 | $ | 3,045,242 | $ | (429,854 | ) | $ | 16,351,044 | |||||||||||
NOTE 15 – REVENUE
In May 2014, the FASB issued new accounting guidance – ASU No. 2014-09, (FASB ASC Topic 606), Revenue from Contracts with Customers related to revenue from contracts with customers. The core principle of the Standard is that recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new guidance requires that companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new guidance effective January 1, 2018, using the modified retrospective method, which applies the new guidance beginning in the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings at January 1, 2018.
The Company’s revenue is derived primarily from insurance agency and brokerage services provided. The Company, through its subsidiaries and variable interest entities, sells insurance products provided by insurance companies to individuals, and is compensated in the form of commissions from the respective insurance companies, according to the terms of each service agreement made by and between the Company and the insurance companies. The sale of an insurance product by the Company is considered complete when initial insurance premium is paid by an individual and the insurance policy is approved by the respective insurance company. When a policy is effective, the insurance company is obligated to pay the agreed-upon commission to the Company under the terms of its service agreement with the Company and such commission is recognized as revenue.
The Company considers the contracts with insurance companies contain one performance obligation and consideration should be recorded when performance obligation is satisfied at point in time. The amount of revenue to be recognized when the insurance policy is effective includes first year commission and other contingent commission that a significant reversal of revenue would not occur in the subsequent periods. When other contingent commission that could not be determined if a significant reversal of revenue would occur, the Company recognizes the commission after receiving insurance companies’ notice.
Since the majority of the Company’s fee arrangements involve contracts that cover a single year of service, there was no significant change in the amount of revenue recognized in an annual period after adoption of the new revenue recognition accounting policy. The cumulative effect of adopting the new standard from January 1, 2018 is nil to the opening balance of retained earnings.
F-27
For the years ended December 31, 2019 and 2018, the Company recorded revenue of $95,919,338 and $78,667,731, respectively. Disaggregation information of revenue is disclosed in Note 21.
Contract Balance
| 2019 | 2018 | |||||||
| Accounts receivable | $ | 22,541,558 | $ | 15,332,355 | ||||
| Unearned revenue – current (Note 10) | 1,781,975 | 1,028,256 | ||||||
| Unearned revenue – noncurrent (Note 11) | 1,049,258 | 2,056,513 | ||||||
Contract assets are the Company’s conditional rights to consideration for completed performance obligation and are in relation to the performance bonus to be rewarded based on the annual performance. The Company recognizes the contingent commission as a contract asset when the performance obligation is fulfilled, and the Company has not had the unconditional rights to the payment. As of December 31, 2019 and 2018, the Company had nil of contract assets.
NOTE 16 –LEASE
The Company has operating leases for its offices with lease terms ranging from one to six years. We determine if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides us the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, we consider it to be, or contain, a lease. We record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments. The lease term used in the calculation of right-of-use assets and lease liabilities include renewal and termination options that are reasonably certain to be exercised. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. Our leases do not provide an implicit borrowing rate, and we estimate the Company’s incremental borrowing rate to discount the lease payments based on information available at lease commencement.
The Company recorded operating lease cost of $2,202,195 for the year ended December 31, 2019.
