UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 000-54884
CHINA UNITED INSURANCE SERVICE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 30-0826400 |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
7F, No. 311 Section 3
Nan-King East Road
Taipei City, Taiwan
(Address of principal executive offices)
+8862-87126958
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer 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 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 Exchange Act.
Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
As of August 7, 2019, there are 29,421,736 shares of common stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.
TABLE OF CONTENTS
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This 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, performance or achievement expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described under Part 1 Item 2 “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 report. You should read this report and the documents that we reference in this report, or that we filed as exhibits to this 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.
2
OTHER PERTINENT INFORMATION
References in this quarterly 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 quarterly 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 quarterly 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
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, 2019 | December 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 9,268,355 | $ | 16,663,942 | ||||
| Time deposits | 39,952,878 | 25,740,164 | ||||||
| Restricted cash equivalents | - | 3,320,802 | ||||||
| Accounts receivable | 10,129,086 | 15,332,355 | ||||||
| Contract assets | 1,893,144 | - | ||||||
| Other current assets | 1,070,826 | 1,155,678 | ||||||
| Total current assets | 62,314,289 | 62,212,941 | ||||||
| Property, plant and equipment, net | 1,214,640 | 1,195,695 | ||||||
| Operating lease assets | 4,413,436 | - | ||||||
| Intangible assets, net | 507,595 | 575,985 | ||||||
| Long-term investments | 2,528,908 | 2,477,558 | ||||||
| Restricted cash - noncurrent | 145,654 | 655,027 | ||||||
| Other assets | 2,672,488 | 1,764,638 | ||||||
| TOTAL ASSETS | $ | 73,797,010 | $ | 68,881,844 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Short-term loans | $ | 6,941,068 | $ | 8,435,587 | ||||
| Income tax payable - current | 1,867,157 | 1,599,146 | ||||||
| Commissions payable to sales professionals | 8,074,265 | 8,014,480 | ||||||
| Due to related parties | 1,131,822 | 996,565 | ||||||
| Operating lease liabilities – current | 1,954,324 | - | ||||||
| Other current liabilities | 6,185,612 | 7,348,841 | ||||||
| Total current liabilities | 26,154,248 | 26,394,619 | ||||||
| Operating lease liabilities - noncurrent | 2,280,673 | - | ||||||
| Income tax payable - noncurrent | 911,387 | 1,007,323 | ||||||
| Other liabilities | 2,102,777 | 2,537,072 | ||||||
| TOTAL LIABILITIES | 31,449,085 | 29,939,014 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding | 10 | 10 | ||||||
| Common stock, par value $0.00001, 100,000,000 authorized, 29,421,736 and 29,452,669 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | 294 | 295 | ||||||
| Additional paid-in capital | 8,190,449 | 8,190,449 | ||||||
| Statutory reserves | 8,058,094 | 7,299,123 | ||||||
| Retained earnings | 8,999,362 | 7,273,227 | ||||||
| Accumulated other comprehensive loss | (548,732 | ) | (171,318 | ) | ||||
| Total stockholders’ equity attribute to parent’s shareholders | 24,699,477 | 22,591,786 | ||||||
| Noncontrolling interests | 17,648,448 | 16,351,044 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 42,347,925 | 38,942,830 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 73,797,010 | $ | 68,881,844 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
(UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue | $ | 21,756,468 | $ | 20,175,337 | $ | 41,183,142 | $ | 37,664,717 | ||||||||
| Cost of revenue | 16,235,356 | 13,696,717 | 27,430,430 | 23,318,420 | ||||||||||||
| Gross profit | 5,521,112 | 6,478,620 | 13,752,712 | 14,346,297 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 508,323 | 789,400 | 996,943 | 1,427,398 | ||||||||||||
| General and administrative | 4,424,480 | 4,078,909 | 8,228,036 | 8,030,530 | ||||||||||||
| Total operating expense | 4,932,803 | 4,868,309 | 9,224,979 | 9,457,928 | ||||||||||||
| Income from operations | 588,309 | 1,610,311 | 4,527,733 | 4,888,369 | ||||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | 130,015 | 127,171 | 218,488 | 224,792 | ||||||||||||
| Interest expenses | (46,561 | ) | (28,395 | ) | (80,143 | ) | (51,249 | ) | ||||||||
| Dividend income | 310,623 | 361,571 | 310,623 | 361,571 | ||||||||||||
| Other - net | 12,756 | 114,267 | 314,682 | 194,505 | ||||||||||||
| Total other income, net | 406,833 | 574,614 | 763,650 | 729,619 | ||||||||||||
| Income before income taxes | 995,142 | 2,184,925 | 5,291,383 | 5,617,988 | ||||||||||||
| Income tax expense | 242,714 | 369,380 | 1,320,101 | 2,487,921 | ||||||||||||
| Net income | 752,428 | 1,815,545 | 3,971,282 | 3,130,067 | ||||||||||||
| Net income attributable to noncontrolling interests | 274,327 | 791,238 | 1,486,176 | 1,760,106 | ||||||||||||
| Net income attributable to parent’s shareholders | 478,101 | 1,024,307 | 2,485,106 | 1,369,961 | ||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Foreign currency translation loss | (233,016 | ) | (2,016,338 | ) | (596,336 | ) | (1,113,481 | ) | ||||||||
| Other | - | 9 | - | 829 | ||||||||||||
| Total comprehensive income (loss) | 519,412 | (200,784 | ) | 3,374,946 | 2,017,415 | |||||||||||
| Less: comprehensive income attributable to noncontrolling interests | 205,727 | 82,909 | 1,267,254 | 1,359,784 | ||||||||||||
| Comprehensive income (loss) attributable to parent’s shareholders | $ | 313,685 | $ | (283,693 | ) | $ | 2,107,692 | $ | 657,631 | |||||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic and diluted | 29,422,076 | 29,452,669 | 29,437,288 | 29,452,669 | ||||||||||||
| Earnings per share attributable to parent’s shareholders | ||||||||||||||||
| Basic and diluted | $ | 0.016 | $ | 0.034 | $ | 0.082 | $ | 0.045 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
| Common Stock | Amount | Preferred Stock | Amount | Additional Paid-in Capital | Statutory Reserves | Accumulated Other Comprehensive Loss | Retained Earnings | Total | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||
| Balance December 31, 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 | - | - | - | - | - | 758,971 | (758,971 | ) | - | |||||||||||||||||||||||||||||||||||
| Business acquisition | - | - | - | - | - | - | - | - | - | 30,150 | 30,150 | |||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | - | (377,414 | ) | - | (377,414 | ) | (218,922 | ) | (596,336 | ) | |||||||||||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Retirement of common stock | (30,933 | ) | (1 | ) | - | - | - | - | - | - | (1 | ) | - | (1 | ) | |||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 2,485,106 | 2,485,106 | 1,486,176 | 3,971,282 | |||||||||||||||||||||||||||||||||
| Balance June 30, 2019 | 29,421,736 | $ | 294 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 8,058,094 | $ | (548,732 | ) | $ | 8,999,362 | $ | 24,699,477 | $ | 17,648,448 | $ | 42,347,925 | |||||||||||||||||||||||
| Common Stock | Amount | Preferred Stock | Amount | Additional Paid-in Capital | Statutory Reserves | Accumulated Other Comprehensive Loss | Retained Earnings | Total | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||
| Balance March 31, 2019 | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 7,299,123 | $ | (384,316 | ) | $ | 9,280,232 | $ | 24,385,793 | $ | 17,412,571 | $ | 41,798,364 | |||||||||||||||||||||||
| Appropriation of reserves | - | - | - | - | - | 758,971 | - | (758,971 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Business acquisition | - | - | - | - | - | - | - | - | - | 30,150 | 30,150 | |||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | - | (164,416 | ) | - | (164,416 | ) | (68,600 | ) | (233,016 | ) | |||||||||||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Retirement of common stock | (30,933 | ) | (1 | ) | - | - | - | - | - | - | (1 | ) | - | (1 | ) | |||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 478,101 | 478,101 | 274,327 | 752,428 | |||||||||||||||||||||||||||||||||
| Balance June 30, 2019 | 29,421,736 | $ | 294 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 8,058,094 | $ | (548,732 | ) | $ | 8,999,362 | $ | 24,699,477 | $ | 17,648,448 | $ | 42,347,925 | |||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||
| Adjustment of reserves | - | - | - | - | - | (41,483 | ) | - | 41,483 | - | - | - | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | - | (712,861 | ) | - | (712,861 | ) | (400,620 | ) | (1,113,481 | ) | |||||||||||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | - | - | 531 | - | 531 | 298 | 829 | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 1,369,961 | 1,369,961 | 1,760,106 | 3,130,067 | |||||||||||||||||||||||||||||||||
| Balance June 30, 2018 | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 5,739,525 | $ | (96,311 | ) | $ | 7,831,381 | $ | 21,665,349 | $ | 15,095,440 | $ | 36,760,789 | |||||||||||||||||||||||
| Common Stock | Amount | Preferred Stock | Amount | Additional Paid-in Capital | Statutory Reserves | Accumulated Other Comprehensive Loss | Retained Earnings | Total | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||
| Balance March 31, 2018 | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 5,781,008 | $ | 1,211,689 | $ | 6,765,591 | $ | 21,949,042 | $ | 15,012,531 | $ | 36,961,573 | ||||||||||||||||||||||||
| Adjustment of reserves | - | - | - | - | - | (41,483 | ) | - | 41,483 | - | - | - | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | - | - | (1,308,006 | ) | - | (1,308,006 | ) | (708,332 | ) | (2,016,338 | ) | |||||||||||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | - | - | 6 | - | 6 | 3 | 9 | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 1,024,307 | 1,024,307 | 791,238 | 1,815,545 | |||||||||||||||||||||||||||||||||
| Balance June 30, 2018 | 29,452,669 | $ | 295 | 1,000,000 | $ | 10 | $ | 8,190,449 | $ | 5,739,525 | $ | (96,311 | ) | $ | 7,831,381 | $ | 21,665,349 | $ | 15,095,440 | $ | 36,760,789 | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 3,971,282 | $ | 3,130,067 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 331,376 | 305,000 | ||||||
| Amortization of bond premium | - | 134 | ||||||
| (Gain) loss on valuation of financial assets | (87,609 | ) | 119,441 | |||||
| Loss on disposal of fixed assets | 14,456 | 5,419 | ||||||
| Loss on debt forgiveness | - | 12,908 | ||||||
