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EX-31.1 - EXHIBIT 31.1 - China United Insurance Service, Inc.v446250_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - China United Insurance Service, Inc.v446250_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - China United Insurance Service, Inc.v446250_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - China United Insurance Service, Inc.v446250_ex31-2.htm
EX-10.2 - EXHIBIT 10.2 - China United Insurance Service, Inc.v446250_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - China United Insurance Service, Inc.v446250_ex10-1.htm

 

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, 2016

 

OR

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

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)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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 or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large Accelerated Filer  ¨ Non-Accelerated Filer  ¨
Accelerated Filer  x Smaller Reporting Company ¨

 

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 5, 2016, 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 F-1
     
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) F-1
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 21
     
ITEM 4. CONTROLS AND PROCEDURES 21
     
PART II. OTHER INFORMATION 22
     
ITEM 1. LEGAL PROCEEDINGS 22
     
ITEM 1A. RISK FACTORS 22
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 22
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
     
ITEM 4. MINE SAFETY DISCLOSURES 22
     
ITEM 5. OTHER INFORMATION 22
     
ITEM 6. EXHIBITS 24
     
SIGNATURES 25

  

 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” and the “Company” and words of like import refer to China United Insurance Service, Inc., its subsidiaries and variable interest entities.

 

References to China or the PRC refer to the People’s Republic of China (excluding Hong Kong, Macao and Taiwan). References to Taiwan refer to 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

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2016   December 31, 2015 
   (UNAUDITED)     
ASSETS          
Current assets          
Cash and equivalents  $24,821,244   $20,831,824 
Marketable securities   2,418,804    2,369,082 
Accounts receivable, net   6,029,877    9,630,993 
Other current assets   528,185    1,055,015 
Total current assets   33,798,110    33,886,914 
           
Property, plant and equipment, net   917,668    918,798 
Intangible assets   785,262    468,779 
Goodwill   2,071,491    2,071,491 
Long-term Investment   1,289,238    1,264,611 
Other assets   768,632    791,223 
TOTAL ASSETS  $39,630,401   $39,401,816 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Taxes payable  $1,490,656   $1,521,962 
Short-term loans   -    222,235 
Due to related parties   359,181    945,932 
Other current liabilities   9,021,116    10,870,750 
Total  current liabilities   10,870,953    13,560,879 
           
Convertible bonds   200,000    - 
Long-term loan   150,526    - 
Long-term liabilities   7,219,595    6,594,530 
TOTAL LIABILITIES   18,441,074    20,155,409 
           
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   8,157,512    8,157,512 
Statutory Reserves   2,967,390    2,385,327 
Retained earnings   2,056,894    1,808,665 
Accumulated other comprehensive gain/(loss)   (562,897)   (680,133)
Stockholders’ equity attribute to parent’s shareholders   12,619,204    11,671,676 
Noncontrolling interest   8,570,123    7,574,731 
TOTAL STOCKHOLDERS’ EQUITY   21,189,327    19,246,407 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $39,630,401   $39,401,816 

 

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

 

 F-1 

 

 

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, 
   2016   2015   2016   2015 
                 
Revenue  $18,775,472   $14,257,517   $28,337,768   $24,113,632 
Cost of revenue   12,181,427    9,935,340    18,650,286    16,381,751 
                     
Gross profit   6,594,045    4,322,177    9,687,482    7,731,881 
                     
Operating expenses:                    
Selling   566,445    245,301    1,464,710    614,560 
General and administrative   3,089,233    2,921,799    5,976,341    5,975,443 
Total operating expense   3,655,678    3,167,100    7,441,051    6,590,003 
                     
Income from operations   2,938,367    1,155,077    2,246,431    1,141,878 
                     
Other income (expenses):                    
Interest income   54,353    59,198    106,109    96,913 
Interest expenses   (8,377)   -    (9,564)   (290)
Dividend income   268,889    -    268,889    - 
Other - net   (38,002)   229,418    (67,352)   242,723 
Total other income   276,863    288,616    298,082    339,346 
                     
Income before income taxes   3,215,230    1,443,693    2,544,513    1,481,224 
Income tax expense   875,304    489,530    878,503    619,159 
                     
Net income   2,339,926    954,163    1,666,010    862,065 
Net income attributable to the noncontrolling interests   865,940    384,620    835,725    573,188 
Net income attributable to parent’s shareholders   1,473,986    569,543    830,285    288,877 
                     
Other comprehensive items                    
Foreign currency translation gain (loss)   (46,276)   59,634    117,236    154,310 
Other   -    -    (1,593)   - 
Other comprehensive income(loss) attributable to  parent’s shareholder   (46,276)   59,634    115,643    154,310 
Other comprehensive items attributable to  noncontrolling interest   10,034    59,336    159,667    168,066 
                     
Comprehensive income attributable to parent’s shareholders  $1,427,710   $629,177    945,928   $443,187 
                    
Comprehensive income attributable to noncontrolling interest  $875,974   $443,956    995,392   $741,254 
                     
Weighted average shares outstanding:                    
Basic   29,452,669    29,452,669    29,452,669    29,277,559 
Diluted   30,455,037    30,452,669    30,453,847    30,277,559 
                     
Income per share:                    
Basic  $0.050   $0.019    0.028   $0.010 
Diluted  $0.048   $0.019    0.027   $0.010 

 

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

 

 F-2 

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six Months Ended June 30, 
   2016   2015 
         
Cash flows from operating activities:          
Net income  $1,666,010   $862,065 
Adjustments to reconcile net income to net cash          
Depreciation and amortization   303,129    216,627 
Gain on valuation of financial assets   (3,529)   (12,742)
Loss (Gain) on disposal of fixed assets   23,555    34,489 
Change in deferred tax liabilities   (3,154)   (26,645)
Changes in operating assets and liabilities:          
Accounts receivable   3,695,556    3,204,365 
Other current assets   528,566    (663,712)
Other assets   25,627    (199,482)
Tax payable   (54,050)   48,143 
Other current liabilities   (1,976,011)   (1,636,868)
Long-term liabilities   488,888    - 
Net cash provided by operating activities   4,694,587    1,826,240 
           
Cash flows from investing activities:          
Cash from acquisition   -    323 
Purchase of property, plant and equipment   (269,329)   (163,944)
Purchase of intangible assets   (352,745)   (29,217)
Net cash used in investing activities   (622,074)   (192,838)
           
Cash flows from financing activities:          
Proceeds from related party borrowing   26,516    96,232 
Repayment to related parties   (610,063)   (315,720)
Proceeds from third party borrowing   353,014    - 
Repayment to loans   (222,778)   - 
Net cash used in financing activities   (453,311)   (219,488)
           
Foreign currency translation   370,218    422,254 
Net increase in cash and cash equivalents   3,989,420    1,836,168 
           
Cash and cash equivalents, beginning balance   20,831,824    19,571,799 
Cash and cash equivalents, ending balance  $24,821,244   $21,407,967 
           
SUPPLEMENTARY DISCLOSURE:          
           
Interest paid  $9,305   $290 
Income tax paid  $1,002,852   $504,227 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW FOR NON-CASH TRANSACTION:          
           
Issuance of common stock for acquisition of GHFL  $-   $3,482,923 

 

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

 

 F-3 

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (UNAUDITED)

 

NOTE 1 – ORGANIZATION

 

China United Insurance Service, Inc. (“China United” or “CUIS”) 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”) to be quoted on the United States Over the Counter Bulletin Board.

 

The corporate structure as of June 30, 2016 is 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.

  

 F-4 

 

 

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 and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  

 

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, 2015, which were included in the Company’s 2015 Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of December 31, 2015, has been derived from the Company’s audited consolidated financial statements as of that date.