Operating lease right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. As of December 31, 2019, operating lease right-of-use assets and lease liabilities were as follows:
|
December 31, 2019 |
||||
| Operating lease right-of-use assets | $ | 5,522,665 | ||
| Operating lease liabilities – current | 2,242,034 | |||
| Operating lease liabilities – noncurrent | 3,048,632 | |||
Lease Term and Discount Rate
| December 31, 2019 | ||||
| Weighted average remaining lease term | ||||
| Operating lease | 2.91 years | |||
| Weighted average discount rate | ||||
| Operating lease | 2.85% | |||
Supplemental Cash Flow Information Related to Leases
|
December 31, 2019 |
||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||
| Operating cash flows related to operating leases | $ | 2,655,644 | ||
Future Minimum Lease Payments
The present value of future minimum lease payment as of December 31, 2019 is as follows:
F-28
| Years ending December 31, | Amount | ||
| 2020 | $ | 2,373,613 | |
| 2021 | 1,754,400 | ||
| 2022 | 680,720 | ||
| 2023 | 401,796 | ||
| 2024 | 321,739 | ||
| Thereafter | - | ||
| Total minimum lease payments | $ | 5,532,268 | |
| Less: Interest | (241,602) | ||
| Present value of future minimum lease payments | $ | 5,290,666 | |
Supplemental Information for Comparative Period
Rental expenses for the years ended December 31, 2018 was $2,720,365. As of December 31, 2018, total future minimum annual lease payments under operating leases were as follows:
| Years ending December 31, | Amount | |||
| 2019 | $ | 2,043,635 | ||
| 2020 | 818,792 | |||
| 2021 | 369,340 | |||
| 2022 | 131,568 | |||
| 2023 | 121,303 | |||
| Thereafter | - | |||
| Total | $ | 3,484,638 | ||
NOTE 17 – INCOME TAX
Provision (benefit) for income taxes for the year ended December 31, 2019 consisted of:
| Year ended December 31, 2019 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | - | $ | - | $ | 2,866,872 | 2,866,872 | |||||||||
| Deferred | - | - | (162,575 | ) | (162,575 | ) | ||||||||||
| Total | $ | - | $ | - | $ | 2,704,297 | 2,704,297 | |||||||||
Provision (benefit) for income taxes for the year ended December 31, 2018 consisted of:
| Year ended December 31, 2018 | Federal | State | Foreign | Total | ||||||||||||
| Current | $ | 1,227,243 | $ | - | $ | 2,546,560 | $ | 3,773,803 | ||||||||
| Deferred | - | - | (163,631 | ) | (163,631 | ) | ||||||||||
| Total | $ | 1,227,243 | $ | - | $ | 2,382,929 | $ | 3,610,172 | ||||||||
F-29
Significant components of the deferred tax assets and liabilities for income taxes as of December 31, 2019 and 2018 consisted of the following:
| 2019 | 2018 | |||||||
| Deferred tax assets | ||||||||
| Net operating loss carry-forward | $ | 1,151,941 | $ | 847,023 | ||||
| Others | 441,364 | 268,237 | ||||||
| Total | $ | 1,593,305 | $ | 1,115,260 | ||||
| Valuation allowance | (1,151,941 | ) | (847,023 | ) | ||||
| Net deferred tax assets - noncurrent | $ | 441,364 | $ | 268,237 | ||||
| Deferred tax liabilities - noncurrent | $ | - | $ | - | ||||
Management determined that it was unlikely that the Company’s deferred tax assets from the net operating loss in PRC and CUIS would be realized and provided a full valuation allowance against the deferred tax assets. In PRC, the net operating losses generated in a tax year can be carryforward for ten years. The 2017 Tax Act allows the net operating losses generated after December 31, 2017 to be carryforward indefinitely, whereas the operating losses generated in tax years prior to December 31, 2017 can only be carryforward for twenty years. The deferred tax assets of $441,364 and $268,237 related to the Taiwan segment were included in other assets on the consolidated balance sheets as of December 31, 2019 and 2018, respectively.
The following table reconciles the Company’s statutory tax rates to effective tax rates for the years ended December 31, 2019 and 2018:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| US statutory rate | 21 | % | 21 | % | ||||
| Tax rate difference | (1 | )% | (1 | )% | ||||
| Tax base difference | 1 | % | - | % | ||||
| Income tax on undistributed earnings | 5 | % | 4 | % | ||||
| Loss in subsidiaries | 8 | % | 3 | % | ||||
| Un-deductible and non-taxable items | (1 | )% | - | % | ||||
| Utilization of deferred tax not recognized in prior years | (2 | )% | - | % | ||||
| True up of prior year income tax | - | % | 3 | % | ||||
| Withholding tax | - | % | 10 | % | ||||
| Effective tax rate | 31 | % | 40 | % | ||||
The Company’s income tax expense is mainly generated by its subsidiaries in Taiwan. The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan. In February 2018. The Income Tax Law was amended to increase the statutory tax rate on income reported in the statutory financial statements after appropriate adjustments from 17% to 20% starting from the beginning of 2018 and reduce the tax rate on any undistributed earnings from 10% to 5%. The Company has recorded an income tax expense of $21,434 for remeasuring the Company’s deferred tax as a result of the tax rate change in the year ended December 31, 2018. In June 2018, the shareholders of Law Enterprise approved the distribution of accumulated earnings to shareholders including AHFL. Under the Income Tax Law of Taiwan, the distributed earnings are not subject to the undistributed earning tax and the foreign shareholders of a Taiwan company will bear 21% of withholding tax after deducting certain tax credits allowed by the Income Tax Law of Taiwan for the dividend received. As a result of the earning distribution, Law Enterprise reversed $902,479 of the undistributed earning tax liability accrued in 2018 and AHFL accrued $877,746 of withholding tax liability that cannot be deducted in its tax jurisdiction. In 2019, the Company had no plan to distribute earnings, and thee tax on undistributed earnings of 5% was estimated. As of December 31, 2019 and 2018, the Company had current tax payable of $2,230,793 and $1,416,540 for Taiwan income tax, respectively.