| Deferred income tax | 35 | (43,980 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,755,539 | 5,080,989 | ||||||
| Contract assets | 373,462 | (1,359,771 | ) | |||||
| Other current assets | 140,667 | (617,844 | ) | |||||
| Net operating lease assets | (121,971 | ) | - | |||||
| Other assets | (2,977,540 | ) | 993,243 | |||||
| Income tax payable | 191,155 | 83,705 | ||||||
| Commissions payable to sales professionals | 163,616 | (114,865 | ) | |||||
| Other current liabilities | 1,790,404 | (2,416,502 | ) | |||||
| Long-term liabilities | (1,260,715 | ) | (176,123 | ) | ||||
| Net cash provided by operating activities | 5,284,157 | 5,001,821 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of time deposits | (34,221,606 | ) | (25,537,004 | ) | ||||
| Proceeds from maturities of time deposits | 19,648,342 | 18,876,553 | ||||||
| Purchases of structured deposits | - | (4,910,401 | ) | |||||
| Proceeds from maturities of structured deposits | - | 3,905,499 | ||||||
| Purchase of long-term investment - REITs | - | (1,355,038 | ) | |||||
| Proceeds from repayment of loan made to RFL | - | 1,517,316 | ||||||
| Purchase of property, plant and equipment | (261,102 | ) | (442,932 | ) | ||||
| Purchase of intangible assets | (59,390 | ) | (43,537 | ) | ||||
| Net cash used in investing activities | (14,893,756 | ) | (7,989,544 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term loans | 11,724,905 | 10,300,000 | ||||||
| Repayment of short-term loans | (13,218,762 | ) | (9,750,000 | ) | ||||
| Proceeds from related party borrowing | 87,367 | 493,424 | ||||||
| Repayment to related party borrowing | - | (557,363 | ) | |||||
| Repayment of convertible bonds | - | (200,000 | ) | |||||
| Net cash (used in) provided by financing activities | (1,406,490 | ) | 286,061 | |||||
| Foreign currency translation | (209,673 | ) | (331,922 | ) | ||||
| Net decrease in cash, cash equivalents and restricted cash | (11,225,762 | ) | (3,033,584 | ) | ||||
| Cash, cash equivalents and restricted cash, beginning balance | 20,639,771 | 15,473,949 | ||||||
| Cash, cash equivalents and restricted cash, ending balance | $ | 9,414,009 | $ | 12,440,365 | ||||
| SUPPLEMENTARY DISCLOSURE: | ||||||||
| Interest paid | $ | 56,265 | $ | 53,412 | ||||
| Income tax paid | $ | 1,007,922 | $ | 2,469,288 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
7
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
China United Insurance Service, Inc. (“China United”, “CUIS”, or the “Company”) is a Delaware corporation, organized on June 4, 2010 by Yi-Hsiao Mao, a Taiwan citizen, as a listing vehicle for both ZLI Holdings Limited (“CU Hong Kong”) and Action Holdings Financial Limited (“AHFL,” a company incorporated in the British Virgin Islands). The Company’s common stock currently trades over the counter under the ticker symbol “CUII” on the OTC Pink market.
In May 2019, AHFL entered into an investment agreement to make capital contributions of $485,909 (NTD15,000,000) to Ilife International Investment Co., Limited (“Ilife”). Upon consummating the agreement, the Company owned 93.75% of Ilife. The business objective of Ilife 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.
On June 4, 2019, Ilife entered into an acquisition agreement with the selling shareholder of Uniwill Insurance Broker Co., Ltd (“Uniwill”). Pursuant to the acquisition agreement, Ilife 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 Company recognized only the acquisition of assets as part of this transaction.
The corporate structure as of June 30, 2019 is as follows:
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The unaudited 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 consolidation.
8
Basis of Presentation
The unaudited consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
These unaudited consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2018, which were included in the Company’s 2018 Annual Report on Form 10-K (“2018 Form 10-K”). The accompanying consolidated balance sheet as of December 31, 2018, has been derived from the Company’s audited consolidated financial statements as of that date.
Use of Estimates
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.
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 June 30, 2019 and December 31, 2018.
Foreign Currency Transactions
The Company’s financial statements are presented in U.S. dollars ($), which is the Company’s reporting and functional currency. The functional currencies of the Company’s subsidiaries are NTD, RMB and HKD. The resulting translation adjustments are reported under other comprehensive income in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 220 (“ASC 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 Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| New Taiwan dollar (NTD) | NTD | 30.960117 | NTD | 29.519475 | ||||
| China yuan (RMB) | RMB | 6.783923 | RMB | 6.366551 | ||||
| Hong Kong dollar (HKD) | HKD | 7.842581 | HKD | 7.837374 | ||||
| United States dollar ($) | $ | 1.000000 | $ | 1.000000 | ||||
| Exchange Rate at | ||||||||
| June 30, 2019 |
December 31, 2018 | |||||||
| New Taiwan dollar (NTD) | NTD | 30.984901 | NTD | 30.564919 | ||||
| China yuan (RMB) | RMB | 6.865570 | RMB | 6.876443 | ||||
| Hong Kong dollar (HKD) | HKD | 7.811948 | HKD | 7.831246 | ||||
| United States dollar ($) | $ | 1.000000 | $ | 1.000000 | ||||
9
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 ASC Topic 260, “Earnings Per Share.” Potential common shares consist primarily of convertible bonds calculated using the if-converted method. However, convertible bonds were excluded from the calculation of diluted earnings per common share due to the antidilutive effect. As of June 30, 2019 and December 31, 2018, the Company does not have any outstanding convertible bonds. The antidilutive common share equivalents excluded from the computation were nil and 45,935 for the three months ended June 30, 2019 and 2018, and were nil and 54,369 for the six months ended June 30, 2019 and 2018, respectively.
The calculation for basic and diluted EPS is as follows:
| Three Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Amounts attributable to CUIS shareholders | $ | 478,101 | $ | 1,024,307 | ||||
| Less: Amount attributable to the participating preferred shareholders | (15,716 | ) | (33,636 | ) | ||||
| Amounts attributable to CUIS common shareholders | 462,385 | 990,671 | ||||||
| Effect of dilution | - | - | ||||||
| Income attributable to CUIS common shareholders after dilution | $ | 462,385 | $ | 990,671 | ||||
| Basic weighted-average number of common shares outstanding | 29,422,076 | 29,452,669 | ||||||
| Effect of convertible bond | - | - | ||||||
| Diluted weighted-average number of common shares outstanding | 29,422,076 | 29,452,669 | ||||||
| Earnings per share attributable to CUIS common shareholders: | ||||||||
| Basic | $ | 0.016 | $ | 0.034 | ||||
| Diluted | $ | 0.016 | $ | 0.034 | ||||
| Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Amounts attributable to CUIS shareholders | $ | 2,485,106 | $ | 1,330,612 | ||||
| Less: Amount attributable to the participating preferred shareholders | (81,647 | ) | (44,987 | ) | ||||
| Amounts attributable to CUIS common shareholders | 2,403,459 | 1,324,974 | ||||||
| Effect of dilution | - | - | ||||||
| Income attributable to CUIS common shareholders after dilution | $ | 2,403,459 | $ | 1,324,974 | ||||
| Basic weighted-average number of common shares outstanding | 29,437,288 | 29,452,669 | ||||||
| Effect of convertible bond | - | - | ||||||
| Diluted weighted-average number of common shares outstanding | 29,437,288 | 29,452,669 | ||||||
| Earnings per share attributable to CUIS common shareholders: | ||||||||
| Basic | $ | 0.082 | $ | 0.045 | ||||
| Diluted | $ | 0.082 | $ | 0.045 | ||||
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 accounted for the cost method. Available-for-sale investments are carried at fair value and unrealized gains and losses as a result of changes in the fair value are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.
The Company 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.
As of June 30, 2019 and December 31, 2018, the Company’s long-term investments consisted the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Equity investments accounted for the cost method | $ | 1,240,440 | $ | 1,257,485 | ||||
| Government bonds held for available-for-sale | 98,211 | 99,834 | ||||||
| REITs | 1,190,257 | 1,120,239 | ||||||
| Total long-term investments | $ | 2,528,908 | $ | 2,477,558 | ||||
10
Fair Value of Financial Instruments
Fair value accounting establishes a framework for measuring fair value and expands disclosure about fair value measurements. Fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
| ¨ | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ¨ | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments. |
| ¨ | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The following fair value hierarchy tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | ||||||||||||||||
| Fair Value | Carrying | |||||||||||||||
| Assets | Level 1 | Level 2 | Level 3 | Value | ||||||||||||
| Marketable securities (included in other current assets): | ||||||||||||||||
| Mutual fund | $ | 32,847 | $ | - | $ | - | $ | 32,847 | ||||||||
| Long-term investments: | ||||||||||||||||
| Government bonds (available-for-sale debt securities) | - | 98,211 | - | 98,211 | ||||||||||||
| REITs | 1,190,257 | - | - | 1,190,257 | ||||||||||||
| December 31, 2018 | ||||||||||||||||
| Fair Value | Carrying | |||||||||||||||
| Assets | Level 1 | Level 2 | Level 3 | Value | ||||||||||||
| Marketable securities (included in other current assets): | ||||||||||||||||
| Mutual fund | $ | 30,800 | $ | - | $ | - | $ | 30,800 | ||||||||
| Long-term investments: | ||||||||||||||||
| Foreign government bonds | - | 99,834 | - | 99,834 | ||||||||||||
| REITs | 1,120,239 | - | - | 1,120,239 | ||||||||||||
During the six months ended June 30, 2019, there were no assets or liabilities that were transferred between any of the levels.
Marketable securities and long-term investments in REITs – The fair value of the mutual fund and REITs is 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 Taipei Exchange.
The amortized cost of the investment in government bonds is $97,265 and $98,732 as of June 30, 2019 and December 31, 2018, respectively. The government bonds will mature on March 17, 2021.
The carrying amounts of financial assets and liabilities in the consolidated balance sheets for cash and cash equivalents, time deposits, restricted cash and cash equivalents, accounts receivable, short-term loans, due to related parties and accrued expense approximate fair value due to the short-term duration of those instruments.
