UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
¨ |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT |
For the transition period from ______ to __________
COMMISSION FILE NUMBER: 000-54884
CHINA UNITED INSURANCE SERVICE, INC.
(Exact name of registrant as specified
in its charter)
Delaware |
|
30-0826400
|
(State or other jurisdiction of
incorporation or
organization) |
|
(IRS Employer Identification No.) |
7F, No. 311 Section 3
Nan-King East Road
Tapei City, Tawain
(Address of principal executive offices)
+886-2-87126958
(Registrant’s
Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ¨
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes x No
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer ¨ |
|
|
Non-Accelerated Filer ¨ |
Accelerated Filer x |
|
|
Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company
as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x
As of September 30, 2014, there are 29,100,503 shares of common
stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
This report contains forward-looking statements. These statements
involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievement expressed or implied by the forward-looking statements.
These risks and uncertainties include, but are not limited to, the factors described under Part 1 Item 2 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking
statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predicts,” “projects,”
“should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.
Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Forward-looking statements represent our estimates and assumptions
only as of the date of this report. You should read this report and the documents that we reference in this report, or that we
filed as exhibits to this report completely and with the understanding that our actual future results may be materially different
from what we expect.
Except as required by law, we assume no obligation to update
any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated
in any forward-looking statements, even if new information becomes available in the future.
OTHER PERTINENT
INFORMATION
References in this report to “we,” “us,”
“our” and the “Company” and words of like import refer to China United Insurance Service, Inc., its subsidiaries
and variable interest entities.
References to China or the PRC refer to the People’s
Republic of China (excluding Hong Kong, Macao and Taiwan). References to Taiwan refer to Taiwan, Republic of China.
Our business is conducted in Taiwan and China using NT$, the
currency of Taiwan and RMB, the currency of China, respectively, and our financial statements are presented in United States dollars
(“USD” or “$”). In this report, we refer to assets, obligations, commitments and liabilities
in our financial statements in USD. These dollar references are based on the exchange rate of NT$ and RMB to USD, determined
as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our
assets in terms of USD which may result in an increase or decrease in the amount of our obligations (expressed in USD) and the
value of our assets, including accounts receivable (expressed in USD).
PART I. FINANCIAL
INFORMATION
CHINA UNITED INSURANCE
SERVICE, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
| |
| | |
| |
| |
| | |
| |
| |
September
30, 2014 | | |
December
31, 2013 | |
| |
(Unaudited) | | |
| |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash and equivalents | |
$ | 19,388,417 | | |
$ | 18,070,093 | |
Marketable securities | |
| 2,531,398 | | |
| 2,563,685 | |
Accounts receivable, net | |
| 3,788,684 | | |
| 7,282,183 | |
Other current assets | |
| 622,516 | | |
| 2,329,677 | |
Total current assets | |
| 26,331,015 | | |
| 30,245,638 | |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 1,206,956 | | |
| 1,041,189 | |
Intangible assets | |
| 311,833 | | |
| 308,267 | |
Goodwill | |
| 31,651 | | |
| - | |
Long-term Investment | |
| 100,795 | | |
| 102,295 | |
Other assets | |
| 584,670 | | |
| 587,303 | |
TOTAL ASSETS | |
$ | 28,566,920 | | |
$ | 32,284,692 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’
EQUITY | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Taxes payable | |
$ | 482,989 | | |
$ | 498,441 | |
Unearned revenue | |
| - | | |
| 1,586,038 | |
Other current liabilities | |
| 6,142,447 | | |
| 8,632,305 | |
Due to related parties | |
| 199,756 | | |
| 154,798 | |
TOTAL CURRENT LIABILITIES | |
| 6,825,192 | | |