WFOE and the Company’s Consolidated Affiliated Entities (“CAE”) in PRC are governed by the Income Tax Law of PRC concerning private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustments, except for Jiangsu. For Jiangsu province in PRC, according to the requirement of local tax authorities, the tax basis is levied at 10% of total revenue, instead of net income. WFOE and CAE had no income tax expenses for the years ended December 31, 2019 and 2018 due to the loss positions.
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. As of December 31, 2019 and 2018, the Company had current tax payable of $56,993 and $51,032 for Hong Kong income tax.
F-30
The 2017 Tax Act was enacted into law on December 22, 2017. The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax.
The Company has determined the implication of the tax rate reduction does not have any impact on its consolidated financial statements. A one-time transition tax, based on the Company’s total post-1986 earnings and profits (“E&P”) that it previously deferred from U.S. income taxes, was recorded at $1,199,195 for the transition tax on undistributed earnings of non-U.S. subsidiaries during the year ended December 31, 2018. As of December 31, 2019, and 2018, the Company had current tax payable of $101,518 and $95,936 and noncurrent tax payable of $815,451 and $1,007,323 for U.S. income tax.
The 2017 Tax 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. For the year ended December 31, 2019 and 2018, no GILTI tax obligation existed and no GILTI tax expense was recorded.
For the year ended December 31, 2019 and 2018, the Company did not have any unrecognized tax benefits.
F-31
NOTE 18 – RELATED PARTY TRANSACTIONS
Due to Related Parties
Due to related parties consisted of the following as of December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||
| Due to Mr. Mao (CEO and Principal shareholder of the Company) | $ | 373,183 | $ | 391,311 | ||||
| Due to Ms. Lu (A shareholder of Anhou) | 85,074 | - | ||||||
| Others | 4,602 | 7,623 | ||||||
| Total | $ | 462,859 | $ | 398,934 | ||||
Due to Mr. Mao
Amounts due to Mr. Mao were associated with funding provided by Mr. Mao for the formation of our subsidiaries in China in 2011. As of December 31, 2019 and 2018, the amounts of $373,183 and 391,311 were non-interesting bearing and payable on demand. The change in amounts owed to Mr. Mao from December 31, 2018 to December 31, 2019 was due to foreign currency translation.
Due to Ms. Lu
Amounts due to Ms. Lu were borrowings from Ms. Lu to support Anhou’s business operation. The amounts were non-interesting bearing and payable on demand.
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Operating Leases
See future minimum annual lease payments in Note 16.
Time Deposits Pledged as Collateral
See time deposits pledged as collateral for short-term loans in Note 8.
Legal Proceedings
On December 20, 2018, the Company and one of the Company’s former employees, agreed to settle fraud charges brought by the SEC relating to a scheme to manipulate the Company’s trading volume for the purpose of obtaining a listing on Nasdaq. Neither the Company nor the former employee realized financial gain from the scheme. Both the Company and the former employee agreed to the entry of a final judgment that enjoins them from violating the charged provisions of the federal securities laws, orders the Company to comply with its undertaking to retain an independent compliance monitor for a period of not less than one year. The SEC did not seek a monetary penalty against the Company and there is no financial impact to the Company.