11
Concentration of Risk
The Company maintains cash with banks in the USA, People’s Republic of China (“PRC” or “China”), Hong Kong, and Taiwan. Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. In Taiwan, a depositor has up to NTD3,000,000 insured by Central Deposit Insurance Corporation (“CDIC”). In China, a depositor has up to RMB500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”). In Hong Kong, a depositor has up to HKD500,000 insured by Hong Kong Deposit Protection Board (“DPB”). In the United States, the standard insurance amount is $250,000 per depositor in a bank insured by the Federal Deposit Insurance Corporation (“FDIC”).
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, time deposits, restricted cash, register capital deposits and accounts receivable. As of June 30, 2019 and December 31, 2018, approximately $2,042,000 and $1,751,000 of the Company’s cash and cash equivalents, time deposits, restricted cash equivalents and register capital deposits held by financial institutions, was insured, and the remaining balance of approximately $47,632,000 and $44,289,000, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.
For the three months ended June 30, 2019 and 2018, the Company’s revenues from sale of insurance policies underwritten by these companies were:
| Three Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 4,264,924 | 20 | % | $ | 4,312,106 | 21 | % | ||||||||
| Taiwan Life Insurance Co., Ltd. | 4,169,768 | 19 | % | 2,401,545 | 12 | % | ||||||||||
| TransGlobe Life Insurance Inc. | 2,187,382 | 10 | % | 2,533,169 | 13 | % | ||||||||||
For the six months ended June 30, 2019 and 2018, the Company’s revenues from sale of insurance policies underwritten by these companies were:
| Six Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 8,685,344 | 21 | % | $ | 9,258,162 | 25 | % | ||||||||
| Taiwan Life Insurance Co., Ltd. | 7,541,011 | 18 | % | 5,199,281 | 14 | % | ||||||||||
| TransGlobe Life Insurance Inc. | 4,975,314 | 12 | % | 4,362,188 | 12 | % | ||||||||||
As of June 30, 2019 and December 31, 2018, the Company’s accounts receivable from these companies were:
| June 30, 2019 | December 31, 2018 | |||||||||||||||
| Amount | % of Total Accounts Receivable |
Amount | % of Total Accounts Receivable |
|||||||||||||
| Farglory Life Insurance Co., Ltd. | $ | 1,850,765 | 18 | % | $ | 3,139,404 | 20 | % | ||||||||
| Taiwan Life Insurance Co., Ltd | 1,747,816 | 17 | % | 2,578,590 | 17 | % | ||||||||||
| TransGlobe Life Insurance Inc. | 1,097,136 | 11 | % | 2,381,181 | 16 | % | ||||||||||
The Company’s operations are in the PRC, Hong Kong and Taiwan. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC, Hong Kong and Taiwan, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, Hong Kong and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
12
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, (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 ASC 842 as of January 1, 2019 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 ASC 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 ASC 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 12 for details.
Accounting Standards Issued but Not Yet Adopted
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, (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. ASU 2016-13 is effective for public entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial position and results of operations.
There were other updates recently issued. The management does not believe that other than disclosed above, the recently issued, but not yet adopted, accounting pronouncements will have a material impact on its financial position results of operations or cash flows.
NOTE 3 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS
Cash, cash equivalents and restricted cash equivalents consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Cash and cash equivalents: | ||||||||
| Cash in banks and on hand | $ | 9,268,355 | $ | 7,439,057 | ||||
| Cash equivalents – re-purchase bonds | - | - | ||||||
| Cash equivalents – commercial paper | - | 654,006 | ||||||
| Time deposits – with original maturities less than three months (see Note 4) | - | 8,570,879 | ||||||
| 9,268,355 | 16,663,942 | |||||||
| Restricted cash equivalents | - | 3,320,802 | ||||||
| Restricted cash – noncurrent | 145,654 | 655,027 | ||||||
| Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 9,414,009 | $ | 20,639,771 | ||||
On March 27, 2019, the Company and China Bills Finance Corporation entered into a repurchase agreement to purchase re-purchase bonds of $1,296,642 (NTD 40,000,000) with 0.48% interest rate per annum. The re-purchase bonds were due in April 2019. As of June 30, 2019, the re-purchase bonds held by the Company was nil.
On December 14, 2018, the Company purchased a commercial paper of $654,006 (NTD 19,989,649) with 0.70% interest rate annum and with the maturity date of January 10, 2019. As of June 30, 2019, the Company did not hold any commercial paper.
As of June 30, 2019 and December 31, 2018, the Company had short-term restricted cash equivalents of nil and $3,320,802 (NTD101,500,000), which 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 of PRC, and a trust account held for the bonus accrued for Law Broker’s general manager.
13
NOTE 4 – TIME DEPOSITS
| June 30, 2019 | December 31, 2018 | |||||||
| Total time deposits | $ | 39,952,878 | $ | 34,311,043 | ||||
| Less: Time deposits – with original maturities less than three months (see Note 3) | - | (8,570,879 | ) | |||||
| Time deposits – original maturities over three months but less than one year | $ | 39,952,878 | $ | 25,740,164 | ||||
Time Deposits Pledged as Collateral
As of June 30, 2019 and December 31, 2018, the Company had time deposits of $5,652,979 and $5,404,889 out of total $39,952,878 and $34,311,043, respectively, pledged as collateral for short-term loans (see Note 5).
NOTE 5 – SHORT-TERM LOANS
The Company’s short-term loans consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Credit facility, FEIB | $ | - | $ | 2,000,000 | ||||
| Credit facility, O-Bank | 3,827,378 | 3,600,000 | ||||||
| Credit facility, CTBC | 1,500,000 | 1,000,000 | ||||||
| Credit facility, KGI | 1,613,690 | 1,600,000 | ||||||
| Subtotal | 6,941,068 | 8,200,000 | ||||||
| Current portion of long-term loans (Note 9) | - | 235,587 | ||||||
| Total short-term loans | $ | 6,941,068 | $ | 8,435,587 | ||||
The Company entered into credit agreements with several commercial banks as follows:
| ¨ | Far Eastern International Bank (“FEIB”): In September 2017, the Company entered into a line of credit agreement with FEIB. The line of credit was renewed on October 26, 2018 and matures on September 21, 2019. Borrowings under the agreement bear interest at the higher of LIBOR or TAIFX3 rate plus a margin of 0.85%. On December 7, 2018, the Company borrowed $2,000,000 with interest at a rate of 3.95% per annum. The Company paid off the borrowing in January 2019. |
| ¨ |
O-Bank Co., Ltd. (“O-Bank”): The Company had a revolving credit facility in amount of $4,000,000 with O-Bank. The maturity date of the revolving credit facility is September 3, 2019. Borrowings under the revolving credit facility bear interest at the TAIFX3 rate plus a margin of 0.5%. On December 7 and December 25, 2018, the Company drew down borrowings of $2,400,000 and $1,200,000, with interest at a rate of 3.60% and 3.75% per annum, respectively. These amounts were paid off in January of 2019. On April 30, 2019, the Company drew down $600,000 with interest at a rate of 3.37% per annum. The borrowing was outstanding as of June 30, 2019 and secured by a total amount of $677,749 (NTD 21,000,000) of time deposit.
In September 2018, Law Broker entered into a credit agreement with O-Bank and the agreement provides for a $3,227,378 (NTD 100,000,000) revolving credit facility from September 4, 2018 to September 3, 2019. Borrowings under this agreement bear interest at the TAIFX3 rate plus a margin of 0.75%. As of June 30, 2019, the revolving credit facility was fully drawn down with an interest rate of 1.49% and secured by a total amount of $3,227,378 (NTD 100,000,000) of time deposits. On July 3, 2019, O-Bank agreed to extend the maturity date of the borrowing to December 26, 2019 with an interest rate of 1.50% per annum. |
| ¨ |
CTBC Bank Co., Ltd. (“CTBC”): The Company has a revolving credit facility in amount of $1,500,000 with CTBC. The maturity date of the revolving credit facility is August 31, 2019. Borrowings under the revolving credit facility bear interest at the CTBC’s cost of funds plus a margin of 1%. On December 28, 2018, the Company drew down $1,000,000 with interest at a rate of 4.10% per annum and the amount was paid off in February of 2019. From February to March 2019, the Company drew down a total borrowing of $1,200,000 with interest at a rate of 3.75% per annum and these amounts were paid off in May 2019. In April 2019, the Company drew down a total borrowing of $150,000 with interest at a rate of 3.65% per annum and the amounts were paid off in May 2019. In May 2019, the Company drew down a total borrowing of $1,500,000 again with a maturity date of July 31, 2019. The interest rate was 3.75% per annum. On July 31, 2019, the interest rate was lowered to 3.65% per annum. Law Broker is the guarantor of the credit facility.
In August 2018, Law Broker entered into a credit agreement with CTBC providing for a $3,227,378 (NTD 100,000,000) revolving credit facility. On January 4, 2019, Law Broker borrowed $3,227,378 with an interest rate of 1.55%. The amount was paid off by Law Broker in April 2019. |
| ¨ |
KGI Commercial Bank Co., Ltd. (“KGI”): On September 19, 2018, the Company was approved for a line of credit agreement with KGI, pursuant to which the Company has a revolving credit facility of $1,600,000 from October 26, 2018 to October 26, 2019. Borrowings under the agreement bear interest at the LIBOR rate plus a margin of 0.9%. On December 27, 2018, the Company drew down a borrowing of $1,600,000 with interest at a rate of 3.41% per annum. The Company paid off the borrowing in January of 2019.
In August 2018, Law Broker entered into a credit agreement with KGI providing for a $1,613,690 (NTD 50,000,000). On January 7, 2019, the revolving credit facility was fully drawn down by Law Broker. The revolving credit facility matures on July 3, 2019 and bears an interest rate of 1.52%. On July 3, 2019, KGI agreed to extend the maturity date of the borrowing to November 21, 2019 and reduced the interest rate to 1.66% per annum. As of June 30, 2019, $1,613,690 loan was outstanding under the credit line secured by a time deposit of $1,747,852 (RMB 12,000,000). |
Total interest expenses for short-term loans incurred were $46,724 and $17,689, respectively, for the three months ended June 30, 2019 and 2018, and were $80,143 and $36,705 for the six months ended June 30, 2019 and 2018.
