The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an
integral part of these consolidated financial statements.
The accompanying notes are an
integral part of these consolidated financial statements.
The accompanying notes are an
integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013 AND 2012
NOTE 1 – ORGANIZATION AND PRINCIPAL
ACTIVITIES
China United Insurance Service, Inc. (“China
United”, “CUIS” or the “Company”) is a Delaware corporation organized on June 4, 2010 by Mao Yi Hsiao,
a Taiwanese citizen, as a listing vehicle for ZLI Holdings Limited (“CU Hong Kong”) to be quoted on the United States
Over the Counter Bulletin Board (the “OTCBB”).
CU Hong Kong, a wholly owned Hong Kong-based
subsidiary of China United, was founded by China United, on July 12, 2010 under Hong Kong law. On October 20, 2010, CU Hong Kong
founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. (“CU WFOE”) in
Henan province in the People’s Republic of China (“PRC”).
On January 16, 2011, the Company issued
20,000,000 shares of common stock, $0.00001 par value, to several non-US persons for $300,000. The issuance was made pursuant to
an exemption from registration in Regulation S under the Securities Act of 1933, as amended. As a result of the issuance of the
20,000,000 shares, the owners of Henan Anhou (accounting acquirer) owned 100% of the Company. Accordingly, this transaction was
accounted for as a recapitalization of Henan Anhou. The historical financial statements presented are those of the accounting acquirer
for all periods presented. On January 28, 2011, the Company increased the number of authorized shares of common stock from 30,000,000
to 100,000,000 and authorized 10,000,000 shares of preferred stock.
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.
Sichuan Kangzhuang Insurance Agency Co.,
Ltd. (“Sichuan Kangzhuang”) was founded on July 10, 2006 in the Sichuan province in the PRC and provides insurance
agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders
voted to sell their shares to Henan Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed
between Henan Anhou and each shareholder of Sichuan Kangzhuang. Sichuan Kangzhuang then had net liabilities of RMB219,123 ($32,134).
Goodwill of RMB751,745 ($110,452) was therefore recorded. Goodwill in the balance sheet differs from the acquisition date amount
due to changes in exchange rates.
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).
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.
The Company is authorized
to issue 10,000,000 shares of preferred stock, $.00001 par value. We currently have 1,000,000 shares of Series A Stock outstanding
as of June 25, 2014. The Series A Stock has the following rights and preferences:
Voting Rights
.
Except as otherwise provided by law, the Series A Stock and the common stock vote together on all matters submitted to a vote of
our shareholders. Each holder of Series A Stock is entitled to ten votes for each share of Series A Stock held of record by such
holder as of the applicable record date on any matter that is submitted to a vote of the stockholders of the Registrant.
Series A Board Designee
and Board Restriction
. In addition to the voting rights disclosed above, the holders of the Series A Stock shall be entitled
to appoint one director (the “Series A Director”). No Board resolution regarding certain material Company actions can
be made without the affirmative vote of the Series A Director.
Dividends
. The
holders of Series A Stock are entitled to share equally with the holders of common stock, on a per share basis, in such dividends
and other distributions of cash, property or shares of stock of the Registrant as may be declared by the Board.
Liquidation
. In
the event of a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Registrant, the holders
of common stock and the holders of Series A Stock shall be entitled to share equally on a per share basis, in all assets of the
Registrant of whatever kind available for distribution.
Conversion Rights
.
The holders of the Series A Stock have the right to convert their shares thereof at any time into shares of the Registrant's common
stock. Each share of Series A Stock is convertible into one share of common stock.
If the Registrant in any
manner subdivides or combines the outstanding shares of common stock, the outstanding shares of the Series A Stock will be subdivided
or combined in the same manner.
Business
Combinations
. In any merger, consolidation, reorganization or other business combination, the consideration received per share
by the holders the common stock and the holders of the Series A Stock in such merger, consolidation, reorganization or other business
combination shall be identical; provided however, that if such consideration consists, in whole or in part, of certain equity interests,
the rights and limitations of such equity interests may differ to the extent that the rights and limitations of the common stock
and the Series A Stock differ.
Fully Paid and Nonassessable
.
All of our outstanding shares of preferred stock are fully paid and nonassessable.
Additional preferred
stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of
Directors deems appropriate. In the event that the Registrant issues any shares of preferred stock, a certificate of designation
containing the rights, privileges and limitations of this series of preferred stock will be filed with the Secretary of State of
the State of Delaware. The effect of this preferred stock designation power is that our Board of Directors alone, subject to Federal
securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could
have the effect of delaying, deferring, or preventing a change in control without further action by our stockholders, and may adversely
affect the voting and other rights of the holders of our common stock.
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 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.
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 has been 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).