Appointment agreement
On December 21, 2018, Law Broker entered into an appointment agreement with Shu-Fen, Lee (“Ms. Lee”), pursuant to which, she serves as the president of Law Broker from December 21, 2018 to December 20, 2021. Ms. Lee’s primary responsibilities include 1) overall business planning, 2) implementation of resolution of the shareholders' meeting or the board of directors, 3) the appointment and dismissal of the Law Broker’s employees and sales professionals, except for internal auditors, 4) financial management and application, 5) being the representative of Law Broker, 6) other matters assigned by the board of directors. According to the agreement, Ms. Lee’s compensation plan include: 1) base salary, 2) managerial allowance, 3) surplus bonus based on 1.25% of Law Broker’s income after tax, and 4) annual year-end bonus. For the year ended December 31, 2019 and 2018, the Company has recorded the compensation expense of $160,613 and $0 under the appointment agreement, respectively.
Engagement agreement
On May 10, 2016, Law Broker entered into an engagement agreement with Hui-Hsien Chao (“Ms. Chao”), pursuant to which, she serves as the general manager of Law Broker from December 29, 2015 to December 28, 2018. The engagement agreement with Ms. Chao was renewed in 2019 and her service period has extended to December 20, 2021. Ms. Chao’s primary responsibilities are to assist Law Broker in operating and managing insurance agency business. According to the engagement agreement, Ms. Chao’s Bonus plans include: 1) execution, 2) long-term service fees, 3) pension and 4) non-competition. The payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms in the engagement agreement. Ms. Chao acts as the general manager or equivalent position of Law Broker for a term of at least three years. For the year ended December 31, 2019 and 2018, the Company has recorded the performance bonus expense of $663,601 and $682,554 under the engagement agreement, respectively.
F-32
NOTE 20 –FAIR VALUE MEASUREMENTS
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. |
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured and reported on a fair value basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.
The following table summarize financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018:
| As of December 31, 2019 | ||||||||||||||||
| Fair Value | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Carrying Value | |||||||||||||
| Assets | ||||||||||||||||
| Total cash equivalents, time deposits, and restricted cash equivalents | $ | 40,194,850 | $ | - | $ | - | $ | 40,194,850 |
||||||||
| Marketable securities (recorded in other current assets): | ||||||||||||||||
| Equity securities | - | 290,153 | - | 290,153 | ||||||||||||
| Long-term investments: | ||||||||||||||||
| Government bonds held for available-for-sale | 101,203 | - | - | 101,203 | ||||||||||||
| REITs | 1,308,711 | - | - | 1,308,711 | ||||||||||||
| Total assets measured at fair value | $ | 41,604,764 | $ | 290,153 | $ | - | $ | 41,894,917 | ||||||||
| As of December 31, 2018 | ||||||||||||||||
| Fair Value | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Carrying Value | |||||||||||||
| Assets | ||||||||||||||||
| Total cash equivalents, time deposits, and restricted cash equivalents | $ | 38,285,851 | $ | - | $ | - | $ | 38,285,851 | ||||||||
| Marketable securities (recorded in other current assets): | ||||||||||||||||
| Mutual fund | 30,800 | - | - | 30,800 | ||||||||||||
| Long-term investments: | ||||||||||||||||
| Government bonds held for available-for-sale | - | 99,834 | - | 99,834 | ||||||||||||
| REITs | 1,120,239 | - | - | 1,120,239 | ||||||||||||
| Total assets measured at fair value | $ | 39,436,890 | $ | 99,834 | $ | - | $ | 39,536,724 | ||||||||
The carrying amounts of current financial assets and liabilities in the consolidated balance sheets for cash equivalents, time deposits, and restricted cash equivalents approximate fair value due to the short-term duration of those instruments.
Marketable securities and long-term investments in REITs – The fair values of mutual funds and REITs were valued based on quoted market prices in active markets.
Government bonds – The fair value of government bonds is valued based on theoretical bond price in the Taipei Exchange.
F-33
NOTE 21 – SEGMENT REPORTING
The Company organizes and manages its business as three operating segments by operating geographic areas. The business of WFOE, CU Hong Kong and the CAE in PRC was managed and reviewed as 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. PRC and Taiwan segments retain majority of reported consolidated amounts.
