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).
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.
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.
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.
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.
Noncontrolling interest consists of direct and indirect equity interest in AHFL and subsidiaries arising from the acquisition of AHFL by CUIS.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The following table shows the results of operations for the years ended June 30, 2013 and 2012:
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.
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.
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%.
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.
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.
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”).
On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925).
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.
As of December 31, 2014, the Company had no off balance sheet arrangements.
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.
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.
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.
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.
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).
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.
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.
The corporate structure as of December 31, 2014 is as follows:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
¨ 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.
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.
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.
The Company’s other current assets consisted of the following as of December 31, 2014 and 2013:
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.
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.
The Company’s taxes payable consisted of the following as of December 31, 2014 and 2013:
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.
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.
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.
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.
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.
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.
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:
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:
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.