Law Enterprise is a holding company for
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 in operation.
The corporate structure after the acquisition
is:
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of China United and its subsidiaries as shown in the organization structure in Note 1 above. 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.
Basis of Presentation
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 Taiwanese Dollar “(NT$”) and
for the VIEs in China is Renminbi (“RMB”).
Noncontrolling Interest
Noncontrolling interest consists of direct
and indirect equity interest in AHFL and subsidiaries arising from the acquisition of AHFL by CUIS.
The Company follows Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “
Consolidation,
”
which governs the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs
be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses,
and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in
a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the
NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable
to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the
NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results
in a deficit NCI balance.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements
and the amounts of revenues and expenses during the reporting periods.
Management makes these estimates using
the best information available when they are made; however, actual results could differ materially from those estimates.
Risks and Uncertainties
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.
Comprehensive Income
The Company follows FASB ASC Topic 220
(“ASC 220”),
“Reporting Comprehensive Income,”
which establishes standards for the reporting and
display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements.
ASC 220 defines comprehensive income as net income and all changes to stockholders' equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders, including adjustments to minimum pension liabilities,
accumulated foreign currency translation, and unrealized gains or losses on marketable securities.
Foreign Currency Transactions
The consolidated financial statements were
translated into United States Dollars (“USD” or “$”) in accordance with FASB ASC Topic 830
“Foreign
Currency Transaction.”
According to the standard, all assets and liabilities were translated at the exchange rate
on the balance sheet dates; stockholders’ equity is translated at historical rates and statement of operations items are
translated at the weighted average exchange rate for the year. The resulting translation adjustments are reported under other comprehensive
income in accordance with ASC 220. Gains and losses resulting from the translation of foreign currency transactions are reflected
in the consolidated statements of operations and other comprehensive income (loss).
Cash and Equivalents
For Statements of Cash Flows purposes,
the Company considers cash on hand, bank deposits, and other highly-liquid investments with maturities of three months or less
when purchased, such as commercial paper, to be cash and equivalents.
The Company maintains cash with banks in
the PRC and Taiwan. Cash accounts are not insured or otherwise protected. Should any bank holding cash become insolvent,
or if the Company is otherwise unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has
not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
Marketable Securities
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 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).”
Accounts Receivable, net
The Company reviews its accounts receivable
regularly to determine if a bad debt allowance is necessary at each year-end. Management reviews the composition of accounts receivable
and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of
June 30, 2013 or 2012.
Property, Plant and Equipment, net
Property, plant and equipment are recorded
at cost. Gain or loss on disposal of property, plant and equipment is recorded in other income at disposal. Expenditures
for betterments, renewals and additions are capitalized. Repairs and maintenance expenses are expensed as incurred.
Depreciation for financial reporting purposes
is provided using the straight-line method over a useful life of three to ten years with salvage value of 10% to 25%. Property,
plant and equipment mainly consist of office furniture, computers and leasehold improvements.
Impairment of Long-Lived Assets
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.
Goodwill
Goodwill arose from the acquisition of
Sichuan Kangzhuang (Note 8). Goodwill is the excess of the cost of an acquisition over the FV of the net assets acquired. Goodwill
is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired, using
the prescribed two-step process under US GAAP. The first step screens for potential impairment of goodwill to determine if the
FV of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if
any, by comparing the implied FV of goodwill to its carrying value. As of June 30, 2013, there were no indications of any impairment.
Revenue Recognition
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 years ended June 30, 2013 and
2012, policy cancellations were $12,809 and nil, respectively.
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 cost of revenue.
Income Taxes
The Company utilizes ASC Topic 740,
“Income
Taxes”
, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of
events included in the financial statements or tax returns. Under this method, deferred taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end
based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
When tax returns are filed, it is likely
some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position
is recognized in the financial statements in the period during which, based on all available evidence, management believes it is
more-likely-than-not the position will be sustained upon examination, including the resolution of appeals or litigation processes,
if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount described
above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest
and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits
is classified as interest expense and penalties are classified in general and administrative expenses in the statements of income
and other comprehensive income (loss). As of 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 or past fiscal years. During the years ended June 30, 2013 and 2012,
the Company did not recognize any interest or penalties.
Fair Values of Financial Instruments
FASB ASC Topic 820,
“Fair Value
Measurements and Disclosures,”
defines FV, establishes a three-level valuation hierarchy for disclosures of FV measurement
and enhances disclosure requirements for FV measures. The carrying amounts reported in the balance sheets for receivables and current
liabilities each qualify as financial instruments and are reasonable estimates of FV because of the short period of time between
the origination of such instruments and their expected realization and their current market rate of interest. The three levels
are defined as follows:
• Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
• Level 3 inputs to the valuation
methodology are unobservable and significant to the FV.
