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 March 31, 2017

 

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)

 

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

 

  

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION	5
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	39
ITEM 4.	CONTROLS AND PROCEDURES	39
PART II.	OTHER INFORMATION	40
ITEM 1.	LEGAL PROCEEDINGS	40
ITEM 1A.	RISK FACTORS	40
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	40
ITEM 4.	MINE SAFETY DISCLOSURES	40
ITEM 5.	OTHER INFORMATION	40
ITEM 6.	EXHIBITS	41
SIGNATURES		42

  

   

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.

  

  

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 (“VIEs”).

 

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).

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2017				December 31, 2016
		(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents		$	26,640,425			$	25,521,802
Marketable securities			4,980,921				2,426,870
Accounts receivable, net			8,008,959				15,774,159
Other current assets			2,379,340				1,890,551
Total current assets			42,009,645				45,613,382
Property, plant and equipment, net			1,026,960				926,905
Intangible assets			828,592				784,219
Goodwill			2,071,491				2,071,491
Long-term investment			1,367,261				1,285,064
Other assets			1,923,193				726,482
TOTAL ASSETS		$	49,227,142			$	51,407,543
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Taxes payable		$	3,196,819			$	2,249,869
Due to related parties			614,807				400,001
Other current liabilities			11,393,388				18,639,909
Total  current liabilities			15,205,014				21,289,779
Convertible bonds			200,000				200,000
Long-term loans			256,874				254,907
Long-term liabilities			5,772,378				5,315,327
TOTAL LIABILITIES			21,434,266				27,060,013
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding			10				10
Common stock, par value $0.00001, 100,000,000 authorized, 29,452,669 issued and outstanding			295				295
Additional paid-in capital			8,190,449				8,157,512
Statutory reserves			4,270,242				3,799,585
Retained earnings			4,152,250				3,286,562
Accumulated other comprehensive gain/(loss)			87,998				(667,976	)
Stockholders' equity attribute to parent’s shareholders			16,701,244				14,575,988
Noncontrolling interest			11,091,632				9,771,542
TOTAL STOCKHOLDERS’ EQUITY			27,792,876				24,347,530
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	49,227,142			$	51,407,543

  

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

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

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

 

		Three Months Ended March 31,
		2017				2016
Revenue		$	15,355,528			$	9,562,296
Cost of revenue			8,783,843				6,468,859
Gross profit			6,571,685				3,093,437
Operating expenses:
Selling			386,181				898,265
General and administrative			3,352,440				2,887,108
Total operating expense			3,738,621				3,785,373
Income (loss) from operations			2,833,064				(691,936	)
Other income (expenses):
Interest income			72,050				51,756
Interest expenses			(8,069	)			(1,187	)
Other - net			(118,967	)			(29,350	)
Total other income (expenses)			(54,986	)			21,219
Income (loss) before income taxes			2,778,078				(670,717	)
Income tax expense			757,279				3,199
Net income (loss)			2,020,799				(673,916	)
Net income (loss) attributable to the noncontrolling interest			684,454				(30,215	)
Net income (loss) attributable to parent's shareholders			1,336,345				(643,701	)
Other comprehensive items
Foreign currency translation gain (loss)			713,503				163,512
Other			42,471				(1,593	)
Other comprehensive income (loss) attributable to parent's shareholder			755,974				161,919
Other comprehensive items attributable to noncontrolling interest			635,636				149,633
Comprehensive income (loss) attributable to parent's shareholders		$	2,092,319			$	(481,782	)
Comprehensive income attributable to noncontrolling interest		$	1,320,090			$	119,418
Weighted average shares outstanding:
Basic			29,452,669				29,452,669
Diluted			30,500,746				29,452,669
Income (loss) per share:
Basic		$	0.045			$	(0.022	)
Diluted		$	0.044			$	(0.022	)

 

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

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three Months Ended March 31,
		2017				2016
Cash flows from operating activities:
Net income (loss)		$	2,020,799			$	(673,916	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			132,820				155,099
Amortization of bond premium			62				-
Gain on valuation of financial assets			614				(1,594	)
Loss on disposal of fixed assets			12,802				37,938
Change in deferred tax assets			(36,796	)			(3,122	)
Changes in operating assets and liabilities:
Accounts receivable			8,540,379				5,509,467
Other current assets			(349,156	)			388,380
Other assets			(1,078,254	)			32,045
Tax payable			797,176				(17,523	)
Other current liabilities			(8,187,180	)			(5,096,789	)
Long-term liabilities			126,956				-
Net cash provided by operating activities			1,980,222				329,985
Cash flows from investing activities:
Proceeds from sale of marketable securities			2,484,686				-
Purchase of marketable securities			(4,831,010	)			-
Purchase of property, plant and equipment			(142,288	)			(217,985	)
Purchase of intangible assets			(130,847	)			(233,400	)
Net cash used in investing activities			(2,619,459	)			(451,385	)
Cash flows from financing activities:
Proceeds from related party borrowing			244,963				11,254
Repayment to related parties			(276	)			(604,906	)
Repayment to loans			-				(45,368	)
Net cash provided by (used in) financing activities			244,687				(639,020	)
Foreign currency translation			1,513,173				361,754
Net increase (decrease) in cash and cash equivalents			1,118,623				(398,666	)
Cash and cash equivalents, beginning balance			25,521,802				20,831,824
Cash and cash equivalents, ending balance		$	26,640,425			$	20,433,158
SUPPLEMENTARY DISCLOSURE:
Interest paid		$	3,000			$	447
Income tax paid		$	5,408			$	9,037
SUPPLEMENTARY DISCLOSURE OF CASH FLOWS FOR NON-CASH TRANSACTION:
Debt forgiveness - related party		$	32,937			$	-

 

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

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT

(UNAUDITED)

 

NOTE 1 – ORGANIZATION

 

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

 

The corporate structure as of March 31, 2017 was as follows:

 

 

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

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

  

Basis of Presentation

  

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

 

  

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2016, which were included in the Company’s 2016 Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of December 31, 2016, has been derived from the Company’s audited consolidated financial statements as of that date.