14
NOTE 6 – INCOME TAX PAYABLE
The Company’s income tax payable consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Taiwan Tax | $ | 1,665,255 | $ | 1,416,540 | ||||
| U.S.A. Tax (Note 14) | 1,035,371 | 1,131,307 | ||||||
| PRC Tax | - | 7,590 | ||||||
| Hong Kong Tax | 77,918 | 51,032 | ||||||
| Total income tax payable | $ | 2,778,544 | $ | 2,606,469 | ||||
| Less: current portion | (1,867,157 | ) | (1,599,146 | ) | ||||
| Income tax payable-noncurrent (Note 14) | $ | 911,387 | $ | 1,007,323 | ||||
NOTE 7 – COMMISSIONS PAYABLE TO SALES PROFESSIONALS
Commissions payable to sales professionals consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Taiwan | $ | 7,545,702 | $ | 7,602,595 | ||||
| PRC | 528,563 | 411,885 | ||||||
| Hong Kong | - | - | ||||||
| Total commissions payable to sales professionals | $ | 8,074,265 | $ | 8,014,480 | ||||
Commissions payable to sales professionals are usually settled within twelve months.
NOTE 8 – OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Unearned revenue - current | 1,360,446 | 1,028,256 | ||||||
| Accrued business tax and tax withholdings | 868,123 | 893,391 | ||||||
| Accrued bonus | 2,117,416 | 2,320,445 | ||||||
| Payroll payable and other benefits | 1,092,157 | 1,360,790 | ||||||
| Other accrued liabilities | 747,470 | 1,745,959 | ||||||
| Total other current liabilities | $ | 6,185,612 | $ | 7,348,841 | ||||
See Note 10 for additional information on current liabilities related to AIA International Limited Taiwan Branch (“AIATW”).
NOTE 9 – LONG-TERM LOANS
The Company’s long-term loans consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Loan A, interest at 8% per annum, maturity date May 15, 2019 | $ | - | $ | 123,611 | ||||
| Loan B, interest at 8% per annum, maturity date July 20, 2019 | - | 111,976 | ||||||
| Total loans | - | 235,587 | ||||||
| Less: current portion (Note 5) | - | (235,587 | ) | |||||
| Total long-term loans | $ | - | $ | - | ||||
15
On May 15, 2016, Anhou entered into a loan agreement (“Loan A”) with an individual third party. As of June 30, 2019 and December 31, 2018, the outstanding balance of Loan A were nil and $123,611 (RMB 850,000), respectively. Loan A bears an interest rate of 8% per annum and interest is payable annually. The Company paid off the total outstanding loan balance and accrued interest in May 2019.
On July 20, 2016, Anhou entered into a loan agreement (“Loan B”) with an individual third party. As of June 30, 2019 and December 31, 2018, the outstanding balance of Loan B were nil and $111,976 (RMB 770,000), respectively. Loan B bears an interest rate of 8% per annum and interest is payable annually. The Company paid off the total outstanding loan balance and accrued interest in May 2019.
NOTE 10 – OTHER LIABILITIES
The Company’s other liabilities consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Unearned revenue – AIATW | $ | 1,521,478 | $ | 2,056,513 | ||||
| Due to previous shareholders of AHFL | 480,559 | 480,559 | ||||||
| Accrued bonus for Ms. Chao (Note 15) | 100,740 | - | ||||||
| Total other liabilities | $ | 2,102,777 | $ | 2,537,072 | ||||
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 $8,068,446 (NTD250,000,000, including the tax of NTD11,904,762, the “Execution Fee”), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “Supplemental Agreement”) with AIATW. In the Supplemental Agreement, the performance targets and the provision about refunding the Execution Fee on a pro rata basis when the performance targets are not met were revised.
On January 6, 2016, AHFL entered into an Amendment 2 to Strategic Alliance Agreement (the “Amendment No. 2”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW. To the extent permitted by applicable laws and regulations, AHFL shall assist and encourage any insurance agency company or insurance brokerage company duly approved by the competent government authorities of Taiwan (the “Appointed Broker/Agent”), to cooperate with AIATW for the promotion of life insurance products of AIATW. Pursuant to the Amendment No. 2, the expiration date of the Strategic Alliance Agreement was extended from May 31, 2018 to December 31, 2021, and the effect of the Strategic Alliance Agreement during the period from October 1, 2014 to December 31, 2015 was suspended. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, among which: (i) expand the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) remove certain provisions related to performance milestones and refund of Execution Fees. On March 15, 2016, AHFL issued a promise letter (the “2016 Letter”) to AIATW that AHFL is required to (i) fulfill sales targets and (ii) the 13-month persistency ratio.
On June 14, 2017, with AIATW’s consent, the 2016 Letter was revoked in order to conform with the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in a third amendment (Amendment No. 3). Pursuant to the Amendment No. 3, both AHFL and AIATW agreed to adjust certain terms and conditions set forth this amendment, among which (i) except the first contract year (April 15th, 2013 to September 30th, 2014), the sales target of the alliance between the parties shall be changed to (a) value of new business (“VONB”) and (b) the 13-month persistency ratio; and (ii) AIATW will calculate and recognize the VONB and 13-month persistency ratio each contract year and inform the Company the result; and (iii) the Company agrees to return the basic business promotion fees to AIATW within thirty (30) days of receipt of the notice sent by AIATW if the Company fails to meet the targets set forth in Amendment No. 3, AIATW reserves the right to offset such amount against the amount payable by it to the Company; and (iv) upon the termination of the Alliance Agreement and its amendments pursuant to the Section 8.2 of the Alliance Agreement, both parties agreed to calculate the amount to be returned or repaid, as applicable, based on the past and current contract years. The Company shall return the basic business promotion fees at NTD 33,000,000 for each contract years within one month after the termination.
16
The following table presents the amounts recognized as revenue and the refunded for each contract year:
| Contract Year |
Period | Execution Fees | Revenue Amount |
Revenue
VAT Amount |
Refund Amount |
Refund
VAT Amount | ||||||||||||||||
| First | 4/15/2013 ~ 9/30/2014 | NTD | 50,000,000 | NTD | 27,137,958 (1) | NTD | 1,356,898 | NTD | 20,481,090(1) | NTD | 1,024,054 | |||||||||||
| Second | 1/1/2016 ~ 12/31/2016 | NTD | 35,000,000 | NTD | 12,855,000 (2) | NTD | 642,750 | NTD | 20,478,333(2) | NTD | 1,023,917 | |||||||||||
| Third | 1/1/2017 ~ 12/31/2017 | NTD | 33,000,000 | NTD | 12,628,201 (3) | NTD | 631,410 | NTD | 18,800,370(3) | NTD | 940,019 | |||||||||||
| Fourth | 1/1/2018 ~ 12/31/2018 | NTD | 33,000,000 | NTD | 11,228,600 (4) | NTD | 561,429 | NTD | 20,199,971(4) | NTD | 1,010,000 | |||||||||||
| Fifth | 1/1/2019 ~ 12/31/2019 | NTD | 33,000,000 | NTD | 9,979,127 (5) | NTD | 498,956 | NTD | 21,449,445(5) | NTD | 1,072,472 | |||||||||||
| Sixth | 1/1/2020 ~ 12/31/2020 | NTD | 33,000,000 | NTD | - | NTD | - | NTD | - | NTD | - | |||||||||||
| Seventh | 1/1/2021 ~ 12/31/2021 | NTD | 33,000,000 | NT | - | NTD | - | NTD | - | NTD | - | |||||||||||
| TOTAL | NTD | 250,000,000 | NTD | 73,828,886 | NTD | 3,691,443 | NTD | 101,409,209 | NTD | 5,070,462 | ||||||||||||
| (1) | The revenue recognition for the first contract year is based on the annual first year premium (“AFYP”) set in Alliance Agreement, which is difference from other contract years. From the second contract year to the seventh contract year, the revenue calculation is based on VONB. The Company recognized the first contract year’s revenue amount of $892,742 (NTD27,137,958), net of Value-Added Tax (“VAT”). On December 3, 2015 and February 23, 2016, the Company refunded the amounts of $160,573 (NTD4,761,905), net of VAT, and $530,056 (NTD15,719,185), net of VAT, to AIATW, respectively, due to the portion of performance sales targets not met during the first contract year. |
| (2) | For the year ended December 31, 2017, the Company recognized the second contract year’s revenue amount of $422,883 (NTD12,855,000), net of VAT, and refunded the amount of $690,537 (NTD20,478,333), net of VAT, for the same contract period. |
| (3) | For the year ended December 31, 2017, the Company estimated to recognize the third contract year’s revenue amount of $415,423 (NTD12,628,201), net of VAT, and refunded the amount of $633,955 (NTD18,800,370), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency. |
| (4) | For the year ended December 31, 2018, the Company estimated to recognize the fourth contract year’s revenue amount of $391,223 (NTD11,788,229), net of VAT, and refunded the amount of $651,816 (NTD19,640,341), 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 $412,230 (NTD 12,068,571) and $661,286 (NTD 19,360,000), respectively, for the year ended December 31, 2018 based on notice received from AIATW. |
| (5) | The Company estimated VONB and 13-month persistency ratio for the year ending December 31, 2019 and calculated the revenue amount to be $322,322 (NTD 9,979,127) for the year. The amount will be reassessed every quarter until receiving AIATW’s notice. |
The Company recognized revenue of $81,836 (NTD 2,533,651) and $87,330 (NTD 2,599,536), net of VAT, for the three months ended June 30, 2019 and 2018, and $161,161 (NTD 4,989,563) and $157,008 (NTD 4,639,443) , net of VAT, for the six months ended June 30, 2019 and 2018 related to this agreement. As of June 30, 2019 and December 31, 2018, the Company had non-current portion of unearned revenue of $1,521,478 and $2,056,513, respectively, and amounts in other current liabilities of $1,360,446 and $1,028,256, respectively, related to the Alliance Agreement.
Due to previous shareholders of AHFL
Due to previous shareholders of AHFL is the entire remaining balance payable of the acquisition cost. On March 12, 2017, the Company and the selling shareholders of AHFL entered into a fifth amendment to the acquisition agreement, pursuant to which, the Company agreed to make the cash payment in the amount of $480,559 (NTD15 million) on or prior to March 31, 2019. On 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 agreed to make the cash payment in the amount of $480,559 (NTD15 million) on or prior to March 31, 2021.