Concentration of Risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of cash and equivalents and accounts receivable.
As of June 30, 2013 and 2012, 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.
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:
|
|
2013
|
|
|
2012
|
|
Fubong
|
|
$
|
9,245,419
|
|
|
$
|
-
|
|
Far Glory
|
|
|
12,118,121
|
|
|
|
-
|
|
As of June 30, 2013 and 2012, the Company’s
receivables from these two companies were:
|
|
2013
|
|
|
2012
|
|
Fubong
|
|
$
|
673,710
|
|
|
$
|
-
|
|
Far Glory
|
|
|
1,501,865
|
|
|
|
-
|
|
The Company's operations are in the PRC and Taiwan. Accordingly, the Company's business, financial condition and results of operations
may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC and Taiwan, and by the
state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions
in the PRC and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
and rates and methods of taxation, among other things.
Operating Leases
Leases, where substantially all the rewards
and risks of ownership of assets remain with the leasing company, that do not meet the capitalization criteria of FASB ASC Topic
840
“Leases,”
are accounted for as operating leases. Rentals under operating leases are expensed on the straight-line
basis over the lease term.
Segment Reporting
The Company follows FASB ASC Topic 280,
“Segment Reporting,”
for its segment reporting. For the years ended, June 30 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.
Contingencies
Certain conditions may exist as of the
date the financial statements are issued, which could result in a loss to the Company which will be resolved when one or more future
events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently
involves judgment. In assessing loss contingencies arising from legal proceedings pending against the Company or unasserted claims
that may rise from such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or
unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates
it is probable a material loss will be incurred and the amount of the loss can be reasonably estimated, then the estimated loss
is accrued in the Company’s financial statements. If the assessment indicates a material loss contingency is not probable
but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material would be disclosed.
Statement of Cash Flows
In accordance with FASB ASC Topic 230,
“Statement of Cash Flows,”
cash flows from the Company's operations are calculated based upon the local currencies
and an average exchange rate is used. As a result, amounts related to assets and liabilities reported on the consolidated statements
of cash flows may not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Cash
from operating, investing and financing activities is net of the effect of acquisition described in Note 9.
Variable Interest Entities
The Company follows FASB ASC Subtopic 810-10-05-8”,
“Consolidation of VIEs,”
states that a VIE is a corporation, partnership, limited liability corporation, trust
or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to
carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are
unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation
to absorb losses or the right to receive returns generated by its operations.
Due to the PRC legal restrictions on foreign
ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital
requirement of the investors, the Company operates its insurance agency and brokerage business primarily through Henan Anhou, a
VIE owned by four individual shareholders, and two subsidiaries of Henan Anhou.
On January 17, 2011, CU WFOE and Henan
Anhou and its shareholders entered into VIE Agreements which included:
¨
|
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.
|
The term of this Agreement is 10 years.
Subsequent to the execution of this Agreement, both CU WFOE and Henan Anhou shall review this Agreement on an annual basis to determine
whether to amend or supplement the provisions. The term of this Agreement may be extended if confirmed in writing by CU WFOE prior
to the expiration thereof. The extended term shall be determined by CU WFOE, and Henan Anhou shall accept such extended term unconditionally.
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.
¨
|
Power of Attorney under which each shareholder of Henan Anhou executed an irrevocable power of attorney to authorize CU WFOE to act on behalf of the shareholder to exercise all of his/her rights as equity owner of Henan Anhou, including without limitation to: (1) attend shareholders' meetings of Henan Anhou; (2) exercise all the shareholder's rights and shareholder's voting rights that he/she is entitled to under the laws of the PRC and Henan Anhou's Articles of Association, including but not limited to the sale or transfer or pledge or disposition of the shareholder’s shareholding in part or in whole, and (3) designate and appoint on behalf of the shareholder the legal representative, the director, supervisor, the chief executive officer and other senior management members of Henan Anhou.
|
¨
|
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:
|
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.
|
|
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.
|
c.
|
The legal entity undertakes additional activities or acquires additional assets, beyond those anticipated at the later of the inception of the entity or the latest reconsideration event, that increase the entity's expected losses.
|
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.
|
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.
Recent Accounting Pronouncements
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:
1.
|
The criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on the substantially agreed terms, even in the event of default by the transferee; and
|
2.
|
The collateral maintenance implementation guidance related to that criterion.
|
Other criteria applicable to the assessment
of effective control are not changed by the amendments in ASC 860. The guidance in this Update is effective for the first interim
or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications
of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this ASU did
not have a material effect on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU 2011-04
Fair Value Measurement (ASC Topic 820),
“Amendments to achieve Common Fair Value Measurement and Disclosure Requirements
in US GAAP and International Financial Reporting Standards,”
(“IFRS”). The amendments in this Update change
the wording used to describe the requirements in US GAAP for measuring FV and for disclosing information about FV measurements.
