SNAS rents its facilities from companies owned by the third parties. As of December 31, 2011, SNAS leased approximately 4,445 square meter of office space for its operations. Its current leased properties are:
Regulatory Commission’s “Joint Conference on the risks of illegal business operation of assurance enterprises” and People’s Bank’s policy of putting guarantee deposits into deposits reserves fully describes the fact that the assurance industry is very important to the social credit system construction, it also reflects the development of assurance industry in China economic development is causing more and more national and social concern.
As for the sector of railway material purchase, the Ministry of Railways disclosed on the National Railway Work Conference held in Beijing on November 23, 2011 that in 2012 the total investment in fixed assets of China railway will be RMB500 billion, and new railway line construction 6,366 km, although it reflects a decrease of 1/3 compared to 2011, the capital investment is still up to RMB400 billion, which is still one of the most important market.
The Company will further extend its business scope, by strengthening the existing relationship with China Construction Bank and Shanghai Pudong Development Bank, to acquire more favorable treatments for the company's existing business and broaden the business scope.
Giving full support for application of new technologies: on the basis of the successful launching of e-commerce web site in 2011, the company looks for achieving double breakthrough in online products and on-line process, striving to line up to the platform data of banks, so as to ensure "safe, efficient, and accurate" process and to achieve the ultimate goal of total electronic processing.
In 2012, the company will focus in the building of a team of internal elites as the core of human resources, paying more attention to professional training and internal control management, in order to achieve all business objectives eventually.
To build an elite team, emphasize in training and performance appraisal.
The Company will develop an innovative risk control mechanism to reduce the business risk in 2012.
The Company will strengthen the communication with business partners and regulatory bodies in order to acquire the most up-to-date information of the industry to make sure the Company can continue to be the leader in the industry.
Year Ended December 31, 2011 compared with Year Ended December 31, 2010
Net revenue: Net revenue for the year ended December 31, 2011, was $8,768,391 as compared to $12,152,741 for the same period in 2010. The decrease of $3,384,350 or approximately 28% was due to the tightening control of bank loan supply in China during the year and as a result reduce the demand of tender and surety guarantee business. The gross margin slightly decreased from 85% to 83% for the year ended December 31, 2010, it was due to the percentage of the guarantee fee income with higher profit margin decreased and the guarantee fee income with lower profit margin increased.
Loss before income tax: Loss before income tax for the year ended December 31, 2011 was $230,303 compared with income before income tax $6,514,978 for the whole year of 2010. The decrease in pre-tax income of $6,745,281 or approximately 104% was mainly due to decrease in
guarantee fee income by the tightening control of bank loan supply in China during the year and reduce demand of tender and surety guarantee business, as well as we employed more agents to promote guarantee business, and increasing our selling, general and administrative expenses.
Depreciation - increase by $45,577 or 41 % from $111,138 in 2010 to $156,715 in 2011. The increase was primarily due to the addition of fixed assets during the year 2011.
We anticipate that our operating expenses will increase in future periods, as we increase sales and marketing operations, and fulfill our obligation as a listing company under the Exchange Act.
For the year ended December 31, 2011, the Company’s balance sheet reflects total current assets of $35,023,074 and total current liabilities $25,047,474. These items increased by $11,775,933 (or 51%) and $11,701,988 (or 88%) respectively as compared to the year ended December 31, 2010. The increase of total current assets was mainly due to an increase of restricted cash, marketable securities, loan receivable as well as prepayments and other receivable, partially offset by decrease in cash and cash equivalents. The increase in total current liabilities was mainly due to increase in customer collateral, deferred revenue as well as accrued liabilities and other payable, partially offset by decrease in income tax payable and deferred tax liabilities.
As of December 31, 2011, the Company had surety and tendering guarantees outstanding resulting in restricted cash with approximately $17,782,504 from customer collateral and $3,148,466 for escrow deposits at the bank. Restricted cash represents (i) fund received from customers for the purpose of trust deposits held at the banks by the Company to pledge against the surety and tendering guarantee under the contractual guarantee period and (ii) escrow deposits as security to the bank for the provision of banking surety guarantee service. Such restricted cash under item (i) is an asset of the Company and is recorded as customer collateral payable to the customers upon the expiry of the guarantee contracts.
Provision for guarantee losses reflects the Company’s best projection of defaults and the Company believes that it is more likely as a result of loss events that have occurred through December 31, 2011. However, the uncertainty in macroeconomic factors and the uncertainty of the effect of any current or future government actions to the global economic crisis make forecasting of default rates increasingly imprecise. The Company regularly reviews actual guarantee loss claims experience to determine if any necessary adjustments may be recognized to the reserve in the period in which those differences arise or are identified. The Company has no actual guarantee loss claims for during the year. At December 31, 2011, the Company has accrued $1,544,795 on the reserve for guarantee losses for any potential claims.
At the balance sheet date, any fees received in advance under the guarantee contracts are recorded as deferred revenue and amortized as revenue over the term of the guarantee period on a straight-line basis.
For the years ended December 31, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2011, the Company did not have any significant unrecognized uncertain tax positions.
In connection with the nature of its guarantee business, the Company is exposed to the potential losses from the shortfall of the guaranteed amount over its customer collateral, if the customers fail to the completion of their performance obligation in a timely manner under the surety guarantees. Therefore, the Company regularly reviews actual claims from guarantee loss to determine if any necessary adjustments may be recognized to the reserve in the period in which those differences arise or are identified. The Company follows ASC Topic 450-20-25, “Loss Contingencies” and assesses the estimated losses from a loss contingency among the outstanding guarantee contracts at the balance sheet date. Provision for guarantee losses reflects the Company’s best projection of defaults and the Company believes that it is more likely as a result of loss events that have occurred through the balance sheet date.