The geographical distributions of the Company’s financial information for the years ended December 31, 2019 and 2018 were as follows:
| For the Years | ||||||||
| Ended December 31, | ||||||||
| Geographic Areas | 2019 | 2018 | ||||||
| Revenue | ||||||||
| Taiwan | $ | 87,415,243 | $ | 67,515,966 | ||||
| PRC | 8,517,475 | 10,465,147 | ||||||
| Hong Kong | 283,918 | 718,924 | ||||||
| Elimination adjustment | (297,298 | ) | (32,306 | ) | ||||
| Total revenue | $ | 95,919,338 | $ | 78,667,731 | ||||
| Income (loss) from operations | ||||||||
| Taiwan | $ | 7,278,045 | $ | 7,362,949 | ||||
| PRC | 181,330 | (48,080 | ) | |||||
| Hong Kong | 28,633 | 478,626 | ||||||
| Elimination adjustment | 166,519 | 143,764 | ||||||
| Total income from operations | $ | 7,654,527 | $ | 7,937,259 | ||||
| Net income | ||||||||
| Taiwan | $ | 5,692,137 | $ | 4,906,605 | ||||
| PRC | 176,112 | 70,087 | ||||||
| Hong Kong | 14,461 | 426,363 | ||||||
| Elimination adjustment | 14,079 | 13,591 | ||||||
| Total net income | $ | 5,896,789 | $ | 5,416,646 | ||||
The geographical distribution of the Company’s financial information as of December 31, 2019 and 2018 were as follows:
| As of | ||||||||
| December 31, | ||||||||
| Geographical Areas | 2019 | 2018 | ||||||
| Long-lived assets | ||||||||
| Taiwan | $ | 1,280,728 | $ | 1,092,576 | ||||
| PRC | 124,443 | 102,383 | ||||||
| Hong Kong | 602 | 736 | ||||||
| Elimination adjustment | (2,907 | ) | - | |||||
| Total long-lived assets | $ | 1,402,866 | $ | 1,195,695 | ||||
| Reportable assets | ||||||||
| Taiwan | $ | 144,663,045 | $ | 100,220,270 | ||||
| PRC | 12,349,634 | 11,796,388 | ||||||
| Hong Kong | 800,746 | 1,015,400 | ||||||
| Elimination adjustment | (68,571,003 | ) | (44,150,214 | ) | ||||
| Total reportable assets | $ | 89,242,422 | $ | 68,881,844 | ||||
| Capital investment | ||||||||
| Taiwan | $ | 602,442 | $ | 641,873 | ||||
| PRC | 57,569 | 53,158 | ||||||
| Hong Kong | - | 997 | ||||||
| Elimination adjustment | - | - | ||||||
| Total capital investments | $ | 660,011 | $ | 696,028 | ||||
F-34
NOTE 22 – SUBSEQUENT EVENTS
The Company has evaluated all other subsequent events through the date these consolidated financial statements were issued and determine that there were no subsequent events or transactions that require recognition or disclosures in the consolidated financial statements except for the follows:
In January 2020, the Company drew down $1,100,000 from the line of credit with O-Bank. The credit facility is with interest at a rate of 2.48% per annum and matures on February 21, 2020.
F-35
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, 2019, 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, 2019, our disclosure controls and procedures were not effective at the reasonable assurance level due to the deficiencies and material weakness 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 fraud and our disclosure controls and internal controls have been deficient in preventing recent fraud. For further information, please see our Amended Current Report Re SEC Action set forth in Item 3 of this annual 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. However, 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 a simple error or mistake. Additionally, controls can be circumvented if an individual desires to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
65
| (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 helps us implement changes and improvements in the internal control over disclosure controls and procedures for remediating the control deficiencies. For further information, please see the Amended Current Report Re SEC Action set forth in Item 3 of this annual 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; |
| 2) | A review of our policies and procedures as they relate to 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 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. |
66
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.
Remediation taken to mitigate the noncompliance issue included (1) an implementation of new policies and procedures to enhance segregation of duties and review controls in the process, (2) an adoption of a new Expense Reimbursement Management System that expressly requires tax receipts to truthfully reflect transactions, (3) reiterations of the importance and requirements for proper and valid documents through trainings to all employees , (4) executions of self-checks to verify any irregularity occurred subsequent to the implementation of the new policies and the adoption of the new system, and (5) ongoing supervision and inspections of financial records of the CAE conducted by the Company’s finance team. We have performed monthly self-checks from August to December 2019 with satisfactory results; however, we will continue to monitor this issue to ensure the effectiveness of the Company’s internal controls and the corporate governance.