| 10,871,582 | |
| |
| | | |
| | |
| |
| | | |
| | |
Long-term liabilities | |
| 7,813,933 | | |
| 7,095,062 | |
TOTAL LIABILITIES | |
| 14,639,125 | | |
| 17,966,644 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS’
EQUITY | |
| | | |
| | |
Preferred stock, par value $0.00001, 10,000,000 authorized,
1,000,000 issued and outstanding | |
| 10 | | |
| 10 | |
Common stock, par value $0.00001, 100,000,000 authorized,
29,100,503 issued and outstanding | |
| 291 | | |
| 291 | |
Additional paid-in capital | |
| 4,674,593 | | |
| 4,674,593 | |
Reserves | |
| 1,185,359 | | |
| 415,041 | |
Accumulated other comprehensive loss | |
| (187,783 | ) | |
| (75,888 | ) |
Retained earnings | |
| 1,953,224 | | |
| 3,598,383 | |
Stockholder’s equity attribute to parent’s shareholders | |
| 7,625,694 | | |
| 8,612,430 | |
Noncontrolling interest | |
| 6,302,101 | | |
| 5,705,618 | |
TOTAL STOCKHOLDERS’
EQUITY | |
| 13,927,795 | | |
| 14,318,048 | |
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY | |
$ | 28,566,920 | | |
$ | 32,284,692 | |
The accompanying
notes are an integral part of these consolidated financial statements.
CHINA
UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES |
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS) |
| |
| |
| |
| | |
| | |
| | |
| |
| |
Three Months
Ended September 30, | | |
Nine Months
Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Revenues | |
$ | 9,795,058 | | |
$ | 7,768,329 | | |
$ | 30,989,923 | | |
$ | 29,235,793 | |
Cost of revenue | |
| 5,984,679 | | |
| 6,003,344 | | |
| 19,683,245 | | |
| 17,539,790 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 3,810,379 | | |
| 1,764,985 | | |
| 11,306,678 | | |
| 11,696,003 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Selling | |
| 1,703,365 | | |
| 1,045,617 | | |
| 2,444,031 | | |
| 1,772,004 | |
General and administrative | |
| 3,114,005 | | |
| 2,325,135 | | |
| 8,433,578 | | |
| 6,763,354 | |
Total operating expenses | |
| 4,817,370 | | |
| 3,370,752 | | |
| 10,877,609 | | |
| 8,535,358 | |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| (1,006,991 | ) | |
| (1,605,767 | ) | |
| 429,069 | | |
| 3,160,645 | |
| |
| | | |
| | | |
| | | |
| | |
Other income: | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 54,001 | | |
| 32,096 | | |
| 147,954 | | |
| 80,161 | |
Other - net | |
| 158,359 | | |
| 116,656 | | |
| 244,260 | | |
| 383,173 | |
Total other income | |
| 212,360 | | |
| 148,752 | | |
| 392,214 | | |
| 463,334 | |
| |
| | | |
| | | |
| | | |
| | |
Income before income taxes | |
| (794,631 | ) | |
| (1,457,015 | ) | |
| 821,283 | | |
| 3,623,979 | |
Income tax expense | |
| (12,753 | ) | |
| (57,067 | ) | |
| 1,171,602 | | |
| 731,192 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (781,878 | ) | |
| (1,399,948 | ) | |
| (350,319 | ) | |
| 2,892,787 | |
Net income attributable to the noncontrolling
interests | |
| 27,876 | | |
| 383,072 | | |
| (524,522 | ) | |
| (1,214,136 | ) |
Net income (loss) attributable to parent's
shareholders | |
| (754,002 | ) | |
| (1,016,876 | ) | |
| (874,841 | ) | |
| 1,678,651 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive items | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation gain (loss) | |
| (74,965 | ) | |
| 37,439 | | |
| (111,894 | ) | |
| (17,278 | ) |
Other comprehensive income(loss) | |
| - | | |
| (8 | ) | |
| - | | |
| (183 | ) |
Attributable to parent's shareholders | |
| (74,965 | ) | |
| 37,431 | | |
| (111,894 | ) | |
| (17,461 | ) |
Other comprehensive items attributable
to noncontrolling interest | |
| 120,695 | | |
| (77,535 | ) | |
| 87,224 | | |
| (76,103 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income (loss) attributable to | |
| | | |
| | | |
| | | |
| | |
parent's shareholders | |
$ | (828,967 | ) | |
$ | (979,445 | ) | |
$ | (986,735 | ) | |
$ | 1,661,190 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income (loss) attributable to | |
| | | |
| | | |
| | | |
| | |
noncontrolling interest | |
$ | 148,571 | | |
$ | 305,537 | | |
$ | (437,298 | ) | |
$ | (1,290,239 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 29,100,503 | | |
| 29,100,503 | | |
| 29,100,503 | | |
| 29,100,503 | |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) per share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.026 | ) | |
$ | (0.035 | ) | |
$ | (0.030 | ) | |
$ | 0.058 | |
The accompanying
notes are an integral part of these consolidated financial statements.
