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China United Insurance Service, Inc. - Quarter Report: 2017 June (Form 10-Q)

 

 

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, 2017

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨     (Do not check if a smaller reporting company) Smaller reporting company ¨
  Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yes ¨  No  x

 

As of August 9, 2017, there are 29,452,669 shares of common stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.

 

 

 

 

 

   

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 5
     
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 41
     
ITEM 4. CONTROLS AND PROCEDURES 41
     
PART II. OTHER INFORMATION 42
     
ITEM 1. LEGAL PROCEEDINGS 42
     
ITEM 1A. RISK FACTORS 42
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 42
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 42
     
ITEM 4. MINE SAFETY DISCLOSURES 42
     
ITEM 5. OTHER INFORMATION 42
     
ITEM 6. EXHIBITS 43
     
SIGNATURES   44

 

 2 

 

    

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.

 

 3 

 

   

OTHER PERTINENT INFORMATION

 

References in this report to “we,” “us,” “our”, the “Registrant” and the “Company” and words of like import refer to China United Insurance Service, Inc., its subsidiaries and variable interest entities (“VIEs”) unless otherwise indicated by the context.

 

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 Taiwan, Republic of China.

 

Our business is conducted in Taiwan, Hong Kong and China using NTD (the currency of Taiwan), HKD (the currency of Hong Kong), and RMB (the currency of China), respectively, and our financial statements are presented in United States dollars (“USD” or “$”).  In this 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 NTD, HKD 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).

 

 4 

 

  

PART I.  FINANCIAL INFORMATION 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2017   December 31, 2016 
   (UNAUDITED)     
ASSETS          
Current assets          
Cash and cash equivalents  $32,162,926   $25,521,802 
Marketable securities   38,932    2,426,870 
Accounts receivable, net   7,284,833    15,774,159 
Other current assets   2,154,666    1,890,551 
Total current assets   41,641,357    45,613,382 
           
Property, plant and equipment, net   1,000,920    926,905 
Intangible assets   782,023    784,219 
Goodwill   2,071,491    2,071,491 
Long-term investment   1,365,889    1,285,064 
Other assets   2,122,001    726,482 
TOTAL ASSETS  $48,983,681   $51,407,543 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Taxes payable  $2,396,143   $2,249,869 
Convertible bonds   200,000    - 
Due to related parties   633,527    400,001 
Other current liabilities   10,555,093    18,639,909 
Total current liabilities   13,784,763    21,289,779 
           
Convertible bonds - noncurrent   -    200,000 
Long-term loans   261,086    254,907 
Long-term liabilities   4,642,472    5,315,327 
TOTAL LIABILITIES   18,688,321    27,060,013 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS’ EQUITY          
Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding   10    10 
Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding   295    295 
Additional paid-in capital   

8,190,449

    8,157,512 
Statutory reserves   4,606,827    3,799,585 
Retained earnings   5,804,053    3,286,562 
Accumulated other comprehensive gain/(loss)   

119,684

    (667,976)
Stockholders' equity attribute to parent’s shareholders   18,721,318    14,575,988 
Noncontrolling interests   11,574,042    9,771,542 
TOTAL STOCKHOLDERS’ EQUITY   30,295,360    24,347,530 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $48,983,681   $51,407,543 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 5 

 

  

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2017     2016     2017     2016  
                         
Revenue   $ 18,518,822     $ 18,775,472     $ 33,874,350     $ 28,337,768  
Cost of revenue     11,890,592       12,181,427       20,674,435       18,650,286  
                                 
Gross profit     6,628,230       6,594,045       13,199,915       9,687,482  
                                 
Operating expenses:                                
Selling     312,122       566,445       698,303       1,464,710  
General and administrative     3,653,864       3,089,233       7,006,304       5,976,341  
Total operating expense     3,965,986       3,655,678       7,704,607       7,441,051  
                                 
Income from operations     2,662,244       2,938,367       5,495,308       2,246,431  
                                 
Other income (expenses):                                
Interest income     95,210       54,353       167,260       106,109  
Interest expenses     (8,200 )     (8,377 )     (16,269 )     (9,564 )
Dividend income     329,749       268,889       329,749       268,889  
Other - net     166,015       (38,002 )     47,048       (67,352 )
Total other income (expenses)     582,774       276,863       527,788       298,082  
                                 
Income before income taxes     3,245,018       3,215,230       6,023,096       2,544,513  
Income tax expense     755,990       875,304       1,513,269       878,503  
                                 
Net income     2,489,028       2,339,926       4,509,827       1,666,010  
Net income attributable to the noncontrolling interests     500,640       865,940       1,185,094       835,725  
Net income attributable to parent's shareholders     1,988,388       1,473,986       3,324,733       830,285  
                                 
Other comprehensive items                                
Foreign currency translation gain (loss)     31,438       (46,276 )     744,941       117,236  
Other     248       -       42,719       (1,593 )
                                 
Other comprehensive income (loss) attributable to parent's shareholder     31,686       (46,276 )     787,660       115,643  
Other comprehensive items attributable to noncontrolling interests     (18,230 )     10,034       617,406       159,667  
                                 
Comprehensive income attributable to parent's shareholders   $ 2,020,074     $ 1,427,710     $ 4,112,393     $ 945,928  
                                 
Comprehensive income attributable to noncontrolling interests   $ 482,410     $ 875,974     $ 1,802,500     $ 995,392  
                                 
Weighted average shares outstanding:                                
Basic     29,452,669       29,452,669       29,452,669       29,452,669  
Diluted     30,505,523       30,455,037       30,505,523       30,453,847  
                                 
Net income per share attributable to parent's shareholder:                                
Basic   $ 0.068     $ 0.050     $ 0.113     $ 0.028  
Diluted   $ 0.065     $ 0.048     $ 0.109     $ 0.027  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 6 

 

  

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Six Months Ended June 30,  
    2017     2016  
             
Cash flows from operating activities:                
Net income   $ 4,509,827     $ 1,666,010  
Adjustments to reconcile net income to net cash provided by operating activities                
Depreciation and amortization     272,088       303,129  
Amortization of bond premium     127       -  
Gain on valuation of financial assets     (2,124 )     (3,529 )
Loss on disposals of property, plant and equipment     39,138       23,555  
Change in deferred income tax     (23,376 )     (3,154 )
Changes in operating assets and liabilities:                
Accounts receivable     9,381,505       3,695,556  
Other current assets     (220,497 )     528,566  
Other assets     (1,332,520 )     25,627  
Tax payable     13,007       (54,050 )
Other current liabilities     (9,117,582 )     (1,976,011 )
Long-term liabilities     (992,495 )     488,888  
Net cash provided by operating activities     2,527,098       4,694,587  
                 
Cash flows from investing activities:                
Proceeds from disposals of marketable securities     7,417,572       -  
Purchase of marketable securities     (4,896,542 )     -  
Purchase of property, plant and equipment     (221,100 )     (269,329 )
Purchase of intangible assets     (65,260 )     (352,745 )
Net cash provided by (used in) investing activities     2,234,670       (622,074 )
                 
Cash flows from financing activities:                
Proceeds from related party borrowing     257,440       26,516  
Repayment to related parties     (559 )     (610,063 )
Proceeds from third party borrowing     -       353,014  
Repayment to loans     -       (222,778 )
Net cash provided by (used in) financing activities     256,881       (453,311 )
                 
Foreign currency translation     1,622,475       370,218  
Net increase in cash and cash equivalents     6,641,124       3,989,420  
                 
Cash and cash equivalents, beginning balance     25,521,802       20,831,824  
Cash and cash equivalents, ending balance   $ 32,162,926     $ 24,821,244  
                 
SUPPLEMENTARY DISCLOSURE:                
                 
Interest paid   $ 17,699     $ 9,305  
Income tax paid   $ 1,494,425     $ 1,002,852  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW FOR NON-CASH TRANSACTION:                
                 
Debt forgiveness - related parties   $ 32,937     $ -  

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 7 

 

  

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – ORGANIZATION

 

China United Insurance Service, Inc. (“China United”, “CUIS” or the “Company”) is a Delaware corporation organized on June 4, 2010 by Yi Hsiao Mao, a Taiwanese citizen, as a listing vehicle for ZLI Holdings Limited (“ZLI Holdings”), which is currently quoted on the United States Over the Counter Bulletin Board.

 

The corporate structure as of June 30, 2017 was as follows:

 

  

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited accompanying condensed consolidated financial statements include the accounts of China United and its subsidiaries as shown in the organization structure in Note 1 above. All significant intercompany transactions and balances were eliminated in consolidation.

  

Basis of Presentation

  

The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, 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 presentation of the financial statements have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.  

  

 8 

 

  

These unaudited condensed 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, 2016, which were included in the Company’s 2016 Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of December 31, 2016, has been derived from the Company’s audited consolidated financial statements as of that date.

 

Foreign Currency Translations

 

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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 220. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange prevailing at the balance sheet date. Any differences are taken as a gain or loss on foreign currency translation in the statements of operations. 

 

In accordance with ASC 830, Foreign Currency Matters, 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 interim financial statements in accordance with ASC 830, Foreign Currency Matters, are as follows:

 

   Average Exchange Rate for the Six Months Ended June 30, 
   2017   2016 
New Taiwan dollar (NTD)  NTD30.633866   NTD32.727300 
China yuan (RMB)  RMB6.837909   RMB6.535360 
Hong Kong dollar (HKD)  HKD7.773106   HKD7.766950 
United States dollar ($)  $1.000000   $1.000000 
           
   Exchange Rate at 
   June 30, 2017   December 31, 2016 
New Taiwan dollar (NTD)  NTD30.387443   NTD  32.283100 
China yuan (RMB)  RMB6.779380   RMB 6.943700 
Hong Kong dollar (HKD)  HKD 7.805650   HKD7.754340 
United States dollar ($)  $1.000000   $1.000000 

 

Fair Values of Financial Instruments

 

FASB ASC 820, “Fair Value Measurements and Disclosures”, defines Fair Value (“FV”), establishes a three-level valuation hierarchy for disclosures of FV measurement and enhances disclosure requirements for FV measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are reasonable estimates of FV because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined 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 FV.

