ITEM 1. BUSINESS
Corporate History and Structure
China United Insurance Service, Inc. (“China United,” “CUIS,” or the “Company”) is a Delaware corporation organized on June 4, 2010 by Mao Yi Hsiao, a Taiwanese citizen, and is quoted on the Over the Counter Bulletin Board (“OTCBB”). The Company’s operating companies are in Taiwan and China. Unless context indicates otherwise, reference to the “Company” throughout this annual report refers to China United and its subsidiaries. Reference to Action Holdings Financial Limited (“AHFL”), refers to the combined operations of AHFL and its Taiwan Subsidiaries. Reference to Anhou refers to the combined operations of Anhou and its subsidiaries.
ZLI Holdings Limited (“CU Hong Kong”), a wholly owned Hong Kong-based subsidiary of China United, was originally founded by China United, on July 12, 2010 under Hong Kong laws. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou ZhonglianHengfu Consulting Co., Ltd. (“CU WFOE”) in Henan province of the PRC.
Law Anhou Insurance Agency Co., Ltd. (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd.) was founded in Henan province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC. On November 26, 2013, Anhou changed its name into Law Anhou Insurance Agency Co., Ltd. and obtained its new business license. On December 18, 2013, Anhou obtained its new Professional Insurance Agency License from local bureau of China Insurance Regulatory Commission (“CIRC”) which reflects its new name.
On September 26, 2013, several new PRC individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong, Chen Li (“Anhou New Investors”) and the original shareholders of Anhou, namely, Zhu Shuqin, Wei Qun, Fang Qunlei and Chen Yanxia (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million ($8,165,895), among which, Wang Yanyan would invest RMB10 million ($1,633,179), accounting for 20%, Chen Zhaohui would invest RMB10 million ($1,633,179), accounting for 20%, Yue Jing would invest RMB7.5 million ($1,224,871), accounting for 15%, HouWeizhe would invest RMB5 million ($816,589), accounting for 10%, Zhang Yong would invest RMB4.5 million ($734,930), accounting for 9%, and Chen Li would invest RMB3 million ($489,949), accounting for 6%, of the registered capital of Anhou.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, Hou Weizhe and Zhang Yong, to invest in Anhou on its behalf.
On October 24, 2013, Anhou completed the registration with local Administration Industry and Commerce (“AIC”) on the above-mentioned capital increase. The new business license was issued to Anhou on October 25, 2013.
The registered capital increase of Anhou is in response to the promulgations of certain regulations by China Insurance Regulatory Commission (“CIRC”). On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8,165,890). 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 ($8,165,890), can continue operation of their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million ($1,633,178). The branch offices of Anhou were all in Henan province. To better implement its expansion strategies, Anhou increased its registered capital to RMB50 million ($8,165,890) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in Mainland China.
On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer price of RMB10 million ($1,633,178). Mr. Hu is currently the legal representative, General Manager and the sole director of Anhou.
On October 24, 2013, Anhou completed the share transfer registration with the local AIC. At the end of October 2013, Anhou completed its filing with local CIRC with respect to its previously-conducted share transfer and capital increase.
Anhou’s wholly owned subsidiary Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 2006 in Sichuan province of the PRC, and it provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders voted for transferring all of their equity interests in Sichuan Kangzhuang to Anhou for RMB532,622 ($83,444). On September 6, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Sichuan Kangzhuang. Anhou has complied with all of the applicable laws and regulations with respect to its holding 100% equity interests in Sichuan Kangzhuang.
Jiangsu Law Insurance Brokers Co., Ltd. (“Jiangsu Law” collectively with Anhou, Sichuan Kangzhuang, the “Consolidated Affiliated Entities”, each a “Consolidated Affiliated Entity”) was founded on September 19, 2005 in Jiangsu province of the PRC. Jiangsu Law is allowed to provide insurance brokerage services. On August 12, 2010, at Jiangsu Law’s general meeting of shareholders, its shareholders voted for transferring all of their shareholdings to Anhou for RMB518,000 ($81,153). On September 28, 2010, the equity transfer agreements were signed between Anhou and each individual shareholder of Jiangsu Law. Pursuant to Provisions on the Supervision and Administration of Insurance Brokerage Institutions, effective on October 1, 2009, if an insurance brokerage entity fails to bring its registered capital to no less than RMB10,000,000 ($1,566,661) on or prior to October 1, 2012, the China Insurance Regulatory Commission (“CIRC”) or its local counterpart, as applicable, may determine not to extend the insurance brokerage license. To meet such minimum registered capital requirement, on February 11, 2011, Anhou invested RMB4.82 million ($755,131) in Jiangsu Law to increase the registered capital to RMB10 million ($1,566,661). Anhou has complied with all of the applicable laws and regulations with respect to its holding 100% equity interests in Jiangsu Law.
On January 16, 2011, China United issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non-US persons for their investment of $300,000 in cash in the Company’s subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended. The consideration was paid to the account of CU Hong Kong by May 6, 2011. All $300,000 was contributed into the bank account of CU WFOE as registered capital.
Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, we operate our PRC business primarily through our Consolidated Affiliated Entities in China. We do not hold equity interests in our Consolidated Affiliated Entities. However, through the VIE Agreements (as described in more details below) with Anhou and its shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these Consolidated Affiliated Entities. On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, however, how these changes will affect entities currently operating in China, particularly foreign controlled variable interest entities, is not entirely clear. See “Risks Related to Our Corporate Structure in the PRC”.
Our Consolidated Affiliated Entities in China are variable interest entities through which all of our insurance services in China are operated. It is through the VIE Agreements that we have effective control of the Consolidated Affiliated Entities, which allows us to consolidate the financial results of the Consolidated Affiliated Entities in our financial statements. If Anhou and its shareholders fail to perform their obligations under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that give us effective control. Furthermore, if we are unable to maintain effective control of our Consolidated Affiliated Entities, we would not be able to continue to consolidate the Consolidated Affiliated Entities’ financial results with our financial results. During each of the fiscal years ended June 30, 2011 and 2012, 100% of our revenues in our consolidated financial statements were derived from our Consolidated Affiliated Entities. For the year ended June 30, 2013, the first fiscal year after the acquisition of AHFL together with its Taiwan Subsidiaries, 92.66% and 7.34% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively. During the six months ended December 31, 2013, 93.72% and 6.28% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively. For the year ended December 31, 2014, 93.55% and 6.45% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively.
On January 17, 2011, CU WFOE, Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. The VIE Agreements now in effect included:
(1) An Exclusive Business Cooperation Agreement through which CU WFOE is appointed the exclusive services provider to provide Anhou with complete technical support, business support and related consulting services (as described in the agreement) in exchange for 90% of the net profits (as defined in the agreement) of Anhou. The agreement does not provide that CU WFOE is responsible for the debts of the Consolidated Affiliated Entities. The term of the Exclusive Business Cooperation Agreement began on January 17, 2011 and lasts ten years, unless earlier terminated as provide in the agreement. The term of the agreement may be extended at CU WFOE’s discretion prior to the expiration thereof. CU WFOE may terminate the agreement at any time with 30 days’ written notice but Anhou may only terminate the agreement if CU WFOE commits gross negligence or a fraudulent act against Anhou;
(2) a Power of Attorney under which the shareholders of Anhou have vested their collective voting control over Anhou to CU WFOE;
(3) an Option Agreement under which the shareholders of Anhou granted to CU WFOE the irrevocable right and option to acquire all of their equity interests in Anhou, subject to applicable PRC laws and regulations. The Option Agreement began on October 24, 2013 and lasts ten years, but may be renewed at CU WFOE’s election; and
(4) a Share Pledge Agreement under which the shareholders of Anhou have pledged all of their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the Exclusive Business Cooperation Agreement.
As a holding company with no business other than holding equity interest of our operating subsidiary, CU WFOE in China and Law Broker in Taiwan, we rely principally on dividends to be paid by CU WFOE in China and Law Broker in Taiwan. CU WFOE, being the exclusive service provider to Anhou, relies on the service fees to which it is entitled from Anhou. Pursuant to the Exclusive Cooperation Agreement between CU WFOE and Anhou, CU WFOE has the right to collect 90% of the net profits of Anhou. As Anhou is still operating at a loss, Anhou has not paid any service fees to CU WFOE yet and CU WFOE has not paid any dividend to us to date. We expect Anhou to make a profit beginning in the fiscal year ending December 31, 2016, when it should start to pay service fees to CU WFOE, although there can be no assurance that Anhou will become profitable by that time or ever. Our capability to receive dividends from CU WFOE, convert them into USD and make the repatriation out of China is subject to the applicable PRC restrictions on the payment of dividends by PRC companies, laws and regulations on foreign exchange and restrictions on foreign investment. Law Broker, being the only operating entity for our Taiwan business, is primarily focused on life and property insurance brokerage and agency business. Through years of operation, Law Broker has become one of the leading insurance brokerage firms in Taiwan and has expanded its business across Taiwan, with 27 sales and service outlets (including the headquarters) and 2,182 employees and insurance sales professionals.
On February 26, 2014, Anhou completed the registration of the change of its registered address to Room 1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued by Jiangsu Bureau of CIRC on April 21, 2014. Anhou has completed the registration of the share pledge with local AIC. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
Anhou owns 100% equity interest in both Sichuan Kangzhuang and Jiangsu Law. The shareholders of Anhou are Hu Changrong, Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong and Chen Li. All of these shareholders are PRC citizens and do not hold any shares in the Company. Pursuant to the VIE Agreements, CU WFOE becomes the primary beneficiary of Anhou and only leaves Anhou shareholders nominal value therein.
On January 28, 2011, the Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock. On July 2, 2012, the Board of Directors and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Mao Yi Hsiao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000 common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification. Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Company. On August 8, 2014, Mr. Lo Chung Mei (“Mr. Lo”), who had been serving as the Company’s Chief Executive Officer, resigned from his position with the Company. Following the resignation of Mr. Lo, the Company’s Board of Directors appointed Mr. Mao as the Company’s Chief Executive Officer.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of AHFL, a limited liability company (“LLC”) incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL becomes a 100% subsidiary of the Company. On August 5, 2013, AHFL, Taiwan Branch (“AHFLTW”) was established with registered capital of NT$100,000.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent” collectively with “Law Enterprise”, “Law Broker” and “Law Agent”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”), a LLC incorporated in Taiwan on June 3, 2000.
Law Enterprise acts as a holding company of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not in active operation. We operate our Taiwan business primarily through Law Broker.
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan Government on November 26, 2014 and on January 13, 2015, respectively. In accordance with the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation.
On April 23, 2014, AHFL entered into a capital increase agreement (the “Agreement”) with Wong Chun Kwok Johnny (“Mr. Wong”), the owner of Prime Financial Asia Ltd. (PFAL) which is a re-insurance broker company residing in Hong Kong. Upon the Agreement, Mr. Wong would increase PFAL’s registered capital from HK$500,000 ($64,424) to HK$1,470,000 ($189,404), and AHFL would contribute HK$1,530,000 ($197,133) to PFAL’s registered capital. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
On February 13, 2015, the Company and AHFL entered into an acquisition agreement (the “Acquisition Agreement”) with Mr. Li Chwan Hau, the selling shareholder of Genius Holdings Financial Limited (the “Selling Shareholder”), a company with limited liability incorporated under the laws of British Virgin Islands (“GHFL”), to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock (“AHFL Shares”) together with an granted put option for 352,166 shares of common stock of the Company (“Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the Selling Shareholder would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL will become a wholly-owned subsidiary of the Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds approximately 15% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. The acquisition price may be further adjusted on the fourth anniversary of the closing date of the acquisition and depending on the earnings per share of GHFL during the fiscal years of 2014 through 2017, subject to other terms and conditions therein. Mr. Li Chwan Hau is the sole shareholder of GHFL and a director and shareholder of the Company. On February 13, 2015, the acquisition was completed, the Selling Shareholder transferred 100% shares in GHFL to AHFL. The Put Option has not been exercised by the Selling Shareholder as of March 15, 2015.
On January 17, 2014, the board of directors of the Company approved a change in our fiscal year end from June 30 to December 31.
Please refer to the chart below for detailed information of the Company’s shareholders who serve as a director or officer of the Company, the Company’s subsidiaries, or the Consolidated Affiliated Entities.
See “Related Party Transactions” for further information on our contractual arrangements with these parties.
The following flow chart illustrates our Company’s organizational structure:
Products and Services
Law Broker and Anhou market and sell to customers two broad categories of insurance products: life insurance products and property and casualty insurance products, both focused on meeting the particular insurance needs of individuals. The insurance products that Law Broker and Anhou sell are underwritten by some of the leading insurance companies in Taiwan and China, respectively.
Through Anhou’s wholly-owned insurance brokerage firm Jiangsu Law, it also closely interacts with insurance companies and actively locates and introduces the right customers in Anhou’s database matching the insurance products offered by such insurance companies to them.
Life Insurance Products
The life insurance products Law Broker distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products Law Broker distributes combine features of one or more of the categories listed below. Total net revenues from life insurance products distributed by Law Broker accounted for 94.33 % of Law Broker’s total net revenues in the fiscal year ended December 31, 2014. Total net revenues from life insurance products distributed by Law Broker accounted for 94.39% of CUIS’ total net revenues of life insurance iin the fiscal year ended December 31, 2014.
· Individual Whole Life Insurance. The individual whole life insurance products Law Broker distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interests is paid upon the death of the insured.
· Individual Term Life Insurance. The individual term life insurance products Law Broker distributes provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years. Term life insurance policies generally expire without value if the insured survives the coverage period.
· Individual Health Insurance. The individual health insurance products Law Broker distributes pay the insured amount of reasonable hospitalization cost, or certain death benefit in case of the death of the insured, due to sickness, accident or childbirth. Individual health insurance policies expire when the premium is not paid or a certain age is attained.
· Casualty Insurance. Accidental Injury Insurance is the kind of life insurance that insurance benefit is given when the insured is dead or disabled because of accidental injury, which is unforeseen by the injured or against his will. Casualty insurance policies expire when the premium is not paid or a certain age is attained.
· Investment-oriented Insurance. Investment-oriented insurance products are the market linked insurance plan which also provide life coverage. The premium amount (after deduction of certain charges) is invested into different funds. The performance of the fund will depend on the market. A growing upward trend in market will increase the fund value. Every investment-oriented insurance policy has market risk exposure depending on the fund invested and such investment risk is solely borne by the policyholder. Depending on the death benefit, Investment-oriented insurance policies are categorized into two broad categories: (1) The death benefit is equal to the higher of insured amount or fund value. (2) The death benefit is equal to the insured amount plus fund value.
· Foreign Currency Policy Commodity. It is a life insurance policy in which a policy benefit shall all be paid in foreign currencies. The foreign currency policy provides insurance for the insured person’s life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interests, is paid upon the death of the insured.
· Travel Accident Insurance. It is a kind of casualty insurance. The travel accident insurance provides monetary compensation in case the insured dies or loses a limb in an accident while he or she is traveling. The premium is based on the days of traveling and the insured amount.
The life insurance products Law Broker distributed in the fiscal year ending December 31, 2014 were primarily underwritten by Farglory Life Insurance Co., Ltd., CTBC Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd. and AIA International Limited, Taiwan Branch.
The life insurance products Anhou distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products Anhou distributes combine features of one or more of the categories listed below. Total net revenues from life insurance products accounted for 80.8% of Anhou’s total net revenues in the fiscal year ending December 31, 2014.
Total net revenues from life insurance products distributed by Anhou accounted for approximately 5.61% of CUIS’ total net revenues of life insurance products in the fiscal year ending December 31, 2014.
· Individual Whole Life Insurance. The individual whole life insurance products Anhou distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interests is paid upon the death of the insured.
· Individual Term Life Insurance. The individual term life insurance products Anhou distributes provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years. Term life insurance policies generally expire without value if the insured survives the coverage period.
· Individual Endowment Life Insurance. The individual endowment products Anhou distributes generally provide maturity benefits if the insured reaches a specified age, and provide to a beneficiary designated by the insured guaranteed benefits upon the death of the insured within the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period, generally ranging from five to 25 years.
· Individual Education Annuity. The individual annuity products Anhou distributes are primarily education related products. They provide annual benefit payments after the insured attains a certain age, e.g., 18, for a fixed time period, or e.g., four years, and a lump payment at the end of the coverage period. In addition, the beneficiary designated in the annuity contract will receive guaranteed benefits upon the death of the insured during the coverage period. In return, the purchaser of the annuity products makes periodic payment of premiums during a pre-determined accumulation period.
· Individual Health Insurance. The individual health insurance products Anhou distributes primarily consist of dread disease insurance products, which provide guaranteed benefits for specified dread diseases during the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period.
The life insurance products Anhou distributed in the fiscal year ending December 31, 2014 were primarily underwritten by Taikang Life Insurance Company, YINGDA TAIHE Life Insurance Co., Ltd., Sunshine Insurance Group Corporation Limited, Sino Life Insurance Co., Ltd. and AVIVA Life Insurance Co., Ltd.
In addition to the periodic premium payment schedules described above, most of the individual life insurance products we distribute also allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured, a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time. This means that once Anhou or Law Broker 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.
Property and Casualty Insurance Products
Law Broker’s main property and casualty insurance products are automobile insurance, casualty insurance and liability insurance. Law Broker commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenues from property and casualty insurance products accounted for 5.67% of Law Broker’s total net revenues in the fiscal year ending December 31, 2014.
Total net revenues from property and casualty insurance products distributed by Law Broker accounted for 81.42% of CUIS’ total net revenues of property and casualty insurance products in the fiscal year ending December 31, 2014.
The property and casualty insurance products Law Broker distributes can be further classified into the following categories:
· Automobile Insurance. Law Broker distributes both standard automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies Law Broker sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. Law Broker also sells standard third party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Law Broker distributes cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches.
· Casualty Insurance. Casualty insurance is made to insure any loss or damage to property. This is designed to cover loss that is made by direct accident. The policy period is usually one year. The premium is based on the insured amount.
· Liability Insurance. When the insured is legally obligated to indemnify a third party and subject to a claim in connection therewith, the liability insurer is liable to provide such indemnification on behalf of the insured. The policy period is usually one year. The premium is based on the insured amount.
The property and casualty insurance products Law Broker distributed in the fiscal year ending December 31, 2014 were primarily underwritten by Fubon Insurance Co., Ltd., Zurich Insurance Company, ACE Insurance Company, Union Insurance Company and Taian Insurance Co., Ltd.
Anhou’s main property and casualty insurance products are automobile insurance and commercial property insurance. Anhou commenced its sale of commercial property insurance in 2009 and had developed its automobile insurance business since 2010. Total net revenues from property and casualty insurance products distributed by Anhou accounted for 19.2% of Anhou’s total net revenues in the fiscal year ending December 31, 2014.
Total net revenues from property and casualty insurance products distributed by Anhou accounted for 18.58% of CUIS’ total net revenues of property and casualty insurance products in the fiscal year ending December 31, 2014.
The property and casualty insurance products Anhou distributes can be further classified into the following categories:
· Automobile Insurance. Automobile insurance is the largest segment of property and casualty insurance in the PRC in terms of gross written premiums. Anhou distributes both standard automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies Anhou sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and natural disasters. Anhou also sells standard third party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Anhou distributes cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches.
· Commercial Property Insurance. The commercial property insurance products Anhou distributes include basic, comprehensive and all risk policies. Basic commercial property insurance policies generally cover damage to the insured property caused by fire, explosion and thunder and lightning. Comprehensive commercial property insurance policies generally cover damage to the insured property caused by fire, explosion and certain natural disasters. All risk commercial property insurance policies cover all causes of damage to the insured property not specifically excluded from the policies.
The property and casualty insurance products Anhou distributed in the fiscal year ending December 31, 2014 were primarily underwritten by PICC Property and Casualty Co., Ltd., China Pacific Insurance (Group) Co., Ltd., Ping An Property and Casualty Insurance Co., Ltd., China Life Property &Casualty Insurance Co., Ltd. and Fubon Property& Casualty Insurance Co., Ltd. .
Strategic Alliance with AIATW
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”). The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan by insurance agency companies or insurance 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 shall pay AHFL an Execution Fee of $8,367,947 (NT$ 250,000,000). The fee will be recorded as revenue upon fulfilling sales target over the next five years. As of September 23, 2013, AHFL has received $8,367,947 (NT$250,000,000) from AIATW under the Alliance Agreement. Pursuant to the Alliance Agreement, AHFL is entitled to the payment of the execution fee, subject to certain terms and conditions therein, including the satisfaction of the performance targets and the threshold 13-month persistency ratio. 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 an Amendment to Strategic Alliance Agreement (the “Amendment”) with AIATW.
Pursuant to the Amendment, the expiration date of the Strategic Alliance Agreement has been extended from May 31, 2018 to December 31, 2020. In addition, both AHFL and AIATW agree to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, including the downward adjustment of the performance targets as well as the mechanism and formula calculating the Execution Fee to be refunded, if any.
In addition, AHFL agreed to refrain from selling, pledging or transferring more than 30% of its holdings in Law Broker. If such sale of Law Broker securities does take place, AIATW may unilaterally terminate the Strategic Alliance Agreement. Upon such a termination, the Execution Fee shall be recalculated based on formulas provided in the Alliance Agreement.
Unified Operating Platform
Law Broker has its own self-developed Unified Operating Platform. Since Law Broker’s establishment in 1992, it has successfully implemented the following components of its operating platform across its branch offices in Taiwan through a hub center located in Taipei:
· A centralized clients and insurance policy management and analysis system, which encompasses our life insurance unit and property and casualty insurance unit, that will better support business operations and facilitate risk control;
· An integrated administrative and information system, that increases the management efficiency among the subsidiaries, branches and sales departments;
· A centralized and computerized accounting and financial management system, that increases the commission distribution and enforcement;
· A human resources management and analysis system; and
· An e-learning system to provide online training to sales professionals.
Through years of operation, the Unified Operating Platform has proved to be an efficient and streamlined operating system which contributes to the successful expansion and growth of Law Broker into one of the leading companies in Taiwan, with 27 sales and service outlets (including the headquarter) across Taiwan and 2,182 employees and insurance sales professionals.
In accordance with our growth strategy in China, Anhou has made significant effort to adapt the Unified Operating Platform utilized by Law Broker to better meet the operational need in China. Since September 2010, Anhou has successfully implemented the tailored operating platform across the PRC subsidiaries through a hub center located in Nantong, Jiangsu province. We expect that this tailored operating platform will make selling easier for sales agents in China, facilitate standardized business and financial management, enhance risk control and increase operational efficiency for the PRC subsidiaries.
Anhou has tailored and refined the platform on the basis of Law Broker’s well-developed operating platform in Taiwan and believes that it is difficult for our competitors in China, particularly new market entrants, to reproduce a similar platform without substantial financial resources, time and operating experience.
Because the various systems, policies and procedures under both of operating platforms utilized by Law Broker and Anhou can be rolled out quickly as we enter new regions or make acquisitions, we believe we can expand our distribution network rapidly and efficiently while maintaining the quality of our services.
Distribution and Service Network and Marketing
Since Law Broker’s establishment in 1991, it has devoted substantial resources in building up its distribution and service network. Law Broker currently has 27 sales and service outlets spread across Taiwan (including the headquarter), among which, 6 located in northern region, 13 located in central region, 6 located in southern region and 2 located in eastern region. As of December 31, 2014, Law Broker had 1,635 full-time sales professionals, 394 part-time sales professionals and 153 administrative staff.
The following table sets forth some additional information of Law Broker’s distribution and service network as of December 31, 2014, broken down by the four regions:
Law Broker markets and sells life insurance products, property and casualty insurance products directly to the targeted customers through the sales professionals, who are not its employees.
Since Anhou’s establishment in 2003, it has devoted substantial resources in building up its distribution and service network. Anhou has targeted its distribution and service network in provinces with most population in China, such as Henan, Jiangsu and Sichuan. As of December 31, 2014, Anhou has two insurance agencies and one insurance brokerage firm, with 1,177 full time sales professionals and 91 administrative staffs operating across 36 cities within these three provinces.
The following table sets forth some additional information of Anhou’s distribution and service network as of December 31, 2014, broken down by provinces:
Anhou markets and sells life insurance products, property and casualty insurance products directly to the targeted customers through the sales agents, who are not its employees.
Customers
As of December 31, 2014, Law Broker had approximately 560,000 customers, among which approximately 94% purchased life insurance products and approximately 6% purchased property and casualty insurance products from Law Broker.
Due to its extensive line of insurance products underwritten by the insurance companies in Taiwan, Law Broker managed to offer a variety of insurance products to customers of different ages or professions. However, as aging population in Taiwan has gradually become a more recognized social issue, despite of a relatively healthy government-sponsored retirement and medial programs, more and more Taiwanese, especially those with stable financial means and aiming for high-end retirement and medical treatment, has been focusing on endowment and medical type of commercial insurance products, while the investment type of insurance products have been playing a less significant role since the economic downturn.
In addition, from time to time, Law Broker has been, either voluntarily or upon request of insurance companies, advising insurance companies or providing feedback on particular type of insurance products before they are put on the market. This interaction with insurance companies has not only enhanced the close cooperation between Law Broker and the insurance companies, but also gives it an edge in understanding the in-depth feature of such insurance products for marketing and distribution purposes.
Law Broker sells automobile insurance and casualty insurance primarily to individual customers. Law Broker sells liability insurance to institutional customers.
As of December 31, 2014, Anhou had 32,398 customers, among which 31,682 purchased life insurance products and 716 purchased property and casualty insurance products from Anhou.
Anhou sells automobile insurance and individual accident insurance primarily to individual customers. Anhou sells commercial property insurance to institutional customers.
Anhou targeted middle class individuals and family members under 50 years age to be its priority clients, which represent 89.1% of its client base. The revenues of Anhou are primarily generated from the sale of life insurance products and we expect the continuous growth in this regard, as more and more customers in China realized the insufficiency of the mandatory social insurance coverage and the necessity to supplement it with commercial insurance. With the implementation of the national one-child policy through the past decades in China, approximately 39% of the insurance policies distributed by Anhou have designated children under 14 years age as the beneficiary of such policies, Anhou expects the continuous growth of insurance market of these factors in the near future.
In the fiscal year ended December 31, 2014, no single customer accounted for more than 3% of the net revenues of CUIS, Law Broker or Anhou.
Insurance Company Partners
We are selective in terms of choosing insurance company as our partners. We take into consideration of a variety of factors, such as the reputation and integrity of the insurance company, the quality and competitiveness of insurance products offered, the prudence and health of the financial standing of the insurance company as well as the complexity and efficiency of claim adjustment and settlement. During years of operation, both Law Broker and Anhou have formed strategic relationships with numerous insurance companies in Taiwan and China, respectively, as of December 31, 2014, Law Broker had established business relationships with 19 insurance companies in Taiwan and Anhou had established business relationships with 31 insurance companies in China.
On June 10, 2013, AHFL entered into an Alliance Agreement with AIATW. The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan by insurance agency companies or insurance 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 shall pay AHFL an Execution Fee of $8,367,947(NT$ 250,000,000). The fee will be recorded as revenue upon fulfilling sales target over the next five years. As the date of September 23, 2013, AHFL has received $8,367,947 (NT$250,000,000) from AIATW. Pursuant to the Alliance Agreement, AHFL is entitled to the payment of the execution fee, subject to certain terms and conditions therein, including the satisfaction of the performance targets and the threshold 13-month persistency ratio. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.
On September 30, 2014, AHFLentered into an Amendment to Strategic Alliance Agreement (the “Amendment”) with AIA TW. Pursuant to the Amendment, the expiration date of the Strategic Alliance Agreement has been extended from May 31, 2018 to December 31, 2020. In addition, both AHFL and AIATW agree to adjust certain terms and conditions set forth in the Strategic Alliance Agreement, including the downward adjustment of the performance targets as well as the mechanism and formula calculating the Execution Fee to be refunded, if any. In addition, AHFL agreed to refrain from selling, pledging or transferring more than 30% of its holdings in Law Broker. If such sale of Law Broker securities does take place, AIATW may unilaterally terminate the Strategic Alliance Agreement. Upon such a termination, the Execution Fee shall be recalculated based on formulas provided in the Alliance Agreement.