CHINA
UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
Nine
Months Ended September 30, | |
| |
2014 | | |
2013 | |
| |
| | | |
| | |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | (350,319 | ) | |
$ | 2,892,787 | |
Adjustments to reconcile net income
to net cash | |
| | | |
| | |
Depreciation and amortization | |
| 285,740 | | |
| 179,556 | |
Gain on valuation of financial assets | |
| (5,347 | ) | |
| - | |
Changes in operating assets and
liabilities: | |
| | | |
| | |
Accounts
receivable | |
| 3,529,527 | | |
| 3,895,323 | |
Other current
assets | |
| (41,348 | ) | |
| (1,061,550 | ) |
Other assets | |
| (4,468 | ) | |
| (14,487 | ) |
Tax payable | |
| (9,736 | ) | |
| (277,040 | ) |
Other current
liabilities | |
| (3,153,091 | ) | |
| (5,575,937 | ) |
Long-term
liabilities | |
| - | | |
| 8,477,163 | |
Net
cash provided by operating activities | |
| 250,958 | | |
| 8,515,815 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Cash from acquisition | |
| 128,933 | | |
| - | |
Sale of investment in current deposit | |
| 1,625,955 | | |
| - | |
Sale of investment marketable securities | |
| (472,971 | ) | |
| 3,222,866 | |
Purchase of
property, plant and equipment | |
| - | | |
| (344,012 | ) |
Net cash
provided by investing activities | |
| 1,281,917 | | |
| 2,878,854 | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Contribution in capital | |
| - | | |
| (5,309,377 | ) |
Proceeds from related party borrowing | |
| 45,527 | | |
| - | |
Repayment
to related parties | |
| - | | |
| (639,481 | ) |
Net cash
provided by financing activities | |
| 45,527 | | |
| (5,948,858 | ) |
| |
| | | |
| | |
Foreign currency
translation | |
| (260,078 | ) | |
| (155,356 | ) |
Net increase (Decrease) in
cash and cash equivalents | |
| 1,318,324 | | |
| 5,290,455 | |
| |
| | | |
| | |
Cash
and cash equivalents, beginning balance | |
| 18,070,093 | | |
| 10,691,767 | |
Cash
and cash equivalents, ending balance | |
$ | 19,388,417 | | |
$ | 15,982,222 | |
| |
| | | |
| | |
| |
| | | |
| | |
Interest
paid | |
$ | - | | |
$ | - | |
Income tax
paid | |
$ | 757,343 | | |
$ | 480,448 | |
The accompanying notes are an integral part of these
consolidated financial statements.
CHINA UNITED INSURANCE SERVICE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The consideration was paid to
the account of CU Hong Kong by May 6, 2011. All $300,000 was contributed into the bank account of CU WFOE as registered capital.
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.
Law Anhou Insurance Agency Co., Ltd. (“Anhou”,
formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd. or Henan Law Anhou Insurance Agency Co., Ltd.) was founded in Henan
province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC.