  

 9 

 

  

The fair values of the Company’s cash and cash equivalents, accounts receivable, other current assets, taxes payable and other current liabilities approximate fair value because of the short maturity of these instruments.

 

The following table presents the fair value and carrying value of the Company’s marketable securities, loan receivable, long-term investment, borrowings and convertible bonds as of June 30, 2017:

 

   Fair Value   Carrying 
   Level 1   Level 2   Level 3   Value 
Assets                    
Marketable securities  $38,932   $-   $-   $38,932 
Loan receivable (Other current assets in Notes 4)   -    -    1,509,359    1,509,359 
Long-term investment:                    
Equity investment   -    -    1,264,829    1,264,829 
Government bonds   101,060    -    -    101,060 
                     
Liabilities                    
Due to related parties  $-   $-   $633,527   $633,527 
Convertible bonds   -    -    200,000    200,000 
Long-term loans   -    -    261,086    261,086 

 

The following table presents the fair value and carrying value of the Company’s marketable securities, loan receivable, long-term investment, borrowings and convertible bonds as of December 31, 2016:

 

   Fair Value   Carrying 
   Level 1   Level 2   Level 3   Value 
Assets                    
Marketable securities  $2,426,870   $-   $-   $2,426,870 
Loan receivable (Other current assets in Notes 4)   -    -    1,486,846    1,486,846 
Long-term investment:                    
Equity investment   -    -    1,190,558    1,190,558 
Government bonds   94,506    -    -    94,506 
                     
Liabilities                    
Due to related parties  $-   $-   $400,001   $400,001 
Convertible bonds   -    -    200,000    200,000 
Long-term loans   -    -    254,907    254,907 

 

Marketable securities – The fair value of marketable securities is generally valued based on quoted market prices in active markets.

 

Loan receivable – The Company’s loan receivable is determined based on 4.5% per annum interest rate on the recent lending to Rich Fountain Limited.

 

Equity investment – The fair value of the Company’s equity investment is unobservable and includes situations where there is little, if any, market activity.

 

Government bonds –The fair value of government bonds is valued based on quoted market price in active markets.

 

Due to related parties – The Company’s due to related parties bears no interest and payable on demand.

 

Convertible bonds – The Company determined the fair value of the convertible bonds is based on the average closing trading price for the 10 business days immediately prior to the conversion date times 80%.

 

 10 

 

  

Long-term loans - The Company’s long-term loans are determined based on 8% per annum interest rate in PRC. 

 

Concentration of Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. As of June 30, 2017, approximately $1,458,000 of the Company’s cash and cash equivalents held by financial institutions was insured, and the remaining balance of approximately $31,843,000 was not insured.

 

Two major insurance companies accounted for more than 10% of the Company’s total revenue for the three months ended of June 30, 2017 and 2016. Revenue from these insurance companies were set out as below:

 

    Three months ended June 30,  
    2017     2016  
    Amount     % of Total
Revenue
    Amount     % of Total
Revenue
 
Farglory Life Insurance Co., Ltd.   $ 4,563,775       25 %   $ 6,435,768       34 %
Taiwan Life Insurance Co., Ltd. (*)     1,881,893       10 %     2,422,083     13 %

 

(*)

Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.

 

For the six months ended of June 30, 2017 and 2016, the Company’s revenue received from the following companies were set out as below:

 

    Six months ended June 30,  
    2017     2016  
    Amount     % of Total
Revenue
    Amount     % of Total
Revenue
 
Farglory Life Insurance Co., Ltd.   $ 8,744,002       26 %   $ 8,677,893       31 %
Taiwan Life Insurance Co., Ltd. (**)     3,969,250       12 %     3,320,744       12 %
Fubon Life Insurance Co., Ltd.     (* )     (* )     3,156,511       11 %

 

(*)Revenue for the six months ended June 30, 2017 had not exceeded 10% or more of the Company’s consolidated revenue of the Company.
(**)Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.

 

As of June 30, 2017 and December 31, 2016, the Company’s accounts receivable from the following companies were set out as below:

  

    June 30, 2017     December 31, 2016  
    Amount     % of Total
Accounts
Receivable
    Amount     % of Total
Accounts
Receivable
 
Farglory Life Insurance Co., Ltd.   $ 1,723,006       24 %   $ 6,503,843       41 %
Taiwan Life Insurance Co., Ltd (*)     800,214       11 %     1,973,410       13 %
Fubon Life Insurance Co., Ltd     (** )     (** )     1,660,685       11 %

 

(*)Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.
(**)The related revenue for the three and six months ended June 30, 2017 had not exceeded 10% or more of the Company’s consolidated revenue.

 

 11 

 

  

With respect to accounts receivable, the Company generally does not have any collateral and does not have any allowance for doubtful accounts.

 

The Company’s operations are in the PRC, Taiwan and Hong Kong. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, and legal environments in the PRC, Taiwan and Hong Kong, the foreign currency exchange and the state of each regions. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, Taiwan and Hong Kong, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (Statement of Financial Accounting Standards No. 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” ASU 2016-07 eliminates the requirement for an investment that qualifies for the use of the equity method of accounting as a result of an increase in the level of ownership or degree of influence to adjust the investment, results of operations and retained earnings retrospectively. ASU 2016-07 will be effective prospectively for the Company for increases in the level of ownership interest or degree of influence that result in the adoption of the equity method that occur during or after the quarter ending December 31, 2017, with early adoption permitted. The impact of this guidance for the Company is dependent on any future increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.

 

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. ‘The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and transition of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Public entities should apply the amendments in ASU No. 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently in the process of evaluating the impact of the adoption of this accounting standards update on its consolidated financial statements.

 

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In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230) to Statement of Cash Flows.” ASU No. 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU No. 2016-15 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this update is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” ("ASU No. 2016-18"), which amends the current accounting guidance.” The amendments in this update require the amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of ASU No. 2016-18 is not expected to have a material impact on the Company’s consolidated financial statements. 

 

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU No. 2017-04 is effective for annual or any interim goodwill tests in fiscal years beginning after December 15, 2019. The adoption is not expected to have a material impact on the Company’s consolidated financial statements of the Company.

 

In July 2017, the FASB issued ASU No. 2017-11, "Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815)," which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

 

There were other updates recently issued. The management does not believe that other than disclosed above, the recently issued, but not yet adopted, accounting pronouncements will have a material impact on its financial position results of operations or cash flows.

 

Going Concern Assessment

 

Pursuant to ASU No. 2014-15, the Company has assessed its ability to continue as a going concern for a period of one year from the date of the issuance of these financial statements. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Company determined that there are no conditions or events that raise substantial doubt about its ability to continue as a going concern as of the date of the issuance of these financial statements.

 

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NOTE 3 – MARKETABLE SECURITIES

 

Marketable securities represent investment in equity securities of listed stocks and funds, which are classified as Level 1 securities as follows:

 

   June 30, 2017 
  

Fair Value at

December 31,

2016

  

Gross

Unrealized

Gains

   Total
Fair Value
 
Level 1 securities:               
Stocks  $38,763   $169   $38,932 
   $38,763   $169   $38,932 

    

   December 31, 2016 
   Fair Value at   Gross     
   December 31,   Unrealized   Total 
   2015   Gains   Fair Value 
Level 1 securities:               
Stocks  $28,863   $9,900   $38,763 
Funds   2,340,219    47,888    2,388,107 
   $2,369,082   $57,788   $2,426,870 

 

NOTE 4 – OTHER CURRENT ASSETS

 

Other current assets consisted of the following as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Loan receivable  $1,509,359   $1,486,846 
Prepaid rent and rent deposit   282,338    199,022 
Prepaid expenses   150,568    64,678 
Other receivable   113,519    50,683 
Deferred tax assets-current   69,750    59,233 
Refundable business tax   16,416    17,441 
Interest receivable   12,716    12,648 
Total other current assets  $2,154,666   $1,890,551 

 

On October 24, 2016, the Company entered into a loan agreement with third party, Rich Fountain Limited (“RFL”), which was incorporated under the laws of Samoa. The Company provided a short-term loan amount of NTD 48,000,000 ($1,486,846) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest are due on April 23, 2017. On April 21, 2017, the Company and RFL entered a supplemental agreement to extend the loan to October 23, 2017. Subsequently, the Company received the partial repayment of this loan amount of NTD 2,134,440 (approximately $70,000) on June 22, 2017. As of June 30, 2017, the outstanding balance of the loan receivable is NTD45,865,560 ($1,509,359).

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment consisted of the following as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Office equipment  $1,207,048   $1,070,061 
Office furniture   145,384    168,658 
Leasehold improvements   718,758    581,964 
Transportation equipment   137,591    132,344 
Other equipment   88,906    87,302 
Total   2,297,687    2,040,329 
Less: accumulated depreciation   (1,296,767)   (1,113,424)
Total property, plant and equipment, net  $1,000,920   $926,905 

 

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Depreciation expense was $80,525 and $78,999 for the three months ended June 30, 2017 and 2016, respectively. Depreciation expense was $156,121 and $150,488 for the six months ended June 30, 2017 and 2016, respectively.

 

NOTE 6 – INTANGIBLE ASSETS

 

As of June 30, 2017 and December 31, 2016, the Company’s intangible assets consisted of the following:

 

   June 30, 2017   December 31, 2016 
Software  $1,659,724   $1,500,339 
Less: accumulated amortization   (877,701)   (716,120)
Total intangible assets  $782,023   $784,219 

 

Estimated future intangible amortization as of June 30, 2017 is as follows:

 

Periods ending June 30,   Amount  
2018   $ 233,746  
2019     218,773  
2020     188,688  
2021     116,828  
2022     21,251  
Thereafter     2,737  
Total   $ 782,023  

 

Amortization expense was $58,743 and $69,031 for the three months ended June 30, 2017 and 2016, respectively. Amortization expense was $115,967 and $152,641 for the six months ended June 30, 2017 and 2016, respectively.

