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, Taibei City, Taiwan, with approximately 753.29 square meters of office space. The lease was between Pengcheng Co., Ltd. and Law Broker, for an original term of two years commencing from June 1, 2011 to May 31, 2013 and with a monthly rent of $11,977 (NT$355,477). On May 23, 2013, the lease was renewed and the term was extended to May 31, 2015 on the same terms as the original lease agreement. Law Broker has also entered into 26 leases for each of its sales and service outlets and training centers (excluding its headquarter), with an aggregate office size of 16,023 square meters for an aggregate monthly fee of $122,266 (NT$3,658,823).
Henan Anhou has two principal offices: (i) one is located at Building 4F, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, China, with 6,157 square feet (572 square meters) of office space. The lease agreement is between Ma Rui and Henan Anhou. The original lease term was from January 1, 2008 to December 30, 2010 for two years, with rent of $4,032 (RMB25,739) per month payable every three months. On January 10, 2011, the lease was renewed and the term was extended to December 30, 2013 on the same terms as the original lease agreement; and (ii) the other office is located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District, Zhengzhou, Henan province, China, with 5,597 square feet (520 square meters) of office space. The lease agreement is between Ma Rui and Henan Anhou. The original lease term was from January 1, 2008 to December 30, 2010 for two years, with rent of $1,880 (RMB12,000) per month payable every three months. On January 1, 2011, the lease was renewed and the term extended to December 30, 2013 on the same terms as the original lease agreement.
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. Jiangsu Law leases such office free of charge and no written agreement was executed.
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”).
Henan Law Anhou Insurance Agency Co., Ltd. (“Henan Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd.) was incorporated in the PRC on August 20, 2003. Henan Anhou provides insurance agency services in the PRC. On August 16, 2010, Ms. Zhu Shuqin contributed RMB8,000,000 ($1,175,440) in cash to Henan Anhou and controlled 80% of Henan Anhou shares.
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 Henan Anhou for RMB518,000 ($75,475) and Henan 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 Henan Anhou and each shareholder of Jiangsu Law.
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. We do not hold equity interests in our CAE. However, through the variable interest entities (“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.
As of June 30, 2013, through our CAE, we had two insurance agencies, one brokerage and 37 service outlets with 888 full-time sales professionals, 37 part-time sales professionals and 67 administrative staff in Henan, Sichuan and Jiangsu provinces in China. In addition, through Law Insurance Broker Co., Ltd., we had 23 sales and service outlets (including the headquarters) with 1,455 full-time sales professionals, 449 part-time sales professionals and 151 administrative staff in Taiwan.
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 year. 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.
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.
Our results of operations for the year ended June 30, 2013 contains the results for ten months for the period ended June 30, 2013 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.
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.
For the year ended June 30, 2013, G&A expenses were $9,062,828, increased by $7,895,987, or 676%, 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. For the year ended June 30, 2013, the Company accrued $200,000 for expenses related to the acquisition.
Other income for the year ended 30 June, 2013 was mainly rental income of sub-leased spare offices and garage.
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 tax basis is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.
Prior to June 30, 2012, the Company’s gross margin couldn’t cover its operating expenses and we recorded an accumulated deficit of $1,918,972. As a result, the Company needed to partially finance its operations through capital contribution and borrowings from related parties.
On June 9, 2013, AHFL entered into a Loan Agreement (the “Company Loan Agreement”) with ZLI Holdings Limited, a wholly-owned Hong Kong subsidiary of CUIS (the “HK Company”).
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 and Ms. Yue Jing, 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 Zhonglian Hengfu 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.
As of the date hereof, Anhou, a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million ($1,633,179). The registered office and branch offices of Anhou currently are all in Henan province. To better implement its expansion strategies, Anhou intends to increase its registered capital to RMB50 million ($8,165,895) 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 Borrowers shall, or cause their designated persons to, enter into the Variable Interest Entities Agreement with the WFOE, the wholly-owned indirect subsidiary of the Company, Anhou and other parties so as to consolidate any additional VIE interest generated from the said registered capital increase into the Company.