 

Translation Adjustment

 

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. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of operations.

 

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 Rate for the six months ended June 30, 
   2016   2015 
Taiwan dollar (NTD)  NTD32.72730   NTD31.17050 
China yuan (RMB)  RMB6.53536   RMB6.11280 
Hong Kong dollar (HKD)  HKD7.76695   HKD7.75350 
United States dollar ($)  $1.00000   $1.00000 

 

   Exchange Rate at June 30, 
   2016   2015 
Taiwan dollar (NTD)  NTD32.21650   NTD30.92230 
China yuan (RMB)  RMB6.64335   RMB6.08880 
Hong Kong dollar (HKD)  HKD7.75859   HKD7.75220 
United States dollar ($)  $1.00000   $1.00000 

 

 F-5 

 

 

Concentration of Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and equivalents and accounts receivable. As of June 30, 2016, approximately $1,470,000 of the Company’s cash and equivalents held by financial institutions was insured, and the remaining balance of approximately $23,350,000 was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.

 

For the three months ended June 30, 2016 and 2015, the Company’s revenue from sale of insurance policies underwritten by these companies were:

   

    Three months ended June 30,  
    2016     2015  
    Amount     % of Total
Revenue
    Amount     % of Total
Revenue
 
Farglory Life Insurance Co., Ltd.   $ 6,435,768       34 %   $ 4,790,664       34 %
Taiwan Life Insurance Co., Ltd.     2,422,083       13 %     (* )     (* )
Fubon Life Insurance Co., Ltd.     (* )     (* )     1,825,803       13 %
CTBC Life Insurance Co., Ltd.     (* )     (* )     (* )     (* )

 

(*)Revenue for the three months ended had not exceeded 10% or more of the consolidated revenue.

  

For the six months ended June 30, 2016 and 2015, the Company’s revenue from sale of insurance policies underwritten by these companies were:

 

    Six months ended June 30,  
    2016     2015  
    Amount     % of Total
Revenue
    Amount     % of Total
Revenue
 
Farglory Life Insurance Co., Ltd.   $ 8,677,893       31 %   $ 7,008,515       29 %
Taiwan Life Insurance Co., Ltd.     3,320,744       12 %     (* )     (* )
Fubon Life Insurance Co., Ltd.     3,156,511       11 %     3,101,521       13 %
CTBC Life Insurance Co., Ltd.     (* )     (* )     2,418,140       10 %

 

  (*) Revenue for the six months ended had not exceeded 10% or more of the consolidated revenue.

 

As of June 30, 2016 and December 31, 2015, the Company’s accounts receivable from these companies were:

 

 F-6 

 

 

 

    June 30, 2016     December 31, 2015  
    Amount     % of Total
Accounts
Receivable
    Amount     % of Total
Accounts
Receivable
 
Farglory Life Insurance Co., Ltd.   $ 2,081,382       35 %   $ 3,689,404       43 %
Taiwan Life Insurance Co., Ltd.     (** )     (** )     (** )     (** ) 
Fubon Life Insurance Co., Ltd     (** )     (** )     990,327       11 %
CTBC Life Insurance Co., Ltd     (** )     (** )     994,978       11 %

 

  (**) Accounts receivable for the year ended had not exceeded 10% or more of the consolidated accounts receivable.

 

The Company’s operations are in the People’s Republic of China (PRC), Taiwan and Hong Kong. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC, Taiwan and Hong Kong, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, 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.

 

Reclassifications

 

Certain prior period amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had no effect on the net income (loss) or stockholders’ equity.

  

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this update defers the effective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, interim and annual reporting periods after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is still in the process of analyzing the effect of this new standard, including the transition method, to determine the impact on the Company’s consolidated financial position, results of operations, cash flows, and related disclosures.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. ASU 2015-17 will be effective for the Company, but will not cause a material impact on the Company’s financial condition or the results of the Company’s operations.

 

 F-7 

 

 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 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 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 2016-03, “Intangibles-Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance”. The amendments in this ASU make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this ASU. Any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections. The amendments in this ASU also extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely. While this ASU extends transition guidance for Updates 2014-07 and 2014-18, there is no intention to change how transition is applied for those two ASUs. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

  

In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” ASU No. 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 No. 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.

 

 F-8 

 

 

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 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Public entities should apply the amendments in ASU 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 on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 impacts certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. ASU No. 2016-09 will be effective for the Company for the quarter ending December 31, 2017, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

 

NOTE 3 – CASH AND EQUIVALENTS

 

As of June 30, 2016 and December 31, 2015, our cash and equivalents primarily consisted of cash and certificates of deposits. The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents approximate fair value.

 

NOTE 4 – 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, 2016 
  

Fair Value at

December 31,
2015

  

Gross

Unrealized

Gains (Losses)

   Total
Fair Value
 
Level 1 securities:               
Stocks  $28,863   $153   $29,016 
Funds   2,340,219    49,569    2,389,788 
   $2,369,082   $49,722   $2,418,804 

   

 F-9 

 

 

   December 31, 2015 
   Cost or    Gross     
   Amortized   Unrealized   Total 
    Cost   Gains (Losses)   Fair Value 
Level 1 securities:               
Stocks  $28,278   $585   $28,863 
Funds   2,408,728    (68,509)   2,340,219 
   $2,437,006   $(67,924)  $2,369,082 

 

NOTE 5 – OTHER CURRENT ASSETS

 

The Company’s other current assets consisted of the following as of June 30, 2016 and December 31, 2015:

 

   June 30, 2016   December 31, 2015 
Prepaid expenses  $220,628   $603,557 
Current assets associated with discontinued operations   -    224,140 
Prepaid rent and rent deposit   194,382    133,179 
Other receivable   65,280    86,539 
Interest receivable   20,715    - 
Deferred tax assets   18,408    - 
Refundable business tax   6,409    7,600 
Other   2,363    - 
Total other current assets  $528,185   $1,055,015 

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment consisted of the following, as of June 30, 2016 and December 31, 2015:

 

   June 30, 2016   December 31, 2015 
Office Equipment  $1,030,218   $1,080,621 
Office Furniture   217,849    125,746 
Leasehold improvements   524,726    511,874 
Transportation equipment   82,458    84,398 
Other equipment   100,979    97,996 
Total   1,956,230    1,900,635 
Less: accumulated depreciation   (1,038,562)   (981,837)
Total property, plant and equipment, net  $917,668   $918,798 

 

 F-10 

 

 

NOTE 7 – INTANGIBLE ASSETS

 

As of June 30, 2016 and December 31, 2015, the Company’s intangible assets consisted the following:

 

   June 30, 2016   December 31, 2015 
Software  $1,347,265   $780,355 
Less: accumulated amortization   (562,003)   (311,576)
Total intangible assets  $785,262   $468,779 

  

Estimated future intangible amortization as of June 30, 2016 is as follows:

 

Years ending June 30,  Amount 
2017  $210,782 
2018   165,531 
2019   165,531 
2020   151,278 
2021   83,367 
Thereafter   8,773 
Total  $785,262 

 

The Company reclassified amount of $175,842 and $89,298 from property, plant and equipment and accumulated depreciation to intangible assets and accumulated amortization, respectively, in January 2016.

  

NOTE 8 – ACQUISITION AND GOODWILL

 

(1) Acquisition of PFAL

 

On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Chun Kwok Wong (“Mr. Wong”), the owner of Prime Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr. Wong would increase PFAL’s capital contribution from HK$500,000 to HK$1,470,000, and AHFL would contribute HK$1,530,000, approximately $197,000, to PFAL’s capital contribution. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.