In the fiscal year ended December 31, 2014, Law Broker’s top five insurance company partners, after aggregating the business conducted between Law Broker and the various local branches of the insurance companies were Farglory Life Insurance Co., Ltd., CTBC Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., and AIA International Limited, Taiwan Branch. Among them, Farglory Life Insurance Co., Ltd. accounted for 30.4 % of Law Broker’s total net revenues from commissions and fees in the fiscal year ending December 31, 2014.
In the fiscal year ended December 31, 2014, Anhou’s top five insurance company partners, after aggregating the business conducted between Anhou and the various local branches of the insurance companies were Taikang Life Insurance Co., Ltd., YINGDA TAIHE Life Insurance Co., Ltd., Sunshine Insurance Group Corporation Limited, Sino Life Insurance Co., Ltd., and AVIVA Life Insurance Co., Ltd. Among them, Taikang Life Insurance Co., Ltd. accounted for 20.12% of Anhou’stotal net revenues from commissions and fees in the fiscal year ending December 31, 2014.
Competition
A number of industry players are involved in the distribution of insurance products in Taiwan and PRC. We compete for customers on the basis of product offerings, customer services and reputation. Because we primarily distribute individual insurance products, our principal competitors include:
· Professional insurance intermediaries. Life insurance is our core business and has a strong regional feature. Through years of business development, we believe that we can compete effectively with other insurance intermediary companies as we have a longer operational history and over the years have assembled a strong and stable team of managers and sales professionals. With the implementation of our unified operating platform, we believe that we could strengthen our lead in our developed local regions and expand our operation to our newly selected areas. However, with increasing consolidation expected in the insurance intermediary sector in the coming years, we expect competition within this sector to intensify.
· Insurance companies. The distribution of individual life insurance products in Taiwan and China historically has been dominated by insurance companies, which usually use both in-house sales force and exclusive sales agents to distribute their own products. We believe that we can compete effectively with insurance companies because we focus only on distribution and offer our customers a broad range of insurance products underwritten by multiple insurance companies.
· Other business entities. In recent years, business entities that distribute insurance products as an ancillary business, primarily commercial banks and postal offices have been playing an increasingly important role in the distribution of insurance products, especially life insurance products. However, the insurance products distributed by these entities are usually confined to those related to their main lines of business, such as investment-related life insurance products. We believe that we can compete effectively with these business entities because we offer our customers a broader variety of products.
Law Broker is one of the leading insurance brokerage firms in Taiwan. During the past two decades, Law Broker has expanded its business across Taiwan, with 27 sales and service outlets (including the headquarter) and 1,635 full time sales professionals and 394 part-time sales professionals and 153 administrative staffs spread over the four regions of Taiwan. Other than insurance companies and commercial banks, Law Broker’s primary competitors are Taiwan insurance brokerage companies of relatively large size, such as Everpro Insurance Brokers Co., Ltd. Through years of operation, Law Broker has won numerous awards from various Taiwan government authorities for its excellence in the insurance brokerage industry. Among which, from year 2005 to year 2008, Law Broker has won the “Taiwan Insurance Excellence Award - Talent Training” for four consecutive years, the “Taiwan Insurance Excellence Award - E-commerce” in 2009, the "Taiwan Insurance Excellence Award - Customer Service and Personal Training” in 2011, the “Taiwan Insurance Excellence Award - Golden Medal for Information Application, Silver Medal for Personnel Training and Silver Medal for Customer Service” in 2013, the “Insurance Dragon and Phoenix Award” in 2012 and 2013 as well as the Most Desirable Insurance Brokerage Company of Finance Insurance Graduates in 2013. The “Taiwan Insurance Excellence Award" is one of most prestigious as well as well-participated insurance events in Taiwan, co-sponsored by the Taiwan Insurance Institute, Taiwan Financial Supervisory Committee and Taiwan Consumer Protection Committee, to encourage the insurance industry participants to actively enhance insurance service quality as well as to improve customer services.
During the past 11 years, Anhou has expanded its business across 36 cities within Henan, Sichuan and Jiangsu provinces with 1,177 full time sales professionals and 91 administrative staffs. Based on the insurance products Anhou is offering and the geographic areas of its branch offices, Anhou’s primary competitors are small-sized and middle-sized insurance agency companies. Anhou is relatively larger in terms of the number of salesmen as well as the sales revenue comparing to those competing insurance agency companies. On April 20, 2012, Anhou obtained the nationwide license from CIRC, pursuant to which Anhou may set up its branch office across the PRC, to carry out the insurance agency business, with no further approval requirement from CIRC other than filing with the local CIRC at the provincial level.
On March 26, 2012, CIRC issued the Notice on Suspension of Market Entry Approval of Regional Insurance Agencies and Certain Part-time Insurance Agencies (“2012 Notice”). Pursuant to the 2012 Notice, CIRC and its local counterparts will suspend granting any new license to full-time insurance agencies operating on a regional basis (“Regional Insurance Agencies”) as well as to branch offices of existing Regional Insurance Agencies. In addition, no new license for part-time insurance agency businesses will be granted unless such applicant is a financial institution or a China Post office. However, CIRC emphasized in the 2012 Notice that its local counterparts shall continue to support the establishment of insurance intermediary groups and full-time insurance agencies operating on a nationwide basis, as well as continue to support their respective branch offices.
As indicated in the 2012 Notice, it appears that CIRC is aiming to increase the entry thresholds of Regional Insurance Agencies and part-time insurance agencies with a view to reducing the number, as well as, enhancing the quality of insurance agencies in the market. CIRC has also indicated in the 2012 Notice that it intends to further amend related rules and regulations to improve the market entry and exit mechanism for insurance agencies, and promote the professionalism as well as enhance the quality of insurance agencies in the market.
On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million ($8.1 million), can continuously operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
With the promulgation and implementation of the above-mentioned regulations, we expect a better regulated insurance agency market in China with orderly competition and pursuit for professional excellence, which will accentuate our competitive advantage due to our continuous commitment to quality service. On October 24, 2013, Anhou has increased its registered capital to RMB50 million ($8,165,890). As of the date of filing of this Annual Report on Form 10-K, Anhou is one of the approximately 100 insurance agencies with a PRC nationwide license. We believe that we will be in a better position to obtain the full support expressly provided in the 2012 Notice from the local CIRC on our expansion strategy nationwide.
Intellectual Property
To protect our intellectual property, we rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees, sales agents, contractors and others.
Law Enterprise, Law Broker and Law Agent jointly own the following registered trademarks in Taiwan:
the Service Mark of Law Insurance Broker Co., Ltd. under the registration number 01462327, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law Insurance Broker Co., Ltd. under the registration number 01604254, with a 10-year validity from October 16, 2013 to October 15, 2023;
the logo of Blue Magpie, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (定律) under the registration number 01462328, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (定律) under the registration number 01611772, with a 10-year validity from December 1, 2013 to November 30, 2023;
the logo of Bao Xian Tong and INS, with a 10-year validity from May 16, 2013 to May 15, 2023; and
the logo of Magpie Baby, with a 10-year validity from May 16, 2012 to May 15, 2022.
Law Broker has the following registered trademarks in Taiwan:
the logo of Blue Magpie Fleet, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Insurance Broker, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Blue Magpie, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Symbiosis, Co-cultivation Co-Prosperity and Law Blue Magpie Picture, with a 10-year validity from July 1, 2008 to June 30, 2018;
the logo of Education Training Blue Magpie, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Cartoon Blue Magpie, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Little Blue Magpie, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Triumph Blue Magpie, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Blue Magpie Fleet Picture, with a 10-year validity from May 1, 2008 to April 30, 2018; and
the logo of Fighting Blue Magpie, with a 10-year validity from June 1, 2008 to May 31, 2018.
Jiangsu Law has one registered trademark in China, the logo of Jiangsu Law:
Employees
As of December 31, 2014, Law Broker has a total of 153 full-time employees and Anhou has 91 full-time employees. Our employees are not represented by any collective bargaining agreement. We believe that we have good relations with our employees and we have never experienced a work stoppage.
Regulation
Taiwan Regulations of the Insurance Industry
The insurance industry in Taiwan is highly regulated. Financial Supervisory Committee of Republic of China, the FSC, is the regulatory authority responsible for the supervision of the insurance industry in Taiwan. Insurance activities undertaken within Taiwan are primarily governed by the Insurance Law and the related rules and regulations.
Insurance Law
The current principal regulation governing insurance in Taiwan is Insurance Law, latest amended on January 8, 2014 by Legislative Yuan, which provided the initial framework for regulating the insurance industry.
The Insurance Law defines several subjects of insurance industry, such as insurer, insurance agency, insurance brokerage and insurance adjustor. It established requirements for form of organization, and qualifications and procedures to establish an insurance organization as well as separation of property insurance businesses and life insurance businesses. The Insurance Law distinguishes insurance between fire disaster, marine, land and air, liability, surety , and other casualty and property insurance businesses on the one hand, and life insurance, health insurance, casualty insurance and annuity businesses on the other. Unless permitted by the FSC, insurance companies are not allowed to engage in both types of insurance businesses.
The insurers, insurance agencies, insurance brokerages and insurance adjustors must join the related industry associations, or they are prohibited from conducting business operation.
FSC
The FSC is in charge of the financial market and financial service industries, among the insurance industry and has the power to control the following items:
1. Financial system and supervision policy.
2. The preparation, amendment and abolishment of financial laws and regulations.
3. Supervision and management of the financial institutions, include its establishment, revocation, abolishment, change, merger, dissolution, and business scope.
4. Development, supervision and management of financial market.
5. Inspection of financial institution.
6. Inspection on public listing company related to their securities market-related matters.
7. Foreign financial matters.
8. Protection of financial customers.
9. Dealing and penalizing the violation of related laws and regulations of finance.
10. Collection of and analysis on relevant statistic data related to financial supervision, management and inspection.
11. Other matters related to financial supervision, management and inspection.
Regulation of Insurance Agents and Agencies
The current principal regulation governing insurance agents and agencies is the Rules on the Administration of Insurance Agent latest amended on June 24, 2014 by Insurance Bureau of FSC (the “Agent Rule”). An insurance agent stipulated under the Insurance Law refers to a person who is on behalf of the insurer to conduct agency business pursuant to the agency contract or the power of attorney and charges fees from the insurer. Depending on their focused insurance areas, i.e. property insurance and life insurance, insurance agents can be divided into property insurance agents and life insurance agents. No matter what insurance industry an insurance agent is engaged in, it must have one of the following qualifications: (1) having passed the insurance agency examination for professional and technical staff; (2) having passed the insurance agency qualification test; or (3) having obtained the agency practitioner certificate and practiced the same business. Those who have agent qualifications required by the Agent Rule may conduct business after they obtain the practitioner certificates under the name of themselves or the company they work for. An agency company must hire more than one agent to act as signatory(ies), and registered with the administrative authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If necessary, the administrative authority may, in its discretion, require the company to add more signatories. An insurance agent may only work for one insurance agency company as signatory at one time.
There are special requirements for agency companies, such as the name of an agent company must contain the words "insurance agency", and when an agency company applies to operate agency business, the minimum registered capital must be at least NT$5 million ($157,953) fully paid up in cash, according to which, insurance agency companies with business license obtained prior to the implementation of this latest Agent Rule shall adjust their registered capital within five years upon the its implementation.
The Practitioner Certificate
The practitioner certificate has a duration of five years, and must be renewed before expiration. In case an agent has the qualifications for both of property and life insurance, unless otherwise approved by the administrative authority, only one kind of insurance agency practitioner certificate may be obtained upon his selection.
Education and Training
There’re two types of education and training for an insurance agent, pre-vocational and on-the-job education and training. An insurance agent must attend in pre-vocational education and training for at least 32 hours during the one year before applying for practicing insurance agency business and on-the-job education and training for at least 16 hours with law courses for no less than 8 hours per year, commencing after one year from the issuance of this latest Agent Rule.
Management of Insurance Agencies
The rules describing how to conduct insurance agency business concentrate on the concept that the agencies must take care of customers' matters in good faith. To ensure this concept is properly carried out, the rules require insurance agency companies must have legal compliance officers with one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories; (2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) having graduated from departments related to insurance or law departments of colleges and universities with more than three years working experience in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance Brokers and Brokerage Companies
The current principal regulation governing insurance brokers and brokerage companies is the Rules on the Administration of Insurance Broker last amended on June 24, 2014 by Insurance Bureau of FSC (the “Broker Rule”). An insurance broker stipulated under the Insurance Law refers to a person who negotiates to conclude an insurance contract on behalf of the insured and charges fees from the insured. Depending on their focused insurance areas, i.e. property or life insurance, insurance brokers can be divided into property insurance brokers and life insurance brokers. No matter what insurance industry an insurance broker is engaged in, it must have one of the following qualifications: (1) have passed the insurance brokerage examination for professional and technical staff; (2) have passed the insurance brokerage qualification test; or (3) have obtained the insurance brokerage practitioner certificate and practiced the same business.
Those who have brokerage qualifications required by the Broker Rule may conduct business after they obtain the practitioner certificates under their own name or the company they work for. A brokerage company must hire more than one broker to act as signatory(ies), and registered with the administrative authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If necessary, the administrative authority may, in its discretion, require the company to add signatories. An insurance broker may only work for one insurance brokerage company as signatory at one time.
There are special requirements for brokerage companies, such as the name of an brokerage company must contain the words "insurance broker"; when an brokerage company applies to operate brokerage business, the minimum registered capital must be at least NT$5 million ($157,953) fully paid up in cash, according to which, insurance brokerage companies with business license obtained prior to the implementation of this latest Broker Rule shall adjust their registered capital within five years upon the its implementation.
The Practitioner Certificate
The insurance broker practitioner certificate has a validation duration of five years, and must be renewed before expiration. In case a broker has the qualifications for both property insurance and life insurance, he may obtain both insurance brokerage practitioner certificates.
Education and Training
There’re two types of education and training for an insurance broker, pre-vocational and on-the-job education and training. An insurance broker must attend pre-vocational education and training for at least 32 hours during the one year before applying for practicing insurance broker business and on-the-job education and training for at least 16 hours with law courses for no less than 8 hours per year, commencing after one year from the issuance of this latest Broker Rule.
Management of Insurance Brokerages
The rules describing how to conduct brokerage business concentrate on the concept that the brokerages must take care of customers' matters in good faith. To ensure that this concept is properly carried out, the rules require insurance brokerage companies must have legal compliance officers who have one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories; (2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) have graduated from college and university departments related to insurance or law with more than three years working experience in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance Salespersons
The current principal regulation governing individual insurance salespersons is the Rules on the Administration of Insurance Salespersons latest amended on September 14, 2010 by Insurance Bureau of FSC (the “Salesperson Rule”). An insurance salesperson falling under the Insurance Law refers to a person who is engaged in attracting insurance business for insurance companies, insurance brokerage companies and insurance agency companies. A salesperson is not allowed to attract business for the company he belongs unless he has completed the registration in accordance with the Salesperson Rules and has obtained the registration certificate. In order to obtain the registration certificate, an insurance salesperson must be at least 20 years old and has at least graduated from a senior high school or a senior vocational school or have an equivalent educational background. In addition, the salesperson must meet one of the following requirements: (1) passed the salesperson qualification examination held by relevant associations; or (2) have a valid the registration certificate. Once the salespersons passed the qualification examination, the relevant association will notify the company where the salesperson works, then the company will issue a registration certificate for the salesperson and file such registration certificate with the relevant authorities. The registration certificate is valid for five years and must be renewed before expiration. The salesperson must present the registration certificate before they start attracting insurance business. Unless approved by the company, the salesperson may not work for any other insurance company, insurance brokerage company or insurance agency company. The company supervises the work of the salesperson and is joint and severally liable for any damage caused by its salesperson.
Education and Training
Salespersons must attend in education and training held by their companies every year, or the companies shall revoke the registration certificates of those who fail to attend such education and training.
The Salesperson Rule also stipulates the proper ways and manners to be followed by the salespersons in conducting their businesses and specifies the penalties in case of their violation of the Salesperson Rule.
Taiwan Regulations on Foreign Exchange
Foreign exchange regulation in Taiwan is primarily governed by the Ordinance of Foreign Exchange Administration, latest amended on April 29, 2009 (the “Foreign Exchange Ordinance”). Under the Foreign Exchange Ordinance, foreign exchange refers to foreign currency, bills and marketable securities. The authority managing the administration of foreign exchange is Ministry of Finance of Republic of China, while the authority managing the practical operation of foreign exchange business is Central Bank of Republic of China. The Foreign Exchange Ordinance also specifies the allocated power of Ministry of Finance and Central Bank, respectively. To the extent that any foreign exchange receipts, payments or transactions reach the threshold of NT$500,000 ($16,653) or equivalent in foreign currency, it must be reported to the Central Bank or its designated authorities. Upon incurrence of any of the following events, the State Council of Republic of China may determine and announce that for a period of time, to close the foreign exchange market, suspend or restrict all or partial foreign exchange payment, order a mandatory sale or deposit of all or partial foreign exchange into a designed bank, or dispose in any other manner as it deems necessary:
· the disorder in domestic or international economy to the detriment of the stability of Taiwan’s economy; or
· Taiwan suffers serious trade deficit.
Taiwan Regulation on Foreign Investment
The current principal regulation governing foreign investment is Foreign Investment Regulation latest amended on November 19, 1997 (the “Investment Regulation”). Under the Investment Regulation, investment refers to any activities involving (1) holding share capital of a company incorporated in Taiwan; (2) establishing branches, wholly-owned or partnership enterprises in Taiwan; or (3) providing more than one-year term loan to the above-mentioned investee enterprises. The authority in charge of foreign investment is Ministry of Economic Affairs of Republic of China. The industries in Taiwan are categorized into permitted, restricted and prohibited foreign investment areas. Investors may apply for settlement of exchange in accordance with the annual yield of their investment or the allocation of surplus.
Eminent Domain
When the investment made by an investor constitutes less than 45% of the total amount of capital of the investee enterprise, and the investee enterprise has been expropriated or acquired by the government for the purpose of national defense, reasonable government compensation shall be paid to the investors. However, if the capital contribution made by the investor constitutes at least 45% of the total amount of capital of the investee enterprise and continues remaining above 45% for two decades since its establishment, then the government may not exercise its eminent domain power over such investee enterprise.
Taiwan Regulations on Tax
The current principal regulations governing tax in Taiwan include the following:
· Income Tax Law, latest amended on January 8, 2014;
· The Implementation Rules of Income Tax Law, latest amended on August 26, 2013;
· Value-Added and Non-Value-Added Business Tax Law, latest amended on June 4, 2014; and
· The Enforcement Rules of Value-Added And Non-Value-Added Business Tax Law, latest amended on May 2, 2014.
Under the Income Tax Law, there are two kinds of income tax, comprehensive income tax for individuals and income tax for enterprises operating for profit, respectively.
Individuals who have income with a source within Taiwan must pay comprehensive income tax on their income sourced within Taiwan; while non-resident individuals having income with a source within Taiwan, except otherwise provided in the Income Tax Law, shall pay tax based on the amount attributable to the sources of their income.
The enterprise with head office located in Taiwan shall pay profit-seeking income tax on its global income both within and outside Taiwan; while the enterprises with head office outside Taiwan shall only pay profit-seeking income tax on its business income sourced from within Taiwan.
Rate of Income Tax
The individual comprehensive income tax exemption threshold is NT$60,000 ($1,998) per person per year. Any income beyond such exemption threshold is subject to a progressive tax rate ranging from 5% to 40%.
With respect to enterprises operating for profit, the exemption threshold is NT$120,000 ($3,997). Any income beyond such exemption threshold is subject to 17% tax rate on its taxable income.
Sale of goods or service, import of goods in Taiwan are subject to a Value-Added or Non-Value-Added Business Tax. The Rate of business tax, except as otherwise stipulated in the relevant tax law, ranges from 5% to 10% as determined by the State Council of Taiwan.
PRC Regulations of the Insurance Industry
The insurance industry in the PRC is highly regulated. CIRC is the regulatory authority responsible for the supervision of the Chinese insurance industry. Insurance activities undertaken within the PRC are primarily governed by the Insurance Law and the related rules and regulations.
Initial Development of Regulatory Framework
The Chinese Insurance Law was enacted in 1995. This original insurance law, which we refer to as the 1995 Insurance Law, provided the initial framework for regulating the domestic insurance industry. Among the steps taken under the 1995 Insurance Law were the following:
(a) Licensing of insurance companies and insurance intermediaries, such as agencies and brokerages. The 1995 Insurance Law established requirements for minimum registered capital levels, form of organization, qualification of senior management and adequacy of the information systems for insurance companies, insurance agencies and brokerages.
(b) Separation of property and casualty insurance and life insurance businesses. The 1995 Insurance Law distinguished insurance between property, casualty, liability and credit insurance businesses, on the one hand, and life, accident and health insurance businesses on the other, and prohibited insurance companies from engaging in both types of businesses.
(c) Regulation of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and other unlawful conduct by insurance companies, agencies and brokerages.
(d) Substantive regulation of insurance products. The 1995 Insurance Law gave insurance regulators the authority to approve the policy terms and premium rates for certain insurance products.
(e) Financial condition and performance of insurance companies. The 1995 Insurance Law established reserve and solvency standards for insurance companies, imposed restrictions on investment powers and established mandatory reinsurance requirements, and put in place a reporting regime to facilitate monitoring by insurance regulators.
(f) Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory authority, then the People’s Bank of China, was given broad powers under the 1995 Insurance Law to regulate the insurance industry.
Establishment of the CIRC and 2002 Amendments to the Insurance Law
China’s insurance regulatory regime was further strengthened with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement reform in the insurance industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was amended in 2002 and the amended insurance law, which we refer to as the 2002 Insurance Law, became effective on January 1, 2003. The major amendments to the 1995 Insurance Law include:
(a) Authorizing the CIRC to be the insurance supervisory and regulatory body nationwide. The 2002 Insurance Law expressly grants the CIRC the authority to supervise and administer the insurance industry nationwide.
(b) Expanding the permitted scope of business of property and casualty insurers. Under the 2002 Insurance Law, property and casualty insurance companies may engage in the short-term health insurance and accident insurance businesses upon the CIRC’s approval.
(c) Providing additional guidelines for the relationship between insurance companies and insurance agents. The 2002 Insurance Law requires an insurance company to enter into an agent agreement with each insurance agent that will act as an agent for such insurance company. The agent agreement sets forth the rights and obligations of the parties to the agreement as well as other matters pursuant to law. An insurance company is responsible for the acts of its agents when the acts are within the scope authorized by the insurance company.
(d) Relaxing restrictions on the use of funds by insurance companies. Under the 2002 Insurance Law, an insurance company may use its funds to make equity investments in insurance-related enterprises, such as asset management companies.
(e) Allowing greater freedom for insurance companies to develop insurance products. The 2002 Insurance Law allowed insurance companies to set their own policy terms and premium rates, subject to the approval of, or a filing with, the CIRC.
2009 Amendments to the Insurance Law
The 2002 Insurance Law was amended again in 2009 and the amended insurance law, which we refer to as the 2009 Insurance Law, became effective on October 1, 2009. The major amendments to the 2009 Insurance Law include:
(a) Strengthening protection of the insured’s interests. The 2009 Insurance Law added a variety of clauses such as incontestable clause, abstained and estoppel clause, common disaster clause and amending immunity clause, claims-settlement prescription clause, reasons for claims rejection and contract modification clause.
(b) Strengthening supervision on the qualification of the shareholders of the insurance companies and setting forth specific qualification requirements for the major shareholders, directors, supervisors and senior managers of insurance companies.
(c) Expanding the business scope of insurers and further relaxing restriction on the use of fund by insurers.
(d) Strengthening supervision on solvency of insurers with stricter measures.
(e) Tightening regulations governing the administration of insurance intermediary companies, especially those relating to behaviors of insurance agents.
According to the 2009 Insurance Law, the minimum registered capital required to establish an insurance agency or insurance brokerage as a company must comply with the PRC Company Law. The registered capital or the capital contribution of insurance agencies or insurance brokerages must be paid-up capital in cash. The 2009 Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage practitioners. The senior managers of insurance agencies or insurance brokerages must meet specific qualification requirements, and their appointments are subject to approval of the CIRC. Personnel of an insurance agency or insurance brokerage engaging in the sales of insurance products must meet the qualification requirements set by the CIRC and obtain a qualification certificate issued by the CIRC. Under the 2009 Insurance Law, the parties to an insurance transaction may engage insurance adjusting firms or other independent appraisal firms that are established in accordance with applicable laws, or persons who possess the requisite professional expertise, to conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance Law specifies additional legal obligations for insurance agencies and brokerages.
The CIRC
The CIRC has extensive authority to supervise insurance companies and insurance intermediaries operating in the PRC, including the power to:
(a) promulgate regulations applicable to the Chinese insurance industry;
(b) investigate insurance companies and insurance intermediaries;
(c) establish investment regulations;
(d) approve policy terms and premium rates for certain insurance products;
(e) set the standards for measuring the financial soundness of insurance companies and insurance intermediaries;
(f) require insurance companies and insurance intermediaries to submit reports concerning their business operations and condition of assets; order the suspension of all or part of an insurance company or an insurance intermediary’s business;
(g) approve the establishment, change and dissolution of an insurance company, an insurance intermediary or their branches;
(h) review and approve the appointment of senior managers of an insurance company, an insurance intermediary or their branches; and
(i) punish improper behaviors or misconducts of an insurance company or an insurance intermediary.
Regulation of Insurance Agencies
The principal regulation governing insurance agencies is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. According to the Agency Provisions, the establishment of an insurance agency is subject to minimum registered capital requirement and other requirements and the approval of the CIRC. The term “insurance agency” refers to an entity that engages in insurance agency business within the authorization of, and collects commissions from, insurance companies, including the professional insurance agency companies and their branches. The insurance agency shall meet the qualification requirements specified by the CIRC, obtain the license to conduct an insurance agency business with the approval of the CIRC. An insurance agency may take any of the following forms: (i) a LLC; or (ii) a joint stock limited company. An insurance agency must have a registered capital of at least RMB2 million ($313,332). Where it is established as a nationwide company, its registered capital must be at least RMB10 million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions, pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agency established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
An insurance agency may engage in the following insurance agency businesses:
(a) selling insurance products on behalf of the insurer principal;
(b) collecting insurance premiums on behalf of the insurer principal; and
(c) conducting loss surveys and handling claims of insurance businesses on behalf of the insurer principal; and other business activities specified by the CIRC.
The name of an insurance agency must contain the words “insurance agency” or “insurance sales.” The license of an insurance agency is valid for a period of three years and may be renewed with due application 30 days prior to its expiration. An insurance agency must report to the CIRC when it (i) changes its registered name or the name of its branches; (ii) changes its registered address or the operating address of its branches; (iii) the sponsors or major shareholders change their respective name; (iv) changes its major shareholders; (v) change its registered capital; (vi) materially change its equity structure; (vii) amends its articles of association; or (viii) closes its branches. Personnel of an insurance agency, including those of its branches engaging in the sales of insurance products or relevant loss survey and claim settlement, must pass a qualification examination for insurance agency practitioners organized by the CIRC and obtain a “Qualification Certificate for Insurance Agency Practitioners.” The senior managers of an insurance agency including its branches must meet specific qualification requirements set forth in the Agency Provisions. The appointment of the senior managers of an insurance agency including its branches is subject to review and approval of the CIRC.
