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 27 leases for each of its sales and service outlets and training centers (excluding its headquarter), with an aggregate office size of 15,776 square meters for an aggregate monthly fee of $114,990 (NT$3,452,439).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
The registered capital increase of Anhou is in response to the recent 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 continuous 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.
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.
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.
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. For more information see “Risk Factors-Risks Related to Our Corporate Structure.”
As of December 31, 2013, through our CAE, we had two insurance agencies, one brokerage and 39 service outlets with 954 full-time sales professionals, 37 part-time sales professionals and 82 administrative staff in Henan, Sichuan and Jiangsu provinces in China. In addition, through Law Insurance Broker Co., Ltd., we had 24 sales and service outlets (including the headquarters) with 1,594 full-time sales professionals, 406 part-time sales professionals and 149 administrative staff in Taiwan.
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 and 2011, 100% of our revenues in our consolidated financial statements were derived from our CAE.
The Company reviews its accounts receivable on a regular basis to determine if a bad debt allowance is necessary. Management reviews the composition of accounts receivable and analyzes the age of receivable 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, 2013, June 30, 2013 and 2012.
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.
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 February 2013, the FASB issued guidance on disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income (“AOCI”). This new guidance requires entities to present (either on the face of the income statements or in the notes) the effects on the line items of the income statement for amounts reclassified out of AOCI. The new guidance was effective for us beginning July 1, 2013. Other than requiring additional disclosures, the adoption of this guidance did not have a material impact on our financial statements.
The following table shows the results of operations for the six months ended December 31, 2013 and 2012 and for the years ended June 30, 2013, 2012 and 2011
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.
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.
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 which was accrued in the six months ended December 31, 2013.
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.
Other income for the year ended June 30, 2013 was mainly rental income of sub-leased spare offices and garage.
The balance of income tax payable as of June 30, 2013 and 2012 mainly is the income tax accrued for the un-deductible commission paid to sub-agents in China before 2011 and is due upon written request of the local tax bureau.
Net cash provided by operating activities during the six months ended December 31, 2013, was $7,817,000, 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 $222,000. The increase was mainly contributed by our Taiwan business.
Net cash provided by operating activities during the year ended June 30 2013 was $2,168,990. 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.
Net cash used in operating activities for the year ended June 30, 2011 was $165,155, while it was $344,495 for the year ended June 30, 2012. The difference was mainly due to the increase in tax payable.
For the six months ended December 31, 2013, net cash used in financing activities was $1,614,000, which is mainly due to the $1,669,000 repayment to related parties. Net cash provided by financing activities was $325,000 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 Shufen, director of CUIS, and Ms. Zhu Shuqin, a shareholder of Anhou.
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 ($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 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.
Anhou, a professional insurance agency with a PRC nationwide license, used to have a registered capital of RMB10 million ($1,633,179). The branch offices of Anhou currently are all in Henan province. To better implement its expansion strategies, Anhou intended 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.
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 ($6,522,944). 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:
On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,522,944).
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 June 30, 2013 and 2012:
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, 2013, and the results of its consolidated operations and its cash flows for the six months ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
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 October 20, 2013, Henan Anhou’s registered capital was increased to RMB 50 million and its name was changed to Law Anhou Insurance Agency Co., Ltd.
Jiangsu Law Insurance Broker Co., Ltd. (“Jiangsu Law”) was founded on May 18, 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 Henan Anhou for RMB518,000 ($75,475) and Henan 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 Henan Anhou and each shareholder of Jiangsu Law. The consideration is due upon request and was not paid as of September 30, 2013. 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 August 17, 2012, Action Holdings Financial Limited (“AHFL”), an LLC incorporated under the laws of the British Virgin Islands on April 30, 2012, purchased 13,593,015 shares of common stock of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996, from certain shareholders at NT$12.8 ($0.44) per share, which was 65.95% ownership in Law Enterprise. As of August 24, 2012, Law Enterprise held (i) 100% of Law Insurance Broker Co., Ltd. (“Law Broker”), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. (“Law Agent”), an LLC incorporated in Taiwan on June 3, 2000.
On March 14, 2013, the Company and the selling shareholders of AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”), pursuant to which, (i) the cash payment deadline as set forth in the Acquisition Agreement was extended from March 31, 2013 to March 31, 2015 or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL; and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agrees to use its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS common stock, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares to be granted to employees of affiliated entities of the Company (including Law Broker employees).