 

The FV of the net identifiable assets of PFAL at acquisition date was $324,871, and 51% of which was $165,684. The Company recorded $31,651 excess of purchase price over the FV of assets acquired and liabilities assumed as goodwill. No intangible assets were identified as of the acquisition date. As of June 30, 2016, there were no indications of the impairment of the goodwill.

  

 F-11 

 

 

(2) Acquisition of GHFL

 

On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with the selling shareholder (Mr. Chwan Hau Li, the director of the Company) of Genius Holdings Financial Limited ( “GHFL”), a company with limited liability incorporated under the laws of British Virgin Islands, to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock together with an granted option for 352,166 shares of common stock of CUIS (“Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of CUIS. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. On February 13, 2015, the acquisition was completed; the selling shareholder transferred 100% shares in GHFL to AHFL. The Option has been exercised by the selling shareholder on March 31, 2015. The total fair value of AHFL 352,166 shares ($1,771,395) and CUIS 352,166 option ($1,711,562) at acquisition date was $3,482,957. The Company recorded $2,039,840 excess of purchase price as goodwill. As of June 30, 2016, there were no indications of the impairment of the goodwill.

  

The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of GHFL have been included in the consolidated financial statements since the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values and the price were allocated as follows:

  

   February 13, 2015 
Current assets  $321 
Long-term investment   1,488,829 
Goodwill   2,039,840 
Current liabilities   (46,033)
Total purchase price  $3,482,957 

 

No supplemental pro forma information is presented for the acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.

  

NOTE 9 – LONG-TERM INVESTMENT

 

The Company classifies its investments as available-for-sale in accordance with ASC 320 “Debt and Equity Securities”, Investments – Debt and Equity Securities, which 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.

 

 F-12 

 

 

As of June 30, 2016 and December 31, 2015, the Company’s long-term investment consisted the following:

 

   June 30, 2016   December 31, 2015 
Equity Investment Co., Ltd  $1,193,019   $1,170,230 
Government Bonds   96,219    94,381 
Total  $1,289,238   $1,264,611 

 

As of June 30, 2016 and December 31, 2015, the Company had the following long-term investment in equity:

 

Type  Investee 

June 30, 2016

Investment

Ownership

   Amount 
Cost  Genius Insurance Broker Co., Ltd   15.64%  $1,193,019 

  

Type   Investee  

December 31, 2015

Investment

Ownership

    Amount  
Cost   Genius Insurance Broker Co., Ltd     15.64 %   $ 1,170,230  

 

According to Taiwan regulatory requirements, Law Broker is required to maintain a minimum of NT$3,000,000 in a separate account. Law Broker chose 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. 

 

   June 30, 2016 
        Gross     
   Fair Value at   Unrealized   Total 
   December 31, 2015    Gains (Losses)    Fair Value 
Government bonds   94,381    1,838    96,219 
   $94,381   $1,838   $96,219 

 

 F-13 

 

 

   December 31, 2015 
    Cost or    Gross     
    Amortized    Unrealized    Total 
    Cost    Gains (Losses)    Fair Value 
Government bonds   93,089    1,292    94,381 
   $93,089   $1,292   $94,381 

 

NOTE 10 – OTHER ASSETS

 

The Company’s other assets consisted of the following as of June 30, 2016 and December 31, 2015:

 

   June 30, 2016   December 31, 2015 
Rental deposits  $428,209   $401,920 
Restricted cash   228,048    231,100 
Prepayments   110,916    156,772 
Other   1,459    1,431 
Total other assets  $768,632   $791,223 

 

Rental deposits include long-term leasing deposits. Restricted cash is a deposit in bank by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, and cannot be withdrawn without the permission of the regulatory commission. Prepayments are prepaid long-term software-maintenance contract pending for final acceptance, and will be transferred to intangible assets upon acceptance.

 

NOTE 11 – TAXES PAYABLE

 

The Company’s taxes payable consisted of the following as of June 30, 2016 and December 31, 2015:

 

   June 30, 2016   December 31, 2015 
PRC Tax  $150,017   $99,505 
Taiwan Tax   1,340,639    1,422,457 
Total tax payable  $1,490,656   $1,521,962 

 

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

  

NOTE 12 – OTHER CURRENT LIABILITIES

 

Other current liabilities are as follows, as of June 30, 2016 and December 31, 2015:

 

 F-14 

 

 

   June 30, 2016   December 31, 2015 
Commissions payable to sub-agents  $6,132,164   $6,644,989 
Accrued bonus   414,140    1,050,411 
Refund to AIATW   -    502,532 
Accrued tax penalties   370,000    370,000 
Accrued business tax   283,951    326,954 
Withholding employee personal tax   355,005    295,989 
Salary payable to administrative staff   121,518    229,624 
Due to previous shareholders of AHFL   698,400    685,059 
Accrued advertisement fee   131,379    151,535 
Accrued labor, health insurance and employee retirement plan   85,629    84,138 
Unearned revenue - current   124,160    - 
Deferred tax liabilities   -    3,143 
Other accrued liabilities   304,770    526,376 
Total other current liabilities  $9,021,116   $10,870,750 

 

Commissions payable to sub-agents, salaries payable to administrative staff, accrued bonus, and accrued advertisement fee are usually settled within 12 months. Refund to AIATW is described in Note 14. Accrued tax penalties are estimated potential penalty in the event of a tax audit. Withholding employee personal tax and accrued labor, health insurance and employee retirement plan will be paid to local tax bureau within one month. The amount due to previous shareholders of AHFL is the remaining balance of the acquisition cost. Other accrued liabilities are mainly for operating expenses payable, such as training and travelling.

 

NOTE 13 – SHORT TERM LOANS

 

   June 30, 2016   December 31, 2015 
Loan A, interest at 1.5%, maturity date December 31, 2016  $-   $70,000 
Loan B, interest at 1.5%, maturity date December 31, 2016   -    152,235 
Total short term loans  $-   $222,235 

 

On October 12, 2015, the Company entered into a loan agreement (“Loan A”) with Zhengxiong Huang. The Short-term Loan Agreement provided for a $70,000 loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on December 31, 2015. On December 31, 2015, the Company extended this loan agreement to December 31, 2016 with the same conditions. The entire amount of this Loan A and interest expenses were paid off in May 2016.

 

On December 3, 2015, the Company entered into a loan agreement (“Loan B”) with Yuzhen Chen. The Short-term Loan Agreement provided for a $152,235 (NTD 5,000,000) loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on December 31, 2015. On December 31, 2015, the Company extended this loan agreement to December 31, 2016 with the same conditions. On January 13, 2016, the Company paid an amount of $46,582 (NTD 1,500,000) back. The entire amount of this Loan B and interest expenses were paid off in May 2016.

 

 F-15 

 

 

NOTE 14 – LONG-TERM LIABILITIES

 

Long-term liabilities are as follows as of June 30, 2016 and December 31, 2015:

 

   June 30, 2016   December 31, 2015 
Unearned revenue – AIATW   6,722,955    6,594,530 
Unearned revenue – Farglory   496,640    - 
Total other long-term liabilities  $7,219,595   $6,594,530 

  

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 the Execution Fee of $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762), 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 to AIATW that AHFL is required to (i) fulfill sales targets and (ii) the 13-month persistency ratio.

 

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 June 10, 2013 to September 30, 2014. AHFL did not book any short-term unearned revenue since the Strategic Alliance Agreement will end on December 31, 2021 and the performance will calculate then to determine how much revenue AHFL can book accordingly, and the Company booked the whole $6,722,955 as long-term liabilities.