Regulation of Insurance Brokerages
The principal regulation governing insurance brokerages is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. According to this Brokerage Provisions, the establishment of an insurance brokerage is subject to the approval of the CIRC. The term “insurance brokerage” refers to an entity provides brokerages service on the execution of the insurance contract between the insured and the insurance company based on the interests of the insured and collects commission as agreed, including the insurance brokerage companies and their branches, The insurance brokerage shall meet the qualification requirements specified by the CIRC and obtain the license to operate an insurance brokering business with the approval of the CIRC. Insurance brokering business includes both direct insurance brokering, which refers to brokering activities on behalf of insurance applicants or the insured in their dealings with the insurance companies, and reinsurance brokering, which refers to brokering activities on behalf of insurance companies in their dealings with reinsurance companies. An insurance brokerage may take any of the following forms: (i) a LLC; or (ii) a joint stock limited company. An insurance brokerage company must have a registered capital or capital contribution of at least RMB10 million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Brokerage Provisions (the “Decision on Revising the Brokerage Provisions”), pursuant to which, CIRC has mandated any insurance brokerage established subsequent to the Decision on Revising the Brokerage Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance brokerage established prior to the issuance of the Decision on Revising the Brokerage Provisions, with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
An insurance brokerage may conduct the following insurance brokering businesses:
(a) making insurance proposals, selecting insurance companies and handling the insurance application procedures for the insurance applicants;
(b) assisting the insured or the beneficiary to claim compensation;
(c) reinsurance brokering business; and
(d) providing consulting services to clients with respect to disaster and damage prevention, risk assessment and risk management; and other business activities specified by the CIRC.
The name of an insurance brokerage must contain the words “insurance brokerage.” The license of an insurance brokerage is valid for three years and may be renewed with due application 30 days prior to its expiration. An insurance brokerage must report to the CIRC when it (i) changes its registered name or the name of its branches; (ii) change its registered address or the operating address of its branches; (iii) the sponsors or the major shareholders change their respective name; (iv) changes its major shareholders; (v) changes its registered capital; (vi) materially changes its equity structure; (vii) amends its articles of association; or (viii) closes its branches. Personnel of an insurance brokerage, including those of its branches engaging in any of the insurance brokering businesses described above, must pass a qualification examination for insurance brokering practitioners organized by the CIRC and obtain a “Qualification Certificate for Insurance Brokerage Practitioners”. The senior managers of an insurance brokerage including its branches must meet specific qualification requirements set forth in the Brokerage Provisions. Appointment of the senior managers of an insurance brokerage including its branches is subject to review and approval by the CIRC.
Regulation of Insurance Salespersons
The principal regulation governing individual insurance salespersons is the Measures on the Supervision of Insurance Salespersons issued by the CIRC on January 6, 2013 and effective on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons promulgated on April 6, 2006 and effective on July 1, 2006. Under this regulation, the term “insurance salesperson” refers to an individual who sells insurance products for an insurance company, including those who are engaged by insurance companies or by insurance agencies. To engage in insurance sales activities as an insurance salesperson, a person first must pass the qualification examination for the insurance agency practitioners organized by the CIRC to obtain a “Qualification Certificate of Insurance Agency Practitioners”. The person must have a junior high school education or above to be qualified for the examination. In addition to the qualification certificate, a person must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Salespersons” issued by the insurance company or insurance agency to which he or she belongs in order to conduct insurance sales activities.
Regulation of Insurance Brokerage Practitioner and Insurance Adjustment Practitioners
The principal regulation governing insurance brokerage practitioners and insurance adjustment practitioners is the Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners issued by the CIRC on January 6, 2013 and effective on July 1, 2013. To engage in the insurance brokerage activities as an insurance brokerage practitioner, or in the insurance adjustment activities as an insurance adjustment practitioner, a person first must pass the qualification examination organized by the CIRC for the insurance brokerage practitioners or for the insurance adjustment practitioners to obtain a “Qualification Certificate of Insurance Brokerage Practitioners” or a “Qualification Certificate of Insurance Adjustment Practitioners”. The person must have a tertiary education or above to be qualified for the examination. In addition to the qualification certificate, a person also must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Brokerage Practitioners” or “Practice Certificate of Insurance Adjustment Practitioners” issued by the insurance brokerage firm or insurance claims adjusting company to which he or she belongs in order to conduct insurance brokerage or claims adjustment activities. An insurance brokerage practitioner is not allowed to conduct insurance brokerage activities on behalf of himself or herself.
Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO
According to the Circular of the CIRC on Distributing the Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO, for the life insurance sector, within three years of China’s accession to the WTO on December 11, 2001, geographical restrictions were to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity services to Chinese citizens and foreign citizens, and no other restrictions allowed except those on the proportion of foreign investment (no more than 50%) and establishment conditions. For the non-life insurance sector, within three years of China’s accession, the geographical restrictions were to be lifted and no restrictions allowed other than establishment conditions. For the insurance brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded subsidiary companies was to be allowed, and no restrictions allowed other than establishment conditions and restrictions on business scope.
PRC Regulations on Foreign Exchange
Foreign Currency Exchange
Foreign exchange regulation in China is primarily governed by the following rules:
· Foreign Currency Administration Rules (2008 Revision), as amended or revised, or the Exchange Rules; and
· Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), as amended or revised, or the Administration Rules.
Under the Exchange Rules, the RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE or relevant authorities.
Under the Administration Rules, foreign-invested enterprises may only buy, sell or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Development and Reform Commission.
PRC Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned companies include:
· Wholly Foreign-Owned Enterprise Law (1986), as amended or revised; and
· Wholly Foreign-Owned Enterprise Law Implementing Rules (2001 Revision), as amended or revised.
Under these regulations, wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards. In addition, these wholly foreign-owned companies are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital. These reserve funds are not distributable as cash dividends.On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, including the Foreign-Invested Enterprise Law.
PRC Regulations on Tax
PRC Enterprise Income Tax
The PRC EIT is calculated base on the taxable income determined under the PRC accounting standards and regulations, as well as the EIT law. On March 16, 2007, the National People’s Congress of China enacted the EIT Law, a new EIT law which became effective on January 1, 2008. On December 6, 2007, the State Council promulgated the Implementation Rules which also became effective on January 1, 2008. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, or the Transition Preferential Policy Circular, which became effective simultaneously with the EIT Law. The EIT Law imposes a uniform EIT rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain exceptions. Under the EIT Law, as further clarified by the Implementation Rules, the Transition Preferential Policy Circular and other related regulations, enterprises that were established and already enjoyed preferential tax treatments before March 16, 2007 will continue to enjoy them in the following manners: (i) in the case of preferential tax rates, for a five-year period starting from January 1, 2008, during which the tax rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a specified term, until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet because of its failure to make a profit, its term for preferential treatment will be deemed to start from 2008.
PRC Business Tax
Taxpayers providing taxable services in China are required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided. According to the Announcement on the VAT Reform Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State Tax Bureau in July 2012, the transportation and some selected modern service sectors, including research and development and technical services, information technology services, cultural creative services, logistics support services, tangible personal property leasing services, and assurance and consulting service sectors, should pay value-added tax instead of business tax based on a predetermined timetable (hereinafter referred to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and October 1, 2012 for entities in Jiangsu. As of March 15, 2015 none of our Consolidated Affiliated Entities has been requested to convert into the VAT system.
Dividend Withholding Tax
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises are exempt from PRC withholding tax. Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are under a 5% withholding tax subject to PRC laws and regulations, provided that we are determined by the relevant PRC tax authorities to be a “non-resident enterprise” under the EIT Law.
PRC regulations relating to the establishment of offshore SPVs by PRC residents
SAFE has promulgated several regulations, including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November 1, 2005. On July 4, 2014, SAFE promulgated the Notice on Issues Relating to Administration of Foreign Exchange in Offshore Investment & Fund-Raising and Round-trip Investment by Domestic Residents Utilizing Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 14, 2014, which replaced Circular 75. On February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving Management Policies of Foreign Exchange in Direct Investment, or SAFE Circular No. 13, which will be effective on June 1, 2015. According to SAFE Circular No. 13, foreign exchange registrations for both domestic and foreign direct investment shall be undertaken by banks, while SAFE and its branches execute indirect supervision on foreign exchange registration of direct investment via banks.The regulation requires PRC residents and PRC corporate entities to register with local banks or local branches (for the supplementary registatration) of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
Under these foreign exchange regulations, PRC residents who will makeinvestments in Special Purpose Vehicles or SPVs are required to register those investments with the bank where the domestic company incorporated, and the PRC residents who have previously made, prior to the implementation of the SAFE Circular No. 37, direct or indirect investments in SPVs are required to register those investments with local SAFE for the supplementary registration.In addition, any PRC resident who is a direct or indirect shareholder of a SPV, is required to update the previously filed registration with the localbanks, with respect to that SPV, to reflect any material change. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions. Furthermore, the persons-in-charge and other persons at such PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.
These foreign exchange regulations provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China.
ITEM 1A.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks described below together with all of the other information included in this Form 10-K. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.” If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.
Risks Relating to Our Business
The recent global macroeconomic events could cause disruptions to our customers and their demand for insurance services. Demand for our products has been, and will continue to be, adversely affected by overall macroeconomic conditions.
The recent global macroeconomic events could have a negative impact on businesses around the world. For example, on August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. In addition, the European sovereign debt crisis that started in 2009 has also had a negative impact on the credit ratings of several European countries and general market sentiment. Furthermore, from May 2013, emerging markets in Asia are facing a capital flight as funds flow back into Europe and the United States. Emerging markets from Thailand to India plunged into the red amid a heavy sell-off, as investors reassessed the implications of another shift in the global economy. These downgrades could have material adverse impacts on financial markets and economic conditions throughout the world. In general, the continuousbad economic situation will cause weak consumer confidence and diminish consumer and business spending, which will have a negative impact on the general market demand for insurance services around the world.
Volatility in the financial markets and overall economic uncertainty increases the risk of substantial quarterly and annual fluctuations in our earnings. Given the current economic environment, we remain cautious and we expect our customers to be cautious as well, which could affect our future results. If the economic recovery slows down or dissipates, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
If we are unable to obtain and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely affected.
We operate our businesses with approvals and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial condition and results of operations, as well as our prospects, will suffer.
We face substantial political risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between Taiwan and the People’s Republic of China, which could adversely affect our financial condition and results of operations.
Law Broker’s executive office and substantial assets are located in Taiwan and most of our revenues are derived from our operations in Taiwan currently. Accordingly, our business, financial condition and results of operations and the market price of our common shares may be affected by changes in Taiwan governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The PRC claims it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established between Taiwan and the PRC, such as the engagement of Economic Cooperation Framework Agreement (“ECFA”) in 2010 and Cross-strait Investment Protection and Promotion Agreement in 2012, relations may become strained again. On June 21, 2013, Association for Relations Across the Taiwan Straits of the PRC and Straits Exchange Foundation of Taiwan entered into the Cross-Strait Agreement on Trade in Services, with the aim of smoothing and extending the cooperation between Mainland China and Taiwan accordingly. However, as of the date of this Annual Report on Form 10-K, the Taiwan government has not approved Cross-Strait Agreement on Trade in Services. The PRC government has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations between the Taiwan and the PRC have on occasion depressed the market prices of the securities of companies in Taiwan. Relations between the Taiwan and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship between the Taiwan and PRC require companies involved in cross-strait business operations to carefully monitor its actions and manage its relationships with both Taiwan and PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the Taiwan and PRC governments for our cross-strait business operations, which could have an adverse effect on our ability to expand our business and conduct cross-strait business operations.
Any future outbreak of contagious diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.
Any future outbreak of contagious diseases, such as severe acute respiratory syndrome or avian influenza, may disrupt our ability to adequately staff our business and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be required to quarantine such employees and the affected areas of our premises. As a result, we may have to temporarily suspend part or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity in affected regions, which may adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of operations.
If we fail to attract and retain productive sales professionals or agents, our business could suffer.
Our entire sales of life, property and casualty insurance products are conducted through its individual sales professionals or agents, who are not our employees. Some of these sales professionals or sales agents are significantly more productive than others in generating sales. If we are unable to attract and retain the core group of highly productive sales professionals or sales agents, our business could be materially and adversely affected. Competition for sales personnel from insurance companies and other insurance intermediaries may also force us to increase the compensation of our sales professionals or sales agents, which would increase operating costs and reduce our profitability.
Our business and prospects could be materially and adversely affected if we are not able to manage our growth successfully.
Law Broker commenced its insurance intermediary business in 1992. During the past two decades, Law Broker has expanded its distribution and service networks across Taiwan, with 27 sales and service outlets (including the headquarters) and 2,182 employees and sales professionals. Anhou commenced its insurance intermediary business in 2003 and has expanded its operations substantially in recent years. Anhou’s distribution and service networks expanded from one company in one province to two insurance agencies and one brokerage in 3 provinces and 36 service outlets as of December 31, 2014. Meanwhile, we broadened our service offerings from the distribution of only life insurance products to cover a wide variety of property and casualty insurance and automobile insurance products. We anticipate continued growth in the future through multiple means. Our expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. To manage and support our continued growth, we must continue to improve our operational, administrative, financial and technological systems, procedures and controls, and expand, train and manage our growing employee and agent base. Furthermore, our management will be required to maintain and expand our relationships with insurance companies, other insurance intermediaries, regulators and other third parties. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to effectively and efficiently manage our expansion could materially and adversely affect our ability to capitalize on new business opportunities, which in turn could have a material adverse effect on our results of operations.
We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.
We expect our future growth to come from acquisitions of high-quality independent insurance agencies and brokerages as well as establishment of new insurance agencies and brokerages. There is no assurance we can successfully identify suitable acquisition candidates, especially in those areas where we do not yet have a presence. Even if we identify suitable candidates, we may not be able to complete an acquisition on terms that are commercially acceptable to us. In addition, we compete with other entities to acquire high-quality independent insurance agencies and brokerages. Many of our competitors may have substantially greater financial resources than we do and may be able to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth strategy may be impeded and our earnings or revenue growth may be negatively affected.
If we fail to integrate acquired companies efficiently, or if the acquired companies do not perform to our expectations, our business and results of operations may be adversely affected.
Even if we succeed in acquiring other insurance agencies and brokerages, our ability to integrate an acquired entity and its operations is subject to a number of factors. These factors include difficulties in the integration of acquired operations and retention of personnel, especially the sales professionals and sales agents who are not employees of the acquired company, entry into unfamiliar markets, unanticipated problems or legal liabilities, and tax and accounting issues. The need to address these factors may divert management’s attention from other aspects of our business and materially and adversely affect our business prospects. In addition, costs associated with integrating newly acquired companies could negatively affect our operating margins.
Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the insurance products in which a company specializes, the loss of key clients after the acquisition closes, general economic factors that impact a company in a direct way and the cultural incompatibility of an acquired company’s management team with us. If an acquired company cannot be operated at the same profitability level as our existing operations, the acquisition would have a negative impact on our operating margin. Our inability to successfully integrate an acquired entity or its failure to perform to our expectations may materially and adversely affect our business, prospects, results of operations and financial condition.
Because the commission and fee revenue we earn on the sale of insurance products is based on premiums and commission and fee rates set by insurance companies, any decrease in these premiums or commission and fee rates may have an adverse effect on our results of operations.
We are engaged in the insurance agency and brokerage business and derive revenues primarily from commissions and fees paid by the insurance companies whose policies our customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation-related and competitive factors that affect insurance companies. These factors, which are not within our control, include the ability of insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of alternative insurance products such as government benefits and self-insurance plans, as well as the tax deductibility of commissions and fees and the consumers themselves. In addition, premium rates for certain insurance products, such as the mandatory automobile liability insurance that each automobile owner in Taiwan and the PRC is legally required to purchase, are tightly regulated by Insurance Bureau of Financial Supervisory Commission, Republic of China, or the FSC in Taiwan and China Insurance Regulatory Commission, or the CIRC in China.
Because we do not determine, and cannot predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes may have on our operations. Intense competition among insurance companies has led to a gradual decline in premium rate levels of some property and casualty insurance products. Although such decline may stimulate demand for insurance products and increase our total sales volume, it also reduces the commissions and fees we earn on each policy sold. Any decrease in premiums or commission and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital expenditures and other expenditures may be disrupted by unexpected decreases in revenues caused by decreases in premiums or commission and fee rates, thereby adversely affecting our operations.
Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.
The insurance intermediary industry in Taiwan and China is highly competitive, and we expect competition to persist and intensify. In insurance product distribution, we face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their products, and from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal offices and automobile dealerships, as well as from other professional insurance intermediaries. We sell insurance products through our exclusive sales professionals and sales agents pursuant to agency contracts entered into with our subsidiaries or Consolidated Affiliated Entities in Taiwan and China, as applicable. The term of these agency contracts with Law Broker generally is for three years and will be re-signed upon expiration, while the term of these agency contracts with Anhou generally is for one year with automatic extension in case neither party objects at the end of the term. These sales professionals and sales agents are not our employees and we cannot assure you that they will continue their services subsequent to the expiration of such agency contracts. We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial results may be negatively affected.
Quarterly and annual variations in our commission and fee revenue may have unexpected impacts on our results of operations.
Our commission and fee revenue is subject to both quarterly and annual fluctuations as a result of the seasonality of its business, the timing of policy renewals and the net effect of new and lost business. Historically, Law Broker’s commission and fee revenue, particularly revenue derived from distribution of life insurance products, for the second and fourth quarters of any given year have been higher than the first and third quarters. Anhou’s commission and fee revenue, particularly revenue derived from distribution of life insurance products, for the fourth quarter of any given year has been the highest among all four quarters, while Anhou’s commission and fee revenue for the first quarter of any given year has been the lowest among all four quarters. The factors that cause the quarterly and annual variations are not within our control. Specifically, consumer demand for insurance products can influence the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations. As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future performance.
If our contracts with insurance companies are terminated or changed, our business and operating results could be adversely affected.
We primarily act as agents for insurance companies in distributing their products to retail customers. Our relationships with the insurance companies are governed by agreements between Law Broker or Anhou and the insurance companies. See “Corporate History and Structure - Insurance Company Partners.” These contracts establish, among other things, the scope of authority, the pricing of the insurance products we distributes and its fee rates. These contracts typically have a term of one year and will be automatically extended for successive one-year term unless terminated earlier with at least 30 days or 60 days advance notice prior to its expiration.
In the fiscal year ended December 31, 2014, Law Broker’s top five insurance company partners, after aggregating the business conducted between Law Broker and the various local branches of the insurance companies were Farglory Life Insurance Co., Ltd., CTBC Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., and AIA International Limited, Taiwan Branch. Among them, Farglory Life Insurance Co., Ltd. accounted for 30.4% of Law Broker’s total net revenues from commissions and fees in the fiscal year ending December 31, 2014.
In the fiscal year ended December 31, 2014, Anhou’s top five insurance company partners, after aggregating the business conducted between Anhou and the various local branches of the insurance companies, were Taikang Life Insurance Co., Ltd., YINGDA TAIHE Life Insurance Co., Ltd., Sunshine Insurance Group Corporation Limited, Sino Life Insurance Co., Ltd., PICC Property and Casualty Co., Ltd., and AVIVA Life Insurance Co., Ltd. Among them, Taikang Life Insurance Co., Ltd. accounted for 20.12% of Anhou’s total net revenues from commissions and fees the fiscal year ending December 31, 2014.
The termination of our contracts with insurance companies that in aggregate account for a significant portion of our business, or changes to material terms of these contracts, could adversely affect our business and operating results.
Our future success depends on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior management team and other key personnel, in particular Mr. Mao Yi Hsiao, the Chief Executive Officer, Ms. Chuang Yung Chi, the Chief Financial Officer, Mr. Hsu Wen Yuan, the Chief Marketing Officer, Mr. Hsieh Tung Chi, the Chief Operating Officer, and Mr. Chiang Te-Yun, the Chief Technology Officer. If one or more of our senior executives or other key personnel, are unable or unwilling to continue in their present positions, we may not be able to replace them easily, or at all. As such, our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and key personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. As is customary in the PRC and Taiwan, we do not have insurance coverage for the loss of our senior management team or other key personnel.
In addition, if any member of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive trade information and key professionals and staff members. Most of our executive officers and key employees have entered into an employment agreement with our subsidiaries or Consolidated Affiliated Entities, respectively. If any disputes arise between any of our senior executives or key personnel and us, we cannot assure you of the extent to which any of these agreements may be enforced.
Sales professionals or sales agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs.
Sales professionals or sales agent and employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:
· making misrepresentation when marketing or selling insurance products to customers;
· hindering insurance applicants from making full and accurate mandatory disclosures or inducing applicants into making misrepresentations;
· hiding or falsifying material information in relation to the insurance contracts;
· fabricating or altering insurance contracts without authorization from relevant parties, selling false policies, or providing false documents on behalf of the applicants;
· falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions;
· colluding with applicants, insured, or beneficiaries to obtain insurance benefits;
· engaging in false claims; or
· otherwise not complying with laws and regulations or our control policies or procedures.
We cannot always deter sales professionals or sales agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective in all cases. We cannot assure you, therefore, that sales professionals or sales agent or employee misconduct will not lead to a material adverse effect on our business, results of operations or financial condition.
All of our personnel engaging in insurance agency or brokering are required under relevant regulations to have a qualification certificate issued by the relevant government authorities in Taiwan or PRC. If these qualification requirements are strictly enforced in the future, our business may be materially and adversely affected.
All of Law Broker’s personnel who engage in insurance agency and brokering are required under relevant Taiwan regulations to obtain a registration certificate. To obtain the registration certificate, the sale professionals have to pass the insurance sales professionals qualification test sponsored by the Life Insurance Association of the Republic of China or Property Insurance Association of the Republic of China (collectively the “Associations”, each a “Association”). Once the applicants passed such test, the Associations will notify Law Broker of those applicants who passed the test and Law Broker is obligated to issue the registration certificate to them. The registration certificate is valid for five years and the holder shall renew the registration certificate prior to its expiration date. See “Corporate History and Structure -Regulation.” As of December 31, 2014, all of Law Broker’s sales professionals had received and held a valid registration certificate.
All of Anhou’s personnel who engage in insurance agency and brokering are required under relevant PRC regulations to obtain a qualification certificate from the CIRC in order to conduct insurance agency or brokering. To obtain the qualification certificate, the sale professionals have to pass the insurance agency or brokerage practitioner qualification test sponsored by the CIRC. Once the applicants passed such test, the CIRC may, subject to certain other conditions set forth in Measures on the Supervision of Insurance Salespersons and Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, determine whether to grant such qualification certificate to the applicants. According to related regulations published by CIRC, qualification certificates obtained before July 1, 2013 have a validity period of three years, starting from the issuance date of such certificates. Holders of those qualification certificates must apply for renewal in local Insurance Regulatory Bureau at least 30 days before the validity period expires. Qualification certificates for insurance intermediaries practitioners (agency, brokerage and adjustment practitioners) obtained after July 1, 2013 are not subject to any validity period. In addition, we understand that the CIRC requires every individual agent carry the qualification certificate and other credentials showing specific information when conducting agency business. Under the relevant PRC regulations, an insurance agency or brokerage that retains unqualified personnel to engage in insurance intermediary activities may be imposed a fine up to RMB100,000 ($16,000). As of December 31, 2014, all of Anhou’s sales professionals had received and held a valid qualification certificate. If more local CIRC agencies were to strictly enforce these regulations in the future, and if a substantial number of our sales forces become unqualified, our business may be adversely affected. Moreover, we may be subject to fines and other administrative proceedings for the failure of our insurance professionals to obtain the necessary CIRC qualification certificate. Any such fines or administrative proceedings could materially and adversely affect our business, financial condition and results of operations.
If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
As a public company, we are subject to reporting obligations under U.S. securities laws. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, every public company is required to include a management report on the Company’s internal controls over financial reporting (“ICFR”) in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting.
While we believe our ICFR is currently effective, there is no assurance we will be able to maintain effective ICFR in the future. If we fail to do so, we may not be able to produce reliable financial reports and prevent fraud. Moreover, if we were not able to conclude we have effective ICFR, investors may lose confidence in the reliability of our financial statements, which would negatively impact the trading price of our shares. Our reporting obligations as a public company, including our efforts to comply with Section 404 of the Sarbanes-Oxley Act, will continue to place a significant strain on our management, operational and financial resources and systems for the foreseeable future.
Any significant failure in our information technology systems could have a material adverse effect on our business and profitability.
Our business is highly dependent on the ability of our information technology systems to timely process a large number of transactions across different markets and products at a time when transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. The proper functioning of our financial control, accounting, customer database, customer service and other data processing systems, together with the communication systems of our Taiwan Subsidiaries and Consolidated Affiliated Entities and our main offices in Taiwan and Jiangsu are critical to our business and to our ability to compete effectively. We cannot assure you that our business activities would not be materially disrupted in the event of a partial or complete failure of any of these primary information technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks or conversion errors due to system upgrading. In addition, a prolonged failure of our information technology system could damage our reputation and materially and adversely affect our future prospects and profitability.
If we are unable to respond in a timely and cost-effective manner to rapid technological change in the insurance intermediary industry, there may be a resulting adverse effect on business and operating results.
The insurance industry is increasingly influenced by rapid technological change, frequent new product and service introductions and evolving industry standards. For example, the insurance intermediary industry has increased use of the Internet to communicate benefits and related information to consumers and to facilitate information exchange and transactions. We believe that our future success will depend on our ability to continue to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a timely and cost-effective basis. There is a risk that we may not successfully identify new product and service opportunities or develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities that our competitors develop or introduce may render our products and services uncompetitive. As a result, we can give no assurances that technological changes that may affect our industry in the future will not have a material adverse effect on our business and results of operations.
The Company’s affiliates have significant control over matters requiring approval by shareholders.
The affiliates to the Company hold 100% of the Company’s outstanding preferred shares, 43.11% of the Company’s outstanding common shares, and 57.66% of the voting power of the Company as of March 15, 2015 (calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended). As a result, the Company’s affiliates, in view of their ownership percentage of our common stock and voting power, have significant control over matters requiring approval by our shareholders, including the selection of our Board of Directors, approval or rejection of mergers, sales or licenses of all or substantially all of our assets, or other business combination transactions. The interests of the Company’s affiliates may not always coincide with the interests of our other shareholders and as such the Company may take action in advancement of its affiliates’ interests to the detriment of our other shareholders, including you. Accordingly, you may not be able to influence any action we take or consider taking, even if it requires a shareholder vote.
Risks Related to Our Corporate Structure in the PRC
If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in insurance agencies and brokerages business, especially those on qualifications as well as capital requirement of the investors. We conduct our operations in China principally through contractual arrangements among our wholly-owned PRC subsidiary, CU WFOE and our operating company in the PRC, namely, Anhou and its shareholders, where Anhou directly holds 100% equity interests in one PRC insurance agency, namely Sichuan Kangzhuang and one insurance brokerage, namely Jiangsu Law. Anhou, Sichuan Kangzhuang and Jiangsu Law hold the licenses and permits necessary to conduct our insurance intermediary business and related businesses in China.
Our contractual arrangements with Anhou, its shareholders enable us to:
· exercise effective control over Anhou and its subsidiaries;
· receive a substantial portion of the economic benefits of Anhou and its subsidiaries in consideration for the services provided by our wholly- owned subsidiary in China; and
· have an exclusive option to purchase all or part of the equity interests in Anhou when and to the extent permitted by PRC law.
Because of these contractual arrangements, we are the primary beneficiary of Anhou and its subsidiaries and have consolidated them into our consolidated financial statements. Although we believe that these agreements are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future, such as the DraftForeign Investment Law described below.
On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. This Draft Foreign Investment Law, once promulgated, will replace and integrate the three existing laws over foreign investment, the Law of the PRC on Chinese-Foreign Equity Joint Ventures, the Wholly Foreign-owned Enterprise Law and the Law of the PRC on Sino-foreign Cooperative Enterprises. The Draft Foreign Investment Law was formulated with a view to opening wider to the outside, promoting and regulating foreign investment, protecting the legitimate rights and interests of foreign investors, safeguarding national security and public interests, and facilitating the healthy development of the socialist market economy. MOFCOM has requested comments from the public on the draft Law by February 17, 2015.