The amendments include:
1.
|
Those that clarify the Board of Directors’ intent about the application of existing FV measurement and disclosure requirements.
|
2.
|
Those that change a particular principle or requirement for measuring FV or for disclosing information about fair value measurements.
|
In addition, to improve consistency in
application across jurisdictions some changes in wording are necessary to ensure that US GAAP and IFRS FV measurement and disclosure
requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in
US GAAP).
The amendments in this Update are to be
applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December
15, 2011. Early application by public entities is not permitted. The adoption of this ASU did not have a material effect on the
Company’s consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05
Comprehensive Income (ASC Topic 220),
“Presentation of Comprehensive Income.”
In this Update, an entity has
the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices,
an entity is required to present each component of net income along with total net income, each component of other comprehensive
income along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an
entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements,
the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified
from other comprehensive income to net income in the statement(s) where the components of net income and the components of other
comprehensive income are presented.
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 July 2012, the FASB issued ASU 2012-02,
Intangibles-Goodwill and Other (ASC Topic 350),
“Testing Indefinite-Lived Intangible Assets for Impairment
.
”
The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate
it is more likely than not the indefinite-lived intangible asset is impaired. If an entity concludes it is more than 50% likely
that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise,
it would be required to determine the FV of the indefinite-lived intangible asset to measure the amount of impairment, if any,
as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement did not have a material impact on our
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.
In March 2013, the FASB issued guidance
on a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets
within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into
net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in
which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not
anticipate a material impact on our financial statements upon adoption.
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.
NOTE 3 – CASH AND EQUIVALENTS
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.
NOTE 4 - MARKETABLE SECURITIES
Marketable securities represent investment
in equity securities of listed stocks and government bonds, which are classified as Level 1 securities as follows:
|
|
June 30, 2013
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Fair Value
|
|
Level 1 securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
25,363
|
|
|
$
|
1,605
|
|
|
$
|
26,968
|
|
Government bonds
|
|
|
105,620
|
|
|
|
(2,201
|
)
|
|
|
103,419
|
|
|
|
$
|
130,983
|
|
|
$
|
(596
|
)
|
|
$
|
130,387
|
|
According to Taiwan regulatory requirements,
Law Broker is required to maintain a minimum of NT$3,000,000 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.
NOTE 5 – OTHER CURRENT ASSETS
The Company’s other current assets
consisted of the following, as of June 30, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Prepaid rent
|
|
$
|
86,697
|
|
|
$
|
34,371
|
|
Refundable business tax
|
|
|
246,854
|
|
|
|
-
|
|
Other
|
|
|
101,492
|
|
|
|
14,269
|
|
Total other current assets
|
|
$
|
435,043
|
|
|
$
|
48,640
|
|
Refundable business tax represents business
tax prepaid by Law Broker and Risk Management, expected to be refunded by Taiwan tax bureau.
NOTE 6– PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment consisted
of the following, as of June 30, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Office Equipment
|
|
$
|
366,455
|
|
|
$
|
304,509
|
|
Office Furniture
|
|
|
2,034,925
|
|
|
|
57,018
|
|
Leasehold improvements
|
|
|
709,228
|
|
|
|
-
|
|
Transportation equipment
|
|
|
16,185
|
|
|
|
99,467
|
|
Other equipment
|
|
|
169,196
|
|
|
|
-
|
|
Total
|
|
|
3,295,989
|
|
|
|
460,994
|
|
Less: accumulated depreciation
|
|
|
(2,134,186
|
)
|
|
|
(346,049
|
)
|
Total property, plant and equipment, net
|
|
$
|
1,161,803
|
|
|
$
|
114,945
|
|
NOTE 7–OTHER ASSETS
As of June 30, 2013 and 2012, the Company’s
other assets mainly consist of deposits, including deposits for long-term leases.
NOTE 8 – GOODWILL
On September 6, 2010, Henan Anhou paid
RMB532,622 ($78,318) to acquire 100% of Sichuan Kangzhuang from its previous shareholders. Sichuan Kangzhuang then had net liabilities
of RMB219,123 ($32,134). Goodwill of RMB751,745 ($110,452) was therefore recorded. Goodwill in the balance sheet differs from the
acquisition date amount due to changes in exchange rates. As of June 30, 2013, there are no indications of any impairment. No intangible
assets are identified in the acquisition date. At the date of acquisition, Sichuan Kangzhuang has no unfulfilled customer contract
or software. Sichuan Kangzhuang’s business process and accounting system are not unique and the management planned to use
unified operating platform after the acquisition. Sichuan Kangzhuang’s business is mainly with retailing customers, and the
management considered there is no customer relationship or customer list that will probably create future business opportunities
for the Company.