Accrued bonus for Ms. Chao
As of June 30, 2019 and December 31, 2018, the Company had current accrued bonus of $651,567 and $597,631, and noncurrent accrued bonus of $100,740 and nil, respectively. Please see details of the accrued bonus for Ms. Chao in Note 16.
NOTE 11 – REVENUE
The Company’s revenue is derived from insurance agency and brokerage services. The Company, through its subsidiaries and variable interest entities, sells insurance products provided by insurance companies to individuals, and is compensated in the form of commissions from the respective insurance companies, according to the terms of each service agreement made by and between the Company and the insurance companies. The sale of an insurance product by the Company is considered complete when initial insurance premium is paid by an individual and the insurance policy is approved by the respective insurance company. When a policy is effective, the insurance company is obligated to pay the agreed-upon commission to the Company under the terms of its service agreement with the Company and such commission is recognized as revenue.
17
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 could not be determined if a significant reversal of revenue would occur, the Company recognizes the commission after receiving insurance companies’ notice.
For the three months ended June 30, 2019 and 2018, the Company recorded revenue of $21,756,468 and $20,175,337, respectively. For the six months ended June 30, 2019 and 2018, the Company recorded revenue of $41,183,142 and $37,664,717, respectively. Disaggregation information of revenue is disclosed in Note 17.
Contract balance
| June 30, 2019 | December 31, 2018 | |||||||
| Accounts receivable | $ | 10,129,086 | $ | 15,332,355 | ||||
| Contract assets – current | 1,893,144 | - | ||||||
| Unearned revenue – current (Note 8) | 1,360,446 | 1,028,256 | ||||||
| Unearned revenue – noncurrent (Note 10) | 1,521,478 | 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.
Unearned revenue relates to advances received prior to performance under the contract. The related contract is the Alliance Agreement with AIATW which is disclosed in Note 10 to the consolidated financial statements.
NOTE 12 –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 options that are reasonably certain to be exercised and termination options that are reasonably certain not 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 $722,013 and $1,374,743 for the three and six months ended June 30, 2019, respectively.
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 June 30, 2019, operating lease right-of-use assets and lease liabilities were as follows:
| June 30, 2019 | ||||
| Operating lease right-of-use assets | $ | 4,413,436 | ||
| Operating lease liabilities – current | 1,954,324 | |||
| Operating lease liabilities – noncurrent | 2,280,673 | |||
Lease term and discount rate
| June 30, 2019 | ||||
| Weighted average remaining lease term | ||||
| Operating lease | 2.49 years | |||
| Weighted average discount rate | ||||
| Operating lease | 3.07 | % | ||
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Supplemental cash flow information related to leases
| June 30, 2019 | ||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||
| Operating cash flows related to operating leases | $ | 1,338,792 | ||
The minimum future lease payments as of June 30, 2019 are as follows:
| Amount | ||||
| 2019 (reminder of year) | $ | 1,130,998 | ||
| 2020 | 1,810,703 | |||
| 2021 | 1,088,995 | |||
| 2022 | 250,697 | |||
| 2023 | 116,627 | |||
| Thereafter | 87,231 | |||
| Total minimum lease payments | 4,485,251 | |||
| Less: Interest | (250,254 | ) | ||
| Present value of future minimum lease payments | $ | 4,234,997 | ||
NOTE 13 – NON-CONTROLLING INTERESTS
Non-controlling interests consisted of the following as of June 30, 2019 and December 31, 2018:
| Name of Entity | % of Non- controlling Interest | December 31, 2018 | Acquisition | Net Income (Loss) | Other Income (Loss) | June 30, 2019 | ||||||||||||||||||
| Law Enterprise | 34.05 | % | $ | (72,557 | ) | $ | - | $ | (70,759 | ) | $ | (9,802 | ) | $ | (153,118 | ) | ||||||||
| Law Broker | 34.05 | % | 16,149,662 | - | 1,455,663 | (209,996 | ) | 17,395,329 | ||||||||||||||||
| PFAL | 49.00 | % | 436,742 | - | 103,945 | 1,014 | 541,701 | |||||||||||||||||
| Ilife | 6.25 | % | - | 30,150 | (1,532 | ) | - | 28,618 | ||||||||||||||||
| Uniwill | 6.25 | % | - | - | (60 | ) | - | (60 | ) | |||||||||||||||
| MKI | 49.00 | % | (2,630 | ) | - | (514 | ) | - | (3,144 | ) | ||||||||||||||
| PA Taiwan | 49.00 | % | (157,762 | ) | - | (530 | ) | (149 | ) | (158,441 | ) | |||||||||||||
| PTC Nanjing | 49.00 | % | (2,411 | ) | - | (37 | ) | 11 | (2,437 | ) | ||||||||||||||
| Total | $ | 16,351,044 | $ | 30,150 | $ | 1,486,176 | $ | (218,922 | ) | $ | 17,648,448 | |||||||||||||
| Name of Entity | % of Non- controlling Interest | December 31, 2017 | Net Income (Loss) | Other Income (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 14 – INCOME TAX
The following table reconciles the Company’s statutory tax rates to effective tax rates for the three and six months ended June 30, 2019 and 2018:
| Three Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| US statutory rate | 21 | % | 21 | % | ||||
| Tax rate difference | (1 | )% | (1 | )% | ||||
| Tax base difference | - | % | 1 | % | ||||
| Income tax on undistributed earnings | 4 | % | 4 | % | ||||
| Loss in subsidiaries | 7 | % | (1 | )% | ||||
| Un-deductible and non-taxable items | 1 | % | (4 | )% | ||||
| True up of prior year income tax | (8 | )% | (44 | )% | ||||
| Withholding tax | - | % | 41 | % | ||||
| Effective tax rate | 24 | % | 17 | % | ||||
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| Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| US statutory rate | 21 | % | 21 | % | ||||
| Tax rate difference | (1 | )% | (1 | )% | ||||
| Tax base difference | 1 | % | 1 | % | ||||
| Income tax on undistributed earnings | 4 | % | 4 | % | ||||
| Loss in subsidiaries | 2 | % | - | |||||
| Un-deductible and non-taxable items | - | (1 | )% | |||||
| True up of prior year income tax | (2 | )% | 4 | % | ||||
| Withholding tax | - | % | 16 | % | ||||
| Effective tax rate | 25 | % | 44 | % | ||||
The Company’s income tax expense is mainly contributed by its subsidiaries in Taiwan and PRC.
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and are subject to a statutory tax rate at 20% on income reported in the statutory financial statements after appropriate adjustments. In addition, Income Tax Law of Taiwan provides that a company is taxed at additional 5% on any undistributed earnings.
CU WFOE and the VIE in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments, except for Jiangsu. For Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income.
The Company’s subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong and are generally subject to a profit tax at the rate of 16.5% on the estimated assessable profits.
The 2017 Tax Cuts and Jobs Act (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 the consolidated financial statements. One-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that it previously deferred from U.S. income taxes. The Company completed its calculation and recorded $1,199,195 of the transition tax on undistributed earnings of non-U.S. subsidiaries during the six months ended June 30, 2018. As of June 30, 2019 and December 31, 2018, the Company had current income tax payable of $123,984 and $95,936 and noncurrent income tax payable of $911,387 and $1,007,323.
In addition, the 2017 Tax Act also creates a new requirement that certain income (i.e., Global Intangible Low-Taxed Income (“GILTI”)) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder income. GILTI is the excess of the shareholder’s net CFC tested income over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. For the three and six months ended June 30, 2019 and 2018, no GILTI tax obligation existed and the GILTI tax expense was nil.
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NOTE 15 – RELATED PARTY TRANSACTIONS
Due to related parties
The following summarizes the Company’s loans payable to related parties as of June 30, 2019 and December 31, 2018:
| June 30, 2019 | December 31, 2018 | |||||||
| Due to Mr. Mao (Principal shareholder of the Company)* | $ | 391,911 | $ | 391,311 | ||||
| Mr. Zhu (Legal Representative of Jiangsu Law) | 2,017 | 597,631 | ||||||
| Ms. Lu (Shareholder of Law Anhou) | 86,328 | 7,623 | ||||||
| Accrued bonus for Ms. Chao (CEO of Lawbroker) | 752,306 | - | ||||||
| Total due to related parties | 1,232,562 | 996,565 | ||||||
| Less: Accrued bonus for Ms. Chao – noncurrent (Note 10) | 100,740 | - | ||||||
| Total | $ | 1,131,822 | $ | 996,565 | ||||
*Amounts due to Mr. Mao bear no interest and are payable on demand.
Advisory Agreements
On December 7, 2016, the Company entered into an advisory agreement with Mr. Fu Chang Li, the Director of the Company. Pursuant to this Advisory Agreement, Mr. Li provided investment consulting services to the Company from December 7, 2016 to December 6, 2017. On December 7, 2017, both parties agreed to extend this advisory agreement from December 7, 2017 to December 6, 2018. The total advisory fee was approximately $60,977 (NTD1,800,000). For the three and six months ended June 30, 2019 and 2018, the Company recognized $29,219 and $30,006, respectively, general and administrative expenses in connection to this advisory agreement.
Consulting Agreement
On November 1, 2016, the Company entered into a consulting agreement with Apex pursuant to which the Company would provide administrative operational consulting services to Apex from November 1, 2016 through December 31, 2021. As of June 30, 2019 and December 31, 2018, the Company had accounts receivable amounted of $3,711 and nil, respectively. The Company also recognized the revenue of $3,535 and $8,089 for the three months ended June 30, 2019 and 2018, respectively, and $3,535 and $24,842 for the six months ended June 30, 2019 and 2018, respectively.
21
NOTE 16 – COMMITMENTS
Operating lease
See future minimum annual lease payments in Note 12.
Pledged securities
See time deposits pledged as collateral for short-term loans in Note 5.
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 three and six months ended June 30, 2019, $36,630 and $36,630 compensation expenses including bonus were incurred under the agreement.
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 three and six months ended June 30, 2019, the Company has recorded the performance bonus of $135,863 and $162,906 under the engagement agreement, respectively.