Some of the more significant concepts in the Foreign Investment Law include the following:
Effective Control
The proposed law has adopted the concept of effective control in the foreign investment area. The Draft Foreign Investment Law notes that a company established in China but controlled by foreign investors shall be deemed a foreign investor and foreign entities controlled by Chinese investors can, in some circumstances, be deemed Chinese domestic investors. According to Draft Foreign Investment Law “control” refers to several circumstances including the contractual control by imposing decisive influences on the operation, finance, personnel or technology of the enterprise by contract, trust or other means.
Negative List Management
Most foreign investments will not need pre-approval as was previously required. It means that the Chinese market could be more open and efficient in some sectors to set up foreign invested companies. However, the Draft Foreign Investment Law sets out a Negative List, or Catalogue of Prohibitions. Foreign investors are not allowed to invest in any sector set out in the Catalogue of Prohibitions. Further, a Catalogue of Restrictions will note those sectors with restrictions imposed on foreign investors. The use of Negative lists represent a method of management or administration of foreign investments.
How domestic VIEs, potentially deemed to be foreign enterprises under the Draft Foreign Investment Law and currently operating in Negative List sectors, will be treated is unclear.
National Security Reviews
The Draft Foreign Investment Law also establishes a united foreign investment national security review system which will conduct examinations on the foreign investments that endangers or may endanger the national security.
Information Reporting System
The Draft Foreign Investment Law establishes a foreign investment information reporting system. The new rules include submission of a foreign investment report (such as when setting up a company), a report of any Changes of Foreign Investment (any adjustments of investment) and an annual report. Generally, reporting obligations arise when a foreign investor purchases not less than 10% of the stock of a domestic entity, or less than 10% but the purchase results in a change of control of the domestic entity.
Supervision and Inspection
The Draft Foreign Investment Law establishes a mechanism for the supervision and inspection of foreign investors and foreign invested enterprises from industrial and commercial, taxation, foreign exchange, auditing and other administrative departments. The government’s eye on foreign investments and foreign investment management has shifted from the approval prior to a foreign invested company being established to the supervision and inspection after it is set up.
PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that our contractual arrangements do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.
If the PRC government finds that we, our PRC subsidiary and Consolidated Affiliated Entities do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
If we, our Consolidated Affiliated Entity, Anhou or any of the existing and future subsidiaries of Anhou are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the CIRC, will have broad discretion in dealing with such violations, including:
· revoking the business and operating licenses of our PRC subsidiary and Consolidated Affiliated Entities;
· restricting or prohibiting any related-party transactions among our PRC subsidiary and Consolidated Affiliated Entities;
· imposing fines or other requirements with which we, our PRC subsidiary or our Consolidated Affiliated Entities may not be able to comply;
· requiring us, our PRC subsidiary or our Consolidated Affiliated Entities to restructure the relevant ownership structure or operations; or
· restricting or prohibiting us from providing additional funding for our business and operations in China.
The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business in the PRC.
We rely on contractual arrangements with Anhou and its shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.
We have relied and expect to continue to rely on contractual arrangements with our PRC Consolidated Affiliated Entity, Anhou, and its shareholders to operate our business in China. For a description of these contractual arrangements, see “Corporate History and Structure”. These contractual arrangements may not be as effective in providing us with control over Anhou and its subsidiaries as direct ownership. We have no direct or indirect equity interests in Anhou or any of its subsidiaries.
Since PRC laws restrict foreign equity ownership in companies engaged in insurance agencies and brokerages businesses in China, especially those on qualifications as well as capital requirement of the investors, we rely on contractual arrangements with Anhou to operate our business in China. If we had direct ownership of Anhou and its subsidiaries, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Anhou and its subsidiaries, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on Anhou and its shareholders’ performance of their contractual obligations to exercise effective control. In addition, our contractual arrangements generally have a term of ten-year with an automatic extension of another ten-year term unless our PRC subsidiary, CU WFOE, determines otherwise. Though neither Anhou nor its shareholders has any right under these agreements to terminate such agreements prior to the expiration date, we may not be able to strictly enforce these agreements in case they choose to do so, due to the uncertainty associated with PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable outside PRC. Certain affiliates of the Company are also directors and executive officers of our Consolidated Affiliated Entities. In addition, though Anhou is under the effective control of CU WFOE through these contractual arrangements, the shareholders and officers of Anhou may not act in the best interests of our company or may not perform their obligations under these agreements, including the obligation to renew these agreements when their initial ten-year term expires. Furthermore, as all of Anhou’s assets are located in China, if Anhou or its shareholders determine to terminate the VIE agreements, the unaffiliated investors will have little or no recourse against them. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with Anhou. Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control over these Consolidated Affiliated Entities.
If Anhou and its shareholders fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs and other resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders and officers of Anhou were to refuse to transfer their equity interest in Anhou to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual obligations. However, due to the uncertainty associated with PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable against Anhou outside PRC, we may not be able to effectively enforce our right under these agreements.
All of our contractual arrangements with Anhou and shareholders are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our Consolidated Affiliated Entities, and our ability to conduct our business in the PRC may be negatively affected.
Contractual arrangements we have entered into with Anhou may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Since both of CU WFOE and Anhou are under our common control, either under direct ownership or through contractual arrangements, and certain our officers and directors used to be and are currently the employees of Anhou and its subsidiaries (for example, Hsieh Tung Chi and Chiang Te Yun, our Chief Operating Officer and Chief Technology Officer, also act as Division Chief of Management and Manager of Jiangsu Law respectively, and Hus Wen Yuan, our Chief Marketing Officer, also acts as the General Manager of Sichuan Kangzhuang), the VIE Agreements are likely to be deemed as arrangements between related parties. In addition, CU WFOE has been granted substantial unilateral right under the VIE Agreements. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our PRC subsidiary and Anhou are not on an arm’s-length basis and adjust the income of Anhou in the form of a transfer pricing adjustment, where the relevant PRC tax authorities may, in their discretion, disregard the tax filing of Anhou and impose a different tax amount payable by Anhou. A transfer pricing adjustment could among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by Anhou, which could in turn increase their respective tax liabilities. Moreover, the PRC tax authorities may impose interest and other penalties on Anhou for underpayment of taxes. Though we have not encountered any challenge or transfer pricing adjustment by the PRC tax authorities so far, we could not assure you that the PRC tax authorities will not do so in the future. Our consolidated net income may be materially and adversely affected by the occurrence of any of the foregoing.
PRC regulation of direct investment by offshore holding companies to PRC entities may delay or prevent us from making additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC subsidiary and Consolidated Affiliated Entities. In order to provide additional funding to our PRC subsidiary and Consolidated Affiliated Entities, we may make additional capital contributions to our PRC subsidiary.
Any capital contributions we make to our PRC subsidiary, must be approved by the PRC Ministry of Commerce or its local counterparts, which usually takes approximately 30 days or longer, and registered with the SAFE or its local counterparts. Such applications and registrations could be time consuming and their outcomes would be uncertain. The registered capital of CU WFOE is $300,000 and has been contributed.
We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
Risks Related to Doing Business in Taiwan
Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.
Subsequent to our acquisition of AHFL on August 24, 2012, we operate our insurance agency and brokerage business in Taiwan through our operating entity Law Broker. As an insurance agency and brokerage service provider in Taiwan, Law Broker is subject to extensive regulation. See “Item 1.Business-Regulation” for a discussion of the regulatory environment applicable to Law Broker. As revenue generated by Law Broker constitutes a substantial part of our revenue, any changes in the regulatory environment applicable to Law Broker may adversely affect our business, financial condition and results of operations.
Currently, Law Broker’s principal regulator is the Financial Supervisory Committee of Republic of China, or the FSC, which was formed on July 1, 2004 in accordance with the Financial Supervisory Organization Act, which was intended to grant regulatory authority over the Taiwan insurance industry to the FSC.
Our operations and financial results could be severely harmed by natural disasters.
Law Broker’s executive office is located in Taiwan, which suffered a severe earthquake during fiscal year of 2000. We did not experience significant disruption to our operations as a result of that earthquake. Taiwan is also exposed to typhoons and tsunamis. If a major earthquake, typhoon, tsunami or other natural disaster were to affect our operations, which would seriously harm our business.
Stockholders may have more difficulty protecting their interests under the laws of the Taiwan than they would under the laws of the United States.
Our corporate affairs are governed by our articles of incorporation, the Company Law, and by the laws governing corporations incorporated in Taiwan. In addition, our corporate affairs may remain governed by the Statute of Law Broker. The rights of stockholders and the responsibilities of management and the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated in the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority stockholders. As a result, holders of our common shares may have more difficulty in protecting their interests in connection with actions taken by our management or members of our board of directors than they would as public stockholders of a United States corporation.
Fluctuation in the value of the New Taiwanese Dollar may have a material adverse effect on your investment.
The value of the New Taiwanese Dollar (“NTD” or “NT$”) against the US dollar (“USD”) and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. As of March 15, 2015, the exchange rate of NT$ to the USD was 1NT$=0.03USD.
In Taiwan, our revenues and costs are denominated in the NT$, and a significant portion of our financial assets are also denominated in NT$. We rely substantially on dividends and other fees paid to us by our Taiwan Subsidiary. Any significant appreciation or depreciation of the NT$ against the USD may affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our shares in USD. For example, a further appreciation of the NT$ against the USD would make any new NT$-denominated investments or expenditures more costly to us, to the extent that we need to convert USD into the NT$ for such purposes. An appreciation of the NT$ against the USD would also result in foreign currency translation losses for financial reporting purposes when we translate our USD denominated financial assets into the NT$, as the NT$ is our reporting currency in Taiwan. Conversely, a significant depreciation of the NT$ against the USD may significantly reduce the USD equivalent of our reported earnings, and may adversely affect the price of our shares.
Sensitivity analysis
The following table indicates the instantaneous change in the Company's (loss) / profit after tax (and accumulated losses) that would arise if foreign exchange rates at the reporting date had changed at that date, assuming all other risk variables remained constant.
The weakening of the US Dollar against the above currencies by the same percentages would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by the Company which expose the Company to foreign currency risk at the reporting date. The analysis excludes differences that would result from the translation of the financial statements of foreign operations into the Company's presentation currency.
Risks Related to Doing Business in China
Our limited operating history in China, especially our limited experience in distributing property and casualty insurance products may not provide an adequate basis to judge our future prospects and results of operations.
We have a limited operating history in China. Anhou commenced our insurance intermediary business in 2003 by distributing life insurance products and expanded our offerings to other types of property and casualty insurance products in 2009. Anhou started distributing automobile insurance business in 2010. Life insurance products distributed by Anhou accounted for 80.8% of Anhou’s total net revenues in the fiscal year ending December 31, 2014. Property and casualty insurance products distributed by Anhou accounted for 19.2% of Anhou’s total net revenues in the fiscal year ending December 31, 2014. While life insurance and property and casualty insurance distribution are two major areas of our future growth strategy in China, we cannot assure you that our efforts to further develop these businesses will be successful. If Anhou’s life insurance distribution and property and casualty insurance distribution fail to grow, our future growth in China will be significantly affected. In addition, our limited operating history in China, especially our limited experience in selling property and casualty insurance products, may not provide a meaningful basis for you to evaluate our business, financial performance and prospects.
PRC regulations relating to the establishment of offshore SPVs by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE has promulgated several regulations, including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November 1, 2005. The regulation requires PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. On July 4, 2014, SAFE promulgated the Notice on Issues Relating to Administration of Foreign Exchange in Offshore Investment & Fund-Raising and Round-trip Investment by Domestic Residents Utilizing Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 14, 2014, which replaced Circular 75. On February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving Management Policies of Foreign Exchange in Direct Investment, or SAFE Circular No. 13, which will be effective on June 1, 2015. According to SAFE Circular No. 13, foreign exchange registrations for both domestic and foreign direct investment shall be undertaken by banks, while SAFE and its branches execute indirect supervision on foreign exchange registration of direct investment via banks.These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
Under these foreign exchange regulations, PRC residents who will make, investments in Special Purpose Vehicles or SPVs are required to register those investments with the bank where the domestic company incorporated, andthePRC residents who have previously made, prior to the implementation of the SAFE Circular No. 37, investments in SPVs are required to register those investments with local SAFE for the supplementary registration.In addition, any PRC resident who is a direct or indirect shareholder of a SPV, is required to update the previously filed registration with the bank where the domestic company incorporated, with respect to that SPV, to reflect any material change. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from distributing its profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions, including (i) the requirement by SAFE to return the foreign exchange remitted overseas within a period specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have been evasive and (ii) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at such PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.
These foreign exchange regulations provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China.
Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun, our shareholders, who do not directly hold any interests in the Consolidated Affiliated Entities, are permanent residents of Taiwan, stay in Mainland China for over 183 days per annum. However, as a result of our inquiries with the local branch of SAFE responsible for our PRC subsidiary’s foreign exchange registrations, we were informed that, given the lack of any publicly-available implementing rules or official interpretations issued by the SAFE regarding the issue of whether the registration and amendment filing requirements under SAFE Circular No. 37 and related rules should apply to non-PRC citizens, Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun should not be deemed a PRC resident for these purposes, and any attempt to submit an application to such local SAFE branch with respect to Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun’s investment and shareholdings in our offshore SPV will not be officially accepted or examined.
However, we cannot conclude the SAFE or the local branch responsible for our PRC subsidiary’s foreign exchange registrations will not later alter its position on and interpretation of the applicability of these foreign exchange regulations to Mr. Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun. If the registration procedures set forth in these foreign exchange regulations become applicable to Mr. Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun, we will urge these individuals to, and believe they will, file necessary registrations and amendments as required under SAFE Circular No. 37 and related rules. However, as SAFE regulations and policies have been evolving rapidly in the past few years, we cannot assure that all of these individuals can successfully make or update any applicable registration or obtain the necessary approval required by these foreign exchange regulations as these individuals may not be able to fully satisfy the new requirements or interpretations that SAFE or its local branch may impose or adopt from time to time. The failure or inability of such individuals to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, the Company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to our stockholders could be materially and adversely affected.
Furthermore, as these foreign exchange regulations are still relatively new and there is uncertainty concerning the reconciliation of the new regulations with the approval requirements under other existing PRC laws and regulations, such as tax laws, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
Our businesses in China are highly regulated, and the administration, interpretation and enforcement of the laws and regulations currently applicable to us involve uncertainties, which could materially and adversely affect our business and results of operations.
Anhou operates in a highly regulated industry. The CIRC has authority to supervise and regulate the insurance industry in China. In exercising its authority, the CIRC has wide discretion, and the administration, interpretation and enforcement of the laws and regulations applicable to us involve uncertainties that could materially and adversely affect our business and results of operations. For example, it is not clear when the CIRC will start strictly enforcing the qualification requirements for sales professionals affiliated with professional insurance intermediaries like our Consolidated Affiliated Entities. Although we have not had any material violations to date, we cannot assure you that our operations will always be consistent with the interpretation and enforcement of the laws and regulations by the CIRC from time to time.
The principal regulation governing insurance agencies in China is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. The Agency Provisions have not only set forth the market entrance standards for applicants to establish an insurance agency, but also stipulate the qualification criteria of senior management for such insurance agency. The Agency Provisions have also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. The principal regulation governing insurance brokerages in China is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. The Brokerage Provisions have not only set forth the market entrance standards for applicants to establish a brokerage firm, but also stipulate the qualification criteria of senior management for such brokerage firm. The Brokerage Provisions have also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. On January 6, 2013, CIRC issued Measures on the Supervision of Insurance Salespersons and Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, which sets forth a higher academic requirement for candidates to take the qualification examination for the insurance agency and brokerage practitioners organized by the CIRC. The enactment of any new laws and regulations in replacement of the above-mentioned laws or the change of interpretations of any such current laws and regulations may have a significant impact on the operation and financial results of the Company.
For an expanded discussion of the material regulations affecting the Company, please review the discussion located under the “Regulation” heading in the “Corporate History and Structure” section of this annual report.
Further development of regulations in China may impose additional costs and restrictions on our activities.
China’s insurance regulatory regime is undergoing significant changes. Some of these changes and the further development of regulations applicable to us may result in additional restrictions on our activities or more intensive competition in this industry. For example, under the provisions for administration of professional insurance agencies and brokerages promulgated on September 25, 2009, insurance agencies and brokerage companies are required to increase their guaranty deposit, which generally cannot be withdrawn without the CIRC’s approval, when they open any new branches. Furthermore, pursuant to the provisions, the minimum registered capital requirements for insurance agencies and brokerages were increased substantially. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions and Decision on Revising the Brokerage Provisions, pursuant to which, CIRC has mandated any insurance agency and insurance brokerage established subsequent to the Decisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agencies and insurance brokerages established prior to the issuance of the above Decisions, with registered capital less than RMB50 million($8.1 million), can continuously operate their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office. See “Corporate History and Structure - Regulation.” Such increase would reduce the amount of cash available for other business purposes. In addition, the CIRC issued an Opinion of CIRC on Reforming and Improving the Management System of Insurance Salespersons in September 2010 (the “Reforming Opinion”), which requires the insurance companies and insurance intermediaries to build up a clear legal relationship with the insurance salespersons, improve the fundamental protection rights of the insurance salespersons, and encourage the insurance companies and insurance intermediaries to actively explore new models and marketing channels for insurance sales system. On September 14, 2012, CIRC issued another opinion to reiterate and push forward the Reforming Opinion above.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
We conduct our business in China primarily through our PRC subsidiary and Consolidated Affiliated Entities. Accordingly, our results of operations, financial condition and prospects in China are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 30 years or so, growth has been uneven across different regions and among various economic sectors of China and has been slowed down during the past few years. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, the PRC government still owns a substantial portion of productive assets in China. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Actions and policies of the PRC government could materially affect our ability to operate our business.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business in China primarily through our PRC subsidiary and Consolidated Affiliated Entities. The business conducted by our PRC subsidiary and Consolidated Affiliated Entities in China are governed by PRC laws and regulations. Our PRC subsidiary is generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
Although, since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. But approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. Under our current corporate structure in the PRC, the primary source of our income at the holding company level from our PRC operations is dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary and our Consolidated Affiliated Entities to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange control system in China prevents us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be able to pay dividends in foreign currencies to our shareholders.
We rely principally on dividends and other distributions on equity paid by our subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and in PRC we rely principally on dividends from our PRC subsidiary in China and service, license and other fees paid to our PRC subsidiary by our Consolidated Affiliated Entities for our cash requirements, including any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profits each year as reported in its PRC statutory financial statements, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and our PRC subsidiary that is considered foreign-invested enterprises is required to further set aside a portion of its after-tax profits as reported in its PRC statutory financial statements to fund the employee welfare fund at the discretion of the board. These reserves are not distributable as cash dividends. However, according to the Draft Foreign Investment Law, which may replace the Wholly Foreign-owned Enterprise Law once promulgated, no such reserve is required. Furthermore, if our PRC subsidiary and Consolidated Affiliated Entities in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our PRC subsidiary’s ability to pay dividends and other distributions to us.
The PRC subsidiary has not made any profits to date and as a result has no accumulated profits available for the purposes of dividend distribution. Even though we expect the PRC subsidiary to become profitable in 2016, we intend to use any profits to fund our business operations or expansion of our business.
Any limitation on the ability of our subsidiary and Consolidated Affiliated Entities to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
The PRC Labor Contract Law and its implementing rules may adversely affect our business and results of operations.
On June 29, 2007, the Standing Committee of the National People’s Congress of China promulgated the Labor Contract Law, which became effective on January 1, 2008 and revised in 2012. On September 18, 2008, the State Council promulgated the implementing rules for the Labor Contract Law, which became effective upon adoption. This new labor law and its implementing rules have reinforced the protection for employees, who, under the existing PRC Labor Law, already have certain rights, such as the right to have written labor contracts, the right to enter into labor contracts with indefinite terms under specific circumstances, the right to receive overtime wages when working overtime, and the right to terminate in the labor contracts. In addition, the Labor Contract Law and its implementing rules have made some amendments to the existing PRC Labor Law and added some clauses that could increase cost of labor to employers. In the event that we decide to significantly reduce our workforce, the Labor Contract Law and its implementing rules could adversely affect our ability to effect these changes cost-effectively or in the manner we desire, which could lead to a negative impact on our business and results of operations in the PRC.
We may have difficulty establishing adequate management, legal and financial controls in the People’s Republic of China.
The PRC historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. Currently, we do not have any employees that are formally trained in US GAAP or in ICFR in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
It may be difficult to affect service of process and enforcement of legal judgments upon us and our officers and directors because they reside outside the United States.
To better operate our business in PRC, some of our directors and officers reside in PRC, our service of process on such directors and officers may be difficult to effect within the United States. Also, with respect to the assets for PRC operation located in PRC, any judgment obtained in the United States against us may not be enforceable outside the United States.
The PRC legal system contains uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Our PRC subsidiary is subject to laws and regulations applicable to foreign investment in China. In addition, our PRC subsidiary and Consolidated Affiliated Entities are incorporated in China and subject to all applicable PRC laws and regulations. Because of the relatively short period for enacting such a comprehensive legal system, it is possible that the laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and our stockholders, and may lead to penalties imposed on us because of the different understanding between the relevant authority and us. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
We may have limited legal recourse under the PRC laws if disputes arise under our contracts with parties in China.
The Chinese government has enacted significant laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The Company faces the risk that the parties to contracts may seek ways to terminate the transactions. For example, management of our Consolidated Affiliated Entities may hinder or prevent us from accessing important information regarding the financial and business operations of the Consolidated Affiliated Entities or refuse to pay us contractual consideration due under the VIE Agreements. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under the PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Although legislation in China over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and our stockholders. The inability to enforce or obtain a remedy under any of our existing or future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our operations.
Certain affiliates of ours are also directors and executive officers of our Consolidated Affiliated Entities. PRC laws provide that a director or certain members of senior management owes a fiduciary duty to the company he/ she directs or manages. These individuals must therefore act in good faith and in the best interests of the relevant PRC company pursuant PRC laws and must not use their respective positions for personal gains. These laws do not require them to consider our best interests when making decisions as a director or member of management of the relevant PRC company. For example, it may be possible for management of Anhou to breach the VIE agreements and while their actions may be in violation of US laws they could be legal in the PRC. Any judgment for violation of fiduciary duty under US law may not be enforceable outside the United States. It may not be possible to effect service of process within the United States or elsewhere outside China upon certain our directors or senior executive officers residing in China, irrespective of matters arising under U.S. federal securities laws or applicable state securities laws. Any court judgment of United States for violation of fiduciary duty under US law may not be enforceable in the PRC due to the lack of bilateral treaties between PRC and the United States providing for the reciprocal recognition and enforcement of civil judgment of courts.
Risks Relating to Ownership of Our Shares
You may not be able to liquidate your investment since there is no assurance that a public market will develop for our common stock or that our common stock will ever be approved for trading on a recognized exchange.
There is no established public trading market for our securities. Though we have engaged a market maker to apply for a quotation on the OTCBB in the United States and obtained the approval for trading, our shares are not and have not been listed on any recognized exchange. We cannot assure you that a regular trading market will develop or that if developed, will be sustained. In the absence of a regular trading market, you may be unable to liquidate its investment, which will result in the loss of your investment.
We have no plans to declare any dividends to shareholders in the near future.
We currently intend to retain our future earnings, if any, to support our operations and to finance expansion. The declaration, and amount of any future dividends will be made at the discretion of the Board of Directors (“BOD”), and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the BOD considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. If you require dividend income, you should not rely on an investment in the Company. Income received from an investment in the Company will only come from a rise in the market price in the Company’s stock, which is uncertain and unpredictable.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES.
Facilities
Law Enterprise, Law Broker, Law Management and Law Agent shared the same address as their registered address, which is located at 5th Floor, No. 311 3rd Section, Nanjing East Road, Taipei City, Taiwan, with approximately 753.29 square meters of office space. The lease was between Pengcheng Co., Ltd. and Law Broker, for two years commencing from June 1, 2013 to May 31, 2015 and with a monthly rent of $12,432 (NT$373,251). Law Broker has also entered into 34 leases for each of its sales and service outlets and training centers (excluding its headquarter), with an aggregate office size of 17,845 square meters for an aggregate monthly fee of $117,673 (NT$3,713,584).
Anhou’s current registered address located at Room 1906-1910, No. 215 Jiangzhong Middle Road, Jianye District, Nanjing, Jiangsu Province, China, with 6,458 square feet (600 square meters) of office space. The lease agreement is between Qing Tian and Anhou. The term is from February 1, 2014 to January 31, 2019 with rent of first year being $120,578 (RMB750,000), second year being $125,592 (RMB795,000), third year being $135,482 (RMB842,700), the fourth year being $143,611 (RMB893,262), and the fifth year being $152,227 (RMB946,857).
Sichuan Kangzhuang’s office is located at A and B areas, 14th Floor Renbao Building, No.57 Dongyu Street, Jinjiang District, Chengdu City, Sichuan province, China, with 8,353 square feet (776 square meters) of office space. The lease was between People's Insurance Company of China, Sichuan Branch and Sichuan Kangzhuang. The lease term is from September 1, 2006 to August 31, 2011 for four years, with rent of approximately $4,862 (RMB31,040) per month, to be increased by 8% per annum commencing from September 1, 2008, payable every three months. Upon the expiration of the above lease, Sichuan Kangzhuang entered into a new lease with People's Insurance Company of China, Sichuan Branch, which is located at B area, 14th Floor Renbao Building, No.57 Dongyu Street, Chengdu City, Sichuan province, China, with 6,672 square feet (612 square meters) of office space. The lease term is from September 1, 2011 to August 31, 2014 for three years, with rent of $5,313 (RMB33,652 ) per month in the first year commencing from September 1, 2011, $5,844 (RMB37,017) per month in the second year commencing from September 1, 2012, $6,429 (RMB40,719) per month in the third year commencing from September 1, 2013, payable every three months. On August 8, 2014, the lease was renewed and the term was extended to August 31, 2017 for three (3) years, with rent of $6,643 (RMB41,606) per month payable every three months.
Jiangsu Law’s office is located at No. 888 Jintong Road, Xingren County, Tongzhou District, Nantong City, Jiangsu province, China, with 10,764 square feet (1,000 square meters) of office space. The lease was between Xiangriya Industrial (Nantong) Co., Ltd., which is an affiliate of Mao Yi Hsiao. The lease term is from January 1, 2013 to December 31, 2017 for five years, with rent of approximately $1,122 (RMB 7,083) per month, payable every year.
ITEM 3.
ITEM 3. 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 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock has been quoted on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “CUII” since August 1, 2012. The latest available closing price of our common stock prior to March 15, 2015 was $13.09.
The following table sets forth for the respective periods indicated the high and low closing prices for the common stock, as reported by the OTCBB. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
Shareholders
As of March 15, 2015, there were 121 record owners of our common stock and one record owner of our preferred stock.
Transfer Agent
Our transfer agent is Globex Transfer, LLC, at the address of 780 Deltona Blvd., Suite 202, Deltona, FL 32725.
Dividends
We have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain our future earnings, if any, to support operations and to finance future growth and expansion and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Pursuant to the provisions of the Acquisition Agreement dated August 24, 2012 and its amendment on March 14, 2013, in lieu of the 2 million employee stock option pool (the “ESOP”) described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4 million shares of CUIS common stock, among which 2 million shares shall be solely granted to employees of Law Broker, and the remaining 2 million shares to be granted to employees of affiliated entities of the Company (including Law Broker employees). Law Broker, being the only actively operated subsidiary in Taiwan, primarily engages in insurance brokerage and insurance agency service business across Taiwan. Upon satisfaction of respective performance criteria of Law Broker employees, the Board of Directorsof Law Broker may submit its recommendation to the Company for its approval and issuance of such options under the ESOP. Details of terms and conditions on the said ESOP shall be set forth in separate ESOP documents duly approved by the Company. As of March 15, 2015, the Company has not yet set up the ESOP.