 

NOTE 7 – LONG-TERM INVESTMENT

 

As of June 30, 2017 and December 31, 2016, the Company’s long-term investment consisted of the following:

 

   June 30, 2017   December 31, 2016 
Equity investment  $1,264,829   $1,190,558 
Government bonds   101,060    94,506 
Total  $1,365,889   $1,285,064 

  

As of June 30, 2017 and December 31, 2016, the Company had the following equity investment:

 

Type   Investee  
Ownership
   

June 30,

2017
Amount

   

December 31,

2016
Amount

 
Cost Method   Genius Insurance Broker Co., Ltd.     15.64 %   $ 1,264,829     $ 1,190,558  

 

According to Taiwan regulatory requirements, Law Insurance Broker Co., Ltd. (“Law Broker”) is required to maintain a minimum of NTD3,000,000 ($98,725 and $92,928 as of June 30, 2017 and December 31, 2016, respectively) in a separate account. Law Broker chose to use such amounts to buy government bonds and has the right to trade such bonds with other debt or equity instruments. The amount, however, was defined as restricted asset.  

 

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   June 30, 2017 
   Fair Value at   Gross   Fair Value at 
   December 31,   Unrealized   June 30, 
   2016   Gains   2017 
Government bonds   94,506    6,554    101,060 
   $94,506   $6,554   $101,060 

 

   December 31, 2016 
   Fair Value at   Gross   Fair Value at 
   December 31,   Unrealized   December 31, 
   2015   Gains   2016 
Government bonds   94,381    125    94,506 
   $94,381   $125   $94,506 

  

NOTE 8 – OTHER ASSETS

 

The Company’s other assets consisted of the following as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Registered capital deposit  $1,032,543   $- 
Rental deposit   487,027    445,283 
Restricted cash   434,990    248,803 
Prepayments   122,100    5,576 
Others   45,341    26,820 
Total other assets  $2,122,001   $726,482 

 

Registered capital deposit is required by China Insurance Regulatory Commission that an intermediary company should hold all of its registered capital in a custodian account and subject to limited usage, among which, no less than 10% of the registered capital shall be invested in significant deposit by agreement or term deposit. Rental deposits include long-term leasing deposits. Restricted cash is a deposit in the bank by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, which is not allowed to be withdrawn without the permission of the regulatory commission and the trust account for Law Broker’s general manager’s Bonus Plans. Prepayments include prepaid recruitment fee and prepaid long-term software-maintenance contract pending for final acceptance. Others are deferred tax assets-noncurrent and other. As of June 30, 2017 and December 31, 2016, the Company had deferred tax assets-noncurrent amount of $43,690 and $25,364, respectively.

 

NOTE 9 – TAXES PAYABLE

 

The Company’s taxes payable consisted of the following as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
PRC Tax  $215,724   $163,461 
Hong Kong Tax   14,140    14,233 
Taiwan Tax   2,166,279    2,072,175 
Total tax payable  $2,396,143   $2,249,869 

 

PRC tax represents income tax and other taxes accrued according to PRC tax law by the Company’s subsidiaries and Consolidated Affiliated Entities (“CAE”) in the PRC. Taiwan tax represents income tax accrued according to Taiwan tax law by the Company’s subsidiaries and branches in Taiwan. Hong Kong tax represents income tax accrued according to Hong Kong tax law by the Company’s subsidiaries in Hong Kong. Above taxes will be settled within the next twelve months according to the respective tax laws.

 

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NOTE 10 – CONVERTIBLE BONDS

 

The Company intended to issue the convertible bonds during the period commencing on June 23, 2016 and ended on September 30, 2016 with an aggregate principal amount of up to $10,000,000. The convertible bonds were to be sold in units, with each unit being $100,000 in principal amount. The Company had not made any offers or sales of the convertible bonds to U.S. persons and there was no direct selling efforts in the United States. The bonds would not be convertible until two years from the issuance date and with an annual interest rate of 6% payable on a quarterly basis. The bond holder might cause the Company to redeem the convertible bonds before the end of the term, subject to certain penalties depending on the holding period of the convertible bonds when redeemed. Upon the expiration of the term of the convertible bonds, the bond holder may, in its sole discretion, choose to collect the payment of full principal amount of the convertible bonds together with any interest accrued or convert the convertible bonds into common shares of the Company at the conversion price. The conversion price shall be the product of (i) the average closing trading price for the 10 business days immediately prior to the conversion date and (ii) 80%.

 

On June 23, 2016, the Company issued two units of its convertible bonds with an aggregate principal amount of $200,000 to a non-US person and the value of the embedded derivatives liabilities is trivial. As of June 30, 2017 and December 31, 2016, the Company has an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $3,000 and $6,000 for the three and six months ended June 30, 2017.

 

NOTE 11 – OTHER CURRENT LIABILITIES

 

Other current liabilities are as follows, as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Commissions payable to sub-agents  $6,115,762   $11,869,181 
Unearned revenue (AIATW and Farglory)   1,744,142    2,090,718 
Due to previous shareholders of AHFL   -    480,559 
Accrued business tax   269,986    469,259 
Withholding employee personal tax   290,344    362,954 
Accrued tax penalties   370,000    370,000 
Accrued bonus   916,528    1,935,091 
Salary payable to administrative staff   438,250    183,066 
Accrued labor, health insurance and employee retirement plan   103,998    92,085 
Accrued advertisement fee   -    32,525 
Other accrued liabilities   306,083    754,471 
Total other current liabilities  $10,555,093   $18,639,909 

 

Commissions payable to sub-agents, accrued bonus, salaries payable to administrative staff, and accrued advertisement expense are usually settled within 12 months. Unearned revenue is described in Note 13. Due to previous shareholders of Action Holdings Financial Limited (“AHFL”) is the remaining balance payable of the acquisition cost. Accrued business tax, withholding employee personal tax and accrued labor, health insurance and employee retirement plan will be paid to the related government department within one month. Accrued tax penalties are estimated potential penalty in the event of a tax audit. Other accrued liabilities mainly consist of accrued interest and operating expenses payable for training and travelling.

  

NOTE 12 – LONG-TERM LOANS

 

   June 30, 2017   December 31, 2016 
Loan B, interest at 8%, maturity date May 15, 2019  $147,506   $144,015 
Loan C, interest at 8%, maturity date July 20, 2019   113,580    110,892 
Total long-term loans  $261,086   $254,907 

 

On May 15, 2016, the Company’s contractually controlled affiliate in PRC, Law Anhou Insurance Agency Co., Ltd (“Anhou” or “Law Anhou”), entered into a loan agreement (“Loan B”) with a third party. The long-term Loan Agreement provided for a $147,506 loan to the Company. Loan B bears an interest rate of 8% per annum and interest is payable annually. The principal and the interest will be due on May 15, 2019.

 

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On July 20, 2016, Anhou entered into a loan agreement (“Loan C”) with a third party. The long-term Loan Agreement provided for a $113,580 loan to the Company. Loan C bears an interest rate of 8% per annum and interest is payable annually. The principal and the interest will be due on July 20, 2019.

 

The total interest expense for both Loan B and Loan C was $5,200 and $10,269 for the three and six months ended June 30, 2017.

 

NOTE 13 – LONG-TERM LIABILITIES

 

Long-term liabilities are as follows as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Unearned revenue – AIATW  $4,017,939   $4,742,272 
Unearned revenue – Farglory   -    495,615 
Due to pervious shareholders of AHFL   480,559    - 
Other long-term liabilities   143,974    77,440 
Long-term liabilities  $4,642,472   $5,315,327 

  

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 of the Alliance Agreement is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The term of the Alliance Agreement is from April 15, 2013 to August 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL an execution fee of $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762, the “Execution Fee”), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL. On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “Supplemental Agreement”) with AIATW. In the Supplemental Agreement, the performance targets and the provision about refunding the Execution Fee 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. The purpose of the Strategic Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan through insurance agency companies or insurance brokerage companies. 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 has been 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 has been 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 has been revoked in order to conform with the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in a third amendment (Amendment No. 3). 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 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 agree to calculate the amount to be returned or repaid, as applicable, based on the past and current contract years. The Company shall return the basic business promotion fees at NTD 330,000,000 for each contract years within one month after the termination.

 

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AHFL refunded the amounts of $152,235 (NTD 5,000,000) and $502,532 (NTD 16,505,144) to AIATW on December 3, 2015 and February 23, 2016, respectively, due to the portion of performance sales targets are not met during the period from April 15, 2013 to September 30, 2014. In addition, due to the portion of performance sales targets are not met during the year 2016, AHFL refunded the amount of $708,621 (NTD 21,502,250) to AIATW on June 23, 2017. The Company recognized revenue of $1,370,790 for the six months ended June 30, 2017 related to this agreement. As of June 30, 2017 and December 31, 2016, the Company had non-current portion of unearned revenue of $4,017,939 and $4,742,272, respectively, and current portion of $1,085,975 and $1,966,814, respectively, related to the Alliance Agreement. 

 

Unearned revenue – Farglory

  

On April 20, 2016, the Company entered into a service agreement (“Service Agreement”) with Farglory Life Insurance Co., Ltd. (“Farglory”). AHFL is to provide consulting services to Farglory for NTD4,000,000 per year and the aggregate consulting services fee is NTD20,000,000 from May 1, 2016 to April 30, 2021. However, both parties are renegotiating the Service Agreement and plan to amend the cooperation method. As of June 30, 2017 and December 31, 2016, the Company had long-term liabilities amount of nil and $495,615, respectively, and current liabilities amounts of $658,167 and $123,904, respectively, related to this Service Agreement.