NOTE 9 – RECENT ACQUISITION
On August 24, 2012, the Company acquired
all of the issued and outstanding shares of AHFL for $2,750,910. NT$15 million ($500,815) and NT$7.5 million ($250,095) payable
in cash in two installments, and 10 million shares of common stock at the then market price of $0.20 per share. The FV of the identifiable
assets and liabilities of AHFL at acquisition date was $8,047,654. The Company recorded the $5,280,042 excess of purchase price
over the FV of assets and liabilities acquired as bargain gain on purchase. We believe the gain on acquisition resulted from the
sellers' strategic intent to enter the PRC market, which has a higher growth rate than Taiwan, and to become the shareholder of
an OTCBB company.
We use August 31, 2012 as the closest available
date to value the FV of the identifiable assets and liabilities of AHFL at acquisition date. The consolidated statement of operations
and other comprehensive income (loss) for the year ended June 30, 2013 contains AHFL’s statement of operations and other
comprehensive income for the 10 months ended June 30, 2013 The consolidated balance sheet as of June 30, 2013 contains AHFL’s
balance sheet as of June 30, 2013.
A summary of AHFL’s assets and liabilities
acquired as of the dates of acquisition is presented below:
|
|
August 31, 2012
|
|
|
|
(Unaudited)
|
|
ASSETS
|
Current assets
|
Cash and equivalents
|
|
$
|
12,766,882
|
|
Marketable securities
|
|
|
127,834
|
|
Accounts receivable, net
|
|
|
2,180,392
|
|
Other current assets
|
|
|
490,046
|
|
Total current assets
|
|
|
15,565,154
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
976,446
|
|
Other assets
|
|
|
380,771
|
|
TOTAL ASSETS
|
|
$
|
16,922,371
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current liabilities
|
|
|
|
|
Taxes payable
|
|
|
(611,250
|
)
|
Due to related party
|
|
|
(31,582
|
)
|
Other current liabilities
|
|
|
(4,076,879
|
)
|
TOTAL CURRENT LIABILITIES
|
|
|
(4,719,711
|
)
|
BARGAIN GAIN
|
|
|
(5,280,042
|
)
|
NON CONTROLLING INEREST
|
|
|
(4,171,708
|
)
|
PURCHASE CONSIDERATION
|
|
$
|
2,750,910
|
|
NOTE 10 – OTHER CURRENT LIABILITIES
Other current liabilities are as follows,
as of June 30, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Commission payable to sub agents
|
|
$
|
2,441,741
|
|
|
$
|
-
|
|
Salary payable to administrative staff
|
|
|
221,851
|
|
|
|
16,604
|
|
Due to previous shareholders of AHFL
|
|
|
750,910
|
|
|
|
-
|
|
Due to previous shareholders of Sichuan Kangzhuang and Jiangsu Law
|
|
|
83,836
|
|
|
|
81,899
|
|
Accrued expenses
|
|
|
1,156,064
|
|
|
|
-
|
|
Other
|
|
|
438,424
|
|
|
|
188,406
|
|
Total other current liabilities
|
|
$
|
5,092,826
|
|
|
$
|
286,909
|
|
Commissions due to sub-agents and salaries
payable to administrative staff are usually settled within 12 months. Due to previous shareholders of AHFL is the balance described
in Note 9. Due to previous shareholders of Jiangsu Law is the remaining balance of the acquisition cost. The acquisition agreement
between the parties has not specified the exact time for payment of the acquisition price or imposed any interest for late payment.
Others are mainly for operating expenses payable within the credit terms provided by suppliers. Withholding employee personal tax
will be paid to local tax bureau within one month. Other mainly represents short term payable for expenses such as training and
travelling.
NOTE 11 – EQUITY
Reserves
According to Taiwan accounting rules and
corporation regulations, the company’s subsidiaries in Taiwan are required to appropriate 10% of net income to statutory
reserves until the accumulated reserve plus common shares hits registered capital. The reserve can be converted into share capital
by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares
currently held by them, with a limitation that the reserve left is not less than 25% of the registered capital after converting
to share capital.
Pursuant to the PRC regulations, the Company’s
Consolidated Affiliated Entities (“CAEs”) are required to transfer 10% of their net profit, as determined under the
PRC accounting regulations, to a Statutory Common Reserve Fund (“Reserve Fund”). Appropriation to the Reserve Fund
may cease when the fund aggregates to 50% of a company’s registered capital or when a company has accumulated losses. The
transfer to this reserve must be made before distribution of dividends to shareholders. The Company's CAEs did not appropriate
such reserve as they have accumulated losses.