67
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. 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, 2019, as described below.
| (1) | We have yet established effective entity-level controls at group level in application of Internal Control-Integrated Framework (2013). |
The material weakness described above could result in material misstatements 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, 2019 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.
68
| (d) | Management’s Remediation Plan Concerning Internal Control Over Financial Reporting |
We are committed to remediating the control deficiencies that constitute the material weakness 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 weakness and have taken or are in the process of taking the following actions:
| (1) | We are committed to design, implement and assess the structures, authorities and responsibilities to establish accountability for internal controls of the Company; |
| (2) | We are committed to hire additional resources, with the appropriate expertise and competence, to assume assigned responsibility for initiating and monitoring entity-level controls at group level in compliance with Internal Control-Integrated Framework (2013); |
| (3) | We are committed to continuously reiterating the importance of Corporate Government and effectiveness of internal controls through trainings and raise the top management’s awareness and ability to exercise meaningful oversight and management. |
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 weakness, 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.
69
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 Securities and Exchange Committee (the “SEC”).
The following sets forth the biographical information of the Directors as of December 31, 2019:
| Name | Age | Position with the Company | ||
| Series A Director | ||||
| Yi Hsiao Mao | 62 | Director and Chief Executive Officer | ||
| Common Stock Directors | ||||
| Fu Chang Li | 65 | Director | ||
| Chwan Hau Li | 61 | Director | ||
| Chih Yuan Lu | 48 | Independent Director | ||
| Lo Tien Hsin | 45 | Independent Director | ||
| Chun Hui Yang | 32 | Independent Director | ||
| Tse Hsun Niu | 52 | Independent Director |
Series A Director
Yi Hsiao Mao, Series A Director and Chief Executive Officer
Mr. Mao previously served as a Common Stock Director of the Company from June 2010 to December 2016. In December 2016, Mr. Mao was elected as a Series A Director and has since served in such capacity. Mr. Mao has been our Company’s Chief Executive Officer since August 2014 and oversees the strategic and operational initiatives of the Company. With over 30 years of insurance brokerage experience, he is the founder of 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 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.
70
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 Co., Ltd. or KHIB. Mr. Li was the president of Time Insurance Brokers Co., Ltd. from 1993 to 2003. After serving as the Consultant of Law Anhou Insurance Agency Co., Limited (formerly known as Henan Law Anhou Insurance Agency Co., Ltd.) (“Law Anhou”), an affiliated entity of our Company in China, from October 2003 to October 2009, he served as 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. 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 Co., Ltd., and has served as its chairman. Mr. Li is also the chairman of Genius Financial Consultants Co., Ltd.. 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 headquarters of Transcend Information Inc. in Taipei, 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 that 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 assumed in August 2017.
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.
71
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 a proven reputation and track record of excellence in supply chain and operational 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 a Senior 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 and has served in that capacity 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 audits 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 served as an assistant professor from August 2002 to July 2007; an associate professor from August 2007 to January 2015, and professor since February 2015. Prior to joining 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.
72
Our Executive Officers
| Name | Age | Principal Position | ||
| Yi Hsiao Mao1 | 62 | Chief Executive Officer | ||
| Yung Chi Chuang | 48 | 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 Law Broker in December 1996, and is currently the supervisor of the financial department of Law Broker. Prior to joining Law Broker, Ms. Chuang was an executive secretary at Pacific Realtor, Inc.
Ms. Chuang graduated from Ming Chuan University in Taiwan where she received her bachelor’s degree in Risk Management and Insurance.
Family Relationships
There are no family relationships by and between or among the members of the Board or other executives.
1 See the sections entitled “Our Board of Directors” above, for a description of the business experience and educational background of Mr. Mao.
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.
73
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.
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 6 meetings during the fiscal year ended December 31, 2019. Mr. Yi Hsiao Mao, Mr. Fu Chang Li, Mr. Chwan Hau Li, Mr. Chi Yuan Lu, Ms. Lo Tien Hsin, Ms. Chun Hui Yang and Mr. Tse Hsun Niu attended all of regularly-scheduled and special meetings of the Board of Directors and the committees on which served.