 

Due to previous shareholders of AHFL

 

Due to previous shareholders of AHFL is the remaining balance payable of the acquisition cost. On March 12, 2017, the Company and the selling shareholders of AHFL entered into a fifth amendment to the acquisition agreement (the “Fifth Amendment”), pursuant to which, the Company agreed to distribute the cash payment in the amount of $480,559 (NTD15 million) on or prior to March 31, 2019.

 

Other long-term liabilities

 

On May 10, 2016, Law Broker entered into an engagement agreement (the “Engagement Agreement”) with Hui-Hsien Chao (“Ms. Chao”), pursuant to which she acts as the general manager of Law Broker for a term from December 29, 2015 to December 28, 2018. Ms. Chao’s primary responsibilities are to assist Law Broker in operating and managing insurance agency business. According to the Engagement Agreement, Ms. Chao’s Bonus plans include: 1) execution, 2) long-term service fees, 3) pension and 4) non-competition, and the payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms therein, among which, Ms. Chao acts as the general manager or equivalent position of Law Broker for at least 3 years.

  

On May 14, 2016, Law Broker and Ms. Chao entered into a supplementary agreement (“Supplementary Agreement”) to postpone her pension vesting date to December 29, 2016. Law Broker expects that none of the above-mentioned bonuses are to be paid prior to May 2019, and therefore it has recorded as long-term liabilities representing the corresponding portion of such bonuses accrued. On March 13, 2017, Law Broker and Ms. Chao entered into an engagement agreement, which is the amendment to Engagement Agreement dated May 10, 2016 to specify 1) Ms. Chao's pension calculation assumption and start date, and 2) the non-competition provision start date. As of June 30, 2017 and December 31, 2016, the balance of such accrued long-term liabilities were $143,974 and $77,440, respectively.

   

NOTE 14 – PREFERRED STOCK

 

The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value and currently has 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of June 30, 2017. The Series A Stock has the following rights and preferences:

 

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Voting Rights. Except as otherwise provided by law, the Series A Stock and the common stock vote together on all matters submitted to a vote of the Company’s shareholders. Each holder of Series A Stock is entitled to ten votes for each share of Series A Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Company.

 

Series A Board Designee and Board Restriction. In addition to the voting rights disclosed above, the holders of the Series A Stock shall be entitled to appoint one director (the “Series A Director”). No Board resolution regarding certain material Company actions can be made without the affirmative vote of the Series A Director.

  

Dividends. The holders of Series A Stock are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Company as may be declared by the Board.

 

Liquidation. In the event of a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Company, the holders of common stock and the holders of Series A Stock shall be entitled to share equally on a per share basis, in all assets of the Company of whatever kind available for distribution.

 

Conversion Rights. The holders of the Series A Stock have the right to convert their shares thereof at any time into shares of the Company’s common stock. Each share of Series A Stock is convertible into one share of common stock.

 

If the Company in any manner subdivides or combines the outstanding shares of common stock, the outstanding shares of the Series A Stock will be subdivided or combined in the same manner.

 

Business Combinations. In any merger, consolidation, reorganization or other business combination, the consideration received per share by the holders the common stock and the holders of the Series A Stock in such merger, consolidation, reorganization or other business combination shall be identical; provided however, that if such consideration consists, in whole or in part, of certain equity interests, the rights and limitations of such equity interests may differ to the extent that the rights and limitations of the common stock and the Series A Stock differ.

 

Fully Paid and Nonassessable. All of the Company’s outstanding shares of preferred stock are fully paid and nonassessable.

 

The fair value of the 1,000,000 preferred shares was $225,000 at the time of the preferred share issuance. The fair value of the common shares was $200,000 at the time of the preferred share issuance based on its market price at the date of the transaction. Therefore, the incremental value of the preferred shares was $25,000. This amount may be deemed compensation.

 

From the qualitative aspect, the Company notes the following regarding this deemed compensation: 

Does not violate any debt or other contract covenants; 

Does not change any earnings or EPS trends; 

Does not affect any previous earnings or EPS guidance; 

Does not affect any segment or class of revenue; 

Does not affect any regulatory compliance matters;  

Does not affect cash compensation of management; 

Does not involve concealment of an unlawful act.

 

Additional preferred stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors (the “BOD”) deems appropriate.  In the event that the Company issues any shares of preferred stock, a certificate of designation containing the rights, privileges and limitations of this series of preferred stock will be filed with the Secretary of State of the State of Delaware.  The effect of this preferred stock designation power is that its BOD alone, subject to Federal securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control without further action by its stockholders, and may adversely affect the voting and other rights of the holders of its common stock.

 

 20 

 

  

NOTE 15 – STATUTORY RESERVES

 

According to Taiwan accounting rules and corporation regulations, the Company’s subsidiaries in Taiwan must appropriate 10% of net income to statutory reserves until the accumulated reserve hits registered capital. The reserve can be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting to share capital.

 

Pursuant to the PRC regulations, CAE are required to transfer 10% of their net profit, as determined under the PRC accounting regulations, to a Statutory Common Reserve Fund (“Reserve Fund”). Appropriation to the Reserve Fund may cease when the fund equals 50% of a company’s registered capital or when a company has accumulated losses. The transfer to this reserve must be made before distribution of dividends to shareholders. The Company’s CAE did not appropriate such reserve as they have accumulated losses.

 

NOTE 16 – NON-CONTROLLING INTERESTS

 

Non-controlling interests consisted of the following:

 

Name of Affiliate   % of Non- 
controlling
Interests
    As of
December 31,
2016
    Adjustments/
Net Income of
Non-controlling
Interests
    As of
June 30,
2017
 
Law Enterprise Co., Ltd. (“Law Enterprise”)     34.05 %   $ 17,386     $ 492,441     $ 509,827  
Law Broker     34.05 %     9,621,159       1,387,261       11,008,420  
Prime Financial Asia Ltd. (“PFAL”)     49.00 %     232,414       (26,302 )     206,112  
Max Key Investments Ltd. (“MKI”)     49.00 %     (1,569 )     (425 )     (1,994 )
Prime Asia Corporation Limited. (“PA Taiwan”)     49.00 %     (95,448 )     (50,596 )     (146,044 )
Prime Management Consulting (Nanjing) Co., Ltd. (“PTC Nanjing”)     49.00 %     (2,400 )     121       (2,279 )
Total           $ 9,771,542     $ 1,802,500     $ 11,574,042  

 

Name of Affiliate   % of Non- 
controlling
Interests
    As of
December 31,
2015
    Adjustments/
Net Income of
Non-controlling
Interests
    As of
December 31,
2016
 
Law Enterprise     34.05 %   $ 199,699     $ (182,313 )   $ 17,386  
Law Broker     34.05 %     7,197,128       2,424,031       9,621,159  
PFAL     49.00 %     206,098       26,316       232,414  
MKI     49.00 %     (1,065 )     (504 )     (1,569 )
PA Taiwan     49.00 %     (26,292 )     (69,156 )     (95,448 )
PTC Nanjing     49.00 %     (837 )     (1,563 )     (2,400 )
Total           $ 7,574,731     $ 2,196,811     $ 9,771,542  

 

 21 

 

  

NOTE 17 – INCOME TAX

 

Provision (benefit) for income taxes for the three months ended June 30, 2017 consisted of:

 

Three months ended

June 30, 2017

  Federal   State   Foreign   Total 
Current  $-   $-   $742,570   $742,570 
Deferred   -    -    13,420    13,420 
Total  $-   $-   $755,990   $755,990 

 

Provision (benefit) for income taxes for the three months ended June 30, 2016 consisted of:

 

Three months ended

June 30, 2016

  Federal     State     Foreign     Total  
Current   $ -     $ -     $ 893,381     $ 893,381  
Deferred     -       -       (18,077 )     (18,077 )
Total   $ -     $ -     $ 875,304     $ 875,304  

 

Provision (benefit) for income taxes for the six months ended June 30, 2017 consisted of:

 

Six months ended

June 30, 2017

  Federal     State     Foreign     Total  
Current   $ -     $ -     $ 1,536,645     $ 1,536,645  
Deferred     -       -       (23,376 )     (23,376 )
Total   $ -     $ -     $ 1,513,269     $ 1,513,269  

 

Provision (benefit) for income taxes for the six months ended June 30, 2016 consisted of:

 

Six months ended

June 30, 2016

  Federal     State     Foreign     Total  
Current   $ -     $ -     $ 899,778     $ 899,778  
Deferred     -       -       (21,275 )     (21,275 )
Total   $ -     $ -     $ 878,503     $ 878,503  

 

Significant components of the deferred tax assets and liabilities for income taxes as of June 30, 2017 and December 31, 2016 consisted of the following:

 

   As of 
   June 30, 2017   December 31, 2016 
Deferred tax assets          
Net operating loss carry-forward  $1,170,068   $993,050 
Others   113,440    84,597 
Total  $1,283,508   $1,077,647 
Valuation allowance   (1,170,068)   (993,050)
Net deferred tax assets  $113,440   $84,597 
Deferred tax assets - current  $69,750   $59,233 
Deferred tax assets - noncurrent  $43,690   $25,364 

 

A 100% valuation allowance was provided for the deferred tax assets related to the PRC segment and the Company as of June 30, 2017 and December 31, 2016. Net deferred tax assets of $113,440 and $84,597, respectively, related to the Taiwan segment were included in both other current assets and other assets on the consolidated balance sheets as of June 30, 2017 and December 31, 2016.

 

 22 

 

  

Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. (“CU WFOE”) and the VIEs in the PRC are governed by the Income Tax Law of the PRC concerning the private enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments, except for Jiangsu and Sichuan. For Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. Sichuan is subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustments.

 

The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional 10% on any undistributed earnings to its shareholders.

 

The Company’s subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong, and are generally subject to a profits tax at the rate of 16.5% on the estimated assessable profits.