As of December 31, 2011, the Company has 709 surety and tendering guarantees outstanding. If the Company’s customers fail to complete their performance obligation in a timely manner so that the Company is obligated to pay on its guarantees, the Company would have the maximum potential amount of future payments of approximately $256,213,528 (RMB1,627,545,197) for surety guarantee.
We have audited the accompanying consolidated balance sheets of Sino Assurance Inc. and its subsidiaries (“the Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations and comprehensive income, cash flows and changes in stockholders’ equity and for the years ended December 31, 2011 and 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an 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 the Company’s internal control over financial reporting. Our audits include 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.
Zhong Heng Jiang Investment Consulting (Shenzhen) Company Limited (“ZHJ”), a wholly-owned subsidiary of the Company, entered into a series of contractual arrangements with CCG. Through the contractual arrangements, described below, the Company has variable interest of CCG and consequently is the primary beneficiary of CCG. Agreements that provide ZHJ effective control over CCG are as follows:
ZHJ has the irrecoverable right to purchase the equity interests of CCG from the registered legal equity owners of CCG, to the extent permitted under PRC laws and regulations at the request of the Company.
The Company has adopted ASC Topic 810-10-5-8, “Variable Interest Entities”. ASC Topic 810-10-5-8 requires a variable interest entity or VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. With the above agreements, the Company, through ZHJ demonstrates its ability to control CCG as the primary beneficiaries and the operating results of the VIE was included in the consolidated financial statements for the years ended December 31, 2011 and 2010.
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
receivable. Guarantee fee receivables are considered impaired if payment of the fee is not received by the Company in accordance with the terms of the guarantee agreement with each customer. When any receivable balances are determined to be uncollectible, these balances are written off immediately.
Concurrently, the Company recognizes the bank charges associated with the guarantee as cost of revenue when incurred.
Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. The Company incurred $24,620 and $8,195 for the years ended December 31, 2011 and 2010, respectively.
For the years ended December 31, 2011 and 2010, the Company has recognized $463,393 and $679,883 on the provision for guarantee losses for any potential claims, respectively.
The provision for income taxes is determined in accordance with ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Marketable securities are determined using Level 1, which is carried at fair value, with quoted prices in active markets.
Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;
Due from Party A, in a term of 12 months, repayable on September 29, 2012, with an interest rate of 2.52% per annum payable at its due date
Due from Party B, in a term of 12 months, repayable on December 30, 2012, with an interest rate of 2.52% per annum payable at its due date
As of December 31, 2011 and 2010, amount due to a related party represented temporary advances made by Mr. Guokang Tu, chief executive officer and a director of the Company, which were unsecured, interest-free with no fixed repayment term. Imputed interest is considered insignificant.
CML is subject to Hong Kong Profits Tax, which is charged at the statutory income rate of 16.5% on its assessable income. For the years ended December 31, 2011 and 2010, CML does not have operations in Hong Kong.
CCG is registered and operates in Shenzhen City, the PRC and is recognized as “Enterprise Located in Special Economic Zone”. Hence, the Company is entitled to Corporate Income Taxes (“CIT”) at a preferential tax rate of 15%. For the years ended December 31, 2011 and 2010, the Company has established various provincial and municipal branches, as well as representative offices in the PRC, which are generally subject to the statutory tax rate of 25%. Under a transitional policy under the CIT Law, the Company will continue to enjoy the unexpired tax holiday in a special economic zone in Shenzhen City and its applicable tax rate will be increased progressively to 25% over a 5-years’ period, starting from January 1, 2008.
The reconciliation of income tax rate to the effective income tax rate for the years ended December 31, 2011 and 2010 is as follows:
The following table sets forth the significant components of the aggregate deferred tax (assets) and liabilities of the Company as of December 31, 2011 and 2010:
Deferred tax liabilities on the provision for guarantee losses reflect the temporary differences between the tax basis of such provision under PRC local tax law and the accounting basis of the estimated losses under U.S. GAAP.
(loss) income per share is computed using the weighted average number of the common share outstanding during the year. The dilutive effect of potential common shares outstanding is included in diluted net (loss) income per share. The following table sets forth the computation of basic and diluted net (loss) income per share for the years ended December 31, 2011 and 2010:
Under the PRC Law, the Company’s subsidiary and VIE in the PRC are required to make appropriation to the statutory reserve based on after-tax net earnings and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of
the registered capital. The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.
For the years ended December 31, 2011 and 2010, there was no single customer who accounted for 10% or more of the Company’s revenues.
Financial instruments that potentially subject the Company to a significant concentration of credit risk consist of cash, restricted cash and guarantee fee receivable. Substantially all of cash and restricted cash are held by the recognized financial institutions in the PRC. The Company also performs ongoing credit evaluations of its customers’ financial condition, but does not require collateral to support such receivables.
The Company is committed under various non-cancelable operating leases with fixed monthly rentals, due through September 2015. Total rent expenses for the years ended December 31, 2011 and 2010 was $515,706 and $399,163, respectively.
Provision for guarantee losses reflects the Company’s best projection of defaults and the Company believes that it is more likely as a result of loss events that have occurred through December 31, 2011. However, the uncertainty in macroeconomic factors and the uncertainty of the effect of any current or future government actions to the global economic crisis make forecasting of default rates increasingly imprecise. The Company regularly reviews actual guarantee loss claims experience to determine if any necessary adjustments may be recognized to the reserve in the period in which those differences arise or are identified. For the years ended December 31, 2011 and 2010, the Company experienced no actual claims for guarantee loss. At December 31, 2011, the Company has accrued $1,544,795 on the provision for guarantee losses for any potential claims.