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The functional currency for our subsidiaries in Taiwan is New Taiwan Dollar (“NT$”) and for the VIEs in China is Renminbi (“RMB”).
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.
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 debt securities the Company has intends and has the ability to hold to maturity; Trading securities represent debt securities bought and held primarily for sale in the near-term to generate income on short-term price differences; Equity security investments are classified as trading securities and reported at FV with changes in FV recorded in “Other Income”. Available-for-sale represents debt securities not classified as held-to-maturity or trading securities; Bonds are classified as available-for-sale and reported at FV with unrealized gains and losses included in “Accumulated other comprehensive income (loss).”
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 six months ended December 31, 2013 or 2012.
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 June 30, 2013, 2012 and 2011, policy cancellations were $22,553, $12,809, nil and nil, respectively.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and equivalents and accounts receivable. As of September 30 and June 30, 2013, 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.
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 two principal insurance companies, Fubong Life Insurance Co., Ltd. (“Fubong”) and Far Glory Life Insurance (“Far Glory”), for which it acts as an insurance agent. For the six months ended December 31, 2013 and for the years ended June 30, 2013, 2012 and 2011, the Company’s revenues from sale of insurance policies underwritten by these companies were:
The Company follows FASB ASC Topic 280, “Segment Reporting,” for its segment reporting. For the six months ended December 31, 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.
Exclusive Business Cooperation Agreement (“EBCA” or the “Agreement”) through which: (1) CU WFOE has the right to provide Henan Anhou with complete technical support, business support and related consulting services during the term of this Agreement; (2) Henan Anhou agrees to accept all the consultations and services provided by CU WFOE. Henan Anhou further agrees that unless with CU WFOE's prior written consent, during the term of this Agreement, Henan 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) Henan Anhou shall pay CU WFOE fees equal to 90% of the net income of Henan 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.
Option Agreement under which the shareholders of Henan Anhou irrevocably granted CU WFOE or its designated person an exclusive and irrevocable right to acquire, at any time, the entire portion of Henan Anhou’s equity interest held by each shareholder of Henan Anhou, or any portion thereof, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in Henan 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 Henan Anhou pledged their equity interests in Henan Anhou to CU WFOE to guarantee Henan Anhou’s performance of its obligations under the EBCA. Pursuant to this agreement, if Henan 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 Henan Anhou’s equity interests in Henan Anhou. This Agreement shall be continuously valid until all payments due under the EBCA have been repaid by Henan Anhou or its subsidiaries.
As a result of the agreements among CU WFOE, the shareholders of Henan Anhou and Henan Anhou, CU WFOE is considered the primary beneficiary of Henan Anhou, CU WFOE has effective control over Henan Anhou; therefore, CU WFOE consolidates the results of operations of Henan Anhou and its subsidiaries. Accordingly the results of operations, assets and liabilities of Henan 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:
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.
The Company reviews the VIE’s status on an annual basis. For the three months ended September 30, 2013, no event including a-d above took place that would change the Company’s primary beneficiary status.
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.
Estimated future intangible amortization as of December 31, 2013 is as follows:
According to Taiwan regulatory requirements, Law Broker is required to maintain a minimum of NT$3,000,000 ($99,920) 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 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) 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. As of December 31, 2013, the Company booked $1,586,038 as short-term liability since we expect to record this amount as revenue within the next twelve months. The remaining balance of $6,344,152 is recorded as long-term liability (Note 15). For the six months ended December 31, 2013 no income was recorded under the Alliance Agreement as performance targets were not met.
Long-term other payable 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 Mar 14, 2013, the payment deadline was extended to March 31, 2015. As described in Note 13, the Company recorded $7,930,190 (NT$238,095,238, net of tax) received from AIATW as unearned revenue, of which, $6,344,152 is classified as a long-term liability.
The balance of income tax payable as of December 31, 2013 mainly is the income tax accrued for the un-deductible commission paid to sub-agents before 2011 and is due upon written request of the local tax bureau.
The following table reconciles the US statutory rates to the Company’s effective tax rate for the six months ended December 31, 2013 and June 30, 2013 and 2012:
On April 27, 2013, China Insurance Regulatory Commission mandated any insurance agency have a minimum registered capital requirement of RMB50 million ($8,150,000). At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered capital of RMB10 million ($1,630,000). 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.
The Company has evaluated all other subsequent events through the date these consolidated financial statements were issued, and determined that there were no other subsequent events or transactions that require recognition or disclosures in the consolidated financial statements.