 

 F-16 

 

  

On April 20, 2016, the Company entered into a service agreement (“Service Agreement”) with Farglory Life Insurance Co., Ltd. (Farglory). AHFL is going to provide consulting services to Farglory for NTD4,000,000 per year and the aggregate consulting services fee is NTD20,000,000 from May 1, 2016 to April 30, 2021. The Company has not yet booked any revenue because the Company has not provided any service yet. As of June 30, 2016, the Company had long-term liabilities and current liabilities amounts of $496,640 and $124,160, respectively, related to this Service Agreement.

 

NOTE 15 – COVERTIBLE BONDS

 

Convertible debt is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20 governs the calculation of an embedded beneficial conversion. The amount of the value of beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. Many of the conversion features embedded in the Company’s notes are variable and are adjusted based on a discount to market prices which could cause an unlimited number of common stock to be issued. In these cases, the Company record the embedded conversion feature as a derivate instrument, at fair value. The embedded conversion features are recorded as discounts when the notes become convertible. The excess of fair value of the embedded conversion feature over the carrying value of the debt is recorded as an immediate charge to operations. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts relating to the initial recording of the derivatives or beneficial conversion features will be amortized over the terms of the convertible bonds.

 

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

 

On June 23, 2016, the Company 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, 2016, the Company has an outstanding principal balance of $200,000 of convertible bonds.

 

 F-17 

 

 

NOTE 16 – LONG-TERM LOAN

 

   June 30, 2016   December 31, 2015 
Loan C, interest at 8%, maturity date May 15, 2019  $150,526   $- 
Total short term loans  $150,526   $- 

 

On May 15, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan C”) with third party Guowei Hu. The long-term Loan Agreement provided for a $150,526 loan to the Company. The long-term Loan C bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on May 15, 2019.

 

NOTE 17 – PREFERRED STOCK

 

The Company is authorized to issue 10,000,000 shares of preferred stock, $0.00001 par value. We currently have 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of June 30, 2016. The Series A Stock has the following rights and preferences:

 

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

 

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

 

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

  

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

 

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

 

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

 

 F-18 

 

 

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

  

 F-19 

 

 

NOTE 18 – STATUTORY RESERVES

 

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

 

Pursuant to the PRC regulations, the Company’s CAE are required to transfer 10% of 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 19 – NON-CONTROLLING INTERESTS

 

Non-controlling interests consisted of the following:

 

Name of Affiliate  % of
Non-controlling
Interest
   As of
December
31,
2015
   Acquisition
and
Increase
Investment
(Fair
Value)
   Adjustments /
Net Income of
Non-controlling
Interest
   Discontinued   As of
June 30,
2016
 
Law Enterprise   34.05%  $199,699   $-   $65,907   $-   $265,606 
Law Broker   34.05%   7,197,128    -    981,262    -    8,178,390 
PFAL   49.00%   206,098    -    (8,032)   -    198,066 
MKI   49.00%   (1,065)   -    (504)   -    (1,569)
PATaiwan   49.00%   (26,292)   -    (43,035)   -    (69,327)
PMC Nanjing   49.00%   (837)   -    (206)   -    (1,043)
Total       $7,574,731   $-   $995,392   $-   $8,570,123 

 

 

Name of Affiliate   % of
Non-controlling
Interest
   

As of
December
31,
2014

    Acquisition
and
Increase
Investment
(Fair
Value)
    Adjustment /
Net Income of
Non-controlling
Interest
    Discontinued    

As of
December
31, 2015

 
Law Enterprise     34.05 %   $ 882,327     $ -     $ (682,628 )   $ -     $ 199,699  
Law Broker     34.05 %     5,471,140       -       1,725,988       -       7,197,128  
Law Agent     36.69 %     24,689       -       (1,033 )     (23,656 )     -  
Risk Management     35.47 %     (91,809 )     -       22,309       69,500       -  
PFAL     49.00 %     97,080       -       109,018       -       206,098  
MKI     49.00 %     -       -       (1,065 )     -       (1,065 )
PATaiwan     49.00 %     -       -       (26,292 )     -       (26,292 )
PMC Nanjing     49.00 %     -       -       (837 )     -       (837 )
Total           $ 6,383,427     $ -     $ 1,145,460     $ 45,844     $ 7,574,731  

 

 F-20 

 

 

NOTE 20 – INCOME TAX

 

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

  

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 following table reconciles the US statutory rates to the Company’s effective tax rate for the three months ended June 30, 2016 and 2015:

 

    June 30, 2016     June 30, 2015  
US statutory rate     34 %     34 %
Tax rate difference     (19 )%     (21 )%
Tax base difference     1 %     - %
Loss in subsidiaries     3 %     (10 )%
Un-deductible and non-taxable items     8 %     31 %
Tax per financial statements     27 %     34 %

 

The following table reconciles the US statutory rates to the Company’s effective tax rate for the six months ended June 30, 2016 and 2015:

 

    June 30, 2016     June 30, 2015  
US statutory rate     34 %     34 %
Tax rate difference     (22 )%     (24 )%
Tax base difference     3 %     - %
Loss in subsidiaries     11 %     (22 )%
Un-deductible and non-taxable items     9 %     54 %
Tax per financial statements     35 %     42 %

 

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

 

 F-21 

 

 

NOTE 21 – RELATED PARTY TRANSACTIONS

 

On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with Mr. Chwanhau Li (the director of the Company), the selling shareholder of Genius Holdings Financial Limited. (Please see detail in Note 8 (2)).

 

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, 2016 and December 31, 2015:

 

   June 30, 2016   December 31, 2015 
Due to Mr. Mao (Principal Shareholder of the Company)  $322,833   $297,414 
Due to Xude Investment (Owned by Mr. ChwanHau Li)   32,393    32,223 
Due to Mr. Zhu (Legal Representative of Jiangsu)   2,084    2,133 
Due to Ms. Lee (Director of CUIS)   807    826 
Due to Yuli Broker (Owned by Ms. Lee – Director of CUIS)   532    - 
Due to Yuli Investment (Owned by Ms. Lee – Director of CUIS)   532    - 
Due to Multiple Capital Enterprise   -    608,941 
Due to other shareholders   -    4,395 
Total  $359,181   $945,932 

 

On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Shu-Fen Lee (“Ms. Lee”), the Series A Director of the Company. Pursuant to the Loan Agreement, Ms. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The entire loan and interest amount of $314,928 (NTD10,009,041) have been paid off on January 14, 2015.

  

On December 25, 2015, the Company entered into a loan agreement (the “Short-term Loan Agreement”) with Multiple Capital Enterprise Co., Ltd. The Short-term Loan Agreement provided for a $608,941 (NTD20,000,000) loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on June 30, 2016. Majority of Multiple Capital Enterprise shareholders are the Company’s management level. The entire loan and interest amount of $598,905 (NTD20,014,795) have been paid off on January 12, 2016.

 

Except for the two aforementioned loans, the loans due to related parties bore no interest and were payable on demand.

 

NOTE 22 – COMMITMENTS

 

Operating Leases

  

The Company has operating leases for its offices. Rental expenses for the three months ended June 30, 2016 and 2015 were $523,874 and $471,894 respectively. Rental expenses for the six months ended June 30, 2016 and 2015 were $1,031,335 and $882,353 respectively. On June 30, 2016, total future minimum annual lease payments under operating leases were as follows, by years:

 F-22 

 

 

Twelve months ended June 30, 2017  $2,036,873 
Twelve months ended June 30, 2018   1,384,413 
Twelve months ended June 30, 2019   736,768 
Twelve months ended June 30, 2020   93,617 
Twelve months ended June 30, 2021   13,640 
Thereafter   - 
Total  $4,265,311 

 

Acquisition Agreement – GHFL

 

On February 22, 2015, the Company and the selling shareholder of GHFL entered into an Amendment to the Acquisition Agreement dated February 13, 2015, pursuant to which if the Guaranteed Price per share is higher than the Average Price per share, then the Parties shall negotiate in good faith on an adjustment to the Purchase Price as necessary, if any.