22
NOTE 17 – SEGMENT REPORTING
The geographical distributions of the Company’s financial information for the three months ended June 30, 2019 and 2018 were as follows:
| Three Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Geographical Areas | ||||||||
| Revenue | ||||||||
| Taiwan | $ | 19,012,300 | $ | 16,998,019 | ||||
| PRC | 2,516,983 | 3,166,721 | ||||||
| Hong Kong | 227,714 | 41,085 | ||||||
| Elimination adjustment | (529 | ) | (30,488 | ) | ||||
| Total revenue | $ | 21,756,468 | $ | 20,175,337 | ||||
| Income (loss) from operations | ||||||||
| Taiwan | $ | 140,328 | $ | 1,413,390 | ||||
| PRC | 248,221 | 208,513 | ||||||
| Hong Kong | 162,136 | (42,698 | ) | |||||
| Elimination adjustment | 37,624 | 31,106 | ||||||
| Total income from operations | $ | 588,309 | $ | 1,610,311 | ||||
| Net income (loss) | ||||||||
| Taiwan | $ | 360,103 | $ | 1,638,309 | ||||
| PRC | 247,483 | 220,936 | ||||||
| Hong Kong | 138,277 | (42,756 | ) | |||||
| Elimination adjustment | 6,565 | (944 | ) | |||||
| Total net income | $ | 752,428 | $ | 1,815,545 | ||||
The geographical distributions of the Company’s financial information for the six months ended June 30, 2019 and 2018 were as follows:
| Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Geographical Areas | ||||||||
| Revenue | ||||||||
| Taiwan | $ | 35,983,417 | $ | 31,738,791 | ||||
| PRC | 4,784,299 | 5,875,342 | ||||||
| Hong Kong | 422,909 | 81,072 | ||||||
| Elimination adjustment | (7,483 | ) | (30,488 | ) | ||||
| Total revenue | $ | 41,183,142 | $ | 37,664,717 | ||||
| Income (loss) from operations | ||||||||
| Taiwan | $ | 3,930,406 | $ | 4,593,112 | ||||
| PRC | 279,805 | 281,703 | ||||||
| Hong Kong | 247,345 | (52,782 | ) | |||||
| Elimination adjustment | 70,177 | 66,336 | ||||||
| Total income from operations | $ | 4,527,733 | $ | 4,888,369 | ||||
| Net income (loss) | ||||||||
| Taiwan | $ | 3,485,991 | $ | 2,893,777 | ||||
| PRC | 266,851 | 289,404 | ||||||
| Hong Kong | 212,133 | (53,805 | ) | |||||
| Elimination adjustment | 6,307 | 691 | ||||||
| Total net income | $ | 3,971,282 | $ | 3,130,067 | ||||
23
The geographical distribution of the Company’s financial information as of June 30, 2019 and December 31, 2018 were as follows:
| June 30, 2019 | December 31, 2018 | |||||||
| Geographical Areas | ||||||||
| Long-lived assets | ||||||||
| Taiwan | $ | 1,080,957 | $ | 1,092,576 | ||||
| PRC | 134,298 | 102,383 | ||||||
| Hong Kong | 700 | 736 | ||||||
| Elimination adjustment | (1,315 | ) | - | |||||
| Total long-lived assets | $ | 1,214,640 | $ | 1,195,695 | ||||
| Reportable assets | ||||||||
| Taiwan | $ | 120,720,802 | $ | 100,220,270 | ||||
| PRC | 12,713,984 | 11,796,388 | ||||||
| Hong Kong | 1,249,218 | 1,015,400 | ||||||
| Elimination adjustment | (60,886,994 | ) | (44,150,214 | ) | ||||
| Total reportable assets | $ | 73,797,010 | $ | 68,881,844 | ||||
| Capital investment | ||||||||
| Taiwan | $ | 208,965 | $ | 641,873 | ||||
| PRC | 52,137 | 53,158 | ||||||
| Hong Kong | - | 997 | ||||||
| Total capital investments | $ | 261,102 | $ | 696,028 | ||||
NOTE 18 – SUBSEQUENT EVENTS
The Company has evaluated 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:
On July 16, 2019, the Company drew down $2,500,000 from FEIB with an interest rate of 3.42% per annum and $600,000 from KGI with an interest rate of 3.22% per annum.
On July 22, 2019, the Company paid $32,227 (NTD 1,000,000) to the original shareholders of Ilife to purchase the remaining 6.25% ownership interest. After the transaction, the Company owned 100% of Ilife.
The Company entered into a revolving credit line agreement in amount of $1,000,000 with E. Sun Bank (“E. Sun"). The maturity date of the revolving credit line is April 2, 2020. The Company has not drawn down any borrowings from E. Sun.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
The following discussion of the results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.
24
Overview
The Company primarily provides two broad categories of insurance products, life insurance products and property and casualty insurance products, in Taiwan and People’s Republic of China (“PRC”). The Company also provides reinsurance brokerage services and insurance consulting services in Hong Kong and Taiwan. The percentage of reinsurance brokerage services and insurance consulting services is about 1% of our total revenue. The insurance products that the Company’s subsidiaries sell are underwritten by some of leading insurance companies in Taiwan and PRC, respectively.
| (1) | Life Insurance Products |
Total net revenue from Taiwan life insurance products accounted for 81.20% and 77.90% of total net revenue for the three months ended June 30, 2019 and 2018, respectively. Total net revenue from PRC life insurance products accounted for 10.45% and 15.37% of total net revenue for the three months ended June 30, 2019 and 2018, respectively.
Total net revenue from Taiwan life insurance products accounted for 80.93% and 77.81% of total net revenue for the six months ended June 30, 2019 and 2018, respectively. Total net revenue from PRC life insurance products accounted for 10.91% and 15.17% of total net revenue for the six months ended June 30, 2019 and 2018, respectively.
In addition to the periodic premium payment schedules, 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 the Company 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 sustained growth of life insurance sales in China and Taiwan, we have focused significant resources ever since the incorporation of Anhou and Law Broker on developing our capability to distribute individual life insurance products with periodic payment schedules. We expect that sales of life insurance products will continuously be our primary source of revenue in the next several years.
| (2) | Property and Casualty Insurance Products |
Total net revenue from Taiwan property and casualty insurance products accounted for 5.71% and 5.69% of total net revenue for the three months ended June 30, 2019 and 2018, respectively. Total net revenue from Taiwan property and casualty insurance products accounted for 5.98% and 5.87% of total net revenue for the six months ended June 30, 2019 and 2018, respectively.
Critical Accounting Policies and Estimates
A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2 of “Summary of Significant Accounting Policies” included within our 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Following is a discussion of the accounting policies that we believe involve the most difficult, subjective or complex judgments and estimates.
Accrued Expenses
As part of the process of preparing our financial statements, we are required to estimate accrued expenses. The estimation basis of the majority of the accrued expenses is dependent on our sales force’s achievement of the sales targets identified by our clients. Examples of estimated accrued expenses include brokerage commission bonus, such as bonus payable to our sales agents, and incentive program rewards, such as the estimated expenditures to fund the reward programs. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.
Revenue Recognition
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.
25
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 terms 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.
Recent Accounting Pronouncements
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, (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. ASU 2016-13 is effective for public entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial position and results of operations.
Overview of the three months ended June 30, 2019 and 2018
The following table shows the results of operations for the three months ended June 30, 2019 and 2018:
| Three Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| (Unaudited) | (Unaudited) | Change | Percent | |||||||||||||
| Revenue | $ | 21,756,468 | $ | 20,175,337 | $ | 1,581,131 | 8 | % | ||||||||
| Cost of revenue | 16,235,356 | 13,696,717 | 2,538,639 | 19 | % | |||||||||||
| Gross profit | 5,521,112 | 6,478,620 | (957,508 | ) | -15 | % | ||||||||||
| Gross profit margin | 25 | % | 32 | % | -7 | % | -22 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 508,323 | 789,400 | (281,077 | ) | -36 | % | ||||||||||
| General and administrative | 4,424,480 | 4,078,909 | 345,571 | 8 | % | |||||||||||
| Total operating expenses | 4,932,803 | 4,868,309 | 64,494 | 1 | % | |||||||||||
| Income from operations | 588,309 | 1,610,311 | (1,022,002 | ) | -63 | % | ||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | 130,015 | 127,171 | 2,844 | 2 | % | |||||||||||
| Interest expenses | (46,561 | ) | (28,395 | ) | (18,166 | ) | 64 | % | ||||||||
| Dividend income | 310,623 | 361,571 | (50,948 | ) | -14 | % | ||||||||||
| Other - net | 12,756 | 114,267 | (101,511 | ) | -89 | % | ||||||||||
| Total other income (expenses) | 406,833 | 574,614 | (167,781 | ) | -29 | % | ||||||||||
| Income before income taxes | 995,142 | 2,184,925 | (1,189,783 | ) | -54 | % | ||||||||||
| Income tax expense | 242,714 | 369,380 | (126,666 | ) | -34 | % | ||||||||||
| Net income | 752,428 | 1,815,545 | (1,063,117 | ) | -59 | % | ||||||||||
| Net income attributable to the noncontrolling interests | 274,327 | 791,238 | (516,911 | ) | -65 | % | ||||||||||
| Net income attributable to parent’s shareholders | $ | 478,101 | $ | 1,024,307 | $ | (546,206 | ) | -53 | % | |||||||
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Revenue
As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies in 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. For the three months ended June 30, 2019 and 2018, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:
| Three months ended June 30, 2019 | Three months ended June 30, 2018 | |||||||
| Geographical Areas | ||||||||
| Revenue | ||||||||
| Taiwan | $ | 19,012,300 | $ | 16,998,019 | ||||
| PRC | 2,516,983 | 3,166,721 | ||||||
| Hong Kong | 227,714 | 41,085 | ||||||
| Elimination adjustment | (529 | ) | (30,488 | ) | ||||
| Total Revenue | $ | 21,756,468 | $ | 20,175,337 | ||||
During the three months ended June 30, 2019, 87.4%, 11.6% and 1.0% of the revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. During the three months ended June 30, 2018, 84.3%, 15.7% and 0.2% of the revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively.
Overall revenue increased by $1,581,131 or 8% from $20,175,337 for the three months ended June 30, 2018 to $21,756,468 for the three months ended June 30, 2019 mainly due to the increase in the revenue earned from Taiwan Life Insurance Co., Ltd. (“Taiwan Life”) in the Taiwan segment. The total revenue earned from Taiwan Life increased by $1,768,223 from $2,401,545 for the three months ended June 30, 2018 to $4,169,768 for the three months ended June 30, 2019 and the increase was due to a surge in the sales of long-term care products. The long-term care products provided more favorable terms to individual customers and the customers took advantage of the opportunity to lock in the policy before it was discontinued by Taiwan Life in June 2019.