  

The following table reconciles the US statutory rates to the Company’s effective tax rate for the three months ended June 30, 2017 and 2016:

 

   Three Months Ended June 30, 
   2017   2016 
US statutory rate   34%   34%
Tax rate difference   (19)%   (19)%
Tax base difference   1%   1%
Loss in subsidiaries   4%   3%
Un-deductible and non-taxable items   3%   8%
Tax per financial statements   23%   27%

 

The following table reconciles the US statutory rates to the Company’s effective tax rate for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended June 30, 
   2017   2016 
US statutory rate   34%   34%
Tax rate difference   (18)%   (22)%
Tax base difference   1%   3%
Loss in subsidiaries   4%   11%
Un-deductible and non-taxable items   4%   9%
Tax per financial statements   25%   35%

 

Un-deductible and non-taxable items mainly represent un-deductible expenses according to local tax laws and the non-taxable tax income or expenses.

 

NOTE 18 – RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Due to Mr. Mao (CEO of the Company)  $392,949   $361,379 
Due to Ms. Lu (Shareholder of Law Anhou)   221,259    - 
Due to Xude Investment (Owned by Mr. ChwanHau Li)   -    32,374 
Due to Mr. Zhu (Legal Representative of Jiangsu)   2,042    1,994 
Due to Yuli Broker (Owned by Ms. Lee)   -    265 
Due to Yuli Investment (Owned by Ms. Lee)   -    265 
Due to I Health Management Corp*   17,277    3,724 
Total  $633,527   $400,001 

*25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise. 24% of Multiple Capital Enterprise’s shares are owned by the Company’s management level 

 

 23 

 

  

The loan due to related parties bore no interest and were payable on demand.

 

Debt Forgiveness – Related Parties

 

In 2015, Xude Investment assisted the Company to set up Genius Holdings Financial Limited (BVI Company) and Genius Investment Consultant Co., Ltd. (Taiwan Company) and paid set up fee on behalf of the Company with the amount of $23,544 and NTD285,083 (approximately $9,000). Xude Investment was owned by Mr. ChwanHau Li, who is one of the Directors of the Company. In March 2017, Xude Investment agreed to forgive the Company’s debt above in whole. As of June 30, 2017, the Company has debt forgiveness from related parties amount of $32,937.

 

Lease Agreements

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Broker to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. For the three and six months ended June 30, 2017, rent income were $142 and $280, respectively.

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Investment to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. For the three and six months ended June 30, 2017, rent income were $142 and $280, respectively.

 

Advisory Agreements

 

On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $40,000 (NTD1,275,000). The Company had cost of revenue related to I Health amount of $3,436 and $13,213, respectively, for the three and six months ended June 30, 2017.

 

On December 7, 2016, the Company entered into an advisory agreement with Fuchang Li (“Mr. Li”, the Director of the Company). Pursuant to this Advisory Agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. The total advisory fee was approximately $58,000 (NTD1,800,000). The Company had general and administrative expense related to this advisory agreement amount of $14,886 and $29,379, respectively, for the three and six months ended June 30, 2017.

  

Consulting Agreement

 

On November 1, 2016, the Company entered into a consulting agreement with Prime Technology Corp. (“Prime Tech”), which has one of the same directors as Prime Financial Asia Ltd. Pursuant to this consulting agreement, the Company provided administrative operation consulting service to Prime Tech from November 1, 2016 to December 31, 2021. As of and for the six months ended June 30, 2017, the Company had account receivable and revenue amount of $5,943 and $16,633, respectively.

 

NOTE 19 – COMMITMENTS

 

Operating Leases

 

The Company has operating leases for its offices. Rental expenses for the three months ended June 30, 2017 and 2016 were $666,035 and $523,874, respectively. Rental expenses for the six months ended June 30, 2017 and 2016 were $1,237,058 and $1,031,335, respectively. At June 30, 2017, total future minimum annual lease payments under operating leases were as follows, by years:

 

Twelve months ending June 30, 2018  $2,209,388 
Twelve months ending June 30, 2019   1,279,587 
Twelve months ending June 30, 2020   223,966 
Twelve months ending June 30, 2021   55,674 
Twelve months ending June 30, 2022   30,873 
Thereafter   - 
Total  $3,799,488 

 

 24 

 

  

Engagement Agreement with Ms. Chao

 

On May 10, 2016, Law Broker entered into the Engagement Agreement with Ms. Chao. Please refer to Note 13 Other Long-term Liabilities.

  

NOTE 20 – FINANCIAL RISK MANAGEMENT AND FAIR VALUE

  

The Company has exposure to credit, liquidity and market risks which arise in the normal course of its business. This note presents information about the Company’s exposure to each of these risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

    

The BOD has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

 

The Company’s BOD oversees how management monitors compliance with the Company’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. 

 

(a)Credit risk

 

The Company’s credit risk arises principally from accounts receivables, loan and other receivables, pledged deposits and cash and equivalents. Management has a credit policy in place and monitors exposures to these credit risk on an ongoing basis. The carrying amounts of account receivables, loan and other receivables, pledged deposits and cash and cash equivalents represent the Company’s maximum exposure to credit risk. Accounts receivable are due within 30 days from the date of billing.

 

(b)Liquidity risk

 

The BOD of the Company is responsible for the overall cash management and raising borrowings to cover expected cash demands. The Company regularly monitors its liquidity requirements, to ensure it maintains sufficient reserves of cash and readily realizable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

 

(c)Currency risk

 

The functional currency for the Company’s subsidiaries in Taiwan is NTD and the functional currency for the Company’s subsidiaries and VIEs in PRC is RMB. The financial statements of the Company are in USD. The fluctuation of NTD and RMB will affect the Company’s operating results expressed in USD. The Company reviews its foreign currency exposures, and the management does not consider its present foreign exchange risk to be significant. 

  

 25 

 

  

NOTE 21 – GEOGRAPHICAL DATA

 

The geographical distribution of the Company’s financial information for the three months ended June 30, 2017 and 2016 were as follows:

 

    For three months ended June 30,  
Geographical Areas   2017     2016  
Revenue                
Taiwan   $ 15,956,177     $ 16,444,722  
PRC     2,543,599       2,317,692  
Hong Kong     29,999       34,884  
Elimination adjustment     (10,953 )     (21,826
Total revenue   $ 18,518,822     $ 18,775,472  
                 
Income (loss) from operations                
Taiwan   $ 2,747,948     $ 3,208,415  
PRC     (86,560     (291,101 )
Hong Kong     (32,371 )     (11,783 )
Elimination adjustment     33,227       32,836  
Total income (loss) from operations   $ 2,662,244     $ 2,938,367  
                 
Depreciation and amortization expenses                
Taiwan   $ 116,140     $ 126,028  
PRC     23,056       21,930  
Hong Kong     72       72  
Elimination adjustment     -       -  
Total depreciation and amortization expenses   $ 139,268     $ 148,030  
                 
Interest income                
Taiwan   $ 113,935     $ 57,723  
PRC     542       2,041  
Hong Kong     -       1  
Elimination adjustment     (19,267 )     (5,412 )
Total interest income   $ 95,210     $ 54,353  
                 
Interest expenses                
Taiwan   $ 22,267     $ 5,813  
PRC     5,200       7,976  
Hong Kong     -       -  
Elimination adjustment     (19,267 )     (5,412 )
Total interest expenses   $ 8,200     $ 8,377  
                 
Income tax expenses                
Taiwan   $ 731,045     $ 875,302  
PRC     24,945       2  
Hong Kong     -       -  
Elimination adjustment     -       -  
Total income tax expenses   $ 755,990     $ 875,304  
                 
Net income (loss)                
Taiwan   $ 2,648,304     $ 2,644,909  
PRC     (128,350     (290,172 )
Hong Kong     (32,356 )     (17,360 )
Elimination adjustment     1,430       2,549  
Total net income (loss)   $ 2,489, 028     $ 2,339,926  

 

 26 

 

  

The geographical distribution of the Company’s financial information for the six months ended June 30, 2017 and 2016 were as follows:

 

    For six months ended June 30,  
Geographical Areas   2017     2016  
Revenue                
Taiwan   $ 28,377,258     $ 24,378,550  
PRC     5,435,531       3,903,459  
Hong Kong     72,514       77,585  
Elimination adjustment     (10,953 )     (21,826
Total revenue   $ 33,874,350     $ 28,337,768  
                 
Income (loss) from operations                
Taiwan   $ 5,304,129     $ 2,887,954  
PRC     163,028       (689,560 )
Hong Kong     (38,296 )     (14,313 )
Elimination adjustment     66,447       62,350  
Total income (loss) from operations   $ 5,495,308     $ 2,246,431  
                 
Depreciation and amortization expenses                
Taiwan   $ 226,394     $ 262,941  
PRC     45,550       40,044  
Hong Kong     144       144  
Elimination adjustment     -       -  
Total depreciation and amortization expenses   $ 272,088     $ 303,129  
                 
Interest income                
Taiwan   $ 200,711     $ 111,813  
PRC     2,269       3,662  
Hong Kong     -       1  
Elimination adjustment     (35,720 )     (9,367 )
Total interest income   $ 167,260     $ 106,109  
                 
Interest expenses                
Taiwan   $ 41,720     $ 10,955  
PRC     10,269       7,976  
Hong Kong     -       -  
Elimination adjustment     (35,720 )     (9,367 )
Total interest expenses   $ 16,269     $ 9,564  
                 
Income tax expenses                
Taiwan   $ 1,425,348     $ 875,389  
PRC     87,921       3,114  
Hong Kong     -       -  
Elimination adjustment     -       -  
Total income tax expenses   $ 1,513,269     $ 878,503  
                 
Net income (loss)                
Taiwan   $ 4,505,169     $ 2,379,700  
PRC     54,608       (692,913 )
Hong Kong     (52,941 )     (24,663 )
Elimination adjustment     2,991       3,886  
Total net income (loss)   $ 4,509,827     $ 1,666,010  