 

On February 17, 2016, the Company and AHFL entered into an Amendment 2 to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Chwan-Hau Li, pursuant to which, on or prior to February 28, 2016, (i) the Company is committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least $10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised.

 

On August 8, 2016, the Company and AHFL entered into an Amendment 3 to the Genuis Acquisition Agreement (the "Third Genius Amendment") with Mr. Li, pursuant to which, the Genius Amendment is terminated with immediate effect on August 8, 2016. As a result, the selling shareholder is no longer entitled to revoke the exercised Put Option right set forth in Secion 2.8 as of the Put Option had never been exercised.

  

 F-23 

 

 

Acquisition Agreement – AHFL

 

On February 17, 2016, the Company and the selling shareholders of AHFL entered into a third Amendment to the 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 $10,000,000; (ii) the Company is committed to distribute the cash payment in the amount of NTD22.5 million (approximately $676,466), 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 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 ($475,406) 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 NTD 4,830,514 ($153,097) to the Selling Shareholders in the amounts set fourth 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 ($153,097) 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.

  

NOTE 23 – DISCONTINUED OPERATION 

 

In the fourth quarter of 2014, the shareholders of the Risk Management and Law Agent made the resolution to dissolve Risk Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Risk Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abiding by the law in Taiwan, the liquidator was appointed by the shareholders of the Risk Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Risk Management and Law Agent completed the process of liquidation in April 2016.

 

Risk Management and Law Agent were acquired by the Company together with their parent Company, Law Enterprise, on August 24, 2012. The Total Assets and Total Liabilities of Risk Management as of June 30, 2016 and December 31, 2015 are as follows:

 

  

As of

June 30, 2016

  

As of

December 31, 2015

 
Total Assets (including cash)   -    224,140 
Total Liabilities   -    4,834 

 

The combined Revenue, Net Loss and EPS of Risk Management and Law Agent for the six months ended June 30, 2016 and 2015 are as follows:

 

  

Six Months Ended

June 30, 2016

  

Six Months Ended

June 30, 2015

 
Revenue   -    - 
Net Income (Loss)   -    (2,257)
EPS   -    - 

 

 F-24 

 

 

NOTE 24 – 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 Board of Directors (“BOD”) has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

 

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

 

(a)Credit risk

 

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

 

(b)Liquidity risk

 

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

 

(c)Currency risk

 

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

 F-25 

 

 

NOTE 25 – GEOGRAPHICAL DATA

 

The geographical distribution of the Company’s financial information for the three months and six months ended June 30, 2016 and 2015 were as follows:

 

Geographical Areas  Three months ended
June 30, 2016
   Three months ended
June 30, 2015
 
Revenue          
Taiwan  $16,444,722   $12,574,878 
PRC   2,317,692    1,653,243 
Hong Kong   34,884    29,396 
Elimination adjustment   (21,826)   - 
Total Revenue  $18,775,472   $14,257,517 
           
Income (loss) from operations          
Taiwan  $3,208,415   $1,447,194 
PRC   (291,101)   (278,543)
Hong Kong   (11,783)   (21,881)
Elimination adjustment   32,836    8,307 
Total Income (loss) from operations  $2,938,367   $1,155,077 
           
Income (loss) before income tax          
Taiwan  $3,520,211   $1,735,654 
PRC   (290,170)   (280,571)
Hong Kong   (17,360)   (7,524)
Elimination adjustment   2,549    (3,866)
Total Income (loss) before income tax  $3,215,230   $1,443,693 
           
Net income (loss)          
Taiwan  $2,644,909   $1,235,079 
PRC   (290,172)   (281,291)
Hong Kong   (17,360)   (7,524)
Elimination adjustment   2,549    7,899 
Total net income (loss)  $2,339,926   $954,163 

  

 F-26 

 

 

Geographical Areas  Six months ended
June 30, 2016
   Six months ended
June 30, 2015
 
Revenue          
Taiwan  $24,378,550   $21,185,418 
PRC   3,903,459    2,897,362 
Hong Kong   77,585    30,852 
Elimination adjustment   (21,826)   - 
Total Revenue  $28,337,768   $24,113,632 
           
Income (loss) from operations          
Taiwan  $2,887,954   $1,947,050 
PRC   (689,560)   (747,131)
Hong Kong   (14,313)   (66,348)
Elimination adjustment   62,350    8,307 
Total Income (loss) from operations  $2,246,431   $1,141,878 
           
Income (loss) before income tax          
Taiwan  $3,255,089   $2,277,511 
PRC   (689,799)   (740,431)
Hong Kong   (24,663)   (51,990)
Elimination adjustment   3,886    (3,866)
Total Income (loss) before income tax  $2,544,513   $1,481,224 
           
Net income (loss)          
Taiwan  $2,379,700   $1,648,549 
PRC   (692,913)   (742,393)
Hong Kong   (24,663)   (51,990)
Elimination adjustment   3,886    7,899 
Total net income (loss)  $1,666,010   $862,065 

 

NOTE 26 – 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 Mainland China.

  

Due to certain restriction on direct foreign investment in insurance agency business under current PRC legal requirements, Anhou sought investments from certain Investor Borrowers 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:

 

 F-27 

 

 

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

 

2.Mr. Li Chen, 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, the 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).

 

NOTE 27 – SUBSEQUENT EVENTS

 

On July 20, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan D”) with third party Guowei Hu. The long-term Loan Agreement provided for a $115,905 loan to the Company. The long-term Loan D bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on July 20, 2019.

 

On August 8, 2016, the Company and the selling shareholders of AHFL entered into a fourth Amendment to the Acquisition Agreement. (Please see detail in Note 22 Acquisition Agreement-AHFL)

 

On August 8, 2016, the Company and AHFL entered into an Amendment 3 to the Genius Acquisition Agreement with Mr. Chwan-Hau Li. (Please see detail in Note 22 Acquisition Agreement – GHFL)

 

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

 

 F-28 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

 

The following discussion of the results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.

 

Overview

 

The Company primarily provides two broad categories of insurance products, life insurance products and property and casualty insurance products, in Taiwan and People’s Republic of China (“PRC”).The Company also provides reinsurance brokerage services and insurance consulting services in Hong Kong and Taiwan. The percentage of reinsurance brokerage services and insurance consulting services is less than 1% of our total revenue. The insurance products that the Company’s subsidiaries sell are underwritten by some of leading insurance companies in Taiwan and PRC, respectively.

 

  (1) Life Insurance Products

 

Total net revenue from Taiwan life insurance products were 80.53% and 82.18% of total net revenue for the six months ended June 30, 2016 and 2015, respectively. Total net revenue from PRC life insurance products were 12.84% and 11.29% of total net revenue for the six month ended June 30, 2016 and 2015, 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.

 

 5 

 

 

  (2) Property and Casualty Insurance Products

 

Taiwan subsidiary commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenue from Taiwan property and casualty insurance products were 5.42% and 5.68% of total net revenue for the six months ending June 30, 2016 and 2015, respectively. Consolidated Affiliated Entities (“CAE”) in PRC commenced its sales of commercial property insurance in 2009 and developed its automobile insurance business in 2010. Total net revenue from PRC property and casualty insurance products were 0.94% and 0.85% of total net revenue for the six months ending June 30, 2016 and 2015, 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 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Following is a discussion of the accounting policies that we believe involve the most difficult, subjective or complex judgments and estimates.