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 Mr. Chih Yuan Lu, Ms. Chun Hui Yang and Ms. Lo Tien Hsin. All members of the Audit Committee satisfy the independence requirements set forth under the applicable rules of the NASDAQ Stock Market. Mr. 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.
74
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.
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 the fiscal year ended December 31, 2019, the Audit Committee met in person or by telephone, or acted by unanimous written consent, four times.
Compensation Committee
The Compensation Committee comprises of Mr. Chih Yuan Lu, Ms. Chun Hui Yang and Ms. 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 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 the fiscal year ended December 31, 2019, the Compensation Committee met in person or by telephone, or acted by unanimous written consent, three times.
75
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 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.
During the fiscal year ended December 31, 2019, the Nominating and Corporate Governance Committee met once in person or by telephone, or acted by unanimous written consent.
76
Risk Management
We had identified one material weakness in our internal control over financial reporting. This material weakness is that we have not established an effective mechanism to implement and monitor entity-level controls at group level in the application of the COSO 2013 Internal Control Framework.
The existence of this material weakness 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 weakness noted above. We are committed to remediating the control deficiencies that constitute the material weakness 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 weakness.
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, addressing and remediating 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 have an insider transaction policy in place. A copy of the Policy on Insider Trading and Disclosure was filed as Exhibit 14.4 to a current report on Form 8-K dated March 18, 2019.
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.
77
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. A copy of the Code of Business Conduct and Ethics was filed as Exhibit 14.1 to a current report on Form 8-K dated March 18, 2019.
iTEM 11. EXECUTIVE COMPENSATION.
Executive Summary
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.
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 includes 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 the year of 2019. Following this discussion is a summary compensation table containing specific data about the compensation earned by or granted to the following NEOs in 2019:
| Name | Age | Principal Position | ||
| Yi Hsiao Mao | 62 | Director and Chief Executive Officer | ||
| Yung Chi Chuang | 48 | Chief Financial Officer |
78
Elements of Executive Compensation for Fiscal Year 2019
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, as of December 31, 2019, both of them had 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, 2019 and 2018 by our named executive officers.
| 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 | 2019 | 281,017 | (1) | — | — | — | — | — | — | 281,017 | ||||||||||||||||||||||||||
| Chief Executive Officer | 2018 | 250,000 | — | — | — | — | — | — | 250,000 | |||||||||||||||||||||||||||
| Yung Chi Chuang | 2018 | 42,088 | (2) | — | — | — | — | — | — | 42,088 | ||||||||||||||||||||||||||
| Chief Financial Officer | 2018 | 50,000 | — | — | — | — | — | — | 50,000 | |||||||||||||||||||||||||||
| (1) | The salary consists of $20,720, which was paid to Mr. Mao for his service as the president of Law Enterprise, and the remaining amount of $260,297 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, 2019. |
| (2) | The salary in the amount of $42,088 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, 2019 and 2018, Mr. Mao served as the consultant of Law Broker and president of Law Enterprise and received all of his compensation from Law Broker and Law Enterprise. Commencing on April 1, 2020, Mr. Yi Hsiao Mao shall receive a salary of $8,300 per month, equivalent to $99,600 per year for his services as the Chief Executive Officer of the Company. In the fiscal years ended December 31, 2019 and 2018, Ms. Chuang served as the supervisor of the financial department of Law Broker.
The above table identifies the amounts of compensation received by the named officers directly from us and our subsidiaries.
79
Outstanding Equity Awards At Fiscal Year End
We currently do not have any outstanding equity awards as of the date of this report.
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, 2019.
Potential Payments Upon Termination or Change in Control
None.
Compensation of Directors
Our directors do not currently receive any compensation for their services as directors of our Company. Set forth below is the compensation paid to each of our directors during the fiscal year ended December 31, 2019 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 | — | 56,397 | (2) | 56,397 | ||||||||
| Chwan Hau Li | — | — | — | |||||||||
| Chih Yuan Lu | 3,885 | — | 3,885 | |||||||||
| Lo Tien Hsin | 3,238 | — | 3,238 | |||||||||
| Chun Hui Yang | 2,914 | — | 2,914 | |||||||||
| Tse Hsun Niu | 3,885 | — | 3,885 | |||||||||
| (1) | Travel stipends to Independent Directors for attending in-person Board and Committee meetings for the fiscal year ended December 31, 2019. | |
| (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, 2019. |
80
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 certain travel stipends.
iTEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information, as of March 6, 2020, 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 29,421,736 shares of common stock and 1,000,000 shares of Series A Preferred Stock outstanding at March 6, 2020. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
81
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 |
Common Stock Percentage (%) |
Beneficially Series A Shares |
Preferred Stock Percentage (%) |
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 outstanding securities, including 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. U-Link International Co., Ltd. is solely owned by Shu Fen Lee. |
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, 2019 is $260,297.