 

 27 

 

  

The geographical distribution of the Company’s financial information as of June 30, 2017 and December 31, 2016 were as follows:

 

    As of  
Geographical Areas   June 30, 2017     December 31, 2016  
Capital expenditures                
Taiwan   $ (258,702 )   $ (835,564 )
PRC     (27,658 )     (148,936 )
Hong Kong     -       -  
Total capital expenditures   $ (286,360 )   $ (984,500 )
                 
Long-lived assets                
Taiwan   $ 24,644,665     $ 26,947,718  
PRC     8,440,919       8,803,587  
Hong Kong     371,042       270,648  
Elimination adjustment     (26,114,302 )     (30,227,792 )
Total long-lived assets   $ 7,342,324     $ 5,794,161  
                 
Reportable assets                
Taiwan   $ 86,701,995     $ 90,388,991  
PRC     10,810,740       13,325,433  
Hong Kong     479,241       561,708  
Elimination adjustment     (49,008,295 )     (52,868,589 )
Total reportable assets   $ 48,983,681     $ 51,407,543  

 

NOTE 22 – LOAN TO SHAREHOLDERS

 

Anhou Registered Capital Increase

 

On April 27, 2013, China Insurance Regulatory Commission mandated any insurance agency have a minimum registered capital requirement of RMB50 million (approximately $ 8 million). At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered capital of RMB10 million (approximately $ 1.6 million). To better implement its expansion strategies, Anhou intends to increase its registered capital to RMB50 million so that it can set up new branches in any province beyond its current operations in the PRC.

 

Due to certain restriction on direct foreign investment in insurance agency business under current PRC legal requirements, Anhou sought investments from certain Investor Borrowers, as defined below in Item 2 of this part, who in turn needed funds through individual loans.

 

On June 9, 2013, AHFL entered into a loan agreement with ZLI Holdings, whereby AHFL agreed to provide a loan to ZLI Holdings of RMB40 million ($6,389,925). The term for such loan is 10 years which may be extended upon the agreement of the parties. The loan was remitted to ZLI Holdings on August 30, 2013. In August 2013, ZLI Holdings entered into three loan agreements (“Investor Loan Agreements”) with the following independent third parties, collectively, the Investor Borrowers:

 

1.Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong (RMB29,500,000 ($4,712,570))

 

2.Ms. Chunyan Lu, PRC citizen (RMB3,000,000 ($479,244))

 

3.Ms. Jing Yue, PRC citizen (RMB7,500,000 ($1,198,111))

  

The term for the above loans is 10 years which may be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers entered into a binding VIE agreement with Anhou, CU WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers were solely used to increase the registered capital of Anhou. As of December 31, 2014 and 2013, the loan was offset against equity.

 

On October 20, 2013, the Investor Borrowers increased Anhou’s registered capital by RMB 40 million ($6,389,925).

 

 28 

 

   

NOTE 23 – SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events through the date these consolidated financial statements were issued, and determined that there were no subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.

 

 29 

 

  

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 part. 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.

 

Overview

 

The Company primarily provides two broad categories of insurance products, life insurance products and property and casualty insurance products in Taiwan and PRC. The Company also provides reinsurance brokerage services and insurance consulting services in Hong Kong and Taiwan. The revenue from our reinsurance brokerage services and insurance consulting services accounts for less than 1% of our total revenue. The insurance products that the Company’s subsidiaries sell is underwritten by some of leading insurance companies in Taiwan and PRC, respectively.

 

(1)Life Insurance Products

 

Total revenue from Taiwan life insurance products accounted for 74.03% and 80.53% of total revenue for the six months ended June 30, 2017 and 2016, respectively. Total revenue from PRC life insurance products were 15.18% and 12.84% of total revenue for the six months ended June 30, 2017 and 2016, 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

 

Taiwan subsidiaries commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total revenue from Taiwan property and casualty insurance products were 5.61% and 5.42% of total revenue for the six months ended June 30, 2017 and 2016, respectively. Our CAE in PRC commenced its sales of commercial property insurance in 2009 and developed its automobile insurance business in 2010. Total revenue from PRC property and casualty insurance products were 0.87% and 0.94% of total revenue for the six months ended June 30, 2017 and 2016, 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 2016 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.

 

 30 

 

  

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.

 

Long-term investment

 

The Company classifies its investments as available-for-sale in accordance with ASC 320 “Debt and Equity Securities”, and Investments – Debt and Equity Securities are reported at fair value. Unrealized gains and losses as a result of changes in the fair value of the available-for-sale investments are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.

 

The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

  

Recent Accounting Pronouncements

 

Refer to Note 2, Summary of Significant Accounting Policies, of our condensed consolidated financial statements for a discussion of recent accounting pronouncements and their effect, if any. 

 

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Overview of the three months ended June 30, 2017 and 2016

 

The following table shows the results of operations for the three months ended June 30, 2017 and 2016:

 

   Three Months Ended 
June 30,
         
   2017   2016         
   (Unaudited)   (Unaudited)   Change   Percent 
                 
Revenue  $18,518,822   $18,775,472   $(256,650)   -1%
Cost of revenue   11,890,592    12,181,427    (290,835)   -2%
Gross profit   6,628,230    6,594,045    34,185    1%
Gross profit margin   36%   35%   1%   3%
                     
Operating expenses:                    
Selling   312,122    566,445    (254,323)   -45%
General and administrative   3,653,864    3,089,233    564,631    18%
Total operating expenses   3,965,986    3,655,678    310,308    8%
                     
Income from operations   2,662,244    2,938,367    (276,123)   -9%
                     
Other income (expenses):                    
Interest income   95,210    54,353    40,857    75%
Interest expenses   (8,200)   (8,377)   177    -2%
Dividend income   329,749    268,889    60,860    23%
Other - net   166,015    (38,002)   204,017    -537%
Total other income (expenses)   582,774    276,863    305,911    110%
                     
Income before income taxes   3,245,018    3,215,230    29,788    1%
Income tax expense   755,990    875,304    (119,314)   -14%
                     
Net income   2,489,028    2,339,926    149,102    6%
Net income attributable to the noncontrolling interests   500,640    865,940    (365,300)   -42%
Net income attributable to parent’s shareholders   1,988,388    1,473,986    514,402    35%

  

Revenue

 

As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance and reinsurance companies, typically calculated as a percentage of premiums paid by our customers to the reinsurance companies in Taiwan, PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. For the three months ended June 30, 2017 and 2016, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:

 

Geographical Areas  Three months ended
June 30, 2017
   Three months ended
June 30, 2016
 
Revenue          
Taiwan  $15,956,177   $16,444,722 
PRC   2,543,599    2,317,692 
Hong Kong   29,999    34,884 
Elimination adjustment   (10,953)   (21,826)
Total Revenue  $18,518,822   $18,775,472 

 

 32 

 

  

During the three months ended June 30, 2017, 86.2%, 13.7% and 0.1% of our revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. During the three months ended June 30, 2016, 87.6%, 12.3% and 0.1% of our revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. The percentage of geographical revenue for the three months ended June 30, 2017 and 2016 were relatively consistent.

 

Total revenue decreased by $256,650, or 1%, from $18,775,472 for the three months ended June 30, 2016 to $18,518,822 for the three months ended June 30, 2017, was mainly due to the change in Taiwan government’s policies in decreasing the interest rate for policy reserve, which resulted in higher price for the same insurance products compared with those of the corresponding period in 2016. Given that the consumers are relatively price sensitive toward insurance products, as compared to other everyday items, the demand for insurance policies had decreased in association with the price increase, thus resulting in the decrease in our revenue.

 

Cost of revenue and gross profit

 

The cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the three months ended June 30, 2017 decreased by $290,835 or 2%, to $11,890,592 compared to $12,181,427 for the three months ended June 30, 2016. The decrease of the cost of revenue was generally in line with the decrease of the revenue.

 

The gross profit for the three months ended June 30, 2017 increased by $34,185 or 1%, to $6,628,230 compared to $6,594,045 for the three months ended June 30, 2016. The gross profit ratio increased to 36% for the three months ended June 30, 2017 from 35% for the three months ended June 30, 2016. Gross profit was relatively consistent between the three-month period ended June 30, 2017 and 2016.

 

Selling expenses

 

Selling expenses were mainly occurred in Law Broker, representing the expense for marketing promotion. The selling expense for the three months ended June 30, 2017 decreased by $254,323 or 45%, to $312,122 compared to $566,445 for the three months ended June 30, 2016. The decrease is mainly due to decreased advertising expense. The Company is already well known by the public in both Taiwan and China. In that case, we decided to reduce our advertising expenses for market promotion.

  

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 attorney.

 

For the three months ended June 30, 2017, G&A expenses were $3,653,864, increased by $564,631, or 18%, compared with $3,089,233 for the three months ended June 30, 2016, which was mainly due to the increased number of branches and employees in Taiwan.

 

Other income (expenses)

 

Net other income for the three months ended June 30, 2017 and 2016 were $582,774 and $276,863, respectively. Other income (expense) mainly consists of interest income, interest expenses, other income, dividend income and loss on disposal of property, plant and equipment. Compared with the three months ended June 30, 2016, net other income increased due to the fluctuation of exchange rate and dividend income.

 

Income tax expense

 

For the three months ended June 30, 2017, the income tax expense was $755,990, decreased by $119,314, or 14%, compared with $875,304 for the three months ended June 30, 2016. The decrease was mainly due to a decrease in taxes on 10% of undistributed earnings to its shareholders for the three months ended June 30, 2017 compared to that for the three months ended June 30, 2016 in Taiwan area.

 

 33 

 

  

The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. In addition, the Income Tax Law of Taiwan provides that a company is taxed an additional 10% on any undistributed earnings to its shareholders.

 

CU WFOE and the CAEs in the PRC are governed by the Income Tax Law of the PRC concerning the private enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments, except for Jiangsu and Sichuan. For Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. Sichuan is subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustments.

