With regard to the policy aspect, in order to regulate the assurance business while promoting the growth of this industry, relating governmental bodies have enacted a series of laws, regulations and policies represented by the "Small to Medium Enterprises Promoting Law", the “Interim Administrative Rules Guiding the Risk Control Work of Small to Medium Enterprises Engaged in the Assurance Business", the "Notice Regarding the Establishment of Credit Assurance System for Small to Medium Enterprises ", the "Administrative Rules for Small-Sum Guaranteed Loan for Unemployed Persons", the "Trial Methods for Undertaking Housing Credit Insurance Business" and the "Certain Trial Rules for the Introduction of Construction Contract Guarantee in Real Estate Developing
Projects". All such rules and regulations have on one hand described the common practices of the assurance industry, strengthened the management of risk control, and on the other hand improved the industrial environment of the assurance business, thus have expanded the assurance business scope and boosted the growth of this industry.
The Company will develop innovative risk control mechanism to reduce the risk. The guarantee industry is a high risk industry, and one negative business may bring in tremendous burden to the operation of the company. To effectively avoid the risk, the internal control system needs to be enhanced and improved. The Company will set up a project assessment panel in 2011 to build up a risk-control and discussion mechanism to ensure a steady growth of business with comparatively low risks.
The Company will try to ensure the talent-oriented developing strategy by redesigning the current employing mechanism. As a new industry in China, the assurance industry is often quoted as a high risky and strongly professional industry, thus this industry would impose strict requirements for the practitioners. Inferring from the development status of the whole country’s assurance entities, lack of human resource now becomes a universal phenomenon. In order to promote sustainable development, the Company will start to form a professional team in 2011. Also, the Company will recruit intelligent graduates from developed regions such as Beijing, Shanghai and Shenzhen to establish a better environment for educating and selecting talents, while creating a better employing and reserve of talents system.
The Company will continue to be client-centric in 2011, the whole Company will act more closely and professionally to increase clients’ confidence in the company. Post-sale service will become the major task in year 2011, the Company’s service will not end when the client makes the purchase, instead, the Company will track the new status of the client after the service to promptly reduce the business risks and maintain a good relationship between the Company and clients.
78% for the year ended December 31, 2009, it was due to increase in the percentage of the guarantee fee income, and tightening of control of our cost of sales.
Income before income tax: Income before income tax for the year ended December 31, 2010 was $6,514,978 compared with $2,602,750 for the whole year of 2009. The increase was mainly due to increase in guarantee fee income by increasing bank referral business and employed more agents to promote guarantee business, and tightening of control of our selling, general and administrative expenses.
Operating expenses: Total operating expenses were $3,713,837 for year ended December 31, 2010, as compared to $2,190,331 for the same period in 2009. The increase of $1,523,506 or 70% was mainly due to increase in provision of guarantee losses, rent, depreciation and staff cost. The reasons for the changes in the major items are as follows:
Staff costs - increase by $453,121 or 43 % from $1,063,571 in 2009 to $1,516,692 in 2010. The increase was mainly due to increase in headcounts and pay rates during the year of 2010.
For the year ended December 31, 2010, cash used in investing activities amounted to $1,722,022 compared to $2,189,731 for the fiscal year ended December 31, 2009. The use of funds was for the purchase of plant and equipment, advances for loans receivable, as well as change in restricted cash, net of customer collateral, which partially offset by the receipts from loans receivable.
For the year ended December 31, 2010, the Company’s balance sheet reflects total current assets of $23,247,141 and total current liabilities $13,345,486. These items increase by $13,403,827 (or 136%) and $8,233,072 (or 161%) respectively as compared to the year ended December 31, 2009. The increase of total current assets was mainly due to increase of cash and cash equivalents, restricted cash, prepayments and other receivable, partially offset by decrease in loans receivable. The increase in total current liabilities was mainly due to increase in accounts payable, customer collateral, deferred revenue, income tax payable, deferred tax liabilities, accrued liabilities and other payable.
As of December 31, 2010, cash and cash equivalent was $7,074,893, as compared to December 31, 2009 balances of $559,105. The increase was mainly due to the increase in cash generated from operation. As of December 31, 2010, restricted cash and customer collateral was $13,050,117 and $8,830,517 respectively, as compared to December 31, 2009 balances of $5,817,191 and 3,729,734 respectively. The increase was mainly due to the increase of the tender and surety guarantee business. As of December 31, 2010, deferred revenue was $915,847 as compared to $364,636 for the same period in 2009. The increase was due to the increase of surety guarantee business with which the services lasted for more than one year. As of December 31, 2010, accrued liabilities and other payable was $1,455,009 as compared to $576,768 for the same period in 2009. The increase was due to the increase in provision for guarantee loss which in line with the increase in revenue.
The Company maintained cash and cash equivalent $7,074,893 as of December 31, 2010. The Company has sufficient funds to satisfy its financial commitments and working capital requirements for the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the expansion of our operating capacity, and the continuing market acceptance of our services.
As of December 31, 2010, The Company owed $61,614 to Mr. Guokang Tu, a director. The loan was unsecured, interest-free with no fixed repayment term.
For the year ended December 31, 2010, The Company had the total future lease commitments under non-cancellable operating leases are $1,135,820. The Company currently has working capital sufficient to fund these lease commitments.