 

Foreign Currency Transactions

 

The Company’s financial statements are presented in U.S. dollars ($), which is the Company’s reporting and functional currency. The functional currencies of the Company’s subsidiaries are NTD, RMB and HKD. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC 220. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currency are translated at the functional currency 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 three months ended March 31,
		2017					2016
Taiwan dollar (NTD)		NTD		31.049410			NTD		33.063000
China yuan (RMB)		RMB		6.888178			RMB		6.539470
Hong Kong dollar (HKD)		HKD		7.760185			HKD		7.773440
United States dollar ($)		$		1.000000			$		1.000000

 

		Exchange Rate at
		March 31, 2017					December 31, 2016
Taiwan dollar (NTD)		NTD		30.351770			NTD		32.283100
China yuan (RMB)		RMB		6.890530			RMB		6.943700
Hong Kong dollar (HKD)		HKD		7.770470			HKD		7.754340
United States dollar ($)		$		1.000000			$		1.000000

 

Fair Values of Financial Instruments

 

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

 

• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

  

• Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.

 

• Level 3 inputs to the valuation methodology are unobservable and significant to the FV.

 

 

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

 

The following table presents the fair value and carrying value of the Company’s marketable securities, loan receivable, borrowings and convertible bonds as of March 31, 2017:

 

		Fair Value												Carrying
		Level 1				Level 2				Level 3				Value
Assets
Marketable securities		$	4,980,921			$	-			$	-			$	4,980,921
Loan receivable (Other current assets in Notes 5)			-				-				1,581,456				1,581,456
Long-term investment:
Equity investment			-				-				1,266,315				1,266,315
Government bonds			100,946				-				-				100,946
Liabilities
Due to related parties		$	-			$	-			$	614,807			$	614,807
Convertible bonds			-				-				200,000				200,000
Long-term loans			-				-				256,874				256,874

 

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

 

		Fair Value												Carrying
		Level 1				Level 2				Level 3				Value
Assets
Marketable securities		$	2,426,870			$	-			$	-			$	2,426,870
Loan receivable (Other current assets in Notes 5)			-				-				1,486,846				1,486,846
Long-term investment:
Equity investment			-				-				1,190,558				1,190,558
Government bonds			94,506				-				-				94,506
Liabilities
Due to related parties		$	-			$	-			$	400,001			$	400,001
Convertible bonds			-				-				200,000				200,000
Long-term loans			-				-				254,907				254,907

 

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

 

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

 

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

 

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

 

Short-term loans – The Company’s short-term loans have been determined based on 1.5% per annum interest rate in year 2015.

 

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

 

 

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

 

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

 

Concentration of Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. As of March 31, 2017, approximately $1,510,000 of the Company’s cash and cash equivalents held by financial institutions was insured, and the remaining balance of approximately $20,734,000 was not insured.

 

Two major insurance companies accounted for more than 10% of the Company’s total revenue for the three months ended of March 31, 2017 and 2016. Revenue and accounts receivable from these insurance companies are as follows:

 

		Three months ended March 31,
		2017								2016
		Amount				% of Total Revenue				Amount				% of Total Revenue
Farglory Life Insurance Co., Ltd.		$	4,180,227				27	%		$	2,242,125				23	%
Taiwan Life Insurance Co., Ltd. (**)			2,087,357				14	%			(*	)			(*	)
Fubon Life Insurance Co., Ltd.			(*	)			(*	)			1,377,986				14	%

 

 

	(*)	Revenue for the three months ended had not exceeded 10% or more of the consolidated revenue.
	(**)	Taiwan Life Insurance Co., Ltd. was formerly known as CTBC Life Insurance Co., Ltd.

  

		March 31, 2017								December 31, 2016
		Amount				% of Total Accounts Receivable				Amount				% of Total Accounts Receivable
Farglory Life Insurance Co., Ltd.		$	2,551,926				32	%		$	6,503,843				41	%
Taiwan Life Insurance Co., Ltd (**)			1,266,033				16	%			1,973,410				13	%
Fubon Life Insurance Co., Ltd			(*	)			(*	)			1,660,685				11	%

 

 

(*)

The related revenue for the year ended had not exceeded 10% or more of the consolidated revenue.

(**)

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

 

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

 

The Company’s operations are in the 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.

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 Accounting Standards Update 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.

 

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

 

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

 

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update provide guidance to assist entities with evaluating when a group of transferred assets and activities (collective referred to as a "set") is a business. This new guidance provides for a "screen", which requires a determination that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen's threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output, eliminating the evaluation of whether a market participant could replace missing elements. This guidance is effective for public entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the effect this guidance will have on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual or any interim goodwill tests in fiscal years beginning after December 15, 2019. The adoption is not expected to have a material impact on the consolidated financial statements.

 

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

 

NOTE 3 – CASH AND CASH EQUIVALENTS

 

As of March 31, 2017 and December 31, 2016, our cash and cash equivalents primarily consisted of petty cash, cash in banks, certificates of deposits and re-purchase bonds. On March 24, 2017, the Company and China Bills Finance Corporation entered into a repurchase agreement with amount of $5,370,362 (NTD 163,000,000) with 0.36% interest rate and was due in April 2017.

 

As of March 31, 2017 and December 31, 2016, the Company’s cash and cash equivalents consisted of the following:

 

		March 31, 2017				December 31, 2016
Petty cash, cash in banks and certificates of deposits		$	21,270,063			$	25,521,802
Cash equivalent – re-purchase bonds			5,370,362				-
Total cash and cash equivalents		$	26,640,425			$	25,521,802

 

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:

 

		March 31, 2017
		Cost or Amortized Cost				Gross Unrealized Gains (Losses)				Total Fair Value
Level 1 securities:
Stocks		$	38,763			$	(171	)		$	38,592
Funds			4,942,051				278				4,942,329
		$	4,980,814			$	107			$	4,980,921

    

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

 

 

NOTE 5 – OTHER CURRENT ASSETS

 

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

 

 

		March 31, 2017				December 31, 2016
Loan receivable		$	1,581,456			$	1,486,846
Prepaid expenses			246,491				64,678
Prepaid rent and rent deposit			326,226				199,022
Other receivable			85,067				50,683
Deferred tax assets-current			92,262				59,233
Interest receivable			31,001				12,648
Refundable business tax			15,040				17,441
Others			1,797				-
Total other current assets		$	2,379,340			$	1,890,551

 

On October 24, 2016, the Company entered into a loan agreement (“Loan A”) with third party, Rich Fountain Limited (“RFL”), which was incorporated under the laws of Samoa. The Company provided a short-term loan amount of NTD 48,000,000 ($1,486,846) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest are due on April 23, 2017. On April 21, 2017, the Company and RFL entered a supplemental agreement to extend this loan to October 23, 2017.