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, 2019 is approximately $56,397.
82
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, 2019 and 2018:
| December 31, 2019 |
December 31, 2018 |
|||||||
| Due to Mr. Yi-Hsiao Mao (Principal shareholder of the Company)* | $ | 373,183 | $ | 391,311 | ||||
| Due to Ms. Lu (Shareholder of Anhou)* | 85,074 | - | ||||||
| Others | 4,602 | 7,623 | ||||||
| Total | $ | 462,859 | $ | 398,934 | ||||
Amounts due to Mr. Mao and Ms. Lu bear no interest and are payable on demand. The change in amounts due to Mr. Mao from December 31, 2018 to December 31, 2019 was due to changes of foreign currency translation. During the year of 2019, Ms. Lu provided credits to support Anhou’s general business operations.
83
Related Party Transaction Policy
The Company is currently working to improve its policies and procedures for approval of transactions between the Company 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.
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. |
84
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 party transaction that it deems appropriate.
On March 15, 2019, the Company adopted its Conflict of Interest Policy to protect the interest of the Company and its shareholders. A copy of the Conflict of Interest Policy was filed with the SEC as Exhibit 14.3 to a current report on Form 8-K on March 18, 2019.
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, 2019 and 2018 by Simon & Edward, LLP:
| Fiscal Year 2019 | Fiscal Year 2018 | |||||||
| Audit fees(1) | $ | 546,000 | $ | 530,000 | ||||
| Audit-related fees(2) | 15,718 | 13,476 | ||||||
| Tax fees(3) | — | 30,000 | ||||||
| All other fees(4) | 10,919 | — | ||||||
| Total | $ | 572,637 | $ | 573,476 | ||||
| (1) | Audit fees consisted of fees billed for professional services rendered for the audit of our consolidated financial statements and internal control over financial reporting and review of our quarterly interim consolidated financial statements. |
| (2) | Audit-related fees consisted of fees billed for services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit fees.” |
| (3) | Tax fees consisted of fees billed for tax return preparation services. |
| (4) | All other fees included the fees billed for an additional audit procedure performed in connection with incompliance of the Company’s expense and reimbursement policies in our consolidated affiliated entities in the PRC. |
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Audit Committee to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, the Audit Committee pre-approved the audit service performed by Simon & Edward, LLP for our consolidated financial statements as of December 31, 2019 and 2018.
85
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.
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:
| * | Filed herewith. |
| ITEM 16. | FORM 10-K SUMMARY |
None.
86
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHINA UNITED INSURANCE SERVICE, INC. | ||
| Dated: March 20, 2020 | By: | /s/ Yi-Hsiao Mao |
| Yi-Hsiao Mao | ||
| Chief Executive Officer | ||
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 | March 20, 2020 | ||
| Yi Hsiao Mao | (Principal Executive Officer) | |||
| /s/ Yung Chi Chuang | Chief Financial Officer | March 20, 2020 | ||
| Yung Chi Chuang | (Principal Executive Officer) | |||
| /s/ Fu Chang Li | Director | March 20, 2020 | ||
| Fu Chang Li | ||||
| /s/ Chwan Hau Li | Director | March 20, 2020 | ||
| Chwan Hau Li | ||||
| /s/ Chih Yuan Lu | Independent Director | March 20, 2020 | ||
| Chih Yuan Lu | ||||
| /s/ Lo Tien Hsin | Independent Director | March 20, 2020 | ||
| Lo Tien Hsin | ||||
| /s/ Chun Hui Yang | Independent Director | March 20, 2020 | ||
| Chun Hui Yang | ||||
| /s/ Tse Hsun Niu | Independent Director | March 20, 2020 | ||
| Tse Hsun Niu |
87