On November 26, 2013, Anhou changed its
name into Law Anhou Insurance Agency Co., Ltd. and obtained its new business license. On December 18, 2013, Anhou obtained its
new Professional Insurance Agency License from local bureau of China Insurance Regulatory Commission (“CIRC”) which
reflects its new name. On February 26, 2014, Anhou completed the registration of the change of its registered address to Room
1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The
new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued
by Jiangsu Bureau of CIRC on April 21, 2014. Anhou is in the process to complete the registration of the share pledge with local
AIC. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District,
Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance
Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
Due to PRC legal restrictions on foreign
ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital
requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong
Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, Hou Weizhe and Zhang Yong, to invest in Anhou on its behalf.
On September 26, 2013, the new PRC individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong, Chen
Li (“Anhou New Investors”) and the original shareholders of Anhou (“Anhou Original Shareholders”) entered
into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed to increase
the registered capital of Anhou to RMB50 million (approximately $8 million). On October 24, 2013, Anhou Original Shareholders
entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr.
Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer
Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu..
Sichuan Kangzhuang Insurance Agency Co.,
Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 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 Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed
between 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. However, Sichuan Kangzhuang suffered loss since the acquisition, indicating
the impairment of goodwill. As of December 31, 2013, the carrying value of the goodwill was fully impaired.
Jiangsu Law Insurance Broker Co., Ltd.
(“Jiangsu Law”) was founded on September 19, 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 Anhou for RMB518,000 ($75,475) and 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 Anhou and each shareholder of Jiangsu Law. 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).
Due to PRC legal restrictions on foreign
ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications and capital
requirements of the investors, we operate our business primarily through our Consolidated Affiliated Entities (“CAE”)
in PRC. On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as variable
interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over Anhou
through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October
24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE
Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the
previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements
were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation
Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. We do not hold equity interests
in our CAE. However, through the VIE Agreements with these CAE and their respective shareholders, we effectively control, and
are able to derive substantially all of the economic benefits from, these CAE, which allows us to consolidate the financial results
of the CAE in our financial statements.
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.
Mr. Mao has extensive experience in the
insurance agency and brokerage industry and has acted as the chairman of the board of Law Broker. Under the leadership of Mr.
Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades
and generated substantial shareholder value for its stockholders. The management of the Company wanted Mr. Mao to apply his years
of experience in insurance industry into the Company’s expansion and to lead its growth. As a result the Company approached
Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and
operation of the Company and its subsidiaries. To ensure the consistently implementation of strategies and policies of the Company,
through mutual discussion and negotiations, both the Company and Mr. Mao (and subsequently a majority of the shareholders) agree
to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting
power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for
the reclassification, Mr. Mao agreed to be engaged by the Company as its Chief Executive Officer within 6 months after July 2,
2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief
Executive Officer, effective immediately.
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. The preferred stock has no material quantitative preferences over common stock,
such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to
the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock
held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company;
while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record
by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
On August 24, 2012, the Company
acquired all of the issued and outstanding shares 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.
AHFL holds 65.95% of the issued and outstanding
shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of
Taiwan on January 30, 1996. 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.
Pursuant to the provisions of the Acquisition
Agreement between the Company and the selling shareholders of AHFL 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 was extended from March 31, 2013 to March 31, 2015
or at any other time or in any other manner otherwise agreed upon by and among the Company and the selling shareholders of AHFL;
and (ii) in lieu of the 2,000,000 employee stock option pool described in the Acquisition Agreement, the Company agrees to use
its best efforts, as soon as practically possible, to create an employee stock pool consisting of up to 4,000,000 shares of CUIS
common stock, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000 shares
to be granted to employees of affiliated entities of the Company (including Law Broker employees).
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. We operate our Taiwan business primarily through Law Broker.