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

 

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

 

		March 31, 2017				December 31,2016
Office equipment		$	1,154,687			$	1,070,061
Office furniture			172,450				168,658
Leasehold improvements			698,960				581,964
Transportation equipment			136,354				132,344
Other equipment			93,888				87,302
Total			2,256,339				2,040,329
Less: accumulated depreciation			(1,229,379	)			(1,113,424	)
Total property, plant and equipment, net		$	1,026,960			$	926,905

 

Depreciation expense was $75,596 and $71,489 for the three months ended March 31, 2017 and 2016, respectively.

 

NOTE 7 – INTANGIBLE ASSETS

 

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

 

		March 31, 2017				December 31, 2016
Software		$	1,648,819			$	1,500,339
Less accumulated amortization			(820,227	)			(716,120	)
Total intangible assets		$	828,592			$	784,219

 

 

Estimated future intangible amortization as of March 31, 2017 is as follows:

 

Periods ending March 31,		Amount
2018		$	231,450
2019			223,955
2020			191,175
2021			147,143
2022			30,488
Thereafter			4,381
Total		$	828,592

 

Amortization expense was $57,224 and $83,610 for the three months ended March 31, 2017 and 2016, respectively.

 

NOTE 8 – LONG-TERM INVESTMENT

 

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

 

		March 31, 2017				December 31, 2016
Equity Investment		$	1,266,315			$	1,190,558
Government Bonds			100,946				94,506
Total		$	1,367,261			$	1,285,064

  

As of March 31, 2017 and December 31, 2016, the Company had the following long-term investment in equity:

 

Type		Investee		Investment Ownership				March 31, 2017 Amount				December 31, 2016 Amount
Cost Method		Genius Insurance Broker Co., Ltd			15.64	%		$	1,266,315			$	1,190,558

 

According to Taiwan regulatory requirements, Law Insurance Broker Co., Ltd. (“Law Broker”) is required to maintain a minimum of NTD3,000,000 ($98,841) 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.

  

		March 31, 2017
		Fair Value at				Gross				Fair Value at
		December 31,				Unrealized				March 31,
		2016				Gains (Losses)				2017
Government bonds			94,506				6,440				100,946
		$	94,506			$	6,440			$	100,946

 

		December 31, 2016
		Cost or				Gross				Fair Value at
		Amortized				Unrealized				December 31,
		Cost				Gains (Losses)				2016
Government bonds			94,381				125				94,506
		$	94,381			$	125			$	94,506

 

 

NOTE 9 – OTHER ASSETS

 

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

 

		March 31, 2017				December 31, 2016
Registered capital deposit		$	1,015,887			$	-
Rental deposit			483,830				445,283
Restricted cash			254,394				248,803
Prepayments			132,069				5,576
Others			37,013				26,820
Total other assets		$	1,923,193			$	726,482

 

Registered capital deposit is the requirement by China Insurance Regulatory Commission that an intermediary company should hold all of its registered capital in a custodian account and subject to limited usage, among which, no less than 10% of the registered capital shall be invested in significant deposit by agreement or term deposit. Rental deposits include long-term leasing deposits. Restricted cash is a deposit in the bank by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, which cannot be withdrawn without the permission of the regulatory commission and the trust account for Law Broker’s general manager’s Bonus Plans. Prepayments are prepaid recruitment fee and prepaid long-term software-maintenance contract pending for final acceptance. Others are deferred tax assets-noncurrent and other. As of March 31, 2017 and December 31, 2016, the Company had deferred tax assets-noncurrent amount of $35,360 and $25,364, respectively.

 

NOTE 10 – TAXES PAYABLE

 

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

 

		March 31, 2017				December 31, 2016
PRC Tax		$	234,822			$	163,461
Hong Kong Tax			14,204				14,233
Taiwan Tax			2,947,793				2,072,175
Total tax payable		$	3,196,819			$	2,249,869

 

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. Hong Kong tax represents income tax accrued according to Hong Kong tax law by our subsidiaries in Hong Kong. Above taxes will be settled within the next twelve months according to the respective tax laws.

 

NOTE 11 – OTHER CURRENT LIABILITIES

 

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

 

		March 31, 2017				December 31, 2016
Commissions payable to sub-agents		$	5,551,226			$	11,869,181
Unearned revenue (AIATW and Farglory)			2,616,372				2,090,718
Due to previous shareholders of AHFL			-				480,559
Accrued business tax			221,036				469,259
Withholding employee personal tax			313,318				362,954
Accrued tax penalties			370,000				370,000
Accrued bonus			861,821				1,935,091
Salary payable to administrative staff			938,422				183,066
Accrued labor, health insurance and employee retirement plan			102,150				92,085
Accrued advertisement fee			-				32,525
Other accrued liabilities			419,043				754,471
Total other current liabilities		$	11,393,388			$	18,639,909

 

Commissions payable to sub-agents, Accrued bonus, Salaries payable to administrative staff, and accrued advertisement expense are usually settled within 12 months. Unearned revenue is described in Note 14. Due to previous shareholders of Action Holdings Financial Limited (“AHFL”) is the remaining balance payable of the acquisition cost. Accrued business tax, withholding employee personal tax and accrued labor, health insurance and employee retirement plan will be paid to the related government department within one month. Accrued tax penalties are estimated potential penalty in the event of a tax audit. Other accrued liabilities are mainly for operating expenses payable, such as training and travelling.

 

 

NOTE 12 – CONVERTIBLE BONDS

 

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

 

On June 23, 2016, the Company 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 March 31, 2017 and December 31, 2016, the Company has an outstanding principal balance of $200,000 of convertible bonds. Total interest expense was $3,000 for the three months ended March 31, 2017.

 

NOTE 13 – LONG-TERM LOANS

 

		March 31, 2017				December 31, 2016
Loan B, interest at 8%, maturity date May 15, 2019		$	145,126			$	144,015
Loan C, interest at 8%, maturity date July 20, 2019			111,748				110,892
Total long term loans		$	256,874			$	254,907

 

On May 15, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd (“Anhou” or “Law Anhou”) entered into a loan agreement (“Loan B”) with third party Guowei Hu. The long-term Loan Agreement provided for a $145,126 loan to the Company. The long-term Loan B bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on May 15, 2019.

 

On July 20, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan C”) with third party Guowei Hu. The long-term Loan Agreement provided for a $111,748 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 July 20, 2019.