Options and Warrants
As of March 15, 2015, we had outstanding put option granted to Li Chwan-Hau for the GHFL Acquisition (Note 25).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated statement of operations data for the year ended December 31, 2014, the six months ended December 31, 2013, and the years ended June 30, 2013 and 2012 and the selected consolidated balance sheet data as of December 31, 2014 and 2013 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The consolidated statement of operations data for the year ended June 30, 2011 is derived from our audited consolidated financial statements not included in this Form 10-K.
On January 17 2014, the Company’s Board of Directors approved a change in our fiscal year end to December 31 from June 30. As China United acquired AHFL and its Taiwan subsidiaries on August 24, 2012, AHFL’s operating results from September 1, 2012 are included in the consolidated statements of operations. The consolidated statements of operations for the years ended June 30, 2012 and 2011 doesn’t include the operating result of AHFL and its subsidiaries.
Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected financial data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements, related notes, and other financial information included elsewhere in this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
You should read this Management’s Discussion and Analysis in conjunction with the Consolidated Financial Statements and Related Notes.
Overview
China United Insurance Service, Inc. (“China United”, ”CUIS” or the “Company”) is a Delaware corporation organized on June 4, 2010 by Mao Yi Hsiao, a Taiwanese citizen, as a listing vehicle for ZLI Holdings Limited (“CU Hong Kong”) to be quoted on the Over the Counter Bulletin Board (the “OTCBB”). CU Hong Kong, a wholly owned Hong Kong-based subsidiary of China United, was founded by China United on July 12, 2010 under Hong Kong laws. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. (“CU WFOE”) in Henan province in the People’s Republic of China (“the PRC”).
On January 16, 2011, China United issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non US persons for $300,000 in cash invested in the Company’s subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended. The consideration was paid as of June 30, 2012. On January 28, 2011, the Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common and 10,000,000 shares of preferred stock.
Law Anhou Insurance Agency Co., Ltd. (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd. or Henan Law Anhou Insurance Agency Co., Ltd.) was founded in Henan province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, Hou Weizhe and Zhang Yong, to invest in Anhou on its behalf. On September 26, 2013, the new PRC individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong, Chen Li (“Anhou New Investors”) and the original shareholders of Anhou (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million (approximately $8 million). On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer price of RMB10 million ($1,633,178). Mr. Hu is currently the legal representative and the sole director of Anhou.
On October 24, 2013, Anhou completed the registration with local Administration Industry and Commerce (“AIC”) on the above-mentioned capital increase. The new business license was issued to Anhou on October 25, 2013.
The registered capital increase of Anhou is in response to the promulgations of certain regulations by China Insurance Regulatory Commission (“CIRC”). On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8,165,890). 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 ($8,165,890), can continue operation of their existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million ($1,633,178). The branch offices of Anhou were all in Henan province. To better implement its expansion strategies, Anhou increased its registered capital to RMB50 million ($8,165,890) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in Mainland China.
On February 26, 2014, Anhou completed the registration of the change of its registered address to Room 1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued by Jiangsu Bureau of CIRC on April 21, 2014. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 2006 in Sichuan province in the PRC and provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Sichuan Kangzhuang. Sichuan Kangzhuang then had net liabilities of RMB219,123 ($32,134). Goodwill of RMB751,745 ($110,452) was therefore recorded. However, Sichuan Kangzhuang suffered loss since the acquisition, indicating the impairment of goodwill. As of December 31, 2014, the carrying value of the goodwill was fully impaired.
Jiangsu Law Insurance Broker Co., Ltd. (“Jiangsu Law”) was founded on September 19, 2005 in Jiangsu Province in the PRC and provides insurance brokerage services in the PRC. On August 12, 2010, at Jiangsu Law’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB518,000 ($75,475) and Anhou increased Jiangsu Law’s paid-in capital to RMB10,000,000 ($1,355,000) from RMB5,180,000 ($625,113) on January 18, 2011 to meet the PRC paid-in capital requirements for insurance brokerage companies. On September 28, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Jiangsu Law. On acquisition date, Jiangsu Law had net assets of RMB2,286,842 ($341,425). Based on the purchase price allocation, the fair value (“FV”) of the identifiable assets and liabilities assumed exceeded the FV of the consideration paid. As a result, the Company recorded a gain on acquisition of RMB1,768,842 ($267,156).
Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications and capital requirements of the investors, we operate our business primarily through our Consolidated Affiliated Entities (“CAE”) in China. On January 17, 2010, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. We do not hold equity interests in our CAE. However, through the VIE Agreements with these CAE and their respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these CAE.
Our CAE in China are VIE through which part of our insurance services are operated. It is through the VIE Agreements that we have effective control of the CAE, which allows us to consolidate the financial results of the CAE in our financial statements. If Anhou and its shareholders fail to perform their obligations under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that give us effective control. Furthermore, if we are unable to maintain effective control of our CAE, we would not be able to continue to consolidate the CAE’s financial results with our financial results. On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment, however, how these changes will affect entities currently operating in China, particularly foreign controlled variable interest entities, is not entirely clear. For more information see “Risk Factors-Risks Related to Our Corporate Structure.”
On July 2, 2012, the Board of Directors and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Mao Yi Hsiao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification.
Mr. Mao has extensive experience in the insurance agency and brokerage industry and has acted as the chairman of the board of Law Broker. Under the leadership of Mr. Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades and generated substantial shareholder value for its stockholders. The management of the Company wanted Mr. Mao to apply his years of experience in insurance industry into the Company’s expansion and to lead its growth. As a result the Company approached Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and operation of the Company and its subsidiaries. To ensure the consistently implementation of strategies and policies of the Company, through mutual discussion and negotiations, both the Company and Mr. Mao (and subsequently a majority of the shareholders) agreed to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for the reclassification, Mr. Mao agreed to be engaged by the Company as its Chief Executive Officer within 6 months after July 2, 2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief Executive Officer, effective immediately.
All 1,000,000 shares of Series A Preferred Stock were reclassified from the 1,000,000 shares of common stock held by Mr. Mao and no additional consideration was paid by Mr. Mao in connection with the Reclassification. The preferred stock has no material quantitative preferences over common stock, such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of Action Holdings Financial Limited (“AHFL”), a limited liability company (“LLC”) incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned subsidiary of the Company.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent” collectively with “Law Enterprise”, “Law Broker” and “Law Agent”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”), a LLC incorporated in Taiwan on June 3, 2000.
Pursuant to the provisions of the Acquisition Agreement between the Company and the selling shareholders of AHFL and for all of the issued and outstanding shares of AHFL, the Company was to pay NT$15 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments, subject to terms and conditions therein. In addition the Company agreed to (i) issue 8,000,000 shares of common stock of the Company to the shareholders of AHFL; (ii) issue 2,000,000 shares of common stock of the Company to certain employees of Law Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of the Company.
On March 14, 2013, the Company and the selling shareholders of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS common stock, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of the Company (including Law Broker employees). On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the Acquisition Agreement (the “Second Amendment”), pursuant to which, the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL.
Law Enterprise is a holding company for its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not active. We operate our Taiwan business primarily through Law Broker.
On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Wong Chun Kwok Johnny (“Mr Wong”), the owner of Prime Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr Wong would increase PFAL’s capital contribution from HK$500,000 to HK$1,470,000, and AHFL would contribute HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital contribution by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation as of now.
On February 13, 2015, the Company and AHFL entered into an acquisition agreement (the “Acquisition Agreement”) with Mr. Li Chwan Hau, the selling shareholder of Genius Holdings Financial Limited (the “Selling Shareholder”), a company with limited liability incorporated under the laws of British Virgin Islands (“GHFL”), to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock (“AHFL Shares”) together with an granted put option for 352,166 shares of common stock of the Company (“Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the Selling Shareholder would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL will become a wholly-owned subsidiary of the Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds approximately 15% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. The acquisition price may be further adjusted on the fourth anniversary of the closing date of the acquisition and depending on the earnings per share of GHFL during the fiscal years of 2014 through 2017, subject to other terms and conditions therein. Mr. Li Chwan Hau is the sole shareholder of GHFL and a director and shareholder of the Company. On February 13, 2015, the acquisition was completed, the Selling Shareholder transferred 100% shares in GHFL to AHFL. The Put Option has not been exercised by the Selling Shareholder as of March 15, 2015.
As of December 31, 2014, through our CAE, we had two insurance agencies, one brokerage and 36 service outlets with 1,177 full-time sales professionals and 91 administrative staff in Henan, Sichuan and Jiangsu provinces in China. In addition, through Law Insurance Broker Co., Ltd., we had 27 sales and service outlets (including the headquarters) with 1,637 full-time sales professionals, 394 part-time sales professionals and 153 administrative staff in Taiwan.
During the year ended December 31, 2014, 93.55% and 6.45% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and CAE, respectively. During the six months ended December 31, 2013, 93.72% and 6.28% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and CAE, respectively. For the year ended June 30, 2013, the first fiscal year after the acquisition of AHFL together with its Taiwan Subsidiaries, 92.66% and 7.34% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and CAE, respectively. During the year ended June 30, 2012, 100% of our revenues in our consolidated financial statements were derived from our CAE.
On January 17 2014, the Company’s Board of Directors approved a change in our fiscal year end to December 31 from June 30.
Critical Accounting Policies
The preparation of financial statements in conformity with Accounting Principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the period. Management makes these estimates using the best information available when they are made. However, actual results could differ materially from those estimates. While there are a number of significant accounting policies affecting the Company’s financial statements; the Company believes the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments The Company has not made any material changes in the methodology used in these accounting polices during the past two years.
Principles of consolidation
The accompanying 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 Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Noncontrolling Interest
Noncontrolling interest consists of direct and indirect equity interest in AHFL and subsidiaries arising from the acquisition of AHFL by CUIS.
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available when they are made; however, actual results could differ materially from those estimates.
Risks and Uncertainties
The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, and foreign currency exchange rates.
Foreign Currency Transactions
The functional currency for our subsidiaries in Taiwan is New Taiwan Dollar (“NT$”) and for the VIEs in China is Renminbi (“RMB”).
The consolidated financial statements were translated into United States Dollars (“USD” or “$”) in accordance with FASB ASC Topic 830 “Foreign Currency Transaction.” According to the standard, all assets and liabilities were translated at the exchange rate on the balance sheet dates; stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. 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).
Marketable Securities
The Company invests part of its excess cash in equity securities, money market funds and government bonds. Such investments are included in “Marketable securities” in the accompanying consolidated balance sheets. Held-to-maturity represents securities the Company has intends and has the ability to hold to maturity; trading securities represent securities bought and held primarily for sale in the near-term to generate income on short-term price differences; available-for-sale represents securities not classified as held-to-maturity or trading securities.
The Company classifies the equity security investments as trading securities and reports them at FV with changes in FV recorded in “Other Income” in the statements of operations and other comprehensive income (loss). The Company classifies bonds as available-for-sale and reports them at FV with unrealized gains and losses included in “Accumulated other comprehensive income (loss)” on the equity section of the balance sheets.
Revenue recognition
The Company’s revenue is from insurance agency and brokerage services. The Company, through its subsidiaries, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of issuance of the policies, in which customers can cancel the contract without any fees. The Company is notified of such cancellations by the insurance carriers. For the six months ended December 31, 2013 and for the fiscal years ended December 31, 2014 and June 30, 2013 and 2012, policy cancellations were $22,553, $84,476, $12,809 and nil, respectively.
The Company pays commissions to its sub-agents when an insurance product is sold by the sub-agent. The Company recognizes commission revenue on a gross basis. The commissions paid by the Company to its sub-agents are recorded as costs of revenue.
Income taxes
The Company utilizes ASC Topic 740 “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that were included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
When tax returns are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of operations and other comprehensive income (loss). As of December 31, 2014 and 2013, the Company did not have any uncertain tax positions.
The Company was not subjected to income tax examinations by taxing authorities during the current or past fiscal years. In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, “Property, Plant and Equipment”, the Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value (“FV”). Assets to be disposed of are reported at the lower of the carrying amount or FV, less costs of disposal. No impairment was recognized for the years ended December 31, 2014, June 30, 2013 and 2012, and the six months ended December 31, 2013.
Goodwill
Goodwill arose from the acquisition of PFAL and Sichuan Kangzhuang. Goodwill is the excess of the cost of an acquisition over the FV of the net assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using the prescribed two-step process under US GAAP. The first step screens for potential impairment of goodwill to determine if the FV of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied FV of goodwill to its carrying value. Sichuan Kangzhuang has been suffering net loss since the acquisition, indicating the impairment of goodwill. As of December 31, 2013, the carrying value of the goodwill was fully impaired. Accordingly, we recorded a goodwill impairment loss of $122,250 in the six months ended December 31, 2013. As of December 31, 2014, there were no any indications of the impairment of goodwill that arose from the acquisition of PFAL.
Recent Accounting Pronouncements
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
The FASB has issued ASU No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.
In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate a material impact on our financial statements upon adoption.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This standard provides guidance regarding when an unrecognized tax benefit should be classified as a reduction to a deferred tax asset or when it should be classified as a liability in the consolidated balance sheet. The new guidance will be effective for us beginning July 1, 2014. Early adoption and retrospective application is permitted. The Company is evaluating the potential impact of this adoption on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (“ASU 2-14-09”). ASU 2-14-09 amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. This new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosure pertaining to revenue recognition in both interim and annual periods. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. We are currently evaluating the potential impact that ASU 2014-09 may have on our financial position and results of operations.
Results of Operations
Overview of the years ended December 31, 2014 and 2013
The following table shows the results of operations for the years ended December 31, 2014 and 2013:
Revenues
As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market in Taiwan. For the years ended December 31, 2014 and 2013, the revenue generated respectively from Taiwan and PRC is as follows:
During the year ended December 31, 2014, 93.55% and 6.45% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and CAE, respectively. During the year ended December 31, 2013, 93.98% and 6.02% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and CAE, respectively.
Total revenues increased by $2,293,388, or 5%, from $45,156,574 for the year ended December 31, 2013 to $47,449,962 for the year ended December 31, 2014, which is mainly due to the increase of the revenue in Taiwan for following reasons,
a)After we entered into a Strategic Alliance Agreement with AIA International Limited Taiwan Branch (“AIATW”) in June 2013, the sales of insurance products of AIATW increased stably.
b)The sales of the products of China Trust Life Insurance Co., Ltd. (“China Trust”) increased in 2014 because China Trust’s good reputation attracted more customers.
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 year ended December 31, 2014 increased by $2,831,369 or 10%, to $30,408,118 compared to $27,576,749 for the year ended December 31, 2013. The cost of revenue increased with the increase in revenue.
a)Direct commission cost: Compared with the comparable period of 2013, the share of the first-year commission (FYC) revenue in the total revenue increased. Accordingly, the cost matched with the FYC revenue increased. Compared with the commission cost of other types of commission revenue, the cost of the FYC is higher.
b)Indirect commission cost: With the increase in sales, indirect commission cost, including special allowance, high-performance awards, practicing bonus, etc. increased compared to the comparable period of 2013.
The gross profit for the year ended December 31, 2014 decreased by $537,981, or 3%, to $17,041,844 compared to $17,579,825 for the year ended December 31, 2013. The gross profit ratio decreased to 36% for the year ended December 31, 2014 from 39% for the year ended December 31, 2013. The decrease was mainly because the bonuses and awards to subagents increased and the share of revenue from the FYC increased in the total revenue compared to the year ended December 31, 2013.
Selling expenses
Selling expenses were mainly occurred in Law Broker, representing the expense for marketing promotion. The selling expense for the year ended December 31, 2014 increased by $1,297,278 or 47%, to $4,034,409 compared to $2,737,131 for the year ended December 31, 2013, which is mainly because the advertizing expense spent in publicity of the company’s brand increased by approximately $1 million.
General and administrative expenses
The general and administrative (“G&A”) expenses principally comprise of 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 year ended December 31, 2014, G&A expenses were $11,971,863, increased by $1,585,128, or 15%, compared with $10,386,735 for the year ended December 31, 2013, which mainly due to the rate of the business tax directly related to sales in Taiwan Subsidiaries increased from 2% to 5% from July 2014. In addition, the G&A expense increased in Anhou due to the relocation expense of moving the Company’s headquarter to Nanjing and setup expense of opening an outlet in Yunnan by Anhou.
Other income
Net other income for the year ended December 31, 2014 was $594,542 and the net other expense for the year ended December 31, 2013 is $228,844. Other income (expense) mainly consists of interest income (expense), gain (loss) on change of fair value of marketable securities and rental income of sub-leased spare offices and garage. In the year ended December 31, 2013, the Company recorded $303,000 of loss from disposal of fixed assets and $370, 000 of estimated tax penalties for late filings of income tax return in the U.S.A. Compared with the year ended December 31, 2013, the Company’s interest income increased by approximately $70,000 due to the fixed deposit of RMB. In the meantime, the loss from disposal of fixed assets decreased by approximately $0.2 million and the gain on change of fair value of marketable securities increased by approximately $0.17 million.
Income tax
For the year ended December 31, 2014, the income tax expense were $1,672,840, increased by $740,921, or 80%, compared with $931,919 for the year ended December 31, 2013.
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. In June 2014, Law Enterprises decided not to distribute its earnings accumulated as of December 31, 2013. Accordingly, NT$18,903,349, approximately $626,406, of income tax was accrued for the undistributed earnings. On December 31, 2014, Law Enterprises decided not to distribute its earnings in 2014. Accordingly, additional NT$9,200,945, approximately $303,589, of income tax was accrued as of December 31, 2014.
CU WFOE and the CAEs in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. According to the requirement of local tax authorities, the taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. The tax rate of Jiangsu Law is also 25%.
According to Chinese tax regulations by the Chinese tax authorities effective January 1, 2008, commissions paid to sub-agents in excess of 5% of the commission revenue were not tax deductible. According to China State Administration of Taxation #15 Announcement in 2012, effective from 2011, such commissions can be fully deducted. Also, such tax payable over three years can be reversed. In the year ended December 31, 2013, the Company reversed tax payable of $160,780 accordingly.
In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit which was accrued in the year ended December 31, 2013.
Overview of the six months ended December 31, 2013 Compared to six months ended December 31, 2012
The following table shows the results of operations for the six months ended December 31, 2013 and 2012:
On August 24, 2012, the Company acquired all of the issued and outstanding shares of AHFL and its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned subsidiary of the Company.
Our results of operations for the six months ended December 31, 2013 contains the results for the six months ended December 31, 2013 of AHFL. Our results of operations for the six months ended December 31, 2012 contains the results for four month ended December 31, 2012 of AHFL. The majority of AHFL’s result is generated by Law Broker, its subsidiary in Taiwan. Acquisition of AHFL enables us to expand our business to Taiwan.
Revenues
Revenues increased by $7,683,031, or 48%, from $16,006,079 for the six months ended December 31, 2012 to $23,689,110 for the six months ended December 31, 2013. The increase in revenues was mainly attributable to our new operations in Taiwan after August 24, 2012 that occurred as a result of our acquisition of AHFL.
As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market in Taiwan. For six months ended December 31, 2013, our business in Taiwan generated $22,201,000 of revenue, which accounts for 94% of our total revenue.
Cost of revenue and gross profit
The cost of revenue for the six months ended December 31, 2013 increased by $5,943,008 or 59%, to $16,040,303 compared to $10,097,295 for the six months ended December 31, 2012. Over 88% of the cost of revenue is commissions paid to our sales agents. Therefore the cost of revenue increased as our sales increased. For the six months ended December 31, 2013, $15,222,816 of our cost of revenue occurred in the Taiwan business we acquired.
The gross profit for the six months ended December 31, 2013 increased by $1,740,023, or 29%, to $7,648,807 compared to $5,908,784 for the six months ended December 31, 2012. The gross profit ratio decreased to 32% for the six months ended December 31, 2013 from 37% for the six months ended December 31, 2012. The decrease was mainly because Law Broker increased the portion of commission paid to sub-agent by paying special bonus.
Selling expenses
Selling expenses were mainly occurred in Law Broker, representing the expense for marketing promotion. For the six months ended December 31, 2012, such expenses were included in operating expenses.
General and administrative expenses
The general and administrative (“G&A”) expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and office supply expenses for our administrative staff.
For the six months ended December 31, 2013, G&A expenses were $5,948,516, increased by $1,544,339, or 35%, compared with $4,404,177 for the six months ended December 31, 2012. The growth of expenses is due to the overall growth of our business and expansion to Taiwan. For the six months ended December 31, 2013, $4,770,589 of our G&A expenses occurred in the Taiwan business we acquired.
Other income (expenses)
Net other expenses for the six months ended December 31, 2013 was $543,425, which was mainly due to $303,000 of loss from disposal of fixed assets and $370, 000 of estimated tax penalties for late filings of income tax return in the U.S.A. For the six months ended December 31, 2012, the Company had a net other income of $5,359,400 which is mainly due to the $5.2 million of bargain gain on purchase of subsidiaries.
Income tax
CU WFOE, the Company’s subsidiary, and the VIEs in the PRC, are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Except for Jiangsu Law, according to the requirement of local tax authorities, the taxable income is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.
According to tax regulations by PRC tax authorities effective January 1, 2008, commissions paid to sub-agents in excess of 5% of the commission revenue was not tax deductible. According to China State Administration of Taxation #15 Announcement in 2012, effective from 2011, such commissions can be fully deducted. Also, such tax payable over the past five years can be adjusted.
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% of income reported in the statutory financial statements after appropriate adjustments.
In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit which was accrued in the six months ended December 31, 2013.
Overview of the years Ended June 30, 2013 and 2012
The following table shows the results of operations for the years ended June 30, 2013 and 2012:
Overview of the years ended June 30, 2013 and 2012
Revenues
Revenues increased by $34,688,470, or 1,100%, from $3,153,776 for the year ended June 30 2012 to $37,842,246 for the year ended June 30, 2013. The increase in revenues was mainly attributable to our new operations in Taiwan after August 24, 2012 that occurred as a result of our acquisition of AHFL.
As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market in Taiwan and increased our sub-agent numbers from 1,098 as of June 30, 2012 to 2,691 as of June 30, 2013.
Cost of revenue and gross profit
The cost of revenue for the year ended June 30, 2013 increased by $21,946,135 or 929%, to $24,309,716 compared to $2,363,581 for the year ended June 30, 2012. Over 90% of the cost of revenue is commissions paid to our sales agents. Therefore the cost of revenue increased as our sales increased.
The gross profit for the year ended June 30, 2013 increased by $12,742,335, or 1,613%, to $13,532,530 compared to $790,195 for the year ended June 30, 2012. The gross profit ratio increased to 36% for the year ended June 30, 2013 from 25% for the year ended June 30, 2012. The increase in profitability was mainly due to the higher margins of Law Broker.
General and administrative expenses
The general and administrative (“G&A”) expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and office supply expenses for our administrative staff.
For the year ended June 30, 2013, G&A expenses were $9,062,828 and increased by $7,895,987, or 677%, compared with $1,166,841 for the year ended June 30, 2012. The growth of expenses is due to the overall growth of our business and the acquisition of AHFL.
Other income
Other income for the year ended June 30, 2013 was mainly bargain gain on acquisition of AHFL and its subsidiaries and rental income of sub-leased spare offices and garage.
For the year ended June 30, 2012, no material other income and expenses such as gain on acquisition of subsidiary occurred.
Income tax
The Company’s subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% of income reported in the statutory financial statements after appropriate adjustments.
CU WFOE, the Company’s subsidiary, and the VIEs in the PRC, are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Except for Jiangsu Law, according to the requirement of local tax authorities, the taxable income is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.
According to tax regulations by PRC tax authorities effective January 1, 2008, commissions paid to sub-agents in excess of 5% of the commission revenue was not tax deductible. According to China State Administration of Taxation #15 Announcement in 2012, effective from 2011, such commissions can be fully deducted. Also, such tax payable over the past five years can be adjusted. Therefore, in the years ended June 30, 2013 and 2012, Anhou and Sichuan Kangzhuang reversed the tax payable of $274,489 and $283,880, respectively, which was accrued before 2011 tax year for such deductible commission and credited as income tax benefit.
Liquidity and Capital Resources
The following table represents a comparison of the net cash provided by operating activities, net cash provided by (used in) investing activities, and net cash provided by (used in) financing activities for the years ended December 31, 2014 and 2013:
Operating activities
Net cash provided by operating activities during the year ended December 31, 2014 was $469,470, significantly decreased in comparison with $10,411,924, net cash provided by operating activities during the year ended December 31, 2013. The decrease is mainly because AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”) in June 2013. Then AHFL received an Execution Fee of approximately $8.3 million from AIATW, which is recorded as unearned revenue by the Company. In addition, compared with the year ended December 31, 2013, the Company’s income from operations decreased by approximately $3.2 million, which is the other factor that result in the decrease of net cash provided by the operating activities.
Investing activities
Net cash provided by investing activities was $1,205,962 during the year ended December 31, 2014, which is mainly due to selling investment of approximately $1.6 million in current deposit and cash of approximately $0.2 million obtained by acquisition of PFAL. During the year ended December 31, 2013, net cash used in investing activities was $1,706,555, which is mainly due to the investment in purchase of marketable securities. In addition, compared with the year ended December 31, 2013, during the year ended December 31, 2014, the Company’s investment in property, plant and equipment decreased by approximately $0.3 million.
Financing activities
Net cash provided by financing activities was $391,812 during the year ended December 31, 2014, which is mainly due to the loan borrowed from Lee Shu-Fen, the Series A Director of the Company, in the amount of $314,644 (NTD10 million) to AHFL. The term for the loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. In January 2015, the principal amount of this loan together with the accrued interests was fully repaid by AHFL.
During the year ended December 31, 2013, net cash used in financing activities was $1,071,853, which is mainly due to the repayment for the borrowing from the related parties.
The following table represents a comparison of the net cash provided by (used in) operating activities, net cash provided by (used in) investing activities, and net cash provided by (used in) financing activities for the six months ended December 31, 2013 and 2012 and for the years ended June 30, 2013 and 2012:
Operating activities
Net cash provided by operating activities during the six months ended December 31, 2013, was $7,816,783, including $7,930,190 advance payment received from AIA International Limited Taiwan Branch. Net cash used in operating activities during the six months ended December 31, 2012 was $222,457. The increase was mainly contributed by our Taiwan business.
Net cash provided by operating activities during the year ended June 30, 2013 was $1,598,575. Net cash used in operating activities during the year ended June 30, 2012 was $344,495. The increase was mainly contributed by our Taiwan business.
Investing activities
Net cash used in investing activities was $4,837,045 during the six months ended December 31, 2013, which is mainly due to the purchase of $4,190,739 fund by Law Broker during the period. The net cash provided by investing activities was $9,285,476 for the six months ended December 31, 2012, which was the combined effect of cash acquired in acquisition of AHFL and purchase of marketable securities.
Net cash provided by investing activities was $12,738,126 during the year ended June 30, 2013. This was the combined effect of cash acquired in acquisition of AHFL and purchase of marketable securities. The net cash used in investing activities was $24,557 for the year ended June 30, 2012.
Financing activities
For the six months ended December 31, 2013, net cash used in financing activities was $1,614,159, which is mainly due to the $1,668,838 repayment to related parties. Net cash provided by financing activities was $325,427 in the six months ended December 31, 2012, which is the result of borrowings from the Company’s related parties.
For the year ended June 30, 2013, net cash provided in financing activities was $1,260,382 and net cash provided by financing activities was $304,872 in the year ended June 30, 2012. The increase was mainly due to the proceeds of borrowing from Mrs. Lee Shu Fen, director of CUIS, and Ms. Zhu Shuqin, a shareholder of Anhou.