Retained Earnings
As a result of stock dividends of NT$172,064,280 ($5,775,747) issued by Law Broker, $3,809,105 in the consolidated retained earnings
is restricted for dividend distribution.
NOTE 12 – OTHER INCOME, OTHER-NET
The following table lists the other income,
other-net, detail for the years ended June 30 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Rental income
|
|
$
|
313,843
|
|
|
$
|
-
|
|
Investment income - net
|
|
|
21,404
|
|
|
|
-
|
|
Other
|
|
|
96,817
|
|
|
|
(18
|
)
|
Total
|
|
$
|
432,064
|
|
|
$
|
(18
|
)
|
Rental income represents income from
leasing spare offices and garage on a month-to-month basis. Other represents miscellaneous income such as training
income and printing service income.
NOTE 13 – INCOME TAX
CU WFOE and the VIEs in the PRC are governed
by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported
in the statutory financial statements after appropriated adjustments. Except for Jiangsu Law, according to the requirement of local
tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.
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.
The balance of income tax payable as of
June 30, 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 year ended June 30, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
US statutory rate
|
|
|
34
|
%
|
|
|
(34
|
)%
|
Tax rate difference
|
|
|
(9
|
)%
|
|
|
8
|
%
|
Tax basis difference
|
|
|
-
|
%
|
|
|
1
|
%
|
Un-deductible and non-taxable items
|
|
|
2
|
%
|
|
|
158
|
%
|
Non-taxable gain on bargain purchase of subsidiary
|
|
|
(19
|
)%
|
|
|
-
|
%
|
Tax per financial statements
|
|
|
8
|
%
|
|
|
133
|
%
|
NOTE 14 - RELATED PARTY TRANSACTIONS
Due to related parties
The related parties listed below loaned
money to the Company for working capital. Due to related parties consisted of the following as of June 30, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Due to Mr. Mao (Principal Shareholder of the Company)
|
|
$
|
71,487
|
|
|
$
|
1,871
|
|
Due to Ms. Zhu (Shareholder of Henan Anhou)
|
|
|
1,099,331
|
|
|
|
441,272
|
|
Due to Mr. Zhu (Legal Representative of Jiangsu Law)
|
|
|
-
|
|
|
|
2,189
|
|
Due to Mrs. Li (Director of CUIS)
|
|
|
566,478
|
|
|
|
-
|
|
Total
|
|
$
|
1,737,296
|
|
|
$
|
445,332
|
|
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.
NOTE 15 – COMMITMENTS
Operating Leases
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:
Year
ended June 30, 2014
|
|
$
|
582,605
|
|
Year ended June
30, 2015
|
|
|
190,531
|
|
Year
ended June 30, 2016
|
|
|
10,808
|
|
Total
|
|
$
|
783,944
|
|
NOTE 16 – FINANCIAL RISK MANAGEMENT
AND FAIR VALUES
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.
The Board of Directors (“BOD”)
has overall responsibility for the establishment and oversight of the Company's risk management framework. The Company's risk management
policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and
to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market
conditions and the Company's activities. The Company, through its training and management standards and procedures, aims to develop
a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Company's BOD oversees how management
monitors compliance with the Company's risk management policies and procedures and reviews the adequacy of the risk management
framework in relation to the risks faced by the Company.
The Company's
credit risk arises principally from accounts and other receivables, pledged deposits and cash and equivalents. Management has a
credit policy in place and monitors exposures to these credit risks on an ongoing basis. The carrying amounts of trade and other
receivables, pledged deposits and cash and cash equivalents represent the Company's maximum exposure to credit risks. Accounts
receivable are due within 30 days from the date of billing.
The BOD of the
Company is responsible for the overall cash management and raising borrowings to cover expected cash demands. The Company regularly
monitors its liquidity requirements, to ensure it maintains sufficient reserves of cash and readily realizable marketable securities
and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer
term.
The functional currency for the subsidiaries
in Taiwan is NT$ and the functional currency for the subsidiaries and VIEs in PRC is RMB. The financial statements of the Company
are in USD. The fluctuation of NT$ and RMB will affect our operating results expressed in USD. The Company reviews its foreign
currency exposures. The management does not consider its present foreign exchange risk to be significant.
NOTE 17 – GEOGRAPHICAL SALES
The geographical distribution of China
United’s revenue for the years ended June 30, 2013 and 2012 is as follows:
Geographical Areas
|
|
2013
|
|
|
2012
|
|
PRC
|
|
$
|
2,775,431
|
|
|
$
|
3,153,776
|
|
Taiwan
|
|
|
35,066,815
|
|
|
|
-
|
|
|
|
$
|
37,842,246
|
|
|
$
|
3,153,776
|
|
NOTE 18 – CONDENSED FINANCIAL
INFORMATION OF US PARENT
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.