 

Accrued Expense

 

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.

 

 6 

 

 

Convertible bonds

 

Convertible debt is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20 governs the calculation of an embedded beneficial conversion. The amount of the value of beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. Many of the conversion features embedded in the Company’s notes are variable and are adjusted based on a discount to market prices which could cause an unlimited number of shares of common stock to be issued. In these cases, the Company records the embedded conversion feature as a derivative instrument, at fair value. The embedded conversion features are recorded as discounts when the notes become convertible. The excess of fair value of the embedded conversion feature over the carrying value of the debt is recorded as an immediate charge to operations. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts relating to the initial recording of the derivatives or beneficial conversion features will be amortized over the terms of the convertible bonds.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this update defers the effective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, interim and annual reporting periods after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is still in the process of analyzing the effect of this new standard, including the transition method, to determine the impact on the Company’s consolidated financial position, results of operations, cash flows, and related disclosures.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. ASU 2015-17 will be effective for the Company, but will not cause a material impact on the Company’s financial condition or the results of the Company’s operations.

 

 7 

 

 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 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 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 2016-03, “Intangibles-Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance”. The amendments in this ASU make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this ASU. Any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections. The amendments in this ASU also extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely. While this ASU extends transition guidance for Updates 2014-07 and 2014-18, there is no intention to change how transition is applied for those two ASUs. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements. 

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” ASU No. 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 No. 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.

 

 8 

 

 

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 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Public entities should apply the amendments in ASU 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 on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 impacts certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. ASU No. 2016-09 will be effective for the Company for the quarter ending December 31, 2017, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.

  

Overview of the three months ended June 30, 2016 and 2015

 

The following table shows the results of operations for the three months ended June 30, 2016 and 2015:

 

   Three Months Ended
June 30,
         
   2016   2015         
   (Unaudited)   (Unaudited)   Change   Percent 
                 
Revenue  $18,775,472   $14,257,517   $4,517,955    31.7%
Cost of revenue   12,181,427    9,935,340    2,246,087    22.6%
Gross profit   6,594,045    4,322,177    2,271,868    52.6%
Gross profit margin   35%   30%   50%   166%
                     
Operating expenses:                    
Selling   566,445    245,301    321,144    130.9%
General and administrative   3,089,233    2,921,799    167,434    5.7%
Total operating expenses   3,655,678    3,167,100    488,578    15.4%
                     
Income from operations   2,938,367    1,155,077    1,783,290    154.4%
                     
Other income (expenses):                    
Interest income   54,353    59,198    (4,845)   -8.2%
Interest expenses   (8,377)   -    (8,377)   -100%
Dividend income   268,889    -    268,889    100%
Other - net   (38,002)   229,418    (267,420)   -116.6%
Total other income   276,863    288,616    (11,753)   -4.1%
                     
Income before income taxes   3,215,230    1,443,693    1,771,537    122.7%
Income tax expense   875,304    489,530    385,774    78.8%
                     
Net income   2,339,926    954,163    1,385,763    145.2%
Net income attributable to the noncontrolling interests   865,940    384,620    481,320    125.1%
Net income attributable to parent’s shareholders   1,473,986    569,543    904,443    158.8%

 

 9 

 

 

Revenue

 

As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies in both Taiwan, People’s Republic of China (“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, 2016 and 2015, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:

 

Geographical Areas  Three months ended
June 30, 2016
   Three months ended
June 30, 2015
 
Revenue          
Taiwan  $16,444,722   $12,574,878 
PRC   2,317,692    1,653,243 
Hong Kong   34,884    29,396 
Elimination adjustment   (21,826)   - 
Total Revenue  $18,775,472   $14,257,517 

 

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. During the three months ended June 30, 2015, 88.2%, 11.6% 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 three months ended June 30, 2016 and 2015 were relatively consistent.

 

Total revenue increased by $4,517,955, or 31.7%, from $14,257,517 for the three months ended June 30, 2015 to $18,775,472 for the three months ended June 30, 2016. The increase was mainly due to the Taiwan central bank’s decreased interest rate, which caused an increase in the demand for both investment-oriented insurance and long-term care insurance.

 

 10 

 

 

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, 2016 increased by $2,246,087 or 22.6%, to $12,181,427 compared to $9,935,340 for the three months ended June 30, 2015. The primary attribute of the heightened cost of revenue is the portion of the first-year commission (FYC) revenue over total revenue increased noticeably. Since the commission rate of FYC revenue is comparatively higher than any other types of commission revenue, the cost of revenue increased accordingly.

   

The gross profit for the three months ended June 30, 2016 increased by $2,271,868 or 52.6%, to $6,594,045 compared to $4,322,177 for the three months ended June 30, 2015. The gross profit ratio increased to 35% for the three months ended June 30, 2016 from 30% for the three months ended June 30, 2015. The primary attribute of the heightened cost of revenue is the portion of the first-year commission (FYC) revenue over total revenue increased noticeably. Since the commission rate of FYC revenue is comparatively higher than any other type of commission revenue, the cost of revenue increased accordingly.

  

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, 2016 increased by $321,144 or 130.9%, to $566,445 compared to $245,301 for the three months ended June 30, 2015. The increase is mainly due to the advertising expense spent in publicity of the Company’s brand.

 

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, 2016, G&A expenses were $3,089,233, increased by $167,434, or 5.7%, compared with $2,921,799 for the three month ended June 30, 2015, which was mainly due to the increased number of employees and branches in year 2016.

 

Other income (expenses)

 

Net other income for the three months ended June 30, 2016 was $276,863 and the net other income for the three months ended June 30, 2015 was $288,616. Other income (expense) mainly consists of interest income, interest expenses, other income, dividend income and loss on disposal of fixed assets. Compared with the three month ended June 30, 2015, net other income decreased due to the increase of the foreign currency exchange loss.

 

 11 

 

 

Income tax

 

For the three months ended June 30, 2016, the income tax expense was $875,304, increased by $385,774, or 78.8%, compared with $489,530 for the three months ended June 30, 2015. The increase was mainly due to the increased income before income tax for the three months ended June 30, 2016 compared to that for the three months ended June 30, 2015.

 

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-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. According to the requirement of local tax authorities, the taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. The tax rate of Jiangsu Law is also 25%.

 

Overview of the six months ended June 30, 2016 and 2015

 

The following table shows the results of operations for the six months ended June 30, 2016 and 2015:

 

   Six Months Ended
June 30,
         
   2016   2015         
   (Unaudited)   (Unaudited)   Change   Percent 
                 
Revenue  $28,337,768   $24,113,632   $4,224,136    17.5%
Cost of revenue   18,650,286    16,381,751    2,268,535    13.8%
Gross profit   9,687,482    7,731,881    1,955,601    25.3%
Gross profit margin   34%   32%   46%   144%
                     
Operating expenses:                    
Selling   1,464,710    614,560    850,150    138.3%
General and administrative   5,976,341    5,975,443    898    0.0%
Total operating expenses   7,441,051    6,590,003    851,048    12.9%
                     
Income from operations   2,246,431    1,141,878    1,104,553    96.7%
                     
Other income (expenses):                    
Interest income   106,109    96,913    9,196    9.5%
Interest expenses   (9,564)   (290)   (9,274)   3197.9%
Dividend income   268,889    -    268,889    100%
Other - net   (67,352)   242,433    (310,075)   -127.7%
Total other income   298,082    339,346    (41,264)   -12.2%
                     
Income before income taxes   2,544,513    1,481,224    1,063,289    71.8%
Income tax expense   878,503    619,159    259,344    41.9%
                     
Net income   1,666,010    862,065    803,945    93.3%
Net income attributable to the noncontrolling interests   835,725    573,188    262,537    45.8%
Net income attributable to parent’s shareholders   830,285    288,877    541,408    187.4%

 

 12 

 

 

Revenue

 

As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies in both 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, 2016 and 2015, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:

 

Geographical Areas  Six months ended
June 30, 2016
   Six months ended
June 30, 2015
 
Revenue          
Taiwan  $24,378,550   $21,185,418 
PRC   3,903,459    2,897,362 
Hong Kong   77,585    30,852 
Elimination adjustment   (21,826)   - 
Total Revenue  $28,337,768   $24,113,632 

 

During the six months ended June 30, 2016, 86.0%, 13.8% and 0.02% 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, 2015, 87.9%, 12.0% and 0.1% of our revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively.