Related Party Loan and Loans to Unrelated Third Parties
Anhou Registered Capital Increase
On April 27, 2013, the China Insurance Regulatory Commission (“CIRC”) issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million (approximately $ 8 million). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “Notice”), pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million (approximately $8 million) can continue to operate its existing business within the provinces where they have a registered office or branch office, but shall not set up any new branches in any provinces where it has no registered office or a branch office.
Prior to the capital increase, Anhou, a professional insurance agency with a PRC nationwide license, used to have a registered capital of RMB10 million (approximately $1.6 million). The branch offices of Anhou currently were all in Henan province. To better implement its expansion strategies, Anhou intended to increase its registered capital to RMB50 million (approximately $8 million) to meet the requirement of CIRC so that it can set up new branches in any province beyond its current operations in Mainland China.
Due to certain restrictions on direct foreign investment in insurance agency business under current PRC legal regime, Anhou has sought certain investments made by the Investor Borrowers and they may need funds through individual loans. Upon the completion of the contemplated increase of registered capital of Anhou, each Investor Borrower shall, or cause their designated persons to, enter into the Variable Interest Entities Agreement with CU WFOE, Anhou and other parties so as to consolidate any additional VIE interest generated from the said registered capital increase into the Company.
On June 9, 2013, AHFL entered into a Loan Agreement (the “Company Loan Agreement”) with CU Hong Kong.
Under the Company Loan Agreement, AHFL agreed to provide a loan to the CU Hong Kong 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 CU Hong Kong on August 30, 2013.
In August 2013, the CU Hong Kong 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 CU Hong Kong for their investment in Anhou and CU Hong Kong 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 CU Hong Kong 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 fails to repay the loan in currency to CU Hong Kong.
The specific amounts loaned to the Investor Borrowers were as follows:
Able Capital Holding Co., Ltd.: RMB29,500,000 ($4,712,570)
Mr. Chen: RMB3,000,000 ($479,244)
Ms. Yue: RMB7,500,000 ($1,198,111)
On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925).
Related Party Loan
On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Lee Shu-Fen (“Ms. Lee”), the Series A Director of the Company. Pursuant to the Loan Agreement, Mrs. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before December 22, 2015. In January 2015, the principal amount of this loan together with the accrued interests was fully repaid by AHFL.
Due to related parties
The related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of December 31, 2014 and 2013:
On a going forward basis, the Company’s primary requirements for cash over the next 12 months consist of:
·providing insurance agency services to its existing clients in its existing branches;
·developing new clients;
·promoting sales activities;
·opening more branches in China; and
·expanding business scale in China, through mergers & acquisitions.
Contractual Obligations
We have total contractual obligations over the next year of $1,719,838 and $3,067,876 over the next three years primarily consisting of various operating office lease agreements.
A summary of our fixed contractual obligations and commitments at December 31, 2014, is as follows:
Off Balance Sheet Arrangements
As of December 31, 2014, the Company had no off balance sheet arrangements.
ITEM 7A.
ITEM 7A. 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 December 31, 2014, we had cash of RMB26.4 million, approximately $4.3 million, and NT$472.1 million, approximately $15.1 million. We hold our cash for working capital purposes. Declines in interest rates would reduce future interest income. For the year ended December 31, 2014, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.
Foreign Currency Risk
The functional currency for the subsidiaries in Taiwan is NT$ 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 NT$ 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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
China United Insurance Service, Inc.
We have audited the accompanying consolidated balance sheets of China United Insurance Service, Inc. and Subsidiaries (collectively the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders’ equity and cash flows for the year ended December 31, 2014 and six months ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2014 and 2013, and the results of its consolidated operations and its cash flows for the year ended December 31, 2014 and six months ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
Simon & Edward, LLP
Diamond Bar, California
March 16, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
China United Insurance Service, Inc.
We have audited the accompanying consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the two-year period ended June 30, 2013 of China United Insurance Service, Inc. China United Insurance Service, Inc's., management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of China United Insurance Service, Inc referred to above present fairly, in all material respects, the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
Goldman Kurland and Mohidin LLP
September 23, 2013, except for Note 1 for which the date is June 25, 2014
Encino, California
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)
The accompanying notes are an integral part of these consolidated financial statements.
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
CHINA UNITED INSURANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014 and 2013, June 30, 2013 and 2012
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
China United Insurance Service, Inc. (“China United”, “CUIS” or the “Company”) is a Delaware corporation organized on June 4, 2010 by Mao Yi Hsiao, a Taiwanese citizen, as a listing vehicle for ZLI Holdings Limited (“CU Hong Kong”) to be quoted on the United States Over the Counter Bulletin Board (the “OTCBB”).
CU Hong Kong, a wholly owned Hong Kong-based subsidiary of China United, was founded by China United, on July 12, 2010 under Hong Kong law. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. (“CU WFOE”) in Henan province in the People’s Republic of China (“PRC”).
On January 16, 2011, the Company issued 20,000,000 shares of common stock, $0.00001 par value, to several non-US persons for $300,000. The issuance was made pursuant to an exemption from registration in Regulation S under the Securities Act of 1933, as amended. The consideration was paid to the account of CU Hong Kong by May 6, 2011. All $300,000 was contributed into the bank account of CU WFOE as registered capital. On January 28, 2011, the Company increased the number of authorized shares of common stock from 30,000,000 to 100,000,000 and authorized 10,000,000 shares of preferred stock.
Law Anhou Insurance Agency Co., Ltd. (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd. or Henan Law Anhou Insurance Agency Co., Ltd.) was founded in Henan province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, Hou Weizhe and Zhang Yong, to invest in Anhou on its behalf. On September 26, 2013, the new PRC individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong, Chen Li (“Anhou New Investors”) and the original shareholders of Anhou (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million (approximately $8 million). On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu.
On February 26, 2014, Anhou completed the registration of the change of its registered address to Room 1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued by Jiangsu Bureau of CIRC on April 21, 2014. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 2006 in the Sichuan province in the PRC and provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Sichuan Kangzhuang. Sichuan Kangzhuang then had net liabilities of RMB219,123 ($32,134). Goodwill of RMB751,745 ($110,452) was therefore recorded. However, Sichuan Kangzhuang suffered loss since the acquisition, indicating the impairment of goodwill. As of December 31, 2013, the carrying value of the goodwill was fully impaired.
Jiangsu Law Insurance Broker Co., Ltd. (“Jiangsu Law”) was founded on September 19, 2005 in Jiangsu Province in the PRC. Jiangsu Law provides insurance brokerage services in the PRC. On August 12, 2010, at Jiangsu Law’s general meeting of shareholders, its shareholders voted to sell their shares to Anhou for RMB518,000 ($75,475) and Anhou increased Jiangsu Law’s paid-in capital to RMB10,000,000 ($1,355,150) from RMB5,180,000 ($625,113), on January 18, 2011, to meet the PRC paid-in capital requirements for insurance brokerage companies. On September 28, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Jiangsu Law. On acquisition date, Jiangsu Law had net assets of RMB2,286,842 ($341,425). Based on the purchase price allocation, the fair value (“FV”) of the identifiable assets and liabilities assumed exceeded the FV of the consideration paid. As a result, the Company recorded a gain on acquisition of RMB1,768,842 ($267,156).
Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications and capital requirements of the investors, we operate our business primarily through our Consolidated Affiliated Entities (“CAE”) in PRC. On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. We do not hold equity interests in our CAE. However, through the VIE Agreements with these CAE and their respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these CAE, which allows us to consolidate the financial results of the CAE in our financial statements.
On July 2, 2012, the Board of Directors and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Mao Yi Hsiao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification.
Mr. Mao has extensive experience in the insurance agency and brokerage industry and has acted as the chairman of the board of Law Broker. Under the leadership of Mr. Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades and generated substantial shareholder value for its stockholders. The management of the Company wanted Mr. Mao to apply his years of experience in insurance industry into the Company’s expansion and to lead its growth. As a result the Company approached Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and operation of the Company and its subsidiaries. To ensure the consistently implementation of strategies and policies of the Company, through mutual discussion and negotiations, both the Company and Mr. Mao (and subsequently a majority of the shareholders) agree to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for the reclassification, Mr. Mao agreed to be engaged by the Company as its Chief Executive Officer within 6 months after July 2, 2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief Executive Officer, effective immediately.
All 1,000,000 shares of Series A Preferred Stock were reclassified from the 1,000,000 shares of common stock held by Mr. Mao and no additional consideration was paid by Mr. Mao in connection with the Reclassification. The preferred stock has no material quantitative preferences over common stock, such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of Action Holdings Financial Limited (“AHFL”), a limited liability company (“LLC”) incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned subsidiary of the Company.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. As of August 24, 2012, Law Enterprise held (i) 100% of Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent”), an LLC incorporated in Taiwan on June 3, 2000.
Pursuant to the provisions of the Acquisition Agreement between the Company and the selling shareholders of AHFL and for all of the issued and outstanding shares of AHFL, the Company was to pay NT$15 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent to March 31, 2013 in cash in two installments, subject to terms and conditions therein. In addition the Company agreed to (i) issue 8,000,000 shares of common stock of the Company to the shareholders of AHFL; (ii) issue 2,000,000 shares of common stock of the Company to certain employees of Law Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares of common stock of the Company.
On March 14, 2013, the Company and the selling shareholders of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS common stock, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of the Company (including Law Broker employees).
Law Enterprise is a holding company for its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not in operation. We operate our Taiwan business primarily through Law Broker.
On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Wong Chun Kwok Johnny (“Mr Wong”), the owner of Prime Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Pursuant to the Agreement, Mr Wong would increase PFAL’s capital contribution from HK$500,000 to HK$1,470,000, and AHFL would contribute HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital contribution by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation as of now.
The corporate structure as of December 31, 2014 is as follows:
On January 17 2014, the Company’s Board of Directors approved a change in our fiscal year end to December 31 from June 30.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying 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 Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Noncontrolling Interest
Noncontrolling interest consists of direct and indirect equity interest in AHFL and subsidiaries arising from the acquisition of AHFL by CUIS.
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available when they are made; however, actual results could differ materially from those estimates.
Risks and Uncertainties
The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, and foreign currency exchange rates.
Comprehensive Income
The Company follows FASB ASC Topic 220 (“ASC 220”), “Reporting Comprehensive Income,” which establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC 220 defines comprehensive income as net income and all changes to stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.
Foreign Currency Transactions
The functional currency for our subsidiaries in Taiwan is New Taiwan Dollar (“NT$”) and for the VIEs in China is Renminbi (“RMB”).
The consolidated financial statements were translated into United States Dollars (“USD” or “$”) in accordance with FASB ASC Topic 830 “Foreign Currency Transaction.” According to the standard, all assets and liabilities were translated at the exchange rate on the balance sheet dates; stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. 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).
Cash and Equivalents
For Statements of Cash Flows purposes, the Company considers cash on hand, bank deposits, and other highly-liquid investments with maturities of three months or less when purchased, such as commercial paper, to be cash and equivalents.
The Company maintains cash with banks in the PRC and Taiwan. Cash accounts with the bank institutions in the PRC are not insured or otherwise protected. Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. In Taiwan, a depositor has up to NT$3,000,000 insured in a bank. In Hong Kong, a depositor has up to HKD$500,000 insured in a bank. In the United States, the standard insurance amount is $250,000 per depositor in a bank under the FDIC’s general deposit insurance rules.
Marketable Securities
The Company invests part of its excess cash in equity securities, money market funds and government bonds. Such investments are included in “Marketable securities” in the accompanying consolidated balance sheets. Held-to-maturity represents securities the Company has intends and has the ability to hold to maturity; trading securities represent securities bought and held primarily for sale in the near-term to generate income on short-term price differences; available-for-sale represents securities not classified as held-to-maturity or trading securities.
The Company classifies the equity security investments as trading securities and reports them at FV with changes in FV recorded in “Other Income” in the statements of operations and other comprehensive income (loss). The Company classifies bonds as available-for-sale and reports them at FV with unrealized gains and losses included in “Accumulated other comprehensive income (loss)” on the equity section of the balance sheets.
Accounts Receivable, net
The Company reviews its accounts receivable regularly to determine if a bad debt allowance is necessary at each year-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of December 31, 2014 and 2013.
Property, Plant and Equipment, net
Property, plant and equipment are recorded at cost. Gain or loss on disposal of property, plant and equipment is recorded in other income at disposal. Expenditures for betterments, renewals and additions are capitalized. Repairs and maintenance expenses are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over a useful life of three to ten years with salvage value of 10% to 25%. Property, plant and equipment mainly consist of office furniture, computers, vehicles and leasehold improvements.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, “Property, Plant and Equipment,” the Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate an asset may be impaired. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by it. If an asset is considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds its FV. Assets to be disposed of are reported at the lower of the carrying amount or FV, less cost of disposal. No impairment was recognized for the years ended December 31, 2014, June 30, 2013 and 2012, and six months ended December 31, 2013.
Goodwill
Goodwill arose from the acquisition of PFAL and Sichuan Kangzhuang (Note 10). Goodwill is the excess of the cost of an acquisition over the FV of the net assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using the prescribed two-step process under US GAAP. The first step screens for potential impairment of goodwill to determine if the FV of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied FV of goodwill to its carrying value. Sichuan Kangzhuang has been suffering net loss since the acquisition, indicating the impairment of goodwill. As of December 31, 2013, the carrying value of the goodwill was fully impaired. Accordingly, we recorded a goodwill impairment loss of $122,250 in the six months ended December 31, 2013. As of December 31, 2014, there were no any indications of the impairment of goodwill that arose from the acquisition of PFAL.
Revenue Recognition
The Company’s revenue is from insurance agency and brokerage services. The Company, through its subsidiaries, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of issuance of the policies, in which customers can cancel the contract without any fees. The Company is notified of such cancellations by the insurance carriers. For the six months ended December 31, 2013 and for the fiscal years ended December 31, 2014 and June 30, 2013 and 2012, policy cancellations were $22,553, $84,476, $12,809 and nil, respectively.
The Company pays commissions to its sub-agents when an insurance product is sold by the sub-agent. The Company recognizes commission revenue on a gross basis. The commissions paid by the Company to its sub-agents are recorded as cost of revenue.
Income Taxes
The Company utilizes ASC Topic 740, “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements or tax returns. Under this method, deferred taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
When tax returns are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in general and administrative expenses in the statements of income and other comprehensive income (loss). As of December 31, 2014 and 2013, the Company did not have any uncertain tax positions.
The Company was not subjected to income tax examinations by taxing authorities during the current or past fiscal years. In connection with the acquisition of China entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting (FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section 6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011 and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit, which has been accrued in the six months ended December 31, 2013, and it has not been paid during the year ended December 31, 2014.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value. We currently have 1,000,000 shares of Series A Preferred Stock (“Series A Stock”) outstanding as of December 31, 2014, which was classified as equity.
Section 480-10-25 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Section 480-10-05-2 classifies all of the following as examples of an obligation:
a. An entity incurs a conditional obligation to transfer assets by issuing (writing) a put option that would, if exercised, require the entity to repurchase its equity shares by physical settlement. (Further, an instrument that requires the issuer to settle its obligation by issuing another instrument [for example, a note payable in cash] ultimately requires settlement by a transfer of assets.)
b. An entity incurs a conditional obligation to transfer assets by issuing a similar contract that requires or could require net cash settlement.
c. An entity incurs a conditional obligation to issue its equity shares by issuing a similar contract that requires net share settlement.
The Series A Preferred Stock does not fall in to any of the above categories as an obligation. The preferred stock is convertible into a fixed number of common shares (one for one). Therefore, the preferred stock has been classified as equity.
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.
Concentration of Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and equivalents and accounts receivable. As of December 31, 2014, approximately $824,108 of the Company’s cash and equivalents held by financial institutions, including $104,285 from discontinued operation, was insured, and the remaining balance of $18,587,487, including $55,919 from discontinued operation, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.
Before acquired AHFL and its Taiwan subsidiaries on August 24, 2012, the company has two principle insurance companies for which it acts as insurance agent. After acquired AHFL and its Taiwan subsidiaries, the Company has several principal insurance companies, for which it acts as an insurance agent. For the six months ended December 31, 2013 and for the years ended December 31, 2014 and June 30, 2013 and 2012, the Company’s revenues from sale of insurance policies underwritten by these companies were:
As of December 31, 2014 and 2013, and June 30, 2013 and 2012, the Company’s accounts receivable from these companies were:
The Company's operations are in the PRC and Taiwan. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC and Taiwan, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
Operating Leases
Leases, where substantially all the rewards and risks of ownership of assets remain with the leasing company, that do not meet the capitalization criteria of FASB ASC Topic 840 “Leases,” are accounted for as operating leases. Rentals under operating leases are expensed on the straight-line basis over the lease term.
Segment Reporting
The Company follows FASB ASC Topic 280, “Segment Reporting” for its segment reporting. In the past periods, the Company managed and reviewed its business as two operating segments. The business of CU WOFE and CAE in PRC was managed and reviewed as PRC segment. The business of AHFL and its subsidiaries in Taiwan was managed and reviewed as Taiwan segment.
ASC-280-10-50-12 states, a public entity shall report separately information about an operating segment that meets any of the following quantitative thresholds:
a. Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments.
b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:
1. The combined reported profit of all operating segments that did not report a loss
2. The combined reported loss of all operating segments that did report a loss.
c. Its assets are 10 percent or more of the combined assets of all operating segments.
The PRC segment does not meet any of the above quantitative thresholds and Taiwan segment is substantially all of the reported consolidated amounts. Therefore, we are not reporting these two segments separately. Note 21 disclose revenues from the two segments.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which could result in a loss to the Company which will be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies arising from legal proceedings pending against the Company or unasserted claims that may rise from such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates it is probable a material loss will be incurred and the amount of the loss can be reasonably estimated, then the estimated loss is accrued in the Company’s financial statements. If the assessment indicates a material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Statement of Cash Flows
In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company's operations are calculated based upon the local currencies and an average exchange rate is used. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows may not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Cash from operating, investing and financing activities is net of the effect of acquisition described in Note 10.
Variable Interest Entities
The Company follows FASB ASC Subtopic 810-10-05-8”, “Consolidation of VIEs,” states that a VIE is a corporation, partnership, limited liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.
Due to the PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, the Company operates its insurance agency and brokerage business in PRC primarily through Anhou, a VIE owned by seven individual shareholders, and two subsidiaries of Anhou.
On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders (as defined in Note1) entered into the Old VIE Agreements (as defined in Note1) which included:
¨Exclusive Business Cooperation Agreement (“EBCA” or the “Agreement”) through which: (1) CU WFOE has the right to provide Anhou with complete technical support, business support and related consulting services during the term of this Agreement; (2) Anhou agrees to accept all the consultations and services provided by CU WFOE. Anhou further agrees that unless with CU WFOE's prior written consent, during the term of this Agreement, Anhou shall not directly or indirectly accept the same or any similar consultations and/or services provided by any third party and shall not establish similar cooperation relationship with any third party regarding the matters contemplated by this Agreement; (3) Anhou shall pay CU WFOE fees equal to 90% of the net income of Anhou, and the payment is quarterly, and (4) CU WFOE retains all exclusive and proprietary rights and interests in all rights, ownership, interests and intellectual properties arising out of or created during the performance of this Agreement.
The term of this Agreement is 10 years. Subsequent to the execution of this Agreement, both CU WFOE and Anhou shall review this Agreement on an annual basis to determine whether to amend or supplement the provisions. The term of this Agreement may be extended if confirmed in writing by CU WFOE prior to the expiration thereof. The extended term shall be determined by CU WFOE, and Anhou shall accept such extended term unconditionally.
During the term of this Agreement, unless CU WFOE commits gross negligence, or a fraudulent act, against Anhou, Anhou may not terminate this Agreement. Nevertheless, CU WFOE shall have the right to terminate this Agreement upon giving 30 days prior written notice to Anhou at any time.
¨Power of Attorney under which each shareholder of Anhou executed an irrevocable power of attorney to authorize CU WFOE to act on behalf of the shareholder to exercise all of his/her rights as equity owner of Anhou, including without limitation to: (1) attend shareholders' meetings of Anhou; (2) exercise all the shareholder's rights and shareholder's voting rights that he/she is entitled to under the laws of the PRC and Anhou's Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the shareholder’s shareholding in part or in whole, and (3) designate and appoint on behalf of the shareholder the legal representative, the director, supervisor, the chief executive officer and other senior management members of Anhou.
¨Option Agreement under which the shareholders of Anhou irrevocably granted CU WFOE or its designated person an exclusive and irrevocable right to acquire, at any time, the entire portion of Anhou’s equity interest held by each shareholder of Anhou, or any portion thereof, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in Anhou shall be the lower of (i) RMB1 ($0.16) and (ii) the lowest price allowed by relevant laws and regulations. If appraisal is required by the laws of PRC when CU WFOE exercises the Equity Interest Purchase Option (as defined in the Option Agreement), the Parties shall negotiate in good faith and based on the appraisal result make necessary adjustment to the Equity Interest Purchase Price (as defined in the Option Agreement) so that it complies with any and all then applicable laws of the PRC. The term of this Agreement is 10 years, and may be renewed at CU WFOE's election.
¨Share Pledge Agreement under which the owners of Anhou pledged their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the EBCA. Pursuant to this agreement, if Anhou fails to pay the exclusive consulting or service fees in accordance with the EBCA, CU WFOE shall have the right, but not the obligation, to dispose of the owners of Anhou’s equity interests in Anhou. This Agreement shall be continuously valid until all payments due under the EBCA have been repaid by Anhou or its subsidiaries.
As a result of the capital increase and the share transfer described in Note1, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders (as defined in Note1) entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The EBCA executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect.
As a result of the agreements among CU WFOE, the shareholders of Anhou and Anhou, CU WFOE is considered the primary beneficiary of Anhou, CU WFOE has effective control over Anhou; therefore, CU WFOE consolidates the results of operations of Anhou and its subsidiaries. Accordingly the results of operations, assets and liabilities of Anhou and its subsidiaries are consolidated in the Company’s financial statements from the earliest period presented. However, the VIE is monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change. These events include:
a. The legal entity's governing documents or contractual arrangements are changed in a manner that changes the characteristics or adequacy of the legal entity's equity investment at risk.
b. The equity investment or some part thereof is returned to the equity investors, and other interests become exposed to expected losses of the legal entity.
c. The legal entity undertakes additional activities or acquires additional assets, beyond those anticipated at the later of the inception of the entity or the latest reconsideration event, that increase the entity's expected losses.
d. The legal entity receives an additional equity investment that is at risk, or the legal entity curtails or modifies its activities in a way that decreases its expected losses.
The Company reviews the VIE’s status on an annual basis. For the six months ended December 31, 2013, and the years ended December 31, 2014, June 30, 2013 and 2012, no event including a-d above took place that would change the Company’s primary beneficiary status.
Reclassifications
Certain prior period amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had no effect on the net income (loss) or stockholders’ equity.
Recent Accounting Pronouncements
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
The FASB has issued ASU No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.
In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate a material impact on our financial statements upon adoption.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This standard provides guidance regarding when an unrecognized tax benefit should be classified as a reduction to a deferred tax asset or when it should be classified as a liability in the consolidated balance sheet. The new guidance will be effective for us beginning July 1, 2014. Early adoption and retrospective application is permitted. The Company is evaluating the potential impact of this adoption on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (“ASU 2-14-09”). ASU 2-14-09 amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. This new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosure pertaining to revenue recognition in both interim and annual periods. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. We are currently evaluating the potential impact that ASU 2014-09 may have on our financial position and results of operations.
NOTE 3 - CASH AND EQUIVALENTS
As of December 31, 2014 and 2013, our cash and equivalents primarily consisted of cash and certificates of deposits with original maturities of three months or less. The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents approximate fair value.
NOTE 4 - MARKETABLE SECURITIES
Marketable securities represent investment in equity securities of listed stocks and funds, which are classified as Level 1 securities as follows:
NOTE 5 - OTHER CURRENT ASSETS
The Company’s other current assets consisted of the following as of December 31, 2014 and 2013:
Refundable business tax, similar to VAT in mainland China, represents business tax prepaid by Risk Management and AHFL, expected to be refunded by Taiwan tax bureau. Investment in current deposit is a semiannual investment product that Anhou purchased in November 2013. Others mainly represent advances to staff and other miscellaneous receivables.
NOTE 6- PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following, as of December 31, 2014 and 2013:
NOTE 7 - INTANGIBLE ASSETS
As of December 31, 2014 and 2013, the Company’s intangible assets consisted the following:
Estimated future intangible amortization as of December 31, 2014 is as follows:
NOTE 8 - LONG-TERM INVESTMENT
According to Taiwan regulatory requirements, Law Broker is required to maintain a minimum of NT$3,000,000 ($94,508) 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.
NOTE 9-OTHER ASSETS
The Company’s other assets consisted of the following as of December 31, 2014 and 2013:
Restricted cash is a deposit in bank by the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, and cannot be withdrawn without the permission of the regulatory commission. Deposits include long-term leasing deposits.
NOTE 10 - ACQUISITION AND GOODWILL
On September 6, 2010, Henan Anhou paid RMB532,622 ($78,318) to acquire 100% of Sichuan Kangzhuang from its previous shareholders. Sichuan Kangzhuang then had net liabilities of RMB219,123 ($32,134). Goodwill of RMB751,745 ($110,452) was therefore recorded. Sichuan Kangzhuang has been suffering net loss since the acquisition, indicating the impairment of goodwill. As of December 31, 2013, the carrying value of the goodwill was fully impaired. Accordingly, we recorded a goodwill impairment loss of $122,250.
On April 23, 2014, AHFL entered into a capital increase agreement (“Agreement”) with Wong Chun Kwok Johnny (“Mr Wong”), the owner of Prime Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr Wong would increase PFAL’s capital contribution from HK$500,000 to HK$1,470,000, and AHFL would contribute HK$1,530,000, approximately $197,335, to PFAL’s capital contribution. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The transaction was completed on April 30, 2014.
The FV of the net identifiable assets of PFAL at acquisition date was $324,871, and 51% of which was $165,684. The Company recorded $31,651 excess of purchase price over the FV of assets acquired and liabilities assumed acquired as goodwill. No intangible assets were identified as of the acquisition date. As of December 31, 2014, there were no any indications of the impairment of the goodwill.
NOTE 11 - TAXES PAYABLE
The Company’s taxes payable consisted of the following as of December 31, 2014 and 2013:
PRC tax represents income tax and other taxes accrued according to PRC tax law by our subsidiaries and CAE in the PRC. Taiwan tax represents income tax and other taxes accrued according to Taiwan tax law by our subsidiaries and branches in Taiwan. Both will be settled within the next twelve months according to the respective tax laws.
NOTE 12 - UNEARNED REVENUE
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. Pursuance to the terms of the Alliance Agreement, AIATW paid AHFL the Execution Fee of $8,326,700 (NT$250,000,000, including the tax of NT$11,904,762), 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. In the meantime, two parties agreed that the Alliance Agreement would be terminated when AHFL’s ownership in Law Enterprise or Law Enterprise’s ownership in Law Broker changed by 30% or above. The term of the Alliance Agreement is changed to the period from June 1, 2013 through December 31, 2020.
As of December 31, 2013, the Company booked $1,586,038 as short-term liability since we expected to record this amount as revenue within the next twelve months. The remaining balance of $6,344,152 was recorded as long-term liability (Note 14). According to the revised agreement, as of December 31, 2014, the Company did not book any short-term unearned revenue since we did not expect to achieve the sales target within the next twelve months, and the Company booked the whole $7,500,645 as long-term liability. For the year ended December 31, 2014, no income was recorded under the Alliance Agreement as performance targets were not met.