CHINA UNITED INSURANCE SERVICE, INC.
BALANCE SHEETS
JUNE 30, 2013 AND 2012
|
|
2013
|
|
|
2012
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
$
|
11,117,884
|
|
|
$
|
641,254
|
|
TOTAL ASSETS
|
|
$
|
11,117,884
|
|
|
$
|
641,254
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
752,781
|
|
|
$
|
-
|
|
Due to related party
|
|
|
566,478
|
|
|
|
583
|
|
TOTAL LIABILITIES
|
|
|
1,319,259
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, par value, $0.00001, 100,000,000 authorized, 1,000,000 issued and outstanding as of March 31, 2013, none issued and outstanding as of June 30, 2012
|
|
|
10
|
|
|
|
-
|
|
Common stock, par value $0.00001, 100,000,000 authorized, 29,100,503 and 20,000,000 issued and outstanding at March 31, 2013 and June 30, 2012, respectively
|
|
|
291
|
|
|
|
201
|
|
Additional paid-in capital
|
|
|
4,674,593
|
|
|
|
2,614,692
|
|
Reserves
|
|
|
257,785
|
|
|
|
-
|
|
Accumulated other comprehensive loss
|
|
|
(41,671
|
)
|
|
|
(55,250
|
)
|
Retained earnings (accumulated deficit)
|
|
|
4,907,617
|
|
|
|
(1,918,972
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
9,798,625
|
|
|
|
640,671
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
11,117,884
|
|
|
$
|
641,254
|
|
CHINA UNITED INSURANCE SERVICE, INC.
STATEMENTS OF OPERATIONS
|
|
Year Ended
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of service
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
564,607
|
|
|
|
1,508
|
|
Loss from operations
|
|
|
(564,607
|
)
|
|
|
(1,508
|
)
|
Other expenses
|
|
|
|
|
|
|
|
|
Equity earnings / (loss) of subsidiaries
|
|
|
7,795,654
|
|
|
|
(87,988
|
)
|
Net income (loss)
|
|
|
7,231,047
|
|
|
|
(89,496
|
)
|
NOTE 19 – PRO FORMA CONSOLIDATED
STATEMENT OF INCOME
The basis of pro forma consolidated statements
of income of the Company is as if the Acquisition Agreement were signed on July 1, 2011 and 2012, and AHFL’s acquisition
of Law Enterprise happened on the same date. The pro forma consolidated statements of income were derived from the statement of
income for the years ended June 30, 2013 and 2012 of AHFL and CUIS. The Company recorded the excess of purchase price over the
FV of assets and liabilities acquired as bargain gain on purchase in the pro forma consolidated statements of income.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME
|
|
Year Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
CUIS
|
|
|
AHFL
|
|
|
Sub Total
|
|
|
Adjustment
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,775,431
|
|
|
$
|
35,066,815
|
|
|
$
|
37,842,246
|
|
|
$
|
6,269,436
|
|
|
$
|
44,111,682
|
|
Cost of revenue
|
|
|
1,639,570
|
|
|
|
22,670,146
|
|
|
|
24,309,716
|
|
|
|
4,219,622
|
|
|
|
28,529,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,135,861
|
|
|
|
12,396,669
|
|
|
|
13,532,530
|
|
|
|
2,049,814
|
|
|
|
15,582,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
237,364
|
|
|
|
725,594
|
|
|
|
962,958
|
|
|
|
-
|
|
|
|
962,958
|
|
General and administrative
|
|
|
1,907,105
|
|
|
|
7,155,723
|
|
|
|
9,062,828
|
|
|
|
1,109,381
|
|
|
|
10,172,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,008,608)
|
|
|
|
4,515,352
|
|
|
|
3,506,744
|
|
|
|
940,433
|
|
|
|
4,447,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,448
|
|
|
|
81,234
|
|
|
|
83,682
|
|
|
|
(519
|
)
|
|
|
83,163
|
|
Gain on acquisition of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,280,042
|
|
|
|
5,280,042
|
|
Other - net
|
|
|
1,519
|
|
|
|
430,545
|
|
|
|
432,064
|
|
|
|
79,545
|
|
|
|
511,609
|
|
Total other income
|
|
|
3,967
|
|
|
|
511,779
|
|
|
|
515,746
|
|
|
|
5,359,068
|
|
|
|
5,874,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(1,004,641)
|
|
|
|
5,027,131
|
|
|
|
4,022,490
|
|
|
|
6,299,501
|
|
|
|
10,321,991
|
|
Income tax expense (benefit)
|
|
|
(256,353)
|
|
|
|
954,861
|
|
|
|
698,508
|
|
|
|
174,835
|
|
|
|
873,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(748,288
|
)
|
|
|
4,072,270
|
|
|
|
3,323,982
|
|
|
|
6,124,666
|
|
|
|
9,448,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the non-controlling interests
|
|
|
-
|
|
|
|
(1,386,556
|
)
|
|
|
(1,386,556
|
)
|
|
|
(527,394
|
)
|
|
|
(1,913,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CUIS’s shareholders
|
|
|
(748,288
|
)
|
|
|
2,685,714
|
|
|
|
1,937,426