On April 23, 2014, AHFL entered into a
capital increase agreement (“Agreement”) with Wong Chun Kwok Johnny (“Mr Wong”), the owner of Prime Financial
Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr Wong would increase PFAL’s
registered capital from HK$500,000 to HK$1,47,000, and AHFL would contribute HK$1,530,000 to PFAL’s registered capital.
Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest,
respectively. The transaction was completed on April 30, 2014.
The corporate structure as of September
30, 2014 is as follows:
On January 17, 2014, the Company’s
Board of Directors approved a change in our fiscal year end to December 31 from June 30.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP’). Certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been omitted as permitted by rules and regulations of the Securities and Exchange Commission (“SEC”).
The consolidated balance sheet as of December 31, 2013 was derived from the audited consolidated financial statements of China
United Insurance Service, Inc. and Subsidiaries. The accompanying unaudited consolidated financial statements should be read in
conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the
Company’s transition report on Form 10-KT for the six-month ended December 31, 2013.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of China United, its subsidiaries and CAE as shown in the organization structure in Note 1 above.
All significant intercompany transactions and balances were eliminated in consolidation.
Basis of Presentation
The Company’s financial statements
are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The functional currency for our subsidiaries in Taiwan is New Taiwan Dollar (“NT$”) and for the VIEs in China
is Renminbi (“RMB”).
Noncontrolling Interest
Noncontrolling interest consists of direct
and indirect equity interest in AHFL and its 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 period. 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 with the bank institutions in the PRC 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. In Taiwan, a depositor has up to NT$3,000,000 insured in a bank. In Hong Kong,
a depositor has up to HKD$500,000 insured in a bank. In the United States, the standard insurance amount is $250,000 per depositor
in a bank under the FDIC’s general deposit insurance rules.
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 securities the Company has intends and has the ability
to hold to maturity; trading securities represent securities bought and held primarily for sale in the near-term to generate income
on short-term price differences; available-for-sale represents securities not classified as held-to-maturity or trading securities.
The Company classifies the equity security
investments as trading securities and reports them at FV with changes in FV recorded in “Other Income” in the statements
of operations and other comprehensive income (loss). The Company classifies bonds as available-for-sale and reports them at FV
with unrealized gains and losses included in “Accumulated other comprehensive income (loss)” on the equity section
of the balance sheets.
Accounts Receivable, net
The Company reviews its accounts receivable
regularly to determine if a bad debt allowance is necessary at each reporting period 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 September 30, 2014 and December 31, 2013.
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, vehicles 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 un-discounted 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 of long-lived assets was recognized
for the nine months ended September 30, 2014 and 2013.
Goodwill
Goodwill arose from the acquisition of
PFAL (Note 10). 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 September 30, 2014, there were no any indications of the impairment of goodwill
that arose from the acquisition of PFAL.
Revenue Recognition
The Company’s revenue is from insurance
agency and brokerage services. The Company, through its subsidiaries and CAE, 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 nine months ended
September 30, 2014 and 2013, policy cancellations were $83,859 and $254,107, respectively. For the three months ended September
30, 2014 and 2013, policy cancellations were $0 and $47,591, 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 December 31, 2013 and September 30, 2014, 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. In connection with the acquisition of China
entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting
(FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section
6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011
and 2012. The potential penalty is estimated to be $370,000 in the event of a tax audit, which has been accrued in the three months
ended December 31, 2013, and it has not been paid during the nine months ended September 30, 2014.
Preferred Stock
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 Preferred Stock
(“Series A Stock”) outstanding as of September 30, 2014, which was classified as equity.
Section 480-10-25 requires that an issuer
classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. Section 480-10-05-2 classifies all of the following as examples of an obligation:
a. An entity incurs a conditional
obligation to transfer assets by issuing (writing) a put option that would, if exercised, require the entity to repurchase its
equity shares by physical settlement. (Further, an instrument that requires the issuer to settle its obligation by issuing another
instrument [for example, a note payable in cash] ultimately requires settlement by a transfer of assets.)
b. An entity incurs a conditional
obligation to transfer assets by issuing a similar contract that requires or could require net cash settlement.
c. An entity incurs a conditional
obligation to issue its equity shares by issuing a similar contract that requires net share settlement.