NOTE 13 - OTHER CURRENT LIABILITIES
Other current liabilities are as follows, as of December 31, 2014 and 2013:
Commissions payable to sub-agents and salaries payable to administrative staff are usually settled within 12 months. The amount due to previous shareholders of AHFL is the remaining balance of the acquisition cost described in Note 1. Due to previous shareholders of Jiangsu Law is the remaining balance of the acquisition cost. The acquisition agreement between the parties has not specified the exact time for payment of the acquisition price or imposed any interest for late payment. Withholding employee personal tax will be paid to local tax bureau within one month. Accrued expenses are mainly for operating expenses payable within the credit terms provided by suppliers. Other mainly represents short term payable for expenses such as training and travelling.
NOTE 14 - LONG-TERM LIABILITIES
Long-term liabilities are as follows as of December 31, 2014 and 2013:
Long-term other payable as of December 31, 2013 is the result of the Company’s acquisition of AHFL as described in Note 1. It’s the cash payment to be made to the selling shareholders of AHFL. On March 14, 2013, the payment deadline was extended to March 31, 2015. As of December 31, 2014, it was reclassified as short-term liabilities.
As described in Note 12, the Company recorded $7,500,645 (NT$238,095,238, net of tax) received from AIATW as unearned revenue. According to the revised agreement, as of December 31, 2014, the Company did not book any short-term unearned revenue since we did not expect to achieve the sales target within the next twelve months, and the Company booked the whole $7,500,645 as long-term liability. As of December 31, 2013, the Company booked $6,344,152 as long-term liability for the same reason.
NOTE 15 - STATUTORY RESERVES
According to Taiwan accounting rules and corporation regulations, the company’s subsidiaries in Taiwan must appropriate 10% of net income to statutory reserves until the accumulated reserve hits registered capital. The reserve can be converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting to share capital.
Pursuant to the PRC regulations, 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 16- INCOME TAX
CU WFOE and the VIEs in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Except for Jiangsu Law, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.
According to Chinese tax regulations by the Chinese tax authorities effective January 1, 2008, commissions paid to sub-agents in excess of 5% of the commission revenue were not tax deductible. According to China State Administration of Taxation #15 Announcement in 2012, effective from 2011, such commissions can be fully deducted. Also, such tax payable over three years can be reversed. Therefore, in the years ended June 30, 2013 and 2012, Anhou and Sichuan Kangzhuang reversed the tax payable of $274,489 and $283,880, respectively, which was accrued before 2011 tax year for such deductible commission and credited as income tax benefit, which is stated as “change in tax status” on the income tax rate reconciliation tables below.
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. In June 2014, Law Enterprises decided not to distribute its earnings accumulated as of December 31, 2013. Accordingly, NT$18,903,349, approximately $626,406, of additional tax was accrued. In December 31, 2014, Law Enterprises decided not to distribute its earnings in 2014. Accordingly, additional NT$9,200,945, approximately $303,589, of income tax was accrued as of December 31, 2014, which is stated as “income tax on undistributed earnings” on the income tax rate reconciliation tables below.
The following table reconciles the US statutory rates to the Company’s effective tax rate for the six months ended December 31, 2013 and the years ended December 31, 2014 and June 30, 2013 and 2012:
Un-deductible and non-taxable items mainly represent un-deductible expenses according to PRC tax laws and the non-taxable tax income or loss.
NOTE 17 - 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 December 31, 2013 and 2014:
On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Lee Shu-Fen (“Ms. Lee”), the Series A Director of the Company. Pursuant to the Loan Agreement, Mrs. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before December 22, 2015.
NOTE 18- COMMITMENTS
Operating Leases
The Company has operating leases for its offices. Rental expenses for the six months ended December 31, 2013 and for the years ended December 31, 2014, and June 30, 2013 and 2012 were $754,029, $1,668,571, $1,410,945 and $889,080, respectively. At December 31, 2014, total future minimum annual lease payments under operating leases were as follows, by years:
NOTE 19 - DISCONTINUED OPERATION
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation as of now.
Law Management and Law Agent were acquired by the Company together with their parent Company, Law Enterprise, on August 24, 2012. The combined Total Assets and Total Liabilities of Law Management and Law Agent as of December 31, 2014 and 2013 and June 30, 2013 are as follows:
The combined Revenue, Net Loss and EPS of Law Management and Law Agent for the six months ended December 31, 2013 and the years ended December 31, 2014 and June 30, 2013 are as follows:
NOTE 20 - FINANCIAL RISK MANAGEMENT AND FAIR VALUE
The Company has exposure to credit, liquidity and market risks which arise in the normal course of its business. This note presents information about the Company's exposure to each of these risks, the Company's objectives, policies and processes for measuring and managing risk, and the Company's management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.
The 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 NT$ 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 NT$ 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 21 - GEOGRAPHICAL REVENUE
The geographical distribution of China United’s revenue for the six months ended December 31, 2013 and for the years ended December 31, 2014, and June 30, 2013 and 2012 were as follows:
NOTE 22 - LOAN TO SHAREHOLDERS
Anhou Registered Capital Increase
On April 27, 2013, China Insurance Regulatory Commission mandated any insurance agency have a minimum registered capital requirement of RMB50 million (approximately $ 8 million). At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered capital of RMB10 million (approximately $ 1.6 million). To better implement its expansion strategies, Anhou intends to increase its registered capital to RMB50 million so that it can set up new branches in any province beyond its current operations in Mainland China.
Due to certain restriction on direct foreign investment in insurance agency business under current PRC legal requirements, Anhou sought investments from certain Investor Borrowers who in turn needed funds through individual loans.
On June 9, 2013, AHFL entered into a Loan Agreement with ZLI Holdings, whereby AHFL agreed to provide a loan to ZLI Holdings of RMB40 million ($6,389,925). The term for such loan is 10 years which may be extended upon the agreement of the parties. The loan was remitted to ZLI Holdings on August 30, 2013. In August 2013, ZLI Holdings entered into three loan agreements (“Investor Loan Agreements”) with the following independent third parties, collectively, the Investor Borrowers:
1.Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong (RMB29,500,000 ($4,712,570))
2.Mr. Chen Li, PRC citizen (RMB3,000,000 ($479,244))
3.Ms. Yue Jing, PRC citizen (RMB7,500,000 ($1,198,111))
The term for the above loans is 10 years which may be extended upon the agreement of the parties. Pursuant to the Investor Loan Agreements, each of the Investor Borrowers entered into a binding VIE agreement with Anhou, the WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers were solely used to increase the registered capital of Anhou. As of December 31, 2014 and 2013, the loan was offset against equity.
On October 20, 2013, the investor borrowers increased Anhou’s registered capital by RMB 40 million ($6,389,925).
NOTE 23 - PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock, $.00001 par value. We currently have 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 our shareholders. Each holder of Series A Stock is entitled to ten votes for each share of Series A Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Registrant.
Series A Board Designee and Board Restriction. In addition to the voting rights disclosed above, the holders of the Series A Stock shall be entitled to appoint one director (the “Series A Director”). No Board resolution regarding certain material Company actions can be made without the affirmative vote of the Series A Director.
Dividends. The holders of Series A Stock are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Registrant as may be declared by the Board.
Liquidation. In the event of a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Registrant, the holders of common stock and the holders of Series A Stock shall be entitled to share equally on a per share basis, in all assets of the Registrant of whatever kind available for distribution.
Conversion Rights. The holders of the Series A Stock have the right to convert their shares thereof at any time into shares of the Registrant's common stock. Each share of Series A Stock is convertible into one share of common stock.
If the Registrant in any manner subdivides or combines the outstanding shares of common stock, the outstanding shares of the Series A Stock will be subdivided or combined in the same manner.
Business Combinations. In any merger, consolidation, reorganization or other business combination, the consideration received per share by the holders the common stock and the holders of the Series A Stock in such merger, consolidation, reorganization or other business combination shall be identical; provided however, that if such consideration consists, in whole or in part, of certain equity interests, the rights and limitations of such equity interests may differ to the extent that the rights and limitations of the common stock and the Series A Stock differ.
Fully Paid and Nonassessable. All of our outstanding shares of preferred stock are fully paid and nonassessable.
The fair value of the 1,000,000 preferred shares was $225,000 at the time of the preferred share issuance. The Fair value of the common shares was $200,000 at the time of the preferred share issuance based on its market price at the date of the transaction. Therefore, the incremental value of the preferred shares was $25,000. This amount may be deemed compensation.
From the qualitative aspect, the Company notes the following regarding this deemed compensation:
Does not violate any debt or other contract covenants;
Does not change any earnings or EPS trends;
Does not affect any previous earnings or EPS guidance;
Does not affect any segment or class of revenue;
Does not affect any regulatory compliance matters;
Does not affect cash compensation of management;
Does not involve concealment of an unlawful act
Additional preferred stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors deems appropriate. In the event that the Registrant issues any shares of preferred stock, a certificate of designation containing the rights, privileges and limitations of this series of preferred stock will be filed with the Secretary of State of the State of Delaware. The effect of this preferred stock designation power is that our Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control without further action by our stockholders, and may adversely affect the voting and other rights of the holders of our common stock.
NOTE 24 - PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The basis of pro forma consolidated statements of income of the Company is as if the Acquisition Agreement for AHFL was signed on July 1, 2011 and 2012, and AHFL’s acquisition of Law Enterprise happened on the same date. The pro forma consolidated statements of income were derived from the statement of income for the years ended June 30, 2013 and 2012 of AHFL and CUIS. The Company recorded the excess of purchase price over the fair value of assets and liabilities acquired as bargain gain on purchase in the pro forma consolidated statements of income.
NOTE 25 - SUBSEQUENT EVENTS
Subsequent Acquisition
On February 13, 2015, CUIS and AHFL entered into an acquisition agreement (the “Acquisition Agreement”) with Mr. LI CHWAN HAU, the selling shareholder of Genius Holdings Financial Limited (the “Selling Shareholder”), a company with limited liability incorporated under the laws of British Virgin Islands (“GHFL”), to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock (“AHFL Shares”) together with an granted put option for 352,166 shares of common stock of CUIS (“Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be exercised within six months of the closing date of the acquisition and the Selling Shareholder would exchange the AHFL Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL will become a wholly-owned subsidiary of CUIS. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds approximately 15% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. On February 13, 2015, the acquisition was completed, the Selling Shareholder transferred 100% shares in GHFL to AHFL. The Put Option has not been exercised by the Selling Shareholder as of March 15, 2015.
Loan Agreement and Repayment of Loans
In January 2015, the principal amount of loans previously disclosed together with the accrued interests under the loan agreements entered into by and between AHFL with Ms. Lee Shu-Fen on December 23, 2014 was fully repaid by AHFL.
Discontinued Operation
As stated in Note 19, in the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Agent was approved by the Taiwan (R.O.C) Government on January 13, 2015. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation as of now.
The Company has evaluated all other subsequent events through the date these consolidated financial statements were issued, and determine that there were no other subsequent events or transactions, except as stated above, that require recognition or disclosures in the consolidated financial statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. 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 December 31, 2014. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of December 31, 2014, 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.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for the Company are provided by executive management's review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls.
Based on this assessment, management has concluded that as of December 31, 2014, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant tothe Company’s status as an emerging growth company undertheJumpstart Our Business Startups Act of 2012.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
The following table sets forth, as of March 15, 2015, the names and ages of our directors and executive officers. The directors will hold such office until the next annual meeting of shareholders and until his or her successor has been elected and qualified.
Business Experience
The following summarizes the occupation and business experience for our officers, directors, key employees and consultants.
Mao Yi Hsiao, Director and CEO
Mr. Mao has served as a director of the Company since June 2010. Mr. Mao, with 25 years of insurance industry experience, is the founder of Taiwan Law Broker Co., Ltd., the biggest insurance broker company in Taiwan. In addition, Mr. Mao has served as a supervisor for the Company’s Consolidated Affiliated Entity Jiangsu Law since March 2005 to the present, also serves as the chairman of Law Enterprise, Law Agent and Law Management. He received his Bachelor’s degree from Taiwan Soochow University School of Law and acquired a Taiwan lawyer's practice certificate. Mr. Mao was selected as a director because of his experience in both the insurance industry and the Company’s PRC operations.
Li Fu Chang, Director
Mr. Li has served as a director of the Company since January 2011. Mr. Li has 30 years of insurance industry experience, including 17 years in the insurance agency industry. From 1980 to 1992, he worked as a manager for Guohua Life Insurance Co., Ltd. From 1992 to 1993 Mr. Li worked as General Manager for Gongxin insurance brokers Co., Ltd. or KHIB. Mr. Li served as a president to Time Insurance Brokers Co., Ltd. from 1993 to 2003. Mr. Li served as a consultant to the Company’s affiliated entity Anhou from October 2003 to October 2009 and as the Chairman of Anhou from October 2009 to May 2012. Mr. Li received a Bachelor degree in Mass Communication from Fu Jen Catholic University. He is one of the primary insurance brokers in Taiwan. Mr. Li was selected as a director because of his experience in both the insurance industry and the Company’s PRC operations.
Li Chwan Hau, Director
Mr. Li has served as a director of the Company since January 2011. Mr. Li has 20 years of insurance industry experience. Mr. Li has served as a service manager at Taiwan Life Insurance from 1987 to 2000. In addition Mr. Li founded Genius Insurance Brokers Co., Ltd., and has served as its Chairman from April 2000 to the present. Mr. Li has also served as Chairman of Genius Financial Consultants Co., Ltd., a Taiwan company from February 2001 to the present. Mr. Li has served as a director to the Company’s affiliated entity Sichuan Kangzhuang from 2006 to 2010. He received a M.S. Degree in Actuarial Science in The University of Iowa and acquired North American actuarial qualification. Mr. Li was selected as a director because of his experience in both the insurance industry and the Company’s PRC operations.
Chen Kuei Chiao, Director
Ms. Chen served as a director of the Company since February 13, 2013. Prior to her appointment as a director of the Company, Ms. Chen served as store manager for KFC in Taiwan from 1987 to 1996. Ms. Chen has not served in any professional capacity in the past six years. Ms. Chen graduated from Yongda Technology College with an associate degree in chemical engineering. Ms. Chen was selected as a director because of her personnel management skills accumulated during her years at KFC.
Lee Shu Fen, Director
Ms. Lee served as a director of the Company since December 6, 2013. Ms. Lee has served as the Law Broker’s Chief Executive Officer since 1987. Ms. Lee worked in Nan Shan Life Insurance Company, Ltd. from September 1983 to September 1987. Ms. Lee serves as the Chairman of the Law Insurance Broker Co., Ltd. from February 2013 to the present. Ms. Lee also serves as the general manager of Law Enterprise Co., Ltd. from February 2013 to the present. Ms. Lee has 30 years of insurance industry experience. Ms. Lee graduated from the National Taiwan Ocean University in Taiwan in the year of 1983, where she received a bachelor's degree of Department of Aquaculture.
Chuang Yung Chi, Chief Financial Officer
Ms. Chuang has served as the Company’s Chief Financial Officer since July 2012. Ms. Chuang has served as financial manager of Law Insurance Broker Co., Ltd. in Taiwan for 16 years, where she has been responsible for overall financial management of such company, including financial and strategic planning, auditing and reporting, and communications to the investors. Prior to her joining Law Insurance Broker Co., Ltd., Ms. Chuang served as business secretary in Pacific Realtor, Inc. since 1996. Ms. Chuang graduated from the Ming Chuan University in Taiwan in the year of 2000, where she received a Bachelor degree of risk management and insurance.
Hsieh Tung Chi, Chief Operating Officer
Mr. Hsieh has served as the Chief Operating Officer of the Company since January 2011. Mr. Hsieh has served as Chief Operating Officer and Division Chief of Management of the Company’s Consolidated Affiliated Entity Jiangsu Law from January 2005 to the present. Mr. Hsieh has worked at First Bank, Head Office, as an Asset Management Specialist in 2000. He has worked at Taiwan Law brokers Co., Ltd., Operating Department, as an Administrative Personnel from 2000 to 2001, officer from 2001 to 2002, Assistant Manager in 2003 and Manager from 2004 to 2005. Mr. Hsieh graduated from the NATIONAL CHUNG HSING University in Taiwan in the year of 1998, where he received a Bachelor degree of Department of Land Economics & Administration.
Hsu Wen Yuan, Chief Marketing Officer
Mr. Hsu has served as the Company’s Chief Marketing Director since January 2011. Mr. Hsu has 17 years of insurance industry experience. From February 2001 to May 2006, Mr. Hsu served as a Vice Business Executive at Alexander Leed Risks Service Inc., an insurance brokerage company. From September 2006 to May 2009, Mr. Hsu served as General Manager of KunshanWoma Insurance Agency Co., Ltd., an insurance agency company. From June 2009 to the present, Mr. Hus served as General Manager of the Company’s affiliated entity Sichuan Kangzhuang. Mr. Hsu graduated from Feng Chia University with a major in Risk Management and Insurance.
Chiang Te Yun, Chief Technology Officer
Mr. Chiang has served as the Company’s Chief Technology Officer since January 2011. Mr. Chiang graduated from insurance department of Shih Chien University and has ten years of experience in the insurance industry. From January 2004 to the present, Mr. Chiang has served as the Manager of the Company’s affiliated entity Jiangsu Law.
Code of Ethics
We have not adopted a code of ethics that applies to our officers, employees and directors, including our Chief Executive Officer and senior executives. However, we plan to adopt one in the future.
Family relationships
Ms. Lee Shu Fen, a director of the Company designated by the preferred shareholders of the Company, is the spouse of Mr. Mao Yi Hsiao who is the Chief Executive Officer and a director of the Company. Other than as described above, there are no family relationships by and between or among the members of the Board or other executives. None of our directors and officers is directors or executive officers of any company that files reports with the SEC.
Involvement in certain legal proceedings
No bankruptcy petition has been filed by or against any business of which any of our executive officers was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
No director has been convicted in a criminal proceeding and is not subject to a pending criminal proceeding (excluding traffic violations and other minor offenses).
No director has been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
No director has been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors (“BOD”) functions as an audit committee and performs some of the same functions as an audit committee including: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; and (3) engaging outside advisors. We are not a "listed company" under SEC rules and is therefore not required to have an audit committee comprised of independent directors. Our BOD has determined that its members do not include a person who is an "audit committee financial expert" within the meaning of the rules and regulations of the SEC. Our BOD has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member's financial sophistication.Accordingly, the BOD believes that each of its members have the sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have.
Indemnification
Under Delaware law and pursuant to our articles of incorporation and bylaws, we may indemnify our officers and directors for various expenses and damages resulting from their acting in these capacities. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our officers or directors pursuant to those provisions, our counsel has informed us that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable.
Section 16(a) Beneficial Ownership Reporting Compliance
The following officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the years ended December 31, 2013 and December 31, 2014: Chief Executive Officer Mao Yi Hsiao (Form 3and Form 4), Chief Financial Officer Chuang Yung Chi (Form 3), Chief Operating Officer Hsieh Tung Chi (Form 3), Chief Marketing Officer Hsu Wen Yuan (Form 3), Chief Technology Officer Chiang Te Yun (Form 3), Directors Li Fu Chang (Form 3), Li Chwan Hau (Form 3), Chen Kuie Chiao (Form 3), and former Chief Executive Officer Lo Chung Mei (Form 3). As of the date of the filing of this annual report, all of the above mentioned reports have been filed with the SEC.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table reflects the compensation paid to our principal executive officer during our fiscal years ended December 31, 2014.
SUMMARY COMPENSATION TABLE
On August 8, 2014, Mr. Lo resigned as the Company’s Chief Executive Officer and Mr. Mao was appointed Chief Executive Officer.
In the Fiscal year ended December 31, 2014, Mr. Mao Yi Hsiao also served as the consultant of Law Broker and president of Law Enterprise and received all of his compensation from Law Broker and Law Enterprise. In the Fiscal years ended June 30, 2013, the transition period (from July 1, 2013 to December 31, 2013) and in the Fiscal years ended December 31, 2014, Mr. Lo Chung Mei also served as the general manager of Anhou and received all of his compensation from Anhou. The above table identifies all compensation received by the named officer directly or indirectly from the Company, its subsidiaries, and its Consolidated Affiliated Entities.
Outstanding Equity Awards At Fiscal Year End
None.
Director Compensation
Our directors do not currently receive compensation for their service as directors of the Company. Set forth below is the compensation paid to each of our directors during the fiscal year ended December 31, 2014 for compensation not related to their role as directors.
DIRECTOR COMPENSATION TABLE
(1)The compensation in the amount $11,373 was paid to Mr. Mao since he worked as the president of Law Enterprise, and the remaining amount was paid to Mr. Mao since he worked as the consultant of Law Broker for the provision of consultation, training and promotion to Law Broker in the fiscal year ended December 31, 2014.
(2)The compensation paid to Li Fu Chang since he has worked as a consultant ofthe Company in the fiscal year ended December 31, 2014.
(3)The compensation paid to Lee Shu Fen since she has worked as president of Law Broker in the fiscal year ended December 31, 2014.
Employment Agreements
Pursuant to an employment agreement between Chuang Yung Chi and the Company, dated July 2, 2012 (the “Chuang Agreement”), Ms. Chuang earns a salary of $2,300 per month to serve as Chief Financial Officer of the Company and will be eligible for other monetary rewards based on her performance evaluations. The term of the Chuang Agreement is indefinite. Chuang Yung Chi also serves as the manager of financial department of Law Broker.
Pursuant to an employment agreement between Law Broker and Chao Hui-Hsien, dated January 7, 2013 (the “Chao Agreement”), Chao Hui-Hsien serves as General Manager of Law Broker. The term of Chao Agreement is from January 7, 2013 to January 6, 2015. On January 7, 2015, the Chao Agreement was renewed and the term was extended to January 6, 2016, Ms. Chao is entitled to the payment of the remuneration, calculated as progressive percentage on commissions achieved and subject to the satisfaction of the threshold 13-month and 25-month persistency ratio. The remuneration is paid each year. Ms. Chao is subject to a non-compete which prohibits her from competing with Law Broker during the term of the Chao Agreement within the territories of ROC and the PRC. Chao Agreement shall be terminated upon the expiration. In addition, Ms. Chao and Law Broker may terminate the contract for enumerated reasons listed in the Chao Agreement.
Pursuant to an employment agreement between Hsieh Tung Chi and Jiangsu Law, dated December 30, 2009 (the “Hsieh Agreement”), Mr. Hsieh earns a salary of RMB3,000 ($490) per month to serve as Division Chief of Management. The original term of the Hsieh Agreement expired on December 29, 2011, with an automatic extension of the Hsieh Agreement if neither party terminates the Hsieh Agreement. After the expiration date, Mr. Hsieh may terminate the Hsieh Agreement at any time and Jiangsu Law may terminate the contract with 30 days notice to Mr. Hsieh.
Jiangsu Law may immediately terminate the Hsieh Agreement under any of the following circumstances: (1) Mr. Hsieh’s failure to meet the recruitment requirements during the probation period; (2) Mr. Hsieh’s serious violation of the internal disciplines or rules of Jiangsu Law; (3) Mr. Hsieh’s negligent or intentional act causing significant loss to Jiangsu Law; and (4) criminal investigation against Mr. Hsieh.
Under any of the following circumstances, Jiangsu Law may terminate the Hsieh Agreement with at least 30 days advance written notice to Mr. Hsieh: (1) where Mr. Hsieh fails to perform after medical treatment and recovery from illness or non-work-related injury; (2) where Mr. Hsieh fails to perform after training or reassignment of work; and (3) no modification to the Hsieh Agreement can be agreed upon in case of frustration of purposes, where the basis for the original contract have changed substantially and the purposes of such original contract can no longer be carried out.
Mr. Hsieh may terminate the Hsieh Agreement with at least 30 days prior notice at any time during the term of the Hsieh Agreement, or may immediately terminate such labor contract under any of the following circumstances: (1) within the probation period; (2) where Mr. Hsieh is illegally forced to work under violence, intimidation or illegal restriction of personal freedom; or (3) upon employer’s failure to make remuneration payment or to provide appropriate working conditions.
Pursuant to an employment agreement between Hsu Wen Yuan and Sichuan Kangzhuang, dated October 1, 2010 (the “Hsu Agreement”), Mr. Hsu earns a salary of RMB13,000 ($2,124) per month to serve as General Manager of Marketing for Sichuan Kangzhuang, the Hsu Agreement is not a fixed term employment agreement, it has no expiration date. The Hsu Agreement also provides for reimbursement of four trips by Mr. Hsu to Taiwan per year, an official car and gas subsidy, 20 days paid vacation, and reimbursement for business related travel and expenses. The Hsu Agreement initially provided for the performance targets with the total first year premium, or FYP, in 2011 must reach RMB10,000,000 ($1,566,661). Though Mr. Hsu failed to achieve the performance target, considering depressing general business environment as well as the extensive managerial experience of Mr. Hsu, Sichuan Kangzhuang continued the employment relationship with Mr. Hsu. Considering the slow-down of general economic environment in China, no FYP target has been set for the calendar year of 2012 and 2013. Mr. Hsu is subject to a non-compete which prohibits him from competing with Sichuan Kangzhuang during the term of the Hsu Agreement and for two years following the termination of his employment with Sichuan Kangzhuang. If Mr. Hsu violates the non-compete provisions of the Hsu Agreement, he is subject to a penalty fee of RMB100,000 ($16,340). Either party may terminate the Hsu Agreement prior to the expiration date of the agreement if such party (i) provides the non- terminating party 30 days notice and (ii) pays the non-terminating party RMB100,000 ($16,340). In addition, Mr. Hsu and Sichuan Kangzhuang may terminate the contract for enumerated reasons listed in the Hsu Agreement without payment of the termination fee.
Pursuant to an employment agreement between Jiangsu Law and Chiang Te Yun, dated December 30, 2009 (the “Chiang Agreement”), Mr. Chiang earns a salary of RMB2,250 ($352) per month to serve as Manager of Jiangsu Law. The original term of the Chiang Agreement expires on December 29, 2011, with an automatic extension of the Chiang Agreement if neither party terminates the Chiang Agreement. After the expiration date Mr. Chiang may terminate the Chiang Agreement at any time and Jiangsu Law may terminate the contract with 30 days notice to Mr. Chiang. Prior to the expiration date, the Chiang Agreement may be terminated by either party subject to applicable PRC labor laws and regulations, among which:
Jiangsu Law may immediately terminate the Chiang Agreement under any of the following circumstances: (1) Mr. Chiang’s failure to meet the recruitment requirements during the probation period; (2) Mr. Chiang’s serious violation of the internal disciplines or rules of Jiangsu Law; (3) Mr. Chiang’s negligent or intentional act causing significant loss to Jiangsu Law; and (4) criminal investigation against Mr. Chiang.
Under any of the following circumstances, Jiangsu Law may terminate the Chiang Agreement with at least 30 days advance written notice to Mr. Chiang: (1) where Mr. Chiang fails to perform after medical treatment and recovery from illness or non-work-related injury; (2) where Mr. Chiang fails to perform after training or reassignment of work; and (3) no modification to the Chiang Agreement can be agreed upon in case of frustration of purposes, where the basis for the original contract have changed substantially and the purposes of such original contract can no longer be carried out.
Mr. Chiang may terminate the Chiang Agreement with at least 30 days prior notice at any time during the term of the Chiang Agreement, or may immediately terminate such labor contract under any of the following circumstances: (1) within the probation period; (2) where Mr. Chiang is illegally forced to work under violence, intimidation or illegal restriction of personal freedom; or (3) upon employer’s failure to make remuneration payment or to provide appropriate working conditions.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information, as of March 15, 2015, concerning, except as indicated by the footnotes below:
· Each person whom we know beneficially owns more than 5% of our common stock or Series A Preferred Stock.
· Each of our directors.
· Each of our named executive officers (see the section titled “Executive Compensation”).
· All of our directors and executive officers as a group.