The related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of June 30, 2013 and 2012:
As of June 30, 2013, the Company had no off balance sheet arrangements.
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”).
Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”) was founded on July 10, 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 Henan Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed between Henan Anhou and each shareholder of Sichuan Kangzhuang. Sichuan Kangzhuang then had net liabilities of RMB219,123 ($32,134). Goodwill of RMB751,745 ($110,452) was therefore recorded. Goodwill in the balance sheet differs from the acquisition date amount due to changes in exchange rates.
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The functional currency for our subsidiaries in Taiwan is New Taiwanese Dollar “(NT$”) and for the VIEs in China is Renminbi (“RMB”).
The Company maintains cash with banks in the PRC and Taiwan. Cash accounts 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.
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 June 30, 2013 or 2012.
Goodwill arose from the acquisition of Sichuan Kangzhuang (Note 8). 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. As of June 30, 2013, there were no indications of any impairment.
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 June 30, 2013 and 2012, the Company did not have any uncertain tax positions.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and equivalents and accounts receivable. As of June 30, 2013 and 2012, substantially all of the Company’s cash and equivalents were held by major financial institutions in Taiwan, which management believes are of high credit quality. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.
The Company follows FASB ASC Topic 280, “Segment Reporting,” for its segment reporting. For the years ended, June 30 2013 and 2012, the Company managed and reviewed its business as a single operating segment providing insurance brokerage and agency services across the PRC and Taiwan (combined referred as “Greater China”). All revenues are derived from Greater China and all long-lived assets are in Greater China.
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 primarily through Henan Anhou, a VIE owned by four individual shareholders, and two subsidiaries of Henan Anhou.
1. The criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on the substantially agreed terms, even in the event of default by the transferee; and
Other criteria applicable to the assessment of effective control are not changed by the amendments in ASC 860. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU 2011-04 Fair Value Measurement (ASC Topic 820), “Amendments to achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards,” (“IFRS”). The amendments in this Update change the wording used to describe the requirements in US GAAP for measuring FV and for disclosing information about FV measurements. The amendments include:
In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that US GAAP and IFRS FV measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in US GAAP).
The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.
As of June 30, 2013 and 2012, the Company’s other assets mainly consist of deposits, including deposits for long-term leases.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of AHFL for $2,750,910. NT$15 million ($500,815) and NT$7.5 million ($250,095) payable in cash in two installments, and 10 million shares of common stock at the then market price of $0.20 per share. The FV of the identifiable assets and liabilities of AHFL at acquisition date was $8,047,654. The Company recorded the $5,280,042 excess of purchase price over the FV of assets and liabilities acquired as bargain gain on purchase. We believe the gain on acquisition resulted from the sellers' strategic intent to enter the PRC market, which has a higher growth rate than Taiwan, and to become the shareholder of an OTCBB company.
We use August 31, 2012 as the closest available date to value the FV of the identifiable assets and liabilities of AHFL at acquisition date. The consolidated statement of operations and other comprehensive income (loss) for the year ended June 30, 2013 contains AHFL’s statement of operations and other comprehensive income for the 10 months ended June 30, 2013 The consolidated balance sheet as of June 30, 2013 contains AHFL’s balance sheet as of June 30, 2013.
As a result of stock dividends of NT$172,064,280 ($5,775,747) issued by Law Broker, $3,809,105 in the consolidated retained earnings is restricted for dividend distribution.
The following table reconciles the US statutory rates to the Company’s effective tax rate for the year ended June 30, 2013 and 2012:
The functional currency for the subsidiaries in Taiwan is NT$ 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.
On April 27, 2013, China Insurance Regulatory Commission issued a decision mandating any insurance agency to meet a minimum registered capital requirement of RMB50 million. At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered capital of RMB10 million. To better implement its expansion strategies, Anhou intended 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.
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 ($6,532,716). 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:
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 shall, or cause their designated persons to, enter 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.