 

Total interest expense was $5,069 for the three months ended March 31, 2017.

 

NOTE 14 – LONG-TERM LIABILITIES

 

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

 

		March 31, 2017				December 31, 2016
Unearned revenue – AIATW		$	4,772,217			$	4,742,272
Unearned revenue – Farglory			406,346				495,615
Due to pervious shareholders of AHFL			480,559				-
Other long-term liabilities			113,256				77,440
Long-term liabilities		$	5,772,378			$	5,315,327

  

 

Unearned revenue – AIATW

 

On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”). The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The term of the Alliance Agreement is from April 15, 2013 to August 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL 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. As of March 31, 2017 and December 31, 2016, the Company had long-term liabilities amount of $4,772,217 and $4,742,272, respectively, and current liabilities amounts of $2,363,778 and $1,966,814, respectively, related to AIATW Alliance Agreement. 

 

Unearned revenue – Farglory

  

On April 20, 2016, the Company entered into a service agreement (“Service Agreement”) with Farglory Life Insurance Co., Ltd. (“Farglory”). AHFL is 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 March 31, 2017 and December 31, 2016, the Company had long-term liabilities amount of $406,346 and $495,615, respectively, and current liabilities amounts of $252,594 and $123,904, respectively, related to this Service Agreement.

 

Due to previous shareholders of AHFL

 

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

 

Other long-term liabilities

 

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

 

 

On May 14, 2016, Law Broker and Ms. Chao entered into a supplementary agreement (“Supplementary Agreement”) to postpone her pension vesting date to December 29, 2016. Though Law Broker expects that none of the above-mentioned bonuses need to be paid prior to May 2019, it has recorded long-term liabilities representing the corresponding portion of such bonuses accrued. On March 13, 2017, Law Broker and Ms. Chao entered into an engagement agreement, which is the amendment to Engagement Agreement dated May 10, 2016 to specify 1) Ms. Chao's pension calculation assumption and start date, and 2) the non-competition provision start date. As of March 31, 2017 and December 31, 2016, the balance of such accrued long-term liabilities were $113,256 and $77,440, respectively.

   

NOTE 15 – PREFERRED STOCK

 

The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value. It currently has 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of December 31, 2014. The Series A Stock has the following rights and preferences:

 

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

 

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

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

Does not violate any debt or other contract covenants; 

Does not change any earnings or EPS trends; 

Does not affect any previous earnings or EPS guidance; 

Does not affect any segment or class of revenue; 

Does not affect any regulatory compliance matters;  

Does not affect cash compensation of management; 

Does not involve concealment of an unlawful act.

 

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

 

NOTE 16 – 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 Consolidated Affiliated Entities (“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 17 – NON-CONTROLLING INTERESTS

 

Non-controlling interests consisted of the following:

 

Name of Affiliate		% of Non-  controlling Interest				As of December 31, 2016				Adjustments/ Net Income of Non-controlling Interest				As of March 31, 2017
Law Enterprise Co., Ltd. (“Law Enterprise”)			34.05	%		$	17,386			$	560,694			$	578,080
Law Broker			34.05	%			9,621,159				802,452				10,423,611
Prime Financial Asia Ltd. (“PFAL”)			49.00	%			232,414				(10,313	)			222,101
Max Key Investments Ltd. (“MKI”)			49.00	%			(1,569	)			(10	)			(1,579	)
Prime Asia Corporation Limited. (“PA Taiwan”)			49.00	%			(95,448	)			(32,767	)			(128,215	)
Prime Management Consulting (Nanjing) Co., Ltd. (“PTC Nanjing”)			49.00	%			(2,400	)			34				(2,366	)
Total						$	9,771,542			$	1,320,090			$	11,091,632

 

 

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

 

NOTE 18 – INCOME TAX

 

Provision (benefit) for income taxes for the three months ended March 31, 2017 consists of:

 

Three months ended March 31, 2017		Federal				State				Foreign				Total
Current		$	-			$	-			$	794,075			$	794,075
Deferred			-				-				(36,796	)			(36,796	)
Change in valuation allowance			-				-				-				-
Total		$	-			$	-			$	757,279			$	757,279

 

Provision (benefit) for income taxes for the three months ended March 31, 2016 consists of:

 

Three months ended March 31, 2016		Federal				State				Foreign				Total
Current		$	-			$	-			$	6,397			$	6,397
Deferred			-				-				(3,198	)			(3,198	)
Change in valuation allowance			-				-				-				-
Total		$	-			$	-			$	3,199			$	3,199

 

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

 

		As of
		March 31, 2017				December 31, 2016
Deferred tax assets
Net operating loss carry-forward		$	1,013,532			$	993,050
Others			127,622				84,597
Total		$	1,141,154			$	1,077,647
Valuation allowance			(1,013,532	)			(993,050	)
Net deferred tax assets		$	127,622			$	84,597
Deferred tax assets - current		$	92,262			$	59,233
Deferred tax assets - noncurrent		$	35,360			$	25,364

 

A 100% valuation allowance was provided for the deferred tax assets related to the PRC segment and US holding company as of March 31, 2017 and December 31, 2016. Net deferred tax assets of $127,622 and $84,597, respectively, related to the Taiwan segment was included in both other current assets and other assets on the consolidated balance sheets as of March 31, 2017 and December 31, 2016.

 

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

 

 

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

 

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

  

The following table reconciles the US statutory rates to the Company’s effective tax rate for the three months ended March 31, 2017 and 2016:

 

		Three Months Ended March 31,
		2017				2016
US statutory rate			34	%			34	%
Tax rate difference			(18	)%			(8	)%
Tax base difference			1	%			(4	)%
Loss in subsidiaries			4	%			(28	)%
Un-deductible and non-taxable items			6	%			6	%
Tax per financial statements			27	%			0	%

 

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

 

NOTE 19 – RELATED PARTY TRANSACTIONS

 

Due to related parties

 

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

 

		March 31, 2017				December 31, 2016
Due to Mr. Mao (CEO of the Company)		$	380,863			$	361,379
Due to Ms. Lu (Shareholder of Law Anhou)			217,690				-
Due to Xude Investment (Owned by Mr. ChwanHau Li)			-				32,374
Due to Mr. Zhu (Legal Representative of Jiangsu)			2,009				1,994
Due to Yuli Broker (Owned by Ms. Lee)			141				265
Due to Yuli Investment (Owned by Ms. Lee)			141				265
Due to I Health Management Corp*			13,963				3,724
Total		$	614,807			$	400,001

*25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise.