 

Total revenue increased by $4,224,136, or 17.5%, from $24,113.632 for the six months ended June 30, 2015 to $28,337,768 for the six months ended June 30, 2016, which is mainly due to the increase of the revenue in Taiwan and PRC for the following reasons,

 

 13 

 

 

a)The sales of Farglory Life Insurance Co., Ltd (“Farglory”) increased in 2016 because Farglory bundles its life insurance products to better customize each of its clients’ needs. By combining insurance contracts with diversified term, premium, and coverage arrangements, the increased flexibility of the products of Farglory drew more attentions from the company’s customers and thus boosted the sales performance for the period ended June 30, 2016.

 

b)The sales of Taiwan Life Insurance Co., Ltd (“Taiwan Life”) have increased in 2016. The main reason is the launch of Taiwan Life’s top seller product that offers comprehensive life-time insurance coverages with an affordable insurance premium. This selling package drew more attentions from the company’s customers and boosted the sales performance for the period ended June 30, 2016.

 

c)The sales increase in the PRC area was primarily because the Company expanded its business geographically and set up a new branch in Yunnan and has gained its reputation within local markets to generate higher revenue for the period ended June 30, 2016.

 

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, 2016 increased by $2,268,535 or 13.8%, to $18,650,286 compared to $16,381,751 for the six months ended June 30, 2015. The primary attribute of the heightened cost of revenue is the portion of the first-year commission (FYC) revenue over total revenue increased noticeably. Since the commission rate of FYC revenue is comparatively higher than any other type of commission revenue, the cost of revenue increased accordingly.

   

The gross profit for the six months ended June 30, 2016 increased by $1,955,601 or 25.3%, to $9,687,482 compared to $7,731,881 for the six months ended June 30, 2015. The gross profit ratio increased to 34% for the six months ended June 30, 2016 from 32% for the six months ended June 30, 2015. The primary attribute of the heightened cost of revenue is the portion of the first-year commission (FYC) revenue over total revenue increased noticeably. Since the commission rate of FYC revenue is comparatively higher than any other type of commission revenue, the cost of revenue increased accordingly.

  

Selling expenses

 

Selling expenses mainly occurred in Law Broker, representing the expense for marketing promotion. The selling expense for the six months ended June 30, 2016 increased by $850,150 or 138.3%, to $1,464,710 compared to $614,560 for the six months ended June 30, 2015. The increase is mainly due to the advertising expense spent in publicity of the Company’s brand.

 

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.

 

 14 

 

 

For the six months ended June 30, 2016, G&A expenses were $5,976,341, increased by $898, or 0.02%, compared with $5,976,341 for the six month ended June 30, 2015. G&A expenses were relatively consistent during year 2015 and 2016 in the same period.

 

Other income (expenses)

 

Net other income for the six months ended June 30, 2016 was $298,082 and the net other income for the six months ended June 30, 2015 was $339,346. Other income (expense) mainly consists of interest income, interest expenses, dividend income, other income and loss on disposal of fixed assets. Compared with the six month ended June 30, 2015, net other income decreased due to the increase of the foreign exchange loss.

 

Income tax

 

For the six months ended June 30, 2016, the income tax expense was $878,503, increased by $259,344, or 41.9%, compared with $619,159 for the six months ended June 30, 2015. The increase was mainly due to the increased income before income tax for the six months ended June 30, 2016 compared to that for the six months ended June 30, 2015.

 

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-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. According to the requirement of local tax authorities, the taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. The tax rate of Jiangsu Law is also 25%.

    

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, net cash used in financing activities and net cash used in financing activities for the six months ended June 30, 2016 and 2015:

 

   Six Months Ended June 30,     
   2016   2015         
   (UNAUDITED)   (UNAUDITED)   Change   Percent 
Net cash provided by operating activities  $4,694,587   $1,826,240    2,868,347    157%
Net cash used in investing activities   (622,074)   (192,838)   (429,236)   223%
Net cash used in financing activities   (453,311)   (219,488)   (233,823)   107%

 

 15 

 

 

Operating activities

 

Net cash provided by operating activities during the six months ended June 30, 2016 was $4,694,587, significantly increased in comparison with $1,826,240 net cash provided by operating activities during six months ended June 30, 2015. The amount change was mainly due to the increase of net income and partially offset by the decrease of other current assets.

  

Investing activities

 

Net cash used in investing activities was $622,074 during the six months ended June 30, 2016, which is mainly due to purchase of office equipment and intangible assets during the period. The net cash used in investing activities was $192,838 for the six months ended June 30, 2015, which is mainly due to same reasons as 2016.

 

Financing activities

 

Net cash used in financing activities was $453,311 during the six months ended June 30, 2016, which is the result of repayment for the borrowings from the Company’s related parties. The net cash used in financing activities was $219,488 for the six months ended June 30, 2015, which is mainly due to same reasons as 2016.

 

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 Mainland China.

 

 16 

 

 

Due to certain restrictions on direct foreign investment in insurance agency business under current PRC legal regime, Anhou has sought certain investments made by the Investor Borrowers and they may need funds through individual loans. Upon the completion of the contemplated increase of registered capital of Anhou, each Investor Borrower shall, or cause their designated persons to, enter into the Variable Interest Entities Agreement with CU WFOE, Anhou and other parties so as to consolidate any additional VIE interest generated from the said registered capital increase into the Company. 

 

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

 

Under the Company Loan Agreement, AHFL agreed to provide a loan to ZLI Holdings with the principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,389,925). The term for such was ten years which could be extended upon the agreement of the parties. The amount of such loan was remitted to the account of ZLI Holdings on August 30, 2013.

 

In August 2013, ZLI Holdings entered into several Loan Agreements (collectively, the “Investor Loan Agreements”) with the following unrelated parties: Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, Mr. Chen Li and Ms. Yue Jing, both PRC citizens (collectively, the “Investor Borrowers”).

 

Under the Investor Loan Agreements, the Investor Borrowers 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)

Mr. Chen: RMB3,000,000 ($479,244)

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

 

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

 

Related Party Loans

 

On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Shu-Fen Lee (“Ms. Lee”), the Series A Director of the Company. Pursuant to the Loan Agreement, Ms. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The entire loan and interest amount of $314,928 (NTD10,009,041) have been paid off on January 14, 2015.

 

 17 

 

 

On December 25, 2015, the Company entered into a loan agreement (the “Short-term Loan Agreement) with Multiple Capital Enterprise Co., Ltd. The Short-term Loan Agreement provided for a $608,941 (NTD20,000,000) loan to the Company. The Short-term Loan bore an interest rate of 1.5% per annum and the principal and interest were due on June 30, 2016. Majority of Multiple Capital Enterprise shareholder are the Company’s management level. The entire loan and interest amount of $598,905 (NTD20,014,795) were paid off on January 12, 2016.