Cost of revenue and gross profit
The cost of revenue mainly consists of commissions paid to our sales professionals. The cost of revenue for the three months ended June 30, 2019 increased by $2,538,639 or 19%, to $16,235,356 compared to $13,696,717 for the three months ended June 30, 2018.
This increase was primarily due to the increase of direct commission cost as a result of first year commission earned from insurance companies and Commission 2.0, which divides sales targets into smaller and more attainable targets to improve the achievement rate. As a result, cost of revenue increased more than the proportional increase of revenue.
The gross profit for the three months ended June 30, 2019 decreased by $957,508 or 15%, to $5,521,112 compared to $6,478,620 for the three months ended June 30, 2018. The gross profit ratio decreased to 25% for the three months ended June 30, 2019 from 32% for the three months ended June 30, 2018. The decrease was because the majority of the insurance policies related to the products to be discontinued had not been underwritten by insurance companies at the period ended June 30, 2019. The commission revenue from selling the insurance policies has not been recognized but the associated cost to sales professional was incurred.
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Selling expenses
Selling expenses were mainly incurred by Law Broker, in connection with online marketing and advertising. The selling expense for the three months ended June 30, 2019 decreased by $281,077 or 36%, to $508,323, compared to $789,400 for the three months ended June 30, 2018. The decrease was mainly because the advertising expenses associated with an online reality show were incurred in 2018, and the Company did not incur related expenses so far in 2019.
General and administrative expenses
The general and administrative (“G&A”) expenses principally comprise salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees to the auditor and our attorneys.
For the three months ended June 30, 2019, G&A expenses were $4,424,480, an increase of $345,571 or 8%, compared with $4,078,909 for the three months ended June 30, 2018. The increase in the G&A expense was resulted from the spending in the improvements of online and web platforms and business system in Law Broker in the second quarter of 2019.
Other income (expenses)
Other income for the three months ended June 30, 2019 was $406,833, a decrease of $167,781 or 29%, compared with $574,614 for the three months ended June 30, 2018. Other income (expense) mainly consisted of interest income, interest expenses, dividend income, other income, gain on valuation of financial assets and gain on foreign exchange. Compared with the three months ended June 30, 2018, net other income decreased primarily due to loss on foreign exchange caused by the depreciation of the NTD and RMB.
Income tax expense
For the three months ended June 30, 2019, income tax expense was $242,714, a decrease of $126,666, or 34%, compared with $369,380 for the three months ended June 30, 2018. The decrease in tax expense aligned with the decrease in income.
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and are subject to a statutory tax rate at 20% on income reported in the statutory financial statements after appropriate adjustments. In addition, Income Tax Law of Taiwan provides that a company is taxed at additional 5% on any undistributed earnings.
CU WFOE and the Anhou in the PRC are governed by the Income Tax Law of the PRC concerning the privately-held enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Jiangsu, however, is taxed at 10% of total revenue, in accordance with local tax authorities rather than PRC laws.
Overview of the six months ended June 30, 2019 and 2018
The following table shows the results of operations for the six months ended June 30, 2019 and 2018:
| Six Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| (Unaudited) | (Unaudited) | Change | Percent | |||||||||||||
| Revenue | $ | 41,183,142 | $ | 37,664,717 | $ | 3,518,425 | 9 | % | ||||||||
| Cost of revenue | 27,430,430 | 23,318,420 | 4,112,010 | 18 | % | |||||||||||
| Gross profit | 13,752,712 | 14,346,297 | (593,585 | ) | -4 | % | ||||||||||
| Gross profit margin | 33 | % | 38 | % | -5 | % | -12 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling | 996,943 | 1,427,398 | (430,455 | ) | -30 | % | ||||||||||
| General and administrative | 8,228,036 | 8,030,530 | 197,506 | 2 | % | |||||||||||
| Total operating expenses | 9,224,979 | 9,457,928 | (232,949 | ) | -2 | % | ||||||||||
| Income from operations | 4,527,733 | 4,888,369 | (360,636 | ) | -7 | % | ||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | 218,488 | 224,792 | (6,304 | ) | -3 | % | ||||||||||
| Interest expenses | (80,143 | ) | (51,249 | ) | (28,894 | ) | 56 | % | ||||||||
| Dividend income | 310,623 | 361,571 | (50,948 | ) | -14 | % | ||||||||||
| Other - net | 314,682 | 194,505 | 120,177 | 62 | % | |||||||||||
| Total other income (expenses) | 763,650 | 729,619 | 34,031 | 5 | % | |||||||||||
| Income before income taxes | 5,291,383 | 5,617,988 | (326,605 | ) | -6 | % | ||||||||||
| Income tax expense | 1,320,101 | 2,487,921 | (1,167,820 | ) | -47 | % | ||||||||||
| Net income | 3,971,282 | 3,130,067 | 841,215 | 27 | % | |||||||||||
| Net income attributable to the noncontrolling interests | 1,486,176 | 1,760,106 | (273,930 | ) | -16 | % | ||||||||||
| Net income attributable to parent’s shareholders | $ | 2,485,106 | $ | 1,369,961 | $ | 1,115,145 | 81 | % | ||||||||
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Revenue
For the six months ended June 30, 2019 and 2018, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:
| Geographical Areas | Six months ended June 30, 2019 |
Six months ended June 30, 2018 |
||||||
| Revenue | ||||||||
| Taiwan | $ | 35,983,417 | $ | 31,738,791 | ||||
| PRC | 4,784,299 | 5,875,342 | ||||||
| Hong Kong | 422,909 | 81,072 | ||||||
| Elimination adjustment | (7,483 | ) | (30,488 | ) | ||||
| Total Revenue | $ | 41,183,142 | $ | 37,664,717 | ||||
During the six months ended June 30, 2019, 87.4%, 11.6% and 1.0% of the revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. During the six months ended June 30, 2018, 84.3%, 15.6% and 0.2% of the revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively.
Overall revenue increased by $3,518,425 or 9% from $37,664,717 for the six months ended June 30, 2018 to $41,183,142 for the six months ended June 30, 2019 mainly due to the increase in the revenue earned from Taiwan Life Insurance Co., Ltd. (“Taiwan Life”) and TransGlobe Life Insurance Inc. (“TransGlobe”) in the Taiwan segment.
The total revenue earned from Taiwan Life increased by $2,341,730 from $5,199,281 for the six months ended June 30, 2018 to $7,541,011 for the six months ended June 30, 2019 and the total revenue earned from TransGlobe increased by $613,126 from $4,362,188 for the six months ended June 30, 2018 to $4,975,314 for the six months ended June 30, 2019. The increase was due to a surge in the sales of long-term care products. The long-term care products provided more favorable terms to individual customers was discontinued in June 2019 and the customers took advantage of the opportunity to lock in the policy prior to June 30, 2019.
Cost of revenue and gross profit
The cost of revenue mainly consists of commissions paid to our sales professionals. The cost of revenue for the six months ended June 30, 2019 increased by $4,112,010 or 18%, to $27,430,430 compared to $23,318,420 for the six months ended June 30, 2018.
This increase was primarily due to the increase of direct commission cost as a result of first year commission earned from insurance companies and Commission 2.0, which divides sales targets into smaller and more attainable targets to improve the achievement rate. As a result, cost of revenue increased more than the proportional increase of revenue.
The gross profit for the six months ended June 30, 2019 decreased by $593,585 or 4%, to $13,752,712 compared to $14,346,297 for the six months ended June 30, 2018. The gross profit ratio decreased to 33% for the six months ended June 30, 2019 from 38% for the six months ended June 30, 2018. The decrease was because the majority of the insurance policies related to the products to be discontinued had not been underwritten by insurance companies at the period ended June 30, 2019. The commission revenue from selling the insurance policies has not been recognized but the associated cost to sales professional was incurred.
29
Selling expenses
Selling expenses were mainly incurred by Law Broker, in connection with online marketing and advertising. The selling expense for the six months ended June 30, 2019 decreased by $430,455 or 30%, to $996,943, compared to $1,427,398 for the six months ended June 30, 2018. The decrease was mainly because the advertising expenses associated with an online reality show were incurred in 2018, and the Company did not incur related expenses in 2019.
General and administrative expenses
The general and administrative (“G&A”) expenses principally comprise salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees to the auditor and our attorneys.
For the six months ended June 30, 2019, G&A expenses were $8,228,036, an increase of $197,506 or 2%, compared with $8,030,530 for the six months ended June 30, 2018. The G&A expense relatively remained the same during 2019 compared to the same period in 2018.
Other income (expenses)
Other income for the six months ended June 30, 2019 was $763,650, an increase of $34,031 or 5%, compared with $729,619 for the six months ended June 30, 2018. Other income (expense) mainly consisted of interest income, interest expenses, dividend income, other income, gain on valuation of financial assets and gain on foreign exchange. Compared with the six months ended June 30, 2018, the increase in net other income was due to the valuation gains on mutual fund and REITs during the six months ended June 30, 2019.
Income tax expense
For the six months ended June 30, 2019, income tax expense was $1,320,101, a decrease of $1,167,820, or 47%, compared with $2,487,921 for the six months ended June 30, 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 for the six months ended June 30, 2018.
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan and are subject to a statutory tax rate at 20% on income reported in the statutory financial statements after appropriate adjustments. In addition, Income Tax Law of Taiwan provides that a company is taxed at additional 5% on any undistributed earnings.
CU WFOE and the Anhou in the PRC are governed by the Income Tax Law of the PRC concerning the privately-held enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Jiangsu, however, is taxed at 10% of total revenue, in accordance with local tax authorities rather than PRC laws.
Liquidity and Capital Resources
The following table presents a comparison of the net cash provided by operating activities, net cash (used in) provided by investing activities, and net cash provided by financing activities for the six months ended June 30, 2019 and 2018:
| Six Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | Change | Percent | |||||||||||||
| Net cash provided by operating activities | $ | 5,284,157 | $ | 5,001,821 | 282,336 | 6 | % | |||||||||
| Net cash used in investing activities | (14,893,756 | ) | (7,989,544 | ) | (6,904,212 | ) | 86 | % | ||||||||
| Net cash (used in) provided by financing activities | (1,406,490 | ) | 286,061 | (1,692,551 | ) | -592 | % | |||||||||
Operating activities
Net cash provided by operating activities during the six months ended June 30, 2019 was $5,284,157 in comparison with net cash of $5,001,821 provided by operating activities during the six months ended June 30, 2018. The increase was mainly due to a strong business performance, resulting in higher net income for the six months ended June 30, 2019 compared with that of the same period in 2018.