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 referred to above present fairly, in all material respects, the financial position of China United Insurance Service, Inc. as of June 30, 2013 and 2012, and 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.
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 January 17, 2011, CU WFOE and Henan Anhou and its shareholders entered into a series of agreements known as variable interest agreements (the “VIE Agreements”) pursuant to which CU WFOE has effective control over Henan Anhou.
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 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. 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 (100% of voting equity interest) of AHFL together with its subsidiaries in Taiwan. Pursuant to the provisions of the Acquisition Agreement 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.
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 year ended June 30, 2013 or 2012.
¨ Exclusive Business Cooperation Agreement (“EBCA” or the “Agreement”) through which: (1) CU WFOE has the right to provide Henan Anhou with complete technical support, business support and related consulting services during the term of this Agreement; (2) Henan Anhou agrees to accept all the consultations and services provided by CU WFOE. Henan Anhou further agrees that unless with CU WFOE's prior written consent, during the term of this Agreement, Henan 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) Henan Anhou shall pay CU WFOE fees equal to 90% of the net income of Henan 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.
During the term of this Agreement, unless CU WFOE commits gross negligence, or a fraudulent act, against Henan Anhou, Henan Anhou may not terminate this Agreement prior to its expiration date. Nevertheless, CU WFOE shall have the right to terminate this Agreement upon giving 30 days prior written notice to Henan Anhou at any time.
¨ Option Agreement under which the shareholders of Henan Anhou irrevocably granted CU WFOE or its designated person an exclusive and irrevocable right to acquire, at any time, the entire portion of Henan Anhou’s equity interest held by each shareholder of Henan Anhou, or any portion thereof, to the extent permitted by PRC law. The purchase price for the shareholders’ equity interests in Henan 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 Henan Anhou pledged their equity interests in Henan Anhou to CU WFOE to guarantee Henan Anhou’s performance of its obligations under the EBCA. Pursuant to this agreement, if Henan 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 Henan Anhou’s equity interests in Henan Anhou. This Agreement shall be continuously valid until all payments due under the EBCA have been repaid by Henan Anhou or its subsidiaries.
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.
In April, 2011, the FASB issued ASU 2011-03 Transfers and Servicing (ASC Topic 860), “Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU 2011-03 remove from the assessment of effective control:
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.
As of June 30 2013 and 2012 our cash and equivalents primarily consisted of cash and certificates of deposits with original maturities of three months or less.
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 five years can be adjusted. Therefore, for year ended June 30, 2013, we reversed the tax payable of $274,489 accrued at June 30, 2010 for such originally non-deductible commission and credited as income tax benefit.
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.
During the year ended June 30, 2013, Mr. Mao paid $69,616 on behalf of the Company, for professional services related to the acquisition of AHFL, Ms. Zhu paid $658,059 for working capital, and Mrs. Lee paid $566,478 for expenses related to financial reporting. During the year ended June 30, 2012, Mr. Mao, Ms. Zhu and Mr. Zhu paid $1,871, $441,272 and $2,189, respectively, for working capital. All amounts are interest-free, unsecured and payable on demand.
The Company has operating leases for its offices. Rental expenses for the year ended June 30 2013 and 2012 were $1,410,945 and $889,080, respectively. At June 30, 2013, total future minimum lease payments under operating leases were as follows, by years:
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.
On June 10, 2013, AHFL entered into a Strategic Alliance Agreement with AIA International Limited Taiwan Branch (“AIATW”). The purpose of the Alliance Agreement was 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. Pursuant to the Alliance Agreement, AHFL shall encourage any insurance agency company and insurance brokerage company owned by itself to execute the related insurance brokerage or agent agreements with AIATW and assist in negotiating insurance contracts to be underwritten by the insurance company underlying such executed brokerage or agent agreements with AIATW.
The term of the Alliance Agreement is from June 1, 2013 to May 31, 2018. Pursuant to its terms, AIATW was to pay AHFL an Execution Fee in the amount of $8,367,947 (NT$250 million). The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL. Neither party may terminate the Alliance Agreement at will. Either party may terminate the Alliance Agreement for cause as defined in the Alliance Agreement. Upon termination for cause, the Execution Fee shall be recalculated based on formulas provided in the Alliance Agreement. In addition, in the event of a breach of the Alliance Agreement, each party has agreed upon such party’s breach to indemnify the other from and against all claims, actions, liabilities, expenses, damages and costs, including, but not limited to, reasonable attorneys’ fees, that may be incurred by reason of such breach of the Alliance Agreement.