As of December 31, 2010, The Company has contingent liabilities in respect of guarantees granted under the surety and tendering guarantee services business in the aggregate amount of $118,543,088. As of December 31, 2010, The Company has 514 surety and tendering guarantees outstanding. If all 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 $118,543,088 (RMB783,783,186) in total. The Company has significant concentration risk related to its guarantees on potential loss if the customers fail to the completion of their performance obligation in a timely manner under the surety guarantees. To reduce these potential losses, the Company holds collateral in the form of cash equivalents, which are reflected in customer collateral on the balance sheets as they are held in restricted cash in the Company’s name.
The Company regularly monitors the guarantee activities to ensure that the performance obligation was completed in a timely manner and that the Company is allowed to receive its guarantee fee. If necessary, the Company charges against as a deduction in the customer collateral held to recover the guarantee fee receivable. Guarantee fee receivables are considered impaired if payment of the fee is not received by the Company in accordance with the terms of
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
We have audited the accompanying consolidated balance sheets of Sino Assurance Inc. and its subsidiaries (“the Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations and comprehensive income, cash flows and changes in stockholders’ equity and for the years ended December 31, 2010 and 2009. 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.
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, 2010 and 2009 and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.
Long-lived assets primarily include plant and equipment. In accordance with the provisions of Accounting Standards Codification ("ASC") Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company periodically reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value using an undiscounted cash flow analysis. There has been no impairment change for the years presented.
Guarantee fee received in advance from rendering of service are recorded as deferred revenue and are amortized into revenue ratably over the related contract period.
In accordance with ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured.
The Company provides guarantees service to corporations and individuals in issuing and obtaining surety or tendering guarantees for their business operations and/or personal use. In exchange for the Company’s
The Company follows ASC Topic 605-20-25-8, “Fees for Guaranteeing a Loan” and recognizes the guarantee fee income over the term of the contract on a straight line basis, net of business taxes, the price to the client is fixed or determinable, and collectability of the resulting receivable is reasonably assured.
Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. The Company incurred $8,195 and $21,149 for the years ended December 31, 2010 and 2009, respectively.
For the years ended December 31, 2010 and 2009, the Company has recognized $679,883 and $104,273 on the provision for guarantee losses for any potential claims, respectively.
The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution of securities by including common stock equivalents, such as stock options, stock warrants and convertible preferred stock, in the weighted average number of common shares outstanding for a period, if dilutive.
The reporting currency of the Company is the United States Dollars ("US$") and the accompanying consolidated financial statements have been expressed in US$. In addition, the Company’s operating entity in the PRC maintains its books and records in its local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which its operation is conducted.
During the year ended December 31, 2010, the Company issued 200,000 shares of its common stock to a consultant for corporate financial advisory service at its grant date, at a fair market price of $0.2 per share or a total value of $40,000.
The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
In October 2009, the FASB issued ASU 2009-13 amending ASC 605 related to revenue arrangements with multiple deliverables. Among other things, ASU 2009-13 provides guidance for entities in determining the accounting for multiple deliverable arrangements and establishes a hierarchy for determining the amount of revenue to allocate to the various deliverables. The amendments in ASU 2009-13 will be effective for the fiscal years beginning January 1, 2011. The Company believes that ASU 2009-13 will not have a material impact on its consolidated financial statements
In January 2010, the FASB issued further guidance under ASC No. 820, “Fair Value Measurements and Disclosures” ("ASC 820"). ASC 820 requires disclosures about the transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). ASC 820 is effective for the fiscal years and
interim periods beginning after December 15, 2010. The Company will adopt the update on January 1, 2011 and expects that ASC 820 will not have a material impact on its consolidated financial statements.
As of December 31, 2010, the Company had surety and tendering guarantees outstanding resulting in restricted cash with approximately $8,830,517 from customer collateral and $4,219,600 for escrow deposits at the bank.
Due from Party A, in a term of 12 months, repayable on October 30, 2010, with an interest rate of 2.52% per annum payable at its due date
Due from Party A, in a term of 12 months, repayable on November 29, 2010, 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, 2010, with an interest rate of 2.52% per annum payable at its due date
Depreciation expense for the years ended December 31, 2010 and 2009 was $111,138 and $83,507, respectively.
As of December 31, 2010 and 2009, 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.
As of December 31, 2010, the operations in the United States of America incurred $40,000 of cumulative net operating losses which can be carried forward to offset future taxable income. The net operating loss carryforwards begin to expire in 2030, if unutilized. The Company has provided for a full valuation allowance against the deferred tax assets of $14,000 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The reconciliation of income tax rate to the effective income tax rate for the years ended December 31, 2010 and 2009 is as follows:
For the years ended December 31, 2010 and 2009, the Company made an appropriation of $173,839 and $54,084 to the statutory reserve, respectively.
For the years ended December 31, 2010 and 2009, there was no single vendor who accounted for 10% or more of the Company’s purchases.
As of December 31, 2010, the Company has future minimum rent payments due under various non-cancelable operating leases in the next five years, as follows:
As of December 31, 2010, the Company has 514 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 $118,543,088 (RMB783,783,186) in total.
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, 2010. 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, 2010 and 2009, the Company experienced no claims for actual guarantee loss. At December 31, 2010, the Company has accrued $1,031,803 on the provision for guarantee losses for any potential claims.