 

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

 

 

Lease Agreements

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Broker to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). For the year ended and as of March 31, 2017, rent income and advance amount were $138 and $141, respectively.

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Investment to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). For the three months ended and as of March 31, 2017, rent income and advance amount were $138 and $141, respectively.

 

Advisory Agreements

 

On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the Advisory Agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $40,000 (NTD1,250,000). The Company had cost of revenue and due to I Health amount of $9,777 and $13,963, respectively, for the three months ended and as of March 31, 2017.

 

On December 7, 2016, the Company entered into an advisory agreement with Fuchang Li (“Mr. Li”, the director of the Company). Pursuant to this Advisory Agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. The total advisory fee was approximately $58,000 (NTD1,800,000). The Company had prepaid expenses and general and administrative expense amount of $9,346 and $14,019, respectively, as of and for the three months ended March 31, 2017.

  

Consulting Agreement

 

On November 1, 2016, the Company entered into a consulting agreement with Prime Technology Corp. (“Prime Tech”), which has one of the same directors as Prime Financial Asia Ltd. Pursuant to this consulting agreement, the Company provided administrative operation consulting service to Prime Tech from November 1, 2016 to December 31, 2021. As of and for the three months ended March 31, 2017, the Company had account receivable and revenue amount of $10,825 and $10,582, respectively.

 

NOTE 20 – COMMITMENTS

 

Operating Leases

 

The Company has operating leases for its offices. Rental expenses for the three months ended March 31, 2017 and 2016 were $571,023and $507,460, respectively. At March 31, 2017, total future minimum annual lease payments under operating leases were as follows, by years:

 

Twelve months ending March 31, 2018		$	2,127,670
Twelve months ending March 31, 2019			1,227,502
Twelve months ending March 31, 2020			307,901
Twelve months ending March 31, 2021			40,487
Twelve months ending March 31, 2022			22,756
Thereafter			-
Total		$	3,726,316

 

Engagement Agreement with Ms. Chao

 

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

 

On May 14, 2016, Law Broker and Ms. Chao entered into a supplementary agreement (“Supplementary Agreement”) to postpone her pension vesting date to December 29, 2016. Though Law Broker expects that none of the above-mentioned bonuses need to be paid prior to May 2019, it has recorded long-term liabilities representing the corresponding portion of such bonuses accrued. On March 13, 2017, Law Broker and Ms. Chao entered into an engagement agreement, which is the amendment to Engagement Agreement dated May 10, 2016 to specify 1) Ms. Chao's pension calculation assumption and start date, and 2) the non-competition provision start date. As of March 31, 2017 and December 31, 2016, the balance of such accrued long-term liabilities were $113,256 and $77,440, respectively.

 

 

NOTE 21 – 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. 

 

 

NOTE 22 – GEOGRAPHICAL DATA

 

The geographical distribution of the Company’s financial information for the three months ended March 31, 2017 and 2016 were as follows:

 

		For three months ended March 31,
Geographical Areas		2017				2016
Revenue
Taiwan		$	12,421,081			$	7,933,828
PRC			2,891,932				1,585,767
Hong Kong			42,515				42,701
Elimination adjustment			-				-
Total revenue		$	15,355,528			$	9,562,296
Income (loss) from operations
Taiwan		$	2,556,181			$	(322,014	)
PRC			249,588				(398,510	)
Hong Kong			(5,925	)			(2,524	)
Elimination adjustment			33,220				31,112
Total income (loss) from operations		$	2,833,064			$	(691,936	)
Depreciation and amortization expenses
Taiwan		$	110,254			$	136,913
PRC			22,494				18,114
Hong Kong			72				72
Elimination adjustment			-				-
Total depreciation and amortization expenses		$	132,820			$	155,099
Interest income
Taiwan		$	86,776			$	54,090
PRC			1,727				1,621
Hong Kong			-				-
Elimination adjustment			(16,453	)			(3,955	)
Total interest income		$	72,050			$	51,756
Interest expenses
Taiwan		$	19,453			$	5,142
PRC			5,069				-
Hong Kong			-				-
Elimination adjustment			(16,453	)			(3,955	)
Total interest expenses		$	8,069			$	1,187
Income tax expenses
Taiwan		$	694,303			$	87
PRC			62,976				3,112
Hong Kong			-				-
Elimination adjustment			-				-
Total income tax expenses		$	757,279			$	3,199
Net income (loss)
Taiwan		$	1,856,865			$	(265,208	)
PRC			182,958				(402,792	)
Hong Kong			(20,585	)			(7,297	)
Elimination adjustment			1,561				1,381
Total net income (loss)		$	2,020,799			$	(673,916	)

 

 

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

 

		As of
Geographical Areas		March 31, 2017				December 31, 2016
Capital expenditures
Taiwan		$	(265,209	)		$	(835,564	)
PRC			(7,926	)			(148,936	)
Hong Kong			-				-
Total capital expenditures		$	(273,135	)		$	(984,500	)
Long-lived assets
Taiwan		$	24,561,486			$	26,947,718
PRC			8,769,738				8,803,587
Hong Kong			575				270,648
Elimination adjustment			(26,114,302	)			(30,227,792	)
Total long-lived assets		$	7,217,497			$	5,794,161
Reportable assets
Taiwan		$	85,962,252			$	90,388,991
PRC			11,173,256				13,325,433
Hong Kong			511,794				561,708
Elimination adjustment			(48,420,160	)			(52,868,589	)
Total reportable assets		$	49,227,142			$	51,407,543

 

NOTE 23 – LOAN TO SHAREHOLDERS

 

Anhou Registered Capital Increase

 

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

 

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

 

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

 

1.

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

 

2.

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

 

3.

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

  

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

 

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

 

 

NOTE 24 – SUBSEQUENT EVENTS

 

On April 21, 2017, the Company and Rich Fountain Limited entered into a supplemental agreement to extend Loan A to October 23, 2017, which is described in Note 5.

 

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

 

 

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

 

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

 

Overview

 

The Company primarily provides two broad categories of insurance products, life insurance products and property and casualty insurance products, in Taiwan and 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 74.94% and 74.81% of total net revenue for the three months ended March 31, 2017 and 2016, respectively. Total net revenue from PRC life insurance products were 17.53% and 15.21% of total net revenue for the three months ended March 31, 2017 and 2016, respectively.