Investing activities
Net cash used in investing activities was $14,893,756 during the six months ended June 30, 2019 in comparison with net cash of $7,989,544 used in investing activities for the six months ended June 30, 2018. This resulted from the Company’s investment of its excess cash in time deposits in 2019, leading to cash outflows from investing activities.
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Financing activities
Net cash used in financing activities was $1,406,490 during the six months ended June 30, 2019 in comparison with net cash of $286,061 provided by financing activities during the same period of 2018. The negative cash flows from the financing activities was mainly due to the repayments of $13,218,762 for bank loans but partially offset by the proceeds of 11,724,905 during the six months ended June 30, 2019.
Related Party Loan and Loans to Unrelated Third Parties
Anhou Registered Capital Increase
On April 27, 2013, the China Insurance Regulatory Commission (“CIRC”) issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million (approximately $8 million). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million (approximately $8 million) can continue to operate its existing business within the provinces where they have a registered office or branch office, but shall not set up any new branches in any provinces where it has no registered office or a branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, used to have a registered capital of RMB10 million (approximately $1.6 million). The branch offices of Anhou currently were all in Henan province. To better implement its expansion strategies, Anhou intended to increase its registered capital to RMB50 million (approximately $8 million) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in the PRC.
Due to certain restrictions on direct foreign investment in insurance agency business under current PRC legal regime, Anhou had sought certain investments made by the Investor Borrowers and they may need funds through individual loans. Upon the completion of the contemplated increase of registered capital of Anhou, each Investor Borrower shall, or cause their designated persons to, enter into the Variable Interest Entities Agreement with CU WFOE, Anhou and other parties so as to consolidate any additional variable interest entities generated from the said registered capital increase into the Company.
On June 9, 2013, AHFL entered into a Loan Agreement (the “Company Loan Agreement”) with ZLI Holdings Limited (“ZLI Holdings”), its wholly-owned, indirect Hong Kong subsidiary.
Under the Company Loan Agreement, AHFL agreed to provide a loan to ZLI Holdings with the principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such was ten years which could be extended upon the agreement of the parties. The amount of such loan was remitted to the account of ZLI Holdings on August 30, 2013.
In August 2013, ZLI Holdings entered into several loan agreements (collectively, the “Investor Loan Agreements”) with the following unrelated parties: Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, Mr. Chen Li and Ms. Yue Jing, both PRC citizens (collectively, the “Investor Borrowers”).
Under the Investor Loan Agreements, the Investor Borrowers borrowed an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925) from ZLI Holdings in exchange for covenanting to make an equivalent investment in Anhou. The term for such loans is ten years which can be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers covenanted to enter into certain Variable Interest Entities Agreements with Anhou, CU WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers shall be solely used to increase the registered capital of Anhou, and ZLI Holdings may determine the repayment methods including transferring of the Investor Borrowers’ corresponding registered capital in Anhou or through other manner as full payment of the loans subject to terms and conditions therein in the event that the Investor Borrowers fail to repay the loan in currency to ZLI Holdings.
The specific amounts loaned to the Investor Borrowers were as follows:
Able Capital Holding Co., Ltd.: RMB29,500,000 ($4,712,570)
Mr. Chen: RMB3,000,000 ($479,244)
Ms. Yue: RMB7,500,000 ($1,198,111)
On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925).
31
Due to related parties
The following summarizes the Company’s payable to related parties as of June 30, 2019 and December 31, 2018:
| June 30, 2019 |
December 31, 2018 |
|||||||
| Due to Mr. Mao (Principal shareholder of the Company)* | $ | 391,911 | $ | 391,311 | ||||
| Mr. Zhu (Legal Representative of Jiangsu Law) | 2,017 | 597,631 | ||||||
| Ms. Lu (Shareholder of Law Anhou) | 86,328 | 7,623 | ||||||
| Accrued bonus for Ms. Chao (CEO of Lawbroker)** | 752,306 | - | ||||||
| Total due to related parties | 1,232,562 | 996,565 | ||||||
| Less: Accrued bonus for Ms. Chao – noncurrent | 100,740 | - | ||||||
| Total | $ | 1,131,822 | $ | 996,565 | ||||
*Amounts due to Mr. Mao bear no interest and are payable on demand.
** Accrued bonus for Ms. Chao is associated with an engagement agreement signed between Law Broker and Hui-Hsien Chao (“Ms. Chao”) on May 10, 2016. In 2019, the engagement agreement with Ms. Chao was renewed and her service period has extended to December 20, 2021. As of June 30, 2019 and December 31, 2018, the Company had current accrued bonus of $651,567 and $597,631, and noncurrent accrued bonus of $100,740 and nil, respectively. Please see details in Contractual Obligations.
Long-term loan
The Company’s long-term loans consisted of the following as of June 30, 2019 and December 31, 2018:
| June 30, 2019 |
December 31, 2018 |
|||||||
| Loan A, interest at 8% per annum, maturity date May 15, 2019 | $ | - | $ | 123,611 | ||||
| Loan B, interest at 8% per annum, maturity date July 20, 2019 | - | 111,976 | ||||||
| Total loans | - | 235,587 | ||||||
| Less: current portion | - | (235,587 | ) | |||||
| Total long-term loans | $ | - | $ | - | ||||
On May 15, 2016, Anhou entered into a loan agreement (“Loan A”) with an individual third party. As of June 30, 2019 and December 31, 2018, the outstanding balance of Loan A were nil and $123,611 (RMB 850,000), respectively. Loan A bears an interest rate of 8% per annum and interest is payable annually. The Company paid off the total outstanding loan balance and accrued interest in May 2019.
On July 20, 2016, Anhou entered into a loan agreement (“Loan B”) with an individual third party. As of June 30, 2019 and December 31, 2018, the outstanding balance of Loan B were nil and $111,976 (RMB 770,000), respectively. Loan B bears an interest rate of 8% per annum and interest is payable annually. The Company paid off the total outstanding loan balance and accrued interest in May 2019.
Contractual Obligations
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.
In 2019, the engagement agreement with Ms. Chao signed between Law Broker and Hui-Hsien Chao (“Ms. Chao”) on May 10, 2016 was renewed and her service period has extended to December 20, 2021. Pursuant to the engagement agreement, she serves as the general manager of Law Broker and 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.
Other than the above mentioned, there have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 2018 Annual Report filed on Form 10-K.
Off Balance Sheet Arrangements
We have not engaged in off balance sheet arrangements that required disclosures.
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ITEM 3. 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.
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ITEM 4. 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 June 30, 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 June 30, 2019, our disclosure controls and procedures were not effective at the reasonable assurance level due to the deficiencies and material weaknesses identified and described in this Item 9A(a) and 9A(c), respectively.
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud and our disclosure controls and internal controls have been deficient in preventing recent fraud. For further information, please see our amended current report filed with the SEC on January 22, 2019. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, our principal executive officers have determined that our disclosure controls and procedures are not currently effectively at doing so. Notwithstanding, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
| (b) | Management’s Remediation Plan Regarding Disclosure Controls and Procedures |
We are committed to remediating the control deficiencies described above by implementing changes to our internal control over disclosure controls and procedures. Pursuant to the terms of the SEC Settlement, we have retained an independent corporate monitor who will help us implement changes and improvements in the internal control over disclosure controls and procedures for remediating the control deficiencies. For further information, please see our amended current report filed with the SEC on January 22, 2019.
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 in Taiwan each time; and |
| 10) | Provide an interim written report in 120 to 180 days and final written report to the SEC no later than December 31, 2019 that includes a description of the review performed, the conclusions reached, recommendations for changes in or improvements to our policies and procedures, and a procedure for implementing the recommended changes in or improvements to our policies and procedures. The company received the interim written report on June 17, 2019. |
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However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the control deficiencies we may determine to take additional.
Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are fully implemented and concluded to be operating effectively, the deficiencies described above could continue to exist.
| (c) | Management’s annual report on internal control over financial reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for our Company are provided by executive management's review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 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 June 30, 2019, as described below.
| (1) | We have yet established an effective mechanism to proper communicate the concepts of corporate governance. |
| (2) | Lack of a qualified experienced financial expert to lead and supervise the overall internal control over financial reporting system of the Company. |
Each of the material weaknesses described above could result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.
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.
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| (d) | Management’s Remediation Plan Concerning Internal Control Over Financial Reporting |
We are committed to remediating the control deficiencies that constitute the material weaknesses described above by implementing changes to our internal control over financial reporting. Our Chief Financial Officer is responsible for implementing changes and improvements in the internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses. We are currently evaluating the impact of the material weaknesses and have taken or are in the process of taking the following actions:
| (1) | We are in the process of implementing an education program aimed at improving the accounting department personnel's US GAAP knowledge. This program will require key personnel who oversee reporting functions to take classes overseen by representatives of the big four accounting firms. |
| (2) | In addition to retaining external professional consultants, we are also committed to building a robust internal audit team. We are actively looking to recruit internal auditors with appropriate experience to join this team. |
| (3) | In order to ensure the proper comprehension of corporate governance and provide further assurances regarding our internal controls, we have set up a compliance team to work closely with the independent corporate monitor to implement changes and improvements as the independent corporate monitor sees fit. Also, our management team has tasked our administration center with the responsibility of reviewing and testing self-assessment results for high risk areas. |
However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address the control deficiencies.
Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are fully implemented and concluded to be operating effectively, the material weaknesses described above will continue to exist.
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From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
There have been no material changes from the risk factors disclosed in our annual report on Form 10-K for the fiscal year period ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
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| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
*The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
| 38 |
Pursuant to the requirements 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. | ||
Date: August 9, 2019 |
By: | /s/ Yi Hsiao Mao |
| Name: | Yi Hsiao Mao | |
| Its: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: August 9, 2019 | By: | /s/ Yung Chi Chuang |
| Name: | Yung Chi Chuang | |
| Its: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
| 39 |