The Series A Preferred Stock does not
fall in to any of the above categories as an obligation. The preferred stock is convertible into a fixed number of common shares
(one for one). Therefore, the preferred stock has been classified as equity.
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 September 30, 2014, approximately $762,000 of the Company’s cash and equivalents held by financial institutions was
insured, and the remaining balance of approximately $18.6 million was not insured. With respect to accounts receivable, the Company
generally does not require collateral and does not have an allowance for doubtful accounts.
After acquired AHFL and its Taiwan subsidiaries,
the Company has several principal insurance companies in Taiwan, for which it acts as an insurance agent. For the three and nine
months ended September 30, 2014 and 2013, the Company’s revenues from sale of insurance policies underwritten by these companies
were:
| |
Nine months ended September 30, | |
| |
2014 | | |
2013 | |
| |
Amount | | |
%
of Total Revenue | | |
Amount | | |
%
of Total Revenue | |
Farglory Life
Insurance Co.,Ltd. | |
$ | 8,415,238 | | |
| 27 | % | |
$ | 9,151,615 | | |
| 31 | % |
Fubon Life Insurance Co.,Ltd. | |
| 4,992,976 | | |
| 16 | % | |
| 5,836,243 | | |
| 20 | % |
AIA International Ltd.,Taiwan | |
| 4,679,385 | | |
| 15 | % | |
| N/A | | |
| N/A | |
TransGlobe Life Insurance
Inc. | |
| 4,132,067 | | |
| 13 | % | |
| 5,292,390 | | |
| 18 | % |
| |
Three months ended September 30, | |
| |
2014 | | |
2013 | |
| |
Amount | | |
% of Total
Revenue | | |
Amount | | |
% of Total
Revenue | |
Farglory Life
Insurance Co.,Ltd. | |
$ | 2,539,976 | | |
| 26 | % | |
$ | 2,005,281 | | |
| 26 | % |
Fubon Life Insurance Co.,Ltd. | |
| 1,488,371 | | |
| 15 | % | |
| 1,417,516 | | |
| 18 | % |
AIA International Ltd.,Taiwan | |
| 1,429,382 | | |
| 15 | % | |
| 751,798 | | |
| 10 | % |
TransGlobe Life Insurance
Inc. | |
| 1,326,987 | | |
| 14 | % | |
| 1,637,204 | | |
| 21 | % |
As of September 30, 2014 and 2013, the
Company’s accounts receivable from these companies were:
| |
September 30,
2014 | | |
September 30,
2013 | |
| |
Amount | | |
% of Total
Accounts Receivable | | |
Amount | | |
% of Total
Accounts Receivable | |
Farglory Life Insurance Co.,Ltd. | |
$ | 886,628 | | |
| 23 | % | |
$ | 729,297 | | |
| 29 | % |
Fubon Life Insurance Co.,Ltd. | |
| 599,170 | | |
| 16 | % | |
| 388,982 | | |
| 16 | % |
TransGlobe Life Insurance Inc. | |
| 597,888 | | |
| 16 | % | |
| 402,990 | | |
| 16 | % |
AIA International Ltd.,Taiwan | |
| 441,272 | | |
| 12 | % | |
| 297,013 | | |
| 12 | % |
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 nine months ended September 30, 2014 and 2013, the Company
managed and reviewed its business as two operating segments. The business of CU WOFE and CAE in PRC was managed and reviewed as
PRC segment. The business of AHFL and its subsidiaries in Taiwan was managed and reviewed as Taiwan segment.