 

The Company's subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong, and are generally subject to a profits tax at the rate of 16.5% on the estimated assessable profits.

 

Overview of the six months ended June 30, 2017 and 2016

 

The following table shows the results of operations for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended 
June 30,
         
   2017   2016         
   (Unaudited)   (Unaudited)   Change   Percent 
                 
Revenue  $33,874,350   $28,337,768   $5,536,582    20%
Cost of revenue   20,674,435    18,650,286    2,024,149    11%
Gross profit   13,199,915    9,687,482    3,512,433    36%
Gross profit margin   39%   34%   5%   15%
                     
Operating expenses:                    
Selling   698,303    1,464,710    (766,407)   -52%
General and administrative   7,006,304    5,976,341    1,029,963    17%
Total operating expenses   7,704,607    7,441,051    263,556    4%
                     
Income from operations   5,495,308    2,246,431    3,248,877    145%
                     
Other income (expenses):                    
Interest income   167,260    106,109    61,151    58%
Interest expenses   (16,269)   (9,564)   (6,705)   70%
Dividend income   329,749    268,889    60,860    23%
Other - net   47,048    (67,352)   114,400    -170%
Total other income (expenses)   527,788    298,082    229,706    77%
                     

Income before income taxes

   6,023,096    2,544,513    3,478,583    137%
Income tax expense   1,513,269    878,503    634,766    72%
                     

Net income

   4,509,827    1,666,010    2,843,817    171%

Net income attributable to the noncontrolling interests

   1,185,094    835,725    349,369    42%

Net income attributable to parent’s shareholders

   3,324,733    830,285    2,494,448    300%

 

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Revenue

 

As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance and reinsurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies in among Taiwan, PRC and Hong Kong. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. For the six months ended June 30, 2017 and 2016, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:

 

Geographical Areas  Six months ended
June 30, 2017
   Six months ended
June 30, 2016
 
Revenue          
Taiwan  $28,377,258   $24,378,550 
PRC   5,435,531    3,903,459 
Hong Kong   72,514    77,585 
Elimination adjustment   (10,953)   (21,826)
Total Revenue  $33,874,350   $28,337,768 

 

During the six months ended June 30, 2017, 83.8%, 16.0% and 0.2% of our revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. During the six months ended June 30, 2016, 86.0%, 13.8% and 0.2% of our revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. The percentage of geographical revenue for the six months ended June 30, 2017 and 2016 were relatively consistent.

 

Total revenue increased by $5,536,582, or 20%, from $28,337,768 for the six months ended June 30, 2016 to $33,874,350 for the six months ended June 30, 2017, which was mainly due to the increase of the revenue in Taiwan and PRC for the following reasons:

 

a)The revenue of TransGlobe Life Insurance Co., Ltd (“TransGlobe”) increased in 2017. The main reason was the launch of TransGlobe’s top seller product that offers better endowment insurance coverages with an affordable insurance premium. This selling package drew more attention from the Company’s customers and boosted the sales performance for the six months ended June 30, 2017.

 

b)The revenue of AIA International Limited Taiwan Branch (“AIATW”) increased in 2017 was primarily due to the expected appreciation of the US dollar in the future. One of AIATW’s top seller products is a life insurance offers repayment in USD, which is more attractive to the Company’s customers. As a result, the sales performance increased in current period compared with prior corresponding period.

 

c)The revenue increase in the PRC is primarily due to the increases in sales of the retirement and critical illness insurance in Sichuan for the six months ended June 30, 2017. In light of the need to make personal provisions or old age and illness, as strongly encouraged by the Chinese government, demand for such policies rose accordingly. In addition, the China Insurance Regulatory Commission (“CIRC”) required insurance companies to make adjustments to policy designs, propelling insurance companies to innovate on their products to better meet market needs. These innovations also led to increase in revenue.

 

Cost of revenue and gross profit

 

The cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the six months ended June 30, 2017 increased by $2,024,149 or 11%, to $20,674,435 compared to $18,650,286 for the six months ended June 30, 2016. The cost of revenue increased is mainly due to the increase of direct commission cost.

   

The gross profit for the six months ended June 30, 2017 increased by $3,512,433 or 36%, to $13,199,915 compared to $9,687,482 for the six months ended June 30, 2016. The gross profit ratio increased to 39% for the six months ended June 30, 2017 from 34% for the six months ended June 30, 2016. The increase in gross profit was primarily due a decrease in indirect cost, such as the bonuses and awards to subagents.

 

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Selling expenses

 

Selling expenses were mainly occurred in Law Broker, representing the expense for marketing promotion. The selling expense for the six months ended June 30, 2017 decreased by $766,407 or 52%, to $698,303 compared to $1,464,710 for the six months ended June 30, 2016. The decrease is mainly due to decreased advertising expense. The Company is already well known by the public in both Taiwan and China. In that case, we decided to reduce our advertising expenses for market promotion.

  

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 attorney.

 

For the six months ended June 30, 2017, G&A expenses were $7,006,304, increased by $1,029,963, or 17%, compared with $5,976,341 for the six months ended June 30, 2016, which was mainly due to the increased number of branches and employees in Taiwan.

 

Other income (expenses)

 

Net other income for the six months ended June 30, 2017 was $527,788 and the net other income for the six months ended June 30, 2016 was $298,082. Other income (expense) mainly consists of interest income, interest expenses, other income, dividend income and loss on disposal of property, plant and equipment. Compared with the six months ended June 30, 2016, net other income increased due to the fluctuation of exchange rate and dividend income.

 

Income tax expense

 

For the six months ended June 30, 2017, the income tax expense was $1,513,269, increased by $634,766, or 72%, compared with $878,503 for the six months ended June 30, 2016. The increase was mainly due to the increased income before income tax for the six months ended June 30, 2017 compared to that for the six months ended June 30, 2016.

 

The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% on income reported in the statutory financial statements after appropriate adjustments. In addition, the Income Tax Law of Taiwan provides that a company is taxed an additional 10% on any undistributed earnings to its shareholders.

 

CU WFOE and the CAEs in the PRC are governed by the Income Tax Law of the PRC concerning the private enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments, except for Jiangsu and Sichuan. For Jiangsu, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. Sichuan is subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustments.

 

The Company's subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong, and are generally subject to a profits tax at the rate of 16.5% on the estimated assessable profits.

 

Liquidity and Capital Resources

 

The following table represents a comparison of the net cash provided by operating activities, net cash provided by (used in) investing activities and net cash provided by (used in) financing activities for the six months ended June 30, 2017 and 2016:

 

   Six Months Ended June 30,     
   2017   2016   Change   Percent 
Net cash provided by operating activities  $2,527,098   $4,694,587    (2,167,489)   -46%
Net cash provided by (used in) investing activities   2,234,670    (622,074)   2,856,744    -459%
Net cash provided by (used in) financing activities   256,881    (453,311)   710,192    -157%

 

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Operating activities

 

Net cash provided by operating activities during the six months ended June 30, 2017 was $2,527,098, significantly decreased in comparison with $4,694,587 net cash provided by operating activities during six months ended June 30, 2016. The decrease was mainly due to the increase in other asset on registered capital deposit, which offset the increase in net income. Registered capital deposit is required by China Insurance Regulatory Commission that an intermediary company should hold all of its registered capital in a custodian account and subject to limited usage.  

 

Investing activities

 

Net cash provided by investing activities was $2,234,670 during the six months ended June 30, 2017, which is mainly due to the net cash inflows from disposals of marketable securities during the period, which outweighed the purchase of the marketable securities. The net cash used in investing activities was $622,074 for the six months ended June 30, 2016, which is mainly due to purchase of property, plant and equipment and intangible assets during the period.

 

Financing activities

 

Net cash provided by financing activities was $256,881 during the six months ended June 30, 2017, which is the result of proceeds from the Company’s related party borrowings. The net cash used in financing activities was $453,311 for the six months ended June 30, 2016, which is the result of repayment for the borrowings from the Company’s related parties and third parties.

   

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.

  

On June 9, 2013, AHFL entered into a Loan Agreement (the “Company Loan Agreement”) with ZLI Holdings, its wholly-owned Hong Kong subsidiary.

  

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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 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”).

 

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 VIE interest generated from the said registered capital increase into the Company. 

 

On November 17, 2016, Li Chen transferred his interests in Anhou to Chunyan Lu for an aggregate consideration of RMB3 million.

 

Under the Investor Loan Agreements, the Investor Borrowers loaned cash from ZLI Holdings for their investment in Anhou and ZLI Holdings agreed to provide certain loans to each of the Investor Borrowers with an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such loans was ten years which could be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers covenants to enter into certain Variable Interest Entities Agreements with Anhou, CU WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers shall be solely used to increase the registered capital of Anhou, and 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)

Ms. Lu: RMB3,000,000 ($479,244)

Ms. Yue: RMB7,500,000 ($1,198,111)

 

On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925).

 

Loan Receivable

 

On October 24, 2016, our Company entered into a loan agreement with third party, RFL, which was incorporated under the laws of Samoa. We provided a short-term loan amount of NTD 48,000,000 ($1,486,846) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest are due on April 23, 2017. On April 21, 2017, the Company and RFL entered a supplemental agreement to extend the loan to October 23, 2017. Subsequently, our Company received the repayment of this loan amount of NTD 2,134,440 on June 22, 2017. As of June 30, 2017, the balance of the loan receivable is $1,509,359.

 

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Due to related parties

 

The related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
Due to Mr. Mao (CEO of the Company)  $392,949   $361,379 
Due to Ms. Lu (Shareholder of Law Anhou)   221,259    - 
Due to Xude Investment (Owned by Mr. ChwanHau Li)   -    32,374 
Due to Mr. Zhu (Legal Representative of Jiangsu)   2,042    1,994 
Due to Yuli Broker (Owned by Ms. Lee)   -    265 
Due to Yuli Investment (Owned by Ms. Lee)   -    265 
Due to I Health Management Corp*   17,277    3,724 
Total  $633,527   $400,001 

*25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise. 24% of Multiple Capital Enterprise’s shares are owned by the Company’s management level

 

The loan due to related parties bore no interest and were payable on demand.