 

In addition to the periodic premium payment schedules, most of the individual life insurance products we distribute also allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured, a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time. This means that once the Company sells a life insurance policy with a periodic premium payment schedule, they will be able to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years. Because of this feature and the expected sustained growth of life insurance sales in China and Taiwan, we have focused significant resources ever since the incorporation of Anhou and Law Broker on developing our capability to distribute individual life insurance products with periodic payment schedules. We expect that sales of life insurance products will continuously be our primary source of revenue in the next several years.

 

(2)

Property and Casualty Insurance Products

 

Taiwan subsidiaries commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenue from Taiwan property and casualty insurance products were 5.88% and 8.09% of total net revenue for the three months ending March 31, 2017 and 2016, 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 1.31% and 1.89% of total net revenue for the three months ending March 31, 2017 and 2016, respectively.

 

Critical Accounting Policies and Estimates

 

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2 of “Summary of Significant Accounting Policies” included within our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Following is a discussion of the accounting policies that we believe involve the most difficult, subjective or complex judgments and estimates.

 

 

Accrued Expenses

 

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. The estimation basis of the majority of the accrued expenses is dependent on our sales force’s achievement of the sales targets identified by our clients. Examples of estimated accrued expenses include brokerage commission bonus, such as bonus payable to our sales agents, and incentive program rewards, such as the estimated expenditures to fund the reward programs. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.

 

Long-term investment

 

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

 

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

  

Recent Accounting Pronouncements

 

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 Accounting Standards Update 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.

 

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

 

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

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update provide guidance to assist entities with evaluating when a group of transferred assets and activities (collective referred to as a "set") is a business. This new guidance provides for a "screen", which requires a determination that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen's threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output, eliminating the evaluation of whether a market participant could replace missing elements. This guidance is effective for public entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the effect this guidance will have on its consolidated financial statements.

 

 

In January 2017, the FASB issued ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual or any interim goodwill tests in fiscal years beginning after December 15, 2019. The adoption is not expected to have a material impact on the consolidated financial statements.

 

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

  

Overview of the three months ended March 31, 2017 and 2016

 

The following table shows the results of operations for the three months ended March 31, 2017 and 2016:

 

		Three Months Ended  March 31,
		2017				2016
		(Unaudited)				(Unaudited)				Change				Percent
Revenue		$	15,355,528			$	9,562,296			$	5,793,232				61	%
Cost of revenue			8,783,843				6,468,859				2,314,984				36	%
Gross profit			6,571,685				3,093,437				3,478,248				112	%
Gross profit margin			43	%			32	%			11	%			34	%
Operating expenses:
Selling			386,181				898,265				(512,084	)			-57	%
General and administrative			3,352,440				2,887,108				465,332				16	%
Total operating expenses			3,738,621				3,785,373				(46,752	)			-1	%
Income from operations			2,833,064				(691,936	)			3,525,000				-509	%
Other income (expenses):
Interest income			72,050				51,756				20,294				39	%
Interest expenses			(8,069	)			(1,187	)			(6,882	)			580	%
Other - net			(118,967	)			(29,350	)			(89,617	)			305	%
Total other income (expenses)			(54,986	)			21,219				(76,205	)			-359	%
Income (loss) before income taxes			2,778,078				(670,717	)			3,448,795				-514	%
Income tax expense			757,279				3,199				754,080				23,572	%
Net income (loss)			2,020,799				(673,916	)			2,694,715				-400	%
Net income (loss) attributable to the noncontrolling interests			684,454				(30,215	)			714,669				-2,365	%
Net income (loss) attributable to parent’s shareholders			1,336,345				(643,701	)			1,980,046				-308	%

 

 

Revenue

 

As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies in among Taiwan, 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 March 31, 2017 and 2016, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:

 

Geographical Areas		Three months ended March 31, 2017				Three months ended March 31, 2016
Revenue
Taiwan		$	12,421,081			$	7,933,828
PRC			2,891,932				1,585,767
Hong Kong			42,515				42,701
Elimination adjustment			-				-
Total Revenue		$	15,355,528			$	9,562,296

 

During the three months ended March 31, 2017, 80.9%, 18.8% and 0.3% of our revenue in our unaudited consolidated financial statements were derived from Taiwan, PRC and Hong Kong, respectively. During the three months ended March 31, 2016, 83.0%, 16.6% and 0.4% 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 March 31, 2017 and 2016 were relatively consistent.

 

Total revenue increased by $5,793,232, or 61%, from $9,562,296 for the three months ended March 31, 2016 to $15,355,528 for the three months ended March 31, 2017, which was mainly due to the increase of the revenue in Taiwan and PRC for the following reasons:

 

a)

The revenue of Taiwan Life Insurance Co., Ltd (“Taiwan Life”) increased in 2017. The main reason was 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 attention from the company’s customers and boosted the sales performance for the three months ended March 31, 2017.

 

b)

The revenue of Farglory Life Insurance Co., Ltd (“Farglory”) increased in 2017 because Farglory bundles its life insurance products to customize each of its clients' needs better. By combining insurance contracts with the 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 three months ended March 31, 2017.

 

c)

The revenue increased in the PRC area primarily due to the increases in sales of the retirement and critical illness insurance in Sichuan for the three months ended March 31, 2017. In light of the need to make personal provisions or old age and illness, as strongly encouraged by the Chinese government, demand for such policies rose accordingly. In addition, the China Insurance Regulatory Commission (“CIRC”) required insurance companies to make adjustments to policy designs, propelling insurance companies to innovate on their products to better meet market needs. These innovations also led to increase in revenue.

 

 Cost of revenue and gross profit

 

The cost of revenue mainly consists of commissions paid to our sales agents. The cost of revenue for the three months ended March 31, 2017 increased by $2,314,984 or 36%, to $8,783,843 compared to $6,468,859 for the three months ended March 31, 2016. The cost of revenue increased is mainly due to the increase of direct commission cost.

   

The gross profit for the three months ended March 31, 2017 increased by $3,478,248 or 112%, to $6,571,685 compared to $3,093,437 for the three months ended March 31, 2016. The gross profit ratio increased to 43% for the three months ended March 31, 2017 from 32% for the three months ended March 31, 2016. 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 March 31, 2017 decreased by $512,084 or 57%, to $386,181 compared to $898,265 for the three months ended March 31, 2016. The decrease is mainly due to decreased 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 March 31, 2017, G&A expenses were $3,352,440, increased by $465,332, or 16%, compared with $2,887,108 for the three months ended March 31, 2016, which was mainly due to the increased number of branches and employees and business tax. The increase in business tax was primarily due to the increase in revenue.