ASC-280-10-50-12 states, a public entity
shall report separately information about an operating segment that meets any of the following quantitative thresholds:
a. Its reported revenue, including
both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal
and external, of all operating segments.
b. The absolute amount of its
reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:
1. The combined reported profit
of all operating segments that did not report a loss
2. The combined reported loss
of all operating segments that did report a loss.
c. Its assets are 10 percent
or more of the combined assets of all operating segments.
The PRC segment does not meet any of the
above quantitative thresholds and Taiwan segment is substantially all of the reported consolidated amounts. Therefore, we are
not reporting these two segments separately. Note 20 disclose revenues from the two segments.
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 10.
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 in PRC primarily through
Anhou, a VIE owned by seven individual shareholders, and two subsidiaries of Anhou.
On January 17, 2011, CU WFOE and Anhou
and Anhou Original Shareholders (as defined in Note1) entered into the Old VIE Agreements (as defined in Note1) which included:
| ● | Exclusive
Business Cooperation Agreement (“EBCA” or the “Agreement”) through
which: (1) CU WFOE has the right to provide Anhou with complete technical support, business
support and related consulting services during the term of this Agreement; (2) Anhou
agrees to accept all the consultations and services provided by CU WFOE. Anhou further
agrees that unless with CU WFOE's prior written consent, during the term of this Agreement,
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) Anhou
shall pay CU WFOE fees equal to 90% of the net income of 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 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 Anhou shall accept such extended term unconditionally.
During the term of this Agreement, unless
CU WFOE commits gross negligence, or a fraudulent act, against Anhou, Anhou may not terminate this Agreement. Nevertheless, CU
WFOE shall have the right to terminate this Agreement upon giving 30 days prior written notice to Anhou at any time.
| ● | Power
of Attorney under which each shareholder of 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 Anhou, including without limitation to: (1) attend shareholders' meetings
of 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 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 Anhou. |
| ● | Option
Agreement under which the shareholders of Anhou irrevocably granted CU WFOE or its designated
person an exclusive and irrevocable right to acquire, at any time, the entire portion
of Anhou’s equity interest held by each shareholder of Anhou, or any portion thereof,
to the extent permitted by PRC law. The purchase price for the shareholders’
equity interests in 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 Anhou pledged their equity interests in Anhou
to CU WFOE to guarantee Anhou’s performance of its obligations under the EBCA.
Pursuant to this agreement, if 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 Anhou’s equity interests in Anhou. This Agreement shall
be continuously valid until all payments due under the EBCA have been repaid by Anhou
or its subsidiaries. |
As a result of the capital increase and
the share transfer described in Note1, on October 24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders (as defined in Note1)
entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys, Exclusive
Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change of shareholder
names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and Anhou Original
Shareholders on the same date. The EBCA executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect.
As a result of the agreements among CU
WFOE, the shareholders of Anhou and Anhou, CU WFOE is considered the primary beneficiary of Anhou, CU WFOE has effective control
over Anhou; therefore, CU WFOE consolidates the results of operations of Anhou and its subsidiaries. Accordingly the results of
operations, assets and liabilities of 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. For the nine months ended September 30, 2014 and 2013, no event including a-d above took place that would
change the Company’s primary beneficiary status.
Reclassifications
Certain prior period amounts were reclassified
to conform to the manner of presentation in the current period. These reclassifications had no effect on the net income (loss)
or stockholders’ equity.
Recent Accounting Pronouncements
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 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.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, (“ASU 2-14-09”). ASU 2-14-09 amends revenue recognition principles and provides
a single set of criteria for revenue recognition among all industries. This new standard provides a five step framework whereby
revenue is recognized when promised goods or services are transferred to a customer at amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosure
pertaining to revenue recognition in both interim and annual periods. ASU 2014-09 is effective for interim and annual periods
beginning after December 15, 2016. We are currently evaluating the potential impact that ASU 2014-09 may have on our financial
position and results of operations.
