On January 16, 2011, China United issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non US persons for $300,000 in cash invested in the Company’s subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended. The consideration was paid as of June 30, 2012. On January 28, 2011, the Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common and 10,000,000 shares of preferred stock.
Our CAE in China are VIE through which all 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 Henan 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. During the year ended June 30, 2012 and 2011, 100% of our revenues in our consolidated financial statements were derived from our CAE. As of 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. For more information see “Risk Factors-Risks Related to Our Corporate Structure.”
On January 17, 2011, CU WFOE and Henan Anhou and its shareholders entered into a series of VIE Agreements pursuant to which CU WFOE has executed effective control over Henan Anhou through these contractual arrangements.
On August 24, 2012, the Company acquired all of the issued and outstanding shares of Action Holdings Financial Limited (“AHFL”), a limited liability company (“LLC”) incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned subsidiary of the Company.
Law Enterprise is a holding company of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not active. We operate our Taiwan business primarily through Law Broker.
The accompanying consolidated financial statements include the accounts of China United and its subsidiaries. The results of operations of AHFL and subsidiaries are included since August 31, 2012 the date of acquisition for accounting convenience. All significant intercompany transactions and balances were eliminated in consolidation.
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 June 30, 2013 and 2012.
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 that 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 measured as 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 are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of operations and other comprehensive income (loss). As of June 30 2013 and 2012, the Company did not have any uncertain tax positions.
The Company was not subjected to income tax examinations by taxing authorities during the current and past fiscal years. During the year ended June 30 2013 and 2012, the Company did not recognize any interest or penalties.
Goodwill arose from the acquisition of 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 that 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.
Results of Operations for the Years Ended June 30, 2013 and 2012
Year Ended June 30, 2013 Compared to Year Ended June 30, 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 1112 as of June 30, 2012 to 2,829 as of June 30, 2013.
The gross profit for the year ended June 30, 2013 increased by $12,742,335, or 1,613%, to $ 13,532,530 compared to $790,195 for the year ended June 30, 2012. The gross profit ratio increased to 36% for the year ended June 30, 2013 from 25% for the year ended June 30, 2012. The increase in profitability was mainly due to the higher margins of Law Broker.
According to tax regulations by 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 the past five years can be adjusted. Therefore, during the year ended June 30 2013, we reversed the tax payable of $274,489 accrued in 2012 for such deductible commissions and credited as income tax benefit.
As a result of the acquisition of AHFL, our cash and equivalents increased by $15,447,116. As of June 30, 2013, the Company had cash and equivalents of $16,705,327
Net cash provided by operating activities during the year ended June 30 2013 was $1,598,575. 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 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 $15,720 for the year ended June 30 2012.
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.
Under the Company Loan Agreement, AHFL agreed to provide a loan to the HK Company with the principal amount equal to the US Dollar equivalent of RMB 40,000,000 ($6,532,716). The term for such was (10) years which could be extended upon the agreement of the parties. The amount of such loan was remitted to the account of the HK Company on August 30, 2013.
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 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 ($8,165,895). 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 their 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 they do not have a registered office or a branch office.
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. Li 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.
We have audited the accompanying consolidated balance sheets of China United Insurance Service, Inc. as of June 30, 2013, and 2012 and the related 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. China United Insurance Service, Inc., management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
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 had not been 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).
• Level 3 inputs to the valuation methodology are unobservable and significant to the FV.
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 years ended June 30, 2013 and 2012, the Company’s revenues from sale of insurance policies underwritten by these two companies was:
As of June 30, 2013 and 2012, the Company’s receivables from these two companies were:
a. The legal entity's governing documents or contractual arrangements are changed in a manner that changes the characteristics or adequacy of the legal entity's equity investment at risk.
The Company reviews the VIE’s status on an annual basis. During the year ended June 30, 2013, no event including a-d above took place that would change the Company’s primary beneficiary status.
1. Those that clarify the Board of Directors’ intent about the application of existing FV measurement and disclosure requirements.
The amendments in ASC 860 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and early adoption is permitted. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
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 will be effective for us beginning July 1, 2013. Other than requiring additional disclosures, we do not anticipate a material impact on our financial statements upon adoption.
The Company’s other current assets consisted of the following, as of June 30, 2013 and 2012:
Refundable business tax represents business tax prepaid by Law Broker and Risk Management, expected to be refunded by Taiwan tax bureau.
Property, plant and equipment consisted of the following, as of June 30, 2013 and 2012:
The following table lists the other income, other-net, detail for the years ended June 30 2013 and 2012:
China United is a holding company and owns no operating assets and has no significant operations independent of its subsidiaries. Set forth below are condensed financial statements for China United on a stand-alone, unconsolidated basis as of June 30, 2013 and 2012, and for the years ended June 30, 2013 and 2012.
1. Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong (RMB29,500,000 ($4,817,896))