 

Other income (expenses)

 

Net other expenses for the three months ended March 31, 2017 was $54,986 and the net other income for the three months ended March 31, 2016 was $21,219. Other income (expense) mainly consists of interest income, interest expenses, other income and loss on disposal of fixed assets. Compared with the three months ended March 31, 2016, net other income (expenses) decreased due to the fluctuation of exchange rate.

 

Income tax expense

 

For the three months ended March 31, 2017, the income tax expense was $757,279, increased by $754,080, or 23,572%, compared with $3,199 for the three months ended March 31, 2016. The increase was mainly due to the increased income before income tax for the three months ended March 31, 2017 compared to that for the three months ended March 31, 2016.

 

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

 

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

 

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

 

Liquidity and Capital Resources

 

The following table represents a comparison of the net cash provided by operating activities, net cash used in investing activities and net cash provided by (used in) financing activities for the three months ended March 31, 2017 and 2016:

 

		Three Months Ended March 31,
		2017				2016				Change				Percent
Net cash provided by operating activities		$	1,980,222			$	329,985				1,650,237				500	%
Net cash used in investing activities			(2,619,459	)			(451,385	)			(2,168,074	)			480	%
Net cash provided by (used in) financing activities			244,687				(639,020	)			883,707				-138	%

 

 

Operating activities

 

Net cash provided by operating activities during the three months ended March 31, 2017 was $1,980,222, significantly increased in comparison with $329,985 net cash provided by operating activities during three months ended March 31, 2016. The amount change was mainly due to the increase in net income.

  

Investing activities

 

Net cash used in investing activities was $2,619,459 during the three months ended March 31, 2017, which is mainly due to purchase of marketable securities, property, plant and equipment and intangible assets during the period. The net cash used in investing activities was $451,385 for the three months ended March 31, 2016, which is mainly due to purchase of property, plant and equipment and intangible assets during the period.

 

Financing activities

 

Net cash provided by financing activities was $244,687 during the three months ended March 31, 2017, which is the result of proceeds from the Company’s related party borrowings. The net cash used in financing activities was $639,020 for the three months ended March 31, 2016, which is the result of repayment for the borrowings from the Company’s related parties and third parties.

   

Related Party Loan and Loans to Unrelated Third Parties

 

Anhou Registered Capital Increase

 

On April 27, 2013, the China Insurance Regulatory Commission (“CIRC”) issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million (approximately $8 million). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million (approximately $8 million) can continue to operate its existing business within the provinces where they have a registered office or branch office, but shall not set up any new branches in any provinces where it has no registered office or a branch office.

  

Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, used to have a registered capital of RMB10 million (approximately $1.6 million). The branch offices of Anhou currently were all in Henan province. To better implement its expansion strategies, Anhou intended to increase its registered capital to RMB50 million (approximately $8 million) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in the PRC.

 

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

 

On 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).

 

Loan Receivable

 

On October 24, 2016, our Company entered into a loan agreement with third party, Rich Fountain Limited (“RFL”), which was incorporated under the laws of Samoa. We provided a short-term loan amount of NTD 48,000,000 ($1,486,846) to RFL. The short-term loan bears an interest rate of 4.5% per annum and the principal and interest are due on April 23, 2017. On April 21, 2017, the Company and RFL entered a supplemental agreement to extend this loan to October 23, 2017.

 

Related Party Loans

 

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.

 

On December 30, 2016, AHFL entered into an amended loan agreement with Law Broker, pursuant to which, the term for the loan shall be extended from January 1, 2017 to December 31, 2017, with a fixed interest rate of 2%. The principal amount of the loan agreement together with the accrued interest for the extended term shall be paid in one lump sum before December 31, 2017.

 

On March 13, 2017, AHFL entered into a loan agreement with Law Enterprise. Pursuant to the loan agreement, Law Broker shall provide a loan in the amount of NT$17 million to AHFL and advance the loan to AHFL within 10 days of its effective date. The term for the loan shall be from March 13, 2017 to March 12, 2018 with a fixed annual interest rate at 2.0%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before March 12, 2018. 

 

Except for the aforementioned loans, 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 March 31, 2017 and December 31, 2016:

 

		March 31, 2017				December 31, 2016
Due to Mr. Mao (CEO of the Company)		$	380,863			$	361,379
Due to Ms. Lu (Shareholder of Law Anhou)			217,690				-
Due to Xude Investment (Owned by Mr. ChwanHau Li)			-				32,374
Due to Mr. Zhu (Legal Representative of Jiangsu)			2,009				1,994
Due to Yuli Broker (Owned by Ms. Lee)			141				265
Due to Yuli Investment (Owned by Ms. Lee)			141				265
Due to I Health Management Corp*			13,963				3,724
Total		$	614,807			$	400,001

*25% of I Health Management Corp’s shares are owned by Multiple Capital Enterprise.

 

Convertible bonds

 

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

 

Long-term loan

  

		March 31, 2017				December 31, 2016
Loan B, interest at 8%, maturity date May 15, 2019		$	145,126			$	144,015
Loan C, interest at 8%, maturity date July 20, 2019			111,748				110,892
Total long term loans		$	256,874			$	254,907

 

On May 15, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan B”) with third party Guowei Hu. The long-term Loan Agreement provided for a $145,126 loan to the Company. The long-term Loan B bears an interest rate of 8% per annum and interest is payable annually. The principal and the last year’s interest will be due on May 15, 2019.

 

On July 20, 2016, the Company’s contractually controlled PRC affiliate Law Anhou Insurance Agency Co., Ltd entered into a loan agreement (“Loan C”) with third party Guowei Hu. The long-term Loan Agreement provided for a $111,748 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 July 20, 2019.

 

Total interest expense was $5,069 for the three months ended March 31, 2017.