  

Convertible bonds

 

On June 23, 2016, the Company has issued two units of its convertible bonds with an aggregate principal amount of $200,000 to a non-US person and the value of the embedded derivatives liabilities is trivial. As of June 30, 2017 and December 31, 2016, the Company has an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $3,000 and $6,000 for the three and six months ended June 30, 2017.

 

Long-term loan

 

   June 30, 2017   December 31, 2016 
Loan B, interest at 8%, maturity date May 15, 2019  $147,506   $144,015 
Loan C, interest at 8%, maturity date July 20, 2019   113,580    110,892 
Total long-term loans  $261,086   $254,907 

 

On May 15, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd (“Anhou” or “Law Anhou”) entered into a loan agreement (“Loan B”) with a third party, Guowei Hu. The long-term Loan Agreement provided for a $147,506 loan to the Company. Loan B bears an interest rate of 8% per annum and interest is payable annually. The principal and the interest will be due on May 15, 2019.

 

On July 20, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan C”) with Guowei Hu. The long-term Loan Agreement provided for a $113,580 loan to the Company. Loan C bears an interest rate of 8% per annum and interest is payable annually. The principal and the interest will be due on July 20, 2019.

 

The total interest expense for the long-term loans was $5,200 and $10,269 for the three and six months ended June 30, 2017.

 

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Contractual Obligations

 

Operating Leases

 

The Company has operating leases for its offices. Rental expenses for the three months ended June 30, 2017 and 2016 were $666,035 and $523,874, respectively. Rental expenses for the six months ended June 30, 2017 and 2016 were $1,237,058 and $1,031,335, respectively. At June 30, 2017, total future minimum annual lease payments under operating leases were as follows, by years:

 

Twelve months ending June 30, 2018  $2,209,388 
Twelve months ending June 30, 2019   1,279,587 
Twelve months ending June 30, 2020   223,966 
Twelve months ending June 30, 2021   55,674 
Twelve months ending June 30, 2022   30,873 
Thereafter   - 
Total  $3,799,488 

 

AHFL Acquisition Agreement

 

The Company conducts all of its Taiwanese operations indirectly through its subsidiary AHFL and the revenue from such Taiwanese operations represented approximately 90% of our total revenue in our consolidated financial statements for the year ended December 31, 2015 and the quarter ended June 30, 2016, and such operations were also the source of all of our profits in 2015. On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the AHFL Acquisition Agreement (the “Third Amendment”), pursuant to which, on or prior to June 30, 2016, (i) the Company is committed to complete the listing of the Company’s shares in a major capital market, where the net proceeds raised through such public offering financing shall be at least US$10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NTD22.5 million (US$312,617), on a pro rata basis, to the selling shareholders of AHFL and issue 5 million common shares to its selected employees pursuant to its employee stock/option plan, or any alternative plan mutually accepted by the Company and such selling shareholders; and (iii) failure to timely complete either of the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind the Acquisition of AHFL by CUIS and restore the status quo of the Company and the selling shareholders (the “Selling Shareholders”) as if the said acquisition had never happened.

 

On August 8, 2016, the Company and the selling shareholders of AHFL entered into a fourth Amendment to the Acquisition Agreement (the “Fourth Amendment”), pursuant to which: (A) the Third Amendment is terminated with immediate effect on August 8, 2016, and (B) Sections 2.2(iii) and (iv) of the Acquisition Agreement are amended and restated so that the Company is now obligated to: (iii) pay NTD15 million (USD475,406) to the Selling Shareholders in the amounts set forth opposite each Selling Shareholder's name on Schedule I on or prior to March 31, 2017 or at any other time or in any other manner otherwise agreed upon by and among the parties; and (iv) pay NTD4,830,514 (USD153,097) to the Selling Shareholders in the amounts set forth opposite each Selling Shareholder's name on Schedule I on July 21, 2016. Unless amended by the Fourth Amendment, any other provision of the Acquisition Agreement shall remain unchanged. On July 21, 2016, the Company arranged for the payment of NTD4,830,514 (USD153,097) to the Selling Shareholders. As a result, the former shareholders of AHFL no longer have the right to unwind the acquisition of AHFL by the Company. On March 12, 2017, the Company and the selling shareholders of AHFL entered into a fifth Amendment to the Acquisition Agreement (the “Fifth Amendment”), pursuant to which, on or prior to March 31, 2019, the Company agreed to distribute the cash payment in the amount of NTD15 million.

 

Engagement Agreement with Ms. Chao

 

On May 10, 2016, Law Broker entered into the Engagement Agreement with Ms. Chao, pursuant to which she acts as the general manager of Law Broker for a term from December 29, 2015 to December 28, 2018. Ms. Chao’s primary responsibilities are to assist Law Broker in operating and managing insurance agency business. According to the Engagement Agreement, Ms. Chao’s Bonus plans include: 1) execution, 2) long-term service fees, 3) pension and 4) non-competition, and the payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms therein, among which, Ms. Chao acts as the general manager or equivalent position of Law Broker for at least 3 years.

 

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On May 14, 2016, Law Broker and Ms. Chao entered into a supplementary agreement (“Supplementary Agreement”) to postpone her pension vesting date to December 29, 2016. Though Law Broker expects that none of the above-mentioned bonuses need to be paid prior to May 2019, it has recorded long-term liabilities representing the corresponding portion of such bonuses accrued. On March 13, 2017, Law Broker and Ms. Chao entered into an engagement agreement, which is the amendment to Engagement Agreement dated May 10, 2016 to specify 1) Ms. Chao's pension calculation assumption and start date, and 2) the non-competition provision start date. As of June 30, 2017 and December 31, 2016, the balance of such accrued long-term liabilities was $142,974 and $77,440, respectively.

 

Lease Agreements

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Broker to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. For the three and six months ended June 30, 2017, rent income were $142 and $280, respectively.

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Investment to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). On June 30, 2017, this lease agreement was extended automatically to June 30, 2018. For the three and six months ended June 30, 2017, rent income were $142 and $280, respectively.

 

Advisory Agreements

 

On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the advisory agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $40,000 (NTD1,275,000). The Company had cost of revenue related to I Health amount of $3,436 and $13,213, respectively, for the three and six months ended June 30, 2017.

 

On December 7, 2016, the Company entered into an advisory agreement with Fuchang Li (“Mr. Li”, the director of the Company). Pursuant to this advisory agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. The total advisory fee was approximately $58,000 (NTD1,800,000). The Company had general and administrative expense related to this advisory agreement amount of $14,886 and $29,379, respectively, for the three and six months ended June 30, 2017.

  

Off Balance Sheet Arrangements

 

We have not participated in any transactions with unconsolidated entities, such as special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates.

 

Interest Rate Sensitivity

 

As of June 30, 2017, we had cash of USD approximately $13,000, cash of RMB7,602,811 (equivalent to approximately $1,121,000), cash of HKD559,901(equivalent to approximately $72,000), and cash of NTD940,706,352 (equivalent to approximately $30,957,000). We hold our cash for working capital purposes. Declines in interest rates would reduce future interest income. For the six months ended June 30, 2017, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.

  

Foreign Currency Risk

 

The functional currency for the subsidiaries in Taiwan is NTD, the functional currency for the subsidiaries in Hong Kong is HKD and the functional currency for the subsidiaries and CAE in PRC is RMB. The financial statements of the Company are in USD. The fluctuation of NTD and RMB will affect our operating results expressed in USD. The Company reviews its foreign currency exposures. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. The management does not consider its present foreign exchange risk to be significant.

  

ITEM 4. CONTROLS AND PROCEDURES

  

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”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2017. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of June 30, 2017, our disclosure controls and procedures were effective to ensure the information required to be disclosed by an issuer in the reports it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms relating to us, and was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.   

 

Changes in internal control over financial reporting

 

During the three months ended June 30, 2017, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

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.

 

ITEM 1A. RISK FACTORS.

 

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, 2016.

 

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.

  

ITEM 5. OTHER INFORMATION.

 

Entry in to a Loan Agreement

 

On June 1, 2017, ZLI Holdings, a wholly-owned Hong Kong subsidiary of the Company, entered into a loan agreement (the “Loan Agreement”) with Law Anhou, a PRC-incorporated company being the operating consolidated affiliated entity.

 

Pursuant to the Loan Agreement, ZLI Holdings will provide an interest-free loan in the amount of 150,000 US Dollars to Law Anhou within 30 days after the execution of this Loan Agreement. The term for the Loan Agreement shall be from June 1, 2017 to May 31, 2020 (the “Expiration Date”); provided that the term of the Loan Agreement shall be automatically extended for a year upon ZLI Holdings’ failure to demand the payment prior to the Expiration Date. Law Anhou may choose to repay the principal amount of the loan in one lump sum or multiple installments prior to the Expiration Date. The Loan Agreement is included as Exhibit 10.1 to this Form 10-Q and its terms are incorporated herein by reference. 

 

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ITEM 6. EXHIBITS

 

(a)Exhibits:

 

Exhibit    
Number   Description of Exhibit
10.1   Translation of Loan Agreement, dated June 1, 2017, by and between ZLI Holdings Limited and Law Anhou Insurance Agency Co., Ltd.

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1*   Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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.

 

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SIGNATURES

 

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, 2017 By: /s/ Yi Hsiao Mao
  Name: Yi Hsiao Mao
  Its: Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 9, 2017 By: /s/ Yung Chi Chuang
  Name: Yung Chi Chuang
  Its: Chief Financial Officer
    (Principal Financial and Accounting Officer)

  

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