Unless otherwise noted below, the address of each of the persons set forth below is in care of China United Insurance Service, Inc., 7F, No. 311 Section 3, Nan-King East Road, Taipei City, Taiwan.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based on 29,100,503 shares of common stock and 1,000,000 shares of Series A Preferred Stock outstanding at March 15, 2015. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
The information provided in the table is based on our records, information filed with the SEC, and information provided to us, except where otherwise noted.
(1) Percentage total voting power represents voting power with respect to all shares of our common stock and Series A Preferred Stock, voting together as a single class. Each holder of common stock is entitled to one vote per share of common stock and each holder of Series A Preferred Stock is entitled to 10 votes per share of Series A Preferred Stock on all matters submitted to our stockholders for a vote.
(2) Includes 200,000 shares of common stock held by Lee Shu Fen, Mao Yi Hsiao’s spouse, 200,000 shares of common stock held by Mao Li Chieh, Mao Yi Hsiao’s daughter, 969,322 shares of common stock held by U-Li Investment Consulting Enterprise Co., Ltd. and 100,000 shares of common stock held by U-Link International CO LTD, 	 Mao Yi Hsiao and Lee Shu Fee hold 34% and 66% shares of U-Li Investment Consulting Enterprise Co., Ltd. respectively and U-Link International CO LTD is solely owned by Lee Shu Fen, Mao Yi Hsiao’s spouse.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Loans
The related parties below loaned money to the Company for working capital. As of the dates below, the following amounts were due to the related parties.
The term for the loan from Mrs. Lee is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The borrowing from other related parties are interest-free, unsecured and repayable on demand.
During the six months ended December 31, 2013, Mr. Mao paid $54,679 on behalf of the Company for the operating expense and registered capital of AHFL’s Taiwan branch.
During the six months ended December 31, 2013, the company repaid Mrs. Lee $564,608 and Ms. Zhu ShuQin $1,104,230.
During the year ended December 31, 2014, the Company borrowed $314,644 from Mrs. Lee and $96,694 from Mr. Mao.
In January 2015, the principal amount of loans from Mrs. Lee was fully repaid by the Company.
VIE Agreements
On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. The VIE Agreements now in effect included:
(1) An Exclusive Business Cooperation Agreement through which CU WFOE is appointed the exclusive services provider to provide Anhou with complete technical support, business support and related consulting services (as described in the agreement) in exchange for 90% of the net profits (as defined in the agreement) of Anhou. The agreement does not provide that CU WFOE is responsible for the debts of the Consolidated Affiliated Entities. The term of the Exclusive Business Cooperation Agreement began on January 17, 2011 and lasts ten years, unless earlier terminated as provide in the agreement. The term of the agreement may be extended at CU WFOE’s discretion prior to the expiration thereof. CU WFOE may terminate the agreement at any time with 30 days’ written notice but Anhou may only terminate the agreement if CU WFOE commits gross negligence or a fraudulent act against Anhou;
(2) a Power of Attorney under which the shareholders of Anhou have vested their collective voting control over Anhou to CU WFOE;
(3) an Option Agreement under which the shareholders of Anhou have granted to CU WFOE the irrevocable right and option to acquire all of their equity interests in Anhou, subject to applicable PRC laws and regulations. The term of the Option Agreement began on October 24, 2013 and lasts ten years, but may be renewed at CU WFOE’s election; and
(4) a Share Pledge Agreement under which the owners of Anhou have pledged all of their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the Exclusive Business Cooperation Agreement.
The foregoing description of the terms of the Exclusive Business Cooperation Agreement, the Power of Attorney, the Option Agreement and the Share Pledge Agreement is qualified in its entirety by reference to the provisions of the agreements filed as Exhibits 10.2 and 10.55-10.57 to this report which are incorporated by reference herein.
Anhou owns 100% equity interest in both Sichuan Kangzhuang and Jiangsu Law. The shareholders of Anhou are Hu Changrong (20%), Wang Yanyan (20%), Chen Zhaohui (20%), Yue Jing (15%), HouWeizhe (10%), Zhang Yong (9%) and Chen Li (6%).All of these shareholders are PRC citizens and none of them holds any shares in the Company. Pursuant to the VIE Agreements, CU WFOE becomes the primary beneficiary of Anhou and only leaves Anhou shareholders nominal value therein. Please refer to the chart below for detailed information on any of the Company’s shareholders being a director or officer of the Company, the Company’s subsidiaries or our Consolidated Affiliated Entities.
Reclassification of Certain Common Stock into Preferred Shares
On July 2, 2012, the BOD and stockholders of the Company approved, in connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held by Mao Yi Hsiao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr. Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000 common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification. Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Company; while each holder of Series A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Company.
Immediately prior to the Reclassification, the Common Stock beneficially owned by Mr. Mao, a director of the Company, represents 17.91% of the voting power of all of the Company’s voting power; immediately subsequent to the Reclassification, the Common Stock and the Series A Preferred Stock represents approximately 43.3% of the combined voting power of all of the Company’s voting stock.
Acquisition of AHFL
On August 24, 2012, the BOD and the shareholders of the Company have, through unanimous consent, approved the acquisition of all of the issued and outstanding shares of Action Holdings Financial Limited (“AHFL”), a LLC incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL becomes a 100% subsidiary of the Company.
Pursuant to the provisions of the Acquisition Agreement and in exchange for all of the issued and outstanding shares of AHFL, the Company will (i) issue eight million shares of common stock of the Company to the shareholders of AHFL; (ii) issue two million shares of common stock of the Company to certain employees of Law Broker; (iii) create an employee stock option pool, consisting of available options, exercisable for up to two million shares of common stock of the Company; and (iv) pay NT$15 million ($500,815) and NT$7.5 million ($250,095) in cash in two installments, subject to terms and conditions therein.
On March 14, 2013, the Company and the selling shareholders of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2 million employee stock option pool described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4 million shares of CUIS common stock, among which 2 million shares shall be solely granted to employees of Law Broker, and the remaining 2 million shares to be granted to employees of affiliated entities of the Company (including Law Broker employees).
On March 13, 2015, the Company and the selling shareholders of AHFL entered into a second Amendment to the Acquisition Agreement (the “Second Amendment”), pursuant to which, the cash payment deadline as set forth in the Acquisition Agreement has been extended from March 31, 2013 to March 31, 2016 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL.
AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent”), a LLC incorporated in Taiwan on June 3, 2000.
Law Enterprise acts as a holding company of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not in active operation. We operate our Taiwan business primarily through Law Broker.
In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan Government on November 26, 2014 and on January 13, 2015, respectively. In accordance with the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation.
As of the date immediately prior to the consummation of the acquisition, certain shareholders of AHFL, including Mao Yi Hsiao, are also significant shareholders of the Company: (i) Mao Yi Hsiao, together with Lee Shu Fen (his wife) and Mao Li Chieh (his daughter), own 17.9% of the outstanding shares of the Company and 24.3% of the outstanding shares of AHFL. Mao Yi Hsiao, one of the directors of the Company, also acts as the sole director of AHFL and the board chairman of Law Enterprise, Law Management and Law Agent, and as the supervisor of Jiangsu Law Broker Co., Ltd. In addition, Lee Shu Fen also acts as general manager of Law Enterprise and the board chairman of Law Broker; (ii) Chao HuiHsien, a shareholder of AHFL and Law Agent, is also a shareholder of the Company. In addition, Chao HuiHsien also acts as general manager of Law Broker and director of Law Enterprise and Law Agent; (iii) Chuang Yung Chi, a shareholder of AHFL, is also a shareholder and Chief Financial Officer of the Company; (iv) Hsieh Tung Chi, a shareholder of AHFL, is also a shareholder of the Company. In addition, Hsieh Tung Chi acts as the Chief Operating Officer of the Company; (v) Tu Wen Ti, a shareholder of AHFL, is also a shareholder of the Company. In addition, Tu Wen Ti acts as the assistant general manager of Law Broker; and (vi) Shen Wen Che, a shareholder of AHFL, is also a shareholder of the Company. In addition, Shen Wen Che acts as the assistant general manager of Law Broker.
Subsequent to the closing of the acquisition, Mao Yi Hsiao holds 100% of the Company’s outstanding preferred shares, and holds, together with his affiliates, 15.6% of the Company’s outstanding common shares, and 37.2% of the voting power of the Company.
Intercompany Loan and Loans to Unrelated Third Parties
On June 9, 2013, Action Holdings Financial Limited (“AHFL”), a wholly-owned British Virgin Islands subsidiary of China United Insurance Service, Inc. (the “Company” or “CUIS”), entered into a Loan Agreement (the “Company Loan Agreement”) with ZLI Holdings Limited, a wholly-owned Hong Kong subsidiary of CUIS (the “HK Company”).
Under the Company Loan Agreement, AHFL agreed to provide a loan to the HK Company with the principal amount equal to the US Dollar equivalent of RMB 40,000,000 ($6,532,716). The term for such was ten (10) years which could be extended upon the agreement of the parties. The amount of such loan was remitted to the account of the HK Company on August 30, 2013.
In August 2013, the HK Company 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 (“Mr.Chen”) and Ms. Yue Jing (Ms. Yue”), both PRC citizens (collectively, the “Investor Borrowers”).
Under the Investor Loan Agreements, the Investor Borrowers loaned cash from the HK Company for their investment in Henan Law Anhou Insurance Agency Co., Ltd. (“Anhou”) and the HK Company 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 ($6,532,716). The term for such loans was ten (10) 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, Zhengzhou ZhonglianHengfu Business Consulting Co., Ltd. (the “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 the HK Company 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 fails to repay the loan in currency to the HK Company.
The specific amounts loaned to the Investor Borrowers were as follows:
Able: RMB29,500,000 ($4,817,896)
Mr. Chen: RMB3,000,000 ($489,949)
Ms. Yue: RMB7,500,000 ($1,224,871)
Recent development of relevant laws and background of the loans
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 has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8,165,895). 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 ($8,165,895), can continue to operate their 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 they do not have a registered office or a branch office.
On September 26, 2013, several new PRC individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, HouWeizhe, Zhang Yong, Chen Li (“Anhou New Investors”) and the original shareholders of Anhou, namely, Zhu Shuqin, Wei Qun, Fang Qunlei and Chen Yanxia (“Anhou Original Shareholders”) entered into a shareholders resolution of Anhou (the “Capital Increase Resolution”), pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase the registered capital of Anhou to RMB50 million ($8,165,895), among which, Wang Yanyan would invest RMB10 million ($1,633,179), accounting for 20%, Chen Zhaohui would invest RMB10 million ($1,633,179), accounting for 20%, Yue Jing would invest RMB7.5 million ($1,224,871), accounting for 15%, HouWeizhe would invest RMB5 million ($816,589), accounting for 10%, Zhang Yong would invest RMB4.5 million ($734,930), accounting for 9%, and Chen Li would invest RMB3 million ($489,949), accounting for 6%, of the registered capital of Anhou.
Due to PRC legal restrictions on foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, HouWeizhe and Zhang Yong, to invest in Anhou on its behalf.
On October 24, 2013, Anhou completed the registration with local Administration Industry and Commerce (“AIC”) on the above-mentioned capital increase. The new business license was issued to Anhou on October 25, 2013.
On October 24, 2013, Anhou Original Shareholders entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr. Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer price of RMB10 million ($1,633,178). Mr. Hu is currently the legal representative and the sole director of Anhou.
On October 24, 2013, Anhou completed the share transfer registration with the local AIC. At the end of October 2013, Anhou completed its filing with Local CIRC with respect to its previously-conducted share transfer and capital increase.
As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect.
Insider Transactions Policies and Procedures
The Company does not currently have an insider transaction policy.
Director Independence
All of the Company’s directors except Mr. Mao and Ms. Lee are “independent directors” as defined by the NYSE Amex Stock Exchange.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Goldman Kurland and Mohidin LLP (“GKM”) has served as our independent auditors for the fiscal years ended June 30, 2013 and 2012. During the fiscal years ended June 30, 2013 and 2012, fees for services billed by GKM were as follows:
(1) Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(2) “Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
Simon & Edward LLP (“Simon & Edward”) has served as our independent auditors for the transitional period from July 1, 2013 to December 31, 2013 and for the year ended December 31, 2014. During the periods, fees for services billed by Simon & Edward were as follows:
(1) Consists of fees billed for the audit of our transition financial statements, and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(2) Consists of fees billed for all out-of-pocket expenses associated with performing audit and review services.
(3) “Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit service performed by Simon & Edward for our consolidated financial statements as of December 31, 2014 and for the transitional period from July 1, 2013 to December 31, 2013.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Index of Financial Statements:
(1) The financial statements required by Item 15(a) are filed in Item 8 of this AnnualReport on Form 10-K.
(2) Schedules required by Item 15(a) are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto.
(b) Index of Exhibits:
Exhibit
Number
Description of Exhibit
2.1
Acquisition Agreement dated August 24, 2012 between the Company and the shareholders of Action Holdings Financial Limited (incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on August 24, 2012)
2.2
Amendment to Acquisition Agreement, between the Company and the shareholders of Action Holdings Financial Limited, effective March 14, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on March 14, 2013)
2.3
Second Amendment to Acquisition Agreement, between the Company and the shareholders of Action Holdings Financial Limited, effective March 13, 2015.
2.4
Acquisition Agreement dated February 13, 2015, between the Company, AHFL and Li ChwanHau. (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on February 18, 2015)
3.1
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the SEC on July 3, 2012)
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K filed with the SEC on July 3, 2012)
4.1
Certificate of Designation of Series A Preferred Stock (incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the SEC on July 3, 2012)
10.1
Stock Purchase Agreement, dated January 17, 2011 (incorporated by reference to Exhibit 10.1 to the Form S-1 filed with the SEC on May 13, 2011)
10.2
Exclusive Business Cooperation Agreement, dated January 17, 2011 (incorporated by reference to Exhibit 10.2 to the Form S-1 filed with the SEC on May 13, 2011)
10.3
Share Pledge Agreement, dated January 17, 2011 - Zhu Shuqin (incorporated by reference to Exhibit 10.3 to the Form S-1 filed with the SEC on May 13, 2011)
10.4
Share Pledge Agreement, dated January 17, 2011 - Wei Qun (incorporated by reference to Exhibit 10.4 to the Form S-1 filed with the SEC on May 13, 2011)
10.5
Share Pledge Agreement, dated January 17, 2011 - Fang Qunlei (incorporated by reference to Exhibit 10.5 to the Form S-1 filed with the SEC on May 13, 2011)
10.6
Share Pledge Agreement, dated January 17, 2011 - Chen Yanxia (incorporated by reference to Exhibit 10.6 to the Form S-1 filed with the SEC on May 13, 2011)
10.7
Power of Attorney, dated January 17, 2011 - Zhu Shuqin (incorporated by reference to Exhibit 10.7 to the Form S-1 filed with the SEC on May 13, 2011)
10.8
Power of Attorney, dated January 17, 2011 - Wei Qun (incorporated by reference to Exhibit 10.8 to the Form S-1 filed with the SEC on May 13, 2011)
10.9
Power of Attorney, dated January 17, 2011 - Fang Qunlei (incorporated by reference to Exhibit 10.9 to the Form S-1 filed with the SEC on May 13, 2011)
10.10
Power of Attorney, dated January 17, 2011 - Chen Yanxia (incorporated by reference to Exhibit 10.10 to the Form S-1 filed with the SEC on May 13, 2011)
10.11
Exclusive Option Agreement, dated January 17, 2011 - Zhu Shuqin (incorporated by reference to Exhibit 10.11 to the Form S-1 filed with the SEC on May 13, 2011)
10.12
Exclusive Option Agreement, dated January 17, 2011 - Wei Qun (incorporated by reference to Exhibit 10.12 to the Form S-1 filed with the SEC on May 13, 2011)
10.13
Exclusive Option Agreement, dated January 17, 2011 - Fang Qunlei (incorporated by reference to Exhibit 10.13 to the Form S-1 filed with the SEC on May 13, 2011)
10.14
Exclusive Option Agreement, dated January 17, 2011 - Chen Yanxia (incorporated by reference to Exhibit 10.14 to the Form S-1 filed with the SEC on May 13, 2011)
10.15
Sichuan Kangzhuang Share Transfer Agreement, between Anhou and Allianz China Life Insurance Company Limited, dated September 6, 2010 (incorporated by reference to Exhibit 10.15 to the Form S-1 filed with the SEC on May 13, 2011)
10.16
Sichuan Kangzhuang Share Transfer Agreement, between Anhou and Chengdu Jingzhan Enterprise Management & Consulting Company Limited, dated September 6, 2010 (incorporated by reference to Exhibit 10.16 to the Form S-1 filed with the SEC on May 13, 2011)
10.17
Sichuan Kangzhuang Share Transfer Agreement, between Anhou and Li Dan, dated September 6, 2010 (incorporated by reference to Exhibit 10.17 to the Form S-1 filed with the SEC on May 13, 2011)
10.18
Sichuan Kangzhuang Share Transfer Agreement, between Anhou and Yan Fang, dated September 6, 2010 (incorporated by reference to Exhibit 10.18 to the Form S-1 filed with the SEC on May 13, 2011)
10.19
Jiangsu Law Share Transfer Agreement, between Anhou and Liu Jianxin, dated September 28, 2010 (incorporated by reference to Exhibit 10.19 to the Form S-1 filed with the SEC on May 13, 2011)
10.20
Jiangsu Law Share Transfer Agreement, between Anhou and Zhu Xudong, dated September 28, 2010 (incorporated by reference to Exhibit 10.20 to the Form S-1 filed with the SEC on May 13, 2011)
10.21
Jiangsu Law Share Transfer Agreement, between Anhou and Zhu Xumin, dated September 28, 2010 (incorporated by reference to Exhibit 10.21 to the Form S-1 filed with the SEC on May 13, 2011)
10.22
Translation of Insurance Agency Contract with Taiping Life Insurance Co., Ltd,, dated November 5, 2003 (incorporated by reference to Exhibit 10.22 to the Form S-1 filed with the SEC on May 13, 2011)
10.23
Translation of Legal Representative Agreement with Li Fu Chang, dated January 1, 2011 (incorporated by reference to Exhibit 10.23 to the Form S-1/A filed with the SEC on November 14, 2011)
10.24
Translation of Employment Agreement with Lo Chung Mei, dated January 1, 2013 (Incorporated by reference to Exhibit 10.24 to the Form 10-K filed with the SEC on September 30, 2013)
10.25
Translation of Employment Agreement with Chiang Te Yun, dated December 30, 2009 (incorporated by reference to Exhibit 10.25 to the Form S-1 filed with the SEC on May 13, 2011)
10.26
Translation of Employment Agreement with Hsu Wen Yuan, dated October 1, 2010 (incorporated by reference to Exhibit 10.26 to the Form S-1/A filed with the SEC on October 28, 2011)
10.27
Translation of Employment Agreement with Tsai Shiu Fang, dated January 1, 2011 (incorporated by reference to Exhibit 10.27 to the Form S-1/A filed with the SEC on October 28, 2011)
10.28
Translation of Employment Agreement with Hsieh Tung Chi, dated December 30, 2009 (incorporated by reference to Exhibit 10.28 to the Form S-1 filed with the SEC on May 13, 2011)
10.29
Translation of Tenancy Contract, Building 4K, dated January 10, 2011 (incorporated by reference to Exhibit 10.29 to the Form S-1 filed with the SEC on May 13, 2011)
10.30
Translation of Tenancy Contract, Building 4F, dated October 5, 2012 (incorporated by reference to Exhibit 10.30 to the Form S-1 filed with the SEC on May 13, 2011)
10.31
Translation of Creditors Right Subrogation Agreement (incorporated by reference to Exhibit 10.31 to the Form S-1/A filed with the SEC on November 14, 2011)
10.32
Translation of Debt Waiver Agreement (incorporated by reference to Exhibit 10.32 to the Form S-1/A filed with the SEC on November 14, 2011)
10.33
Translation of Legal Representative Agreement with Li Fu Chang, dated January 1, 2010 (incorporated by reference to Exhibit 10.33 to the Form S-1/A filed with the SEC on November 14, 2011)
10.34
Translation of Insurance Agency Contract with Cathay Insurance Co., Ltd., dated November 30, 2011 (incorporated by reference to Exhibit 10.34 to the Form S-1/A filed with the SEC on December 2, 2011)
10.35
Translation of Insurance Agency Contract with Tianan Insurance Co., Ltd., dated July 1, 2011 (incorporated by reference to Exhibit 10.35 to the Form S-1/A filed with the SEC on December 2, 2011)
10.36
Translation of Employment Agreement with Chuang Yun Chi, dated July 2, 2012 (incorporated by reference to Exhibit 10.36 to the Form 10-K filed with the SEC on September 28, 2012)
10.37
Translation of Insurance Agency Contract between Law Broker and China Life Insurance Company dated January 1, 2008 (incorporated by reference to Exhibit 10.37 to the Form 10-K filed with the SEC on September 28, 2012)
10.38
Translation of Insurance Agency Contract between Law Broker and Farglory Life Insurance Co, Ltd. dated December 30, 2000 (incorporated by reference to Exhibit 10.38 to the Form 10-K filed with the SEC on September 28, 2012)
10.39
Translation of Insurance Agency Contract between Law Broker and Fubon Life Insurance Co, Ltd. dated February 20, 2004 (incorporated by reference to Exhibit 10.39 to the Form 10-K filed with the SEC on September 28, 2012)
10.40
Translation of Insurance Agency Contract between Law Broker and KuoHua Life Insurance Company dated July 22, 1993 (incorporated by reference to Exhibit 10.40 to the Form 10-K filed with the SEC on September 28, 2012)
10.41
Translation of Insurance Agency Contract between Law Broker and TransGlobe Life Insurance Company dated January 1, 2002 (incorporated by reference to Exhibit 10.41 to the Form 10-K filed with the SEC on September 28, 2012)
10.42
Translation of Insurance Agency Contract between Law Broker and ACE Insurance Company dated September 1, 2009 (incorporated by reference to Exhibit 10.42 to the Form 10-K filed with the SEC on September 28, 2012)
10.43
Translation of Insurance Agency Contract between Law Broker and Fubon Insurance Co, Ltd. dated December 1, 2006 (incorporated by reference to Exhibit 10.43 to the Form 10-K filed with the SEC on September 28, 2012)
10.44
Translation of Insurance Agency Contract between Law Broker and Taian Insurance Co., Ltd. dated August 5, 2010 (incorporated by reference to Exhibit 10.44 to the Form 10-K filed with the SEC on September 28, 2012)
10.45
Translation of Insurance Agency Contract between Law Broker and Union Insurance Company dated April 1, 2008 (incorporated by reference to Exhibit 10.45 to the Form 10-K filed with the SEC on September 28, 2012)
10.46
Translation of Insurance Agency Contract between Law Broker and Zurich Insurance Company dated October 1, 2005. (incorporated by reference to Exhibit 10.46 to the Form 10-K filed with the SEC on September 28, 2012)
10.47
Reclassification Agreement between the Company and Mao Yi Hsiao, dated July 2, 2012 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on July 3, 2012).
10.48
Strategic Alliance Agreement between Action Holdings Financial and AIA International Limited Taiwan Branch, dated June 10, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on July 29, 2013)
10.49
Loan Agreement between Action Holdings Financial Limited and ZLI Holdings Limited, dated June 9, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on September 6, 2013)
10.50
Loan Agreement between ZLI Holdings and Able Capital Holding Co., Ltd., dated August 28, 2013 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on September 6, 2013)
10.51
Loan Agreement between ZLI Holdings and Chen Li, dated August 9, 2013 (incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the SEC on September 6, 2013)
10.52
Loan Agreement between ZLI Holdings and Yue Jing, dated August 9, 2013 (incorporated by reference to Exhibit 10.4 to the Form 8-K filed with the SEC on September 6, 2013)
10.53
Translation of Tenancy Contract, between Pon-Chen Co., Ltd. and Law Insurance Broker Co., Ltd., dated October 5, 2012 (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed with the SEC on February 14, 2013).
10.54
Consulting Service Agreement between the Company and Li Fu-Chang, dated December 7, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on December 12, 2013).
10.55
Form of Share Pledge Agreement, dated October 24, 2013. (incorporated by reference to Exhibit 10.55 to the Form 10-KT filed with the SEC on April 17, 2014)
10.56
Form of Power of Attorney, dated October 24, 2013. (incorporated by reference to Exhibit 10.56 to the Form 10-KT filed with the SEC on April 17, 2014)
10.57
Form of Exclusive Option Agreement, dated October 24, 2013. (incorporated by reference to Exhibit 10.57 to the Form 10-KT filed with the SEC on April 17, 2014)
10.58
Translation Lease Agreement between Qing Tian and Law Anhou Insurance Agency Co., Ltd., dated January 17, 2014. (incorporated by reference to Exhibit 10.58 to the Form 10-KT filed with the SEC on April 17, 2014)
10.59
Translated Broker Agreement between AIA International Limited, Taiwan Branch and Law Insurance Broker, Co. Ltd. (incorporated by reference to Exhibit 10.59 to the Form 10-KT filed with the SEC on April 17, 2014)
10.60
Translated Employment Agreement between Law Anhou Insurance Agency Co., Ltd. and Lo Chung Mei, dated January 1, 2014. (incorporated by reference to Exhibit 10.60 to the Form 10-KT filed with the SEC on April 17, 2014)
10.61
Employment Agreement between Chao Hui-Hsien and Law Insurance Broker Co. Ltd., dated, dated January 7, 2013 (incorporated by reference to Exhibit 10.61 to the Form 10-KT filed with the SEC on April 17, 2014)
10.62
Translation of Tenancy Renewal Contract, Building 4F, dated January 10, 2014 (incorporated by reference to Exhibit 10.62 to the Form 10-KT filed with the SEC on April 17, 2014)
10.63
Translation of Tenancy Renewal Contract, Building 4K, dated January 10, 2014 (incorporated by reference to Exhibit 10.63 to the Form 10-KT filed with the SEC on April 17, 2014)
10.64
Translation of Loan Agreement between Law Enterprise and AHFL, dated September 15, 2014 (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed with the Securities Exchange Commission on September 23, 2014).
10.65
Amendment to Strategic Alliance Agreement (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed with the Securities Exchange Commission on September 30, 2014).
10.66
Loan Agreement between AHFL and Lee Shu-Fen, dated December 23, 2014. (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed with the Securities Exchange Commission on December 23, 2014).
10.67
Loan Agreement between AHFL and Law Insurance Broker Co., Ltd., dated January 14, 2015. (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed with the Securities Exchange Commission on January 16, 2015).
10.68
Insurance Agency Contract, dated March 1, 2012, between CTBC Life Insurance and Law Broker.
10.69
Insurance Agency Contract, dated January 1, 2011, between Shin Kong Life and Law Broker.
10.70
Insurance Contract, dated December 31, 2013, between Yingda Life Insurance Co. Ltd. and Anhou.
10.71
Insurance Contract, dated January 1, 2015, between Aviva Life Insurance Co. Ltd. and Anhou.
10.72
Engagement Agreement dated January 7, 2015 between Chao Hui-Hsien and Law Insurance Broker Co., Ltd., dated January 7, 2015.
Subsidiaries of the registrant (incorporated by reference to the Exhibit 21 to the Form 10-K filed with the SEC on September 28, 2012)
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 annual report on Form 10-K 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 Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Mao Yi Hsiao
Chief Executive Officer (Principal Executive Officer)
March 18, 2015
Mao Yi Hsiao
/s/ Chuang Yung Chi
Chief Financial Officer (Principal Accounting Officer)
March 18, 2015
Chuang Yung Chi
/s/ Mao Yi Hsiao
Director
March 18, 2015
Mao Yi Hsiao
/s/ Li Fu Chang
Director
March 18, 2015
Li Fu Chang
/s/ Li ChwanHau
Director
March 18, 2015
Li ChwanHau
/s/ Chen KueiChiao
Director
March 18, 2015
Chen KueiChiao
/s/ Lee Shu Fen
Director
March 18, 2015
Lee Shun Fen