|
|
|
|
5,597,272
|
|
|
|
7,534,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
13,579
|
|
|
|
(2,343
|
)
|
|
|
11,236
|
|
|
|
-
|
|
|
|
11,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(734,709
|
)
|
|
$
|
2,683,371
|
|
|
|
1,948,662
|
|
|
$
|
5,597,272
|
|
|
$
|
7,545,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,093,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.29
|
|
PRO
FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
|
|
Year Ended June 30, 2012
|
|
|
|
CUIS
|
|
|
AHFL
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,153,776
|
|
|
$
|
37,812,492
|
|
|
$
|
40,966,268
|
|
Cost of revenue
|
|
|
2,363,581
|
|
|
|
26,122,202
|
|
|
|
28,485,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
790,195
|
|
|
|
11,690,290
|
|
|
|
12,480,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
-
|
|
|
|
1,046,457
|
|
|
|
1,046,457
|
|
General and administrative
|
|
|
1,166,841
|
|
|
|
6,889,690
|
|
|
|
8,056,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(376,646
|
)
|
|
|
3,754,113
|
|
|
|
3,377,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,756
|
|
|
|
3,643
|
|
|
|
8,399
|
|
Gain on acquisition of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
5,442,523
|
|
Other - net
|
|
|
(19
|
)
|
|
|
477,542
|
|
|
|
477,523
|
|
Total other income
|
|
|
4,737
|
|
|
|
481,185
|
|
|
|
5,928,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(371,909
|
)
|
|
|
4,235,328
|
|
|
|
9,305,942
|
|
Income tax expense
|
|
|
(268,440
|
)
|
|
|
846,507
|
|
|
|
578,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(103,469
|
)
|
|
|
3,388,821
|
|
|
|
8,727,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CUIS’s shareholders
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
13,972
|
|
|
|
96,480
|
|
|
|
13,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(89,497
|
)
|
|
$
|
3,485,301
|
|
|
$
|
8,741,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
30,100,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.29
|
|
NOTE 20 – SUBSEQUENT EVENT
Henan Anhou Registered Capital Increase
On April 27,
2013, China Insurance Regulatory Commission issued a decision mandating any insurance agency to meet a minimum registered capital
requirement of RMB50 million.
At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered
capital of RMB10 million. To better implement its expansion strategies, Anhou intended 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.
Due to certain restriction on direct foreign
investment in insurance agency business under current PRC legal requirements, Anhou sought investments from certain
Investor
Borrowers who in turn needed funds through individual loans.
On June 9, 2013, AHFL entered into a Loan
Agreement with ZLI Holdings, whereby AHFL agreed to provide a loan to ZLI Holdings of RMB40 million ($6,532,716). The term for
such loan is 10 years which may be extended upon the agreement of the parties. The loan was remitted to ZLI Holdings on August
30, 2013. In August 2013, ZLI Holdings entered into three loan agreements (“Investor Loan Agreements”) with the following
independent third parties, collectively, the Investor Borrowers:
|
1.
|
Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong
Kong (RMB29,500,000 ($4,817,896))
|
|
2.
|
Mr. Chen Li, PRC citizen (RMB3,000,000 ($489,949))
|
|
3.
|
Ms. Yue Jing, PRC citizen (RMB7,500,000 ($1,224,871))
|
The term
for the above loans is 10 years which may be extended upon the agreement of the parties. Pursuant to the Investor Loan
Agreements, each of the Investor Borrowers shall, or cause their designated persons to, enter into a binding VIE
agreement with Anhou, the WFOE and certain existing shareholders of Anhou.
T
he proceeds
received from the said loans by the Investor Borrowers were solely used to increase the registered capital of
Anhou
.
Strategic Alliance with AIATW
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.
On August 5, 2013, AHFL, Taiwan Branch
(“AHFLTW”) was established with registered capital of NT$100,000. On August 12, 2013, AHFLTW received NT$125 million
and another NT$125 million on August 26, 2013. The Company recorded the total NT$250 million as unearned revenue and will record
revenue upon fulfilling the sales targets over the next five years.