 

Except for the two aforementioned loans, the loans due to related parties bore no interest and were payable on demand.

 

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, 2016 and December 31, 2015:

 

   June 30, 2016   December 31, 2015 
Due to Mr. Mao (Principal Shareholder of the Company)  $322,833   $297,414 
Due to Xude Investment (Owned by Mr. ChwanHau Li)   32,393    32,223 
Due to Mr. Zhu (Legal Representative of Jiangsu)   2,084    2,133 
Due to Ms. Lee (Director of CUIS)   807    826 
Due to Yuli Broker (Owned by Ms. Lee – Director of CUIS)   532    - 
Due to Yuli Investment (Owned by Ms. Lee – Director of CUIS)   532    - 
Due to Multiple Capital Enterprise   -    608,941 
Due to other shareholders   -    4,395 
Total  $359,181   $945,932 

    

Convertible bonds

 

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, 2016, the Company has outstanding an aggregate principal balance of $200,000 of convertible bonds.

 

Long-term loan

 

   June 30, 2016   December 31, 2015 
Loan C, interest at 8%, maturity date May 15, 2019  $150,526   $- 
Total short term loans  $150,526   $- 

 

 18 

 

 

On May 15, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan C”) with third party-Guowei Hu. The long-term Loan Agreement provided for a $150,526 loan to the Company. The long-term Loan bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on May 15, 2019.

 

Contractual Obligations

 

The Company has operating leases for its offices. Rental expenses for the three months ended June 30, 2016 and 2015 were $523,874 and $471,894, respectively. Rental expenses for the six months ended June 30, 2016 and 2015 were $1,031,335 and $882,353, respectively. On June 30, 2016, total future minimum annual lease payments under operating leases were as follows, by years:

 

Twelve months ended June 30, 2017  $2,036,873 
Twelve months ended June 30, 2018   1,384,413 
Twelve months ended June 30, 2019   736,768 
Twelve months ended June 30, 2020   93,617 
Twelve months ended June 30, 2021   13,640 
Thereafter   - 
Total  $4,265,311 

 

Genius Acquisition Agreement

 

On February 22, 2015, the Company and the selling shareholder of GHFL entered into an Amendment to the Acquisition Agreement dated February 13, 2015, pursuant to which if the Guaranteed Price per share is higher than the Average Price per share, then the Parties shall negotiate in good faith on an adjustment to the Purchase Price as necessary, if any.

 

On February 17, 2016, the Company and AHFL entered into an Amendment 2 to the Genius Acquisition Agreement (the “Genius Amendment”) with Mr. Li, pursuant to which, on or prior to February 28, 2016, (i) the Company is committed to complete the listing of the Company into major capital markets, where the net proceeds raised through such public offering financing shall be at least $10,000,000; and (ii) failure to timely complete the above-mentioned criteria shall be deemed as a material breach of the Company under Article 8 of the Genius Acquisition Agreement, whereby the Selling Shareholder shall be entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised. On August 8, 2016, the Company and AHFL entered into an Amendment 3 to the Genius Acquisition Agreement (the “Third Genius Amendment”) with Mr. Li, pursuant to which, the Second Genius Amendment is terminated with immediate effect on August 8, 2016. As a result, the selling shareholder is no longer entitled to revoke the exercised Put Option right set forth in Section 2.8 as if the Put Option had never been exercised.

 

 19 

 

    

AHFL Acquisition Agreement

 

The former shareholders of Action Holdings Financial Limited, the holding company through which the Company conducts all of its Taiwan operations (“AHFL”), currently have the right to require the Company to unwind the acquisition of AHFL and return the ownership of AHFL to such shareholders, in which case our business prospects and future results of operations would be severely adversely affected.

 

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 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.

 

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.

 

 20 

 

 

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, 2016, we had cash of RMB11,441,474, approximately $1,722,000, HKD2,155,549, approximately $278,000 and NTD735,114,440, approximately $22,818,000. We hold our cash for working capital purposes. Declines in interest rates would reduce future interest income. For the six and three months ended June 30, 2016, 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. INTERNAL CONTROLS OVER FINANCIAL REPORTING.

 

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, 2016. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of June 30, 2016, 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 Securities Exchange Act of 1934, 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, 2016, 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 are involved in legal proceedings arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that there is no litigation pending that is likely to have a material adverse effect on our business. Regardless of the outcome, legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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, 2015.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None not previously reported.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

  

ITEM 5. OTHER INFORMATION.

 

Entry into Loan Agreements

 

On May 15, 2016, Law Anhou Insurance Agency Co., Ltd. (“Anhou”) and Mr. Hu Guowei, the general manager of Anhou, a PRC citizen, entered into a loan agreement, with Anhou as the borrower and Mr. Hu as the lender (“Anhou Loan Agreement No.1”). Zhengzhou Zhonglian Hengfu Consulting Co., Ltd. (“CU WFOE”) has effective control over Anhou through contractual arrangements known as variable interest agreements. CU WFOE is a wholly foreign owned subsidiary of ZLI Holdings Limited, a wholly owned Hong Kong-based subsidiary of China United Insurance Service, Inc. (the “Company” or “CUIS”).

 

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Pursuant to Anhou Loan Agreement No.1, Mr. Hu agreed to lend Anhou USD150,526 (RMB1,000,000) with an annual rate of 8% and to advance such loan amount on or prior to May 15, 2016. The term of Anhou Loan No.1 shall be three years. In case Anhou fails to fully repay the loan amount upon its due date, May 15, 2019, Mr. Hu shall be entitled to collect the loan amount together with an accrued interest calculated as the outstanding loan amount multiplied by a daily rate of 1% for the period commencing from its due date till the date of full payment.

 

On July 20, 2016, Anhou and Mr. Hu entered into another loan agreement, with Anhou as the borrower and Mr. Hu as the lender (“Anhou Loan Agreement No.2”). Pursuant to Anhou Loan Agreement No.2, Mr. Hu agreed to lend Anhou USD115,905 (RMB770,000) with an annual rate of 8% and to advance such loan amount on or prior to July 20, 2016. The term of Anhou Loan No.2 shall be three years. In case Anhou fails to fully repay the loan amount upon its due date, July 20, 2019, Mr. Hu shall be entitled to collect the loan amount together with an accrued interest calculated as the outstanding loan amount multiplied by a daily rate of 1% for the period commencing from its due date till the date of full payment.

 

Anhou Loan Agreement No.1 and Anhou Loan Agreement No.2 are included as Exhibits 10.1 and 10.2, respectively, to this Report on Form 10-Q and and are the legal documents that govern the terms of the loans. The foregoing description of the loan arrangements is qualified in its entirety by reference to the complete text of Anhou Loan Agreement No.1 and Anhou Loan Agreement No.2.

 

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ITEM 6. EXHIBITS

 

(a)Exhibits:

 

Exhibit    
Number   Description of Exhibit
     
10.1   Loan Agreement dated May 15, 2016 between Hu Guowei and Law Anhou Insurance Agency Co., Ltd. (English translation)
10.2   Loan Agreement dated July 20, 2016 between Hu Guowei and Law Anhou Insurance Agency Co., Ltd. (English translation)
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, 2016 By: /s/ Yi Hsiao Mao
  Name:   Yi Hsiao Mao
  Its: Chief Executive Officer
    (Principal Executive Officer)
     
     
Date: August 9, 2016 By: /s/ Yung Chi Chuang
  Name:   Yung Chi Chuang
  Its: Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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