 

Contractual Obligations

 

The Company has operating leases for its offices. Rental expenses for the three months ended March 31, 2017 and 2016 were $571,023and $507,460, respectively. At March 31, 2017, total future minimum annual lease payments under operating leases were as follows, by years:

 

Twelve months ending March 31, 2018		$	2,127,670
Twelve months ending March 31, 2019			1,227,502
Twelve months ending March 31, 2020			307,901
Twelve months ending March 31, 2021			40,487
Twelve months ending March 31, 2022			22,756
Thereafter			-
Total		$	3,726,316

    

    

AHFL Acquisition Agreement

 

The Company conducts all of its Taiwanese operations indirectly through its subsidiary Action Holdings Financial Limited (“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. On March 12, 2017, the Company and the selling shareholders of AHFL entered into a fifth Amendment to the Acquisition Agreement (the “Fifth Amendment”), pursuant to which, on or prior to March 31, 2019, the Company agreed to distribute the cash payment in the amount of NTD15 million.

 

 

Engagement Agreement with Ms. Chao

 

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

 

On May 14, 2016, Law Broker and Ms. Chao entered into a supplementary agreement (“Supplementary Agreement”) to postpone her pension vesting date to December 29, 2016. Though Law Broker expects that none of the above-mentioned bonuses need to be paid prior to May 2019, it has recorded long-term liabilities representing the corresponding portion of such bonuses accrued. On March 13, 2017, Law Broker and Ms. Chao entered into an engagement agreement, which is the amendment to Engagement Agreement dated May 10, 2016 to specify 1) Ms. Chao's pension calculation assumption and start date, and 2) the non-competition provision start date. As of March 31, 2017 and December 31, 2016, the balance of such accrued long-term liabilities were $113,256 and $77,440, respectively.

 

Lease Agreements

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Broker to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). For the year ended and as of March 31, 2017, rent income and advance amount were $138 and $141, respectively.

 

On July 1, 2016, the Company entered into a lease agreement with Yuli Investment to lease its Nan-King East Road office space in Taipei City. The lease term was for one year commencing on July 1, 2016 and ending on June 30, 2017, with an annual base rent approximately of $580 (NTD18,000). For the three months ended and as of March 31, 2017, rent income and advance amount were $138 and $141, respectively.

 

Advisory Agreements

 

On May 2, 2016, the Company entered into an advisory agreement with I Health. Pursuant to the advisory agreement, I Health provided 10,000 Taiwan citizen’s health information to the Company for its new insurance product during May 2, 2016 to May 1, 2017. The total advisory fee was approximately $40,000 (NTD1,250,000). The Company has cost of revenue and due to I Health amount of $9,777 and $13,963, respectively, for the three months ended and as of March 31, 2017.

 

On December 7, 2016, the Company entered into an advisory agreement with Fuchang Li (“Mr. Li”, the director of the Company). Pursuant to this advisory agreement, Mr. Li provided investment consulting to the Company from December 7, 2016 to December 6, 2017. The total advisory fee was approximately $58,000 (NTD1,800,000). The Company has prepaid expenses and general and administrative expense amount of $9,346 and $14,019, respectively, as of and for the three months ended March 31, 2017.

  

Off Balance Sheet Arrangements

 

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

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

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

 

Interest Rate Sensitivity

 

As of March 31, 2017, we had cash of USD approximately $7,000, cash of RMB5,015,158 (equivalent to approximately $728,000), cash of HKD1,951,805(equivalent to approximately $251,000), and cash of NTD778,643,013 (equivalent to approximately $25,654,000). We hold our cash for working capital purposes. Declines in interest rates would reduce future interest income. For the three months ended March 31, 2017, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.

 

Foreign Currency Risk

 

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

  

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As required by SEC Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2017. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of March 31, 2017, our disclosure controls and procedures were effective to ensure the information required to be disclosed by an issuer in the reports it files or submits under the 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 March 31, 2017, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

  

 

PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

ITEM 1A. RISK FACTORS.

 

There have been no material changes from the risk factors disclosed in our annual report on Form 10-K for the fiscal year period ended December 31, 2016.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

  

ITEM 5. OTHER INFORMATION.

 

Entry into Loan Agreements

 

On December 30, 2016, AHFL entered into an amended loan agreement with Law Broker, pursuant to which, the term for the loan shall be extended from January 1, 2017 to December 31, 2017, with a fixed interest rate is 2%. The principal amount of the loan agreement together with the accrued interest for the extended term shall be paid in one lump sum before December 31, 2017. This amendment is discussed under Management's Discussion and Analysis of Financial Conditions and Results of Operation.

 

On March 13, 2017, AHFL entered into a loan agreement with Law Enterprise. Pursuant to the loan agreement, Law Broker shall provide a loan in the amount of NTD17 million to AHFL and advance the loan to AHFL within 10 days of its effective date. The term for the loan shall be from March 13, 2017 to March 12, 2018 with a fixed annual interest rate at 2.0%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before March 12, 2018. This loan is discussed under the Management's Discussion and Analysis of Financial Conditions and Results of Operation.

 

On April 21, 2017, the Company and Rich Fountain Limited entered into a supplemental agreement to extend Loan A to October 23, 2017, which is described under Note 5 of Condensed Consolidated Financial Statements (Unaudited).

 

 

ITEM 6. EXHIBITS

 

(a)

Exhibits:

 

Exhibit
Number		Description of Exhibit
10.1		Translation of Amendment to Loan Agreement, dated December 30, 2016, by and between Law Insurance Broker Co., Ltd. and Action Holdings Financial Limited (incorporated by reference to Exhibit 10.92 to the Form 10-K filed with the SEC on March 15, 2017)
10.2		Translation of Loan Agreement, dated March 13, 2017, by and between Law Enterprise Co., Ltd. and Action Holdings Financial Limited Taiwan Branch (incorporated by reference to Exhibit 10.93 to the Form 10-K filed with the SEC on March 15, 2017)
10.3		Translation of Fifth Amendment to Acquisition Agreement, dated March 12, 2017, among China United Insurance Service, Inc. and the selling shareholders of Action Holdings Financial Limited named therein (incorporated by reference to Exhibit 10.91 to the Form 10-K filed with the SEC on March 15, 2017)
10.4		Translation of Amendment to Loan Agreement, dated April 21, 2017, by and between Action Holdings Financial Limited and Rich Fountain Limited
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.

 

   

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: May 10, 2017	By:	/s/ Yi Hsiao Mao
	Name:	Yi Hsiao Mao
	Its:	Chief Executive Officer
		(Principal Executive Officer)
Date: May 10, 2017	By:	/s/ Yung Chi Chuang
	Name:	Yung Chi Chuang
	Its:	Chief Financial Officer
		(Principal Financial and Accounting Officer)