NOTE 3 – CASH AND EQUIVALENTS
As of September 30, 2014 and December
31, 2013, our cash and equivalents consist of highly liquid investments purchased with an original maturity of three months or
less. The carrying amounts reported on the consolidated balance sheets for cash and cash equivalents approximate fair value.
NOTE 4 - MARKETABLE SECURITIES
Marketable securities represent investment
in equity securities of listed stocks and funds, which are classified as Level 1 securities as follows:
| |
| | |
| | |
| |
| |
September
30, 2014 | |
| |
Cost or | | |
Gross | | |
| |
| |
Amortized | | |
Unrealized | | |
Total | |
| |
Cost | | |
Gains (Losses) | | |
Fair Value | |
Level 1 securities: | |
| | | |
| | | |
| | |
Stocks | |
$ | 31,211 | | |
$ | (5,651 | ) | |
$ | 25,560 | |
Funds | |
| 2,532,475 | | |
| (26,637 | ) | |
| 2,505,838 | |
| |
$ | 2,563,686 | | |
$ | (32,288 | ) | |
$ | 2,531,398 | |
| |
December
31, 2013 | |
| |
Cost or | | |
Gross | | |
| |
| |
Amortized | | |
Unrealized | | |
Total | |
| |
Cost | | |
Gains (Losses) | | |
Fair Value | |
Level 1 securities: | |
| | |
| | |
| |
Stocks | |
$ | 29,453 | | |
$ | 1,757 | | |
$ | 31,210 | |
Funds | |
| 2,531,317 | | |
| 1,158 | | |
| 2,532,475 | |
| |
$ | 2,560,770 | | |
$ | 2,915 | | |
$ | 2,563,685 | |
NOTE 5 – OTHER CURRENT ASSETS
The Company’s other current assets
consisted of the following, as of September 30, 2014 and December 31, 2013:
| |
September
30, 2014 | | |
December
31, 2013 | |
Prepaid rent | |
$ | 194,658 | | |
$ | 121,361 | |
Refundable business tax | |
| 175,174 | | |
| 177,615 | |
Investment in current deposit | |
| - | | |
| 1,630,789 | |
Other | |
| 252,684 | | |
| 399,912 | |
Total other current
assets | |
$ | 622,516 | | |
$ | 2,329,677 | |
Refundable business tax, similar to VAT
in mainland China, represents business tax prepaid by Risk Management and AHFL, expected to be refunded by Taiwan tax bureau.
Investment in current deposit is a semiannual investment product that Anhou purchased in November 2013. Others mainly represent
advances to staff and other miscellaneous receivables.
NOTE 6– PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment consisted
of the following, as of September 30, 2014 and December 31, 2013:
| |
September
30, 2014 | | |
December
31,2013 | |
Office Equipment | |
$ | 1,314,345 | | |
$ | 1,204,386 | |
Office Furniture | |
| 127,114 | | |
| 111,699 | |
Leasehold improvements | |
| 652,402 | | |
| 469,102 | |
Transportation equipment | |
| 88,986 | | |
| 89,598 | |
Other equipment | |
| 103,974 | | |
| 51,421 | |
Total | |
| 2,286,821 | | |
| 1,926,206 | |
Less: accumulated depreciation | |
| (1,079,865 | ) | |
| (885,017 | ) |
| |
| | | |
| | |
Total property, plant and equipment,
net | |
$ | 1,206,956 | | |
$ | 1,041,189 | |
NOTE 7 – INTANGIBLE ASSETS
As of September 30, 2014 and December
31, 2013, the Company’s intangible assets consisted the following:
| |
September
30, 2014 | | |
December
31, 2013 | |
Software | |
$ | 482,238 | | |
| 402,096 | |
Less accumulated amortization | |
| (170,405 | ) | |
| (93,829 | ) |
Total other current
assets | |
$ | 311,833 | | |
| 308,267 | |
Estimated future intangible amortization
as of September 30, 2014 is as follows:
Years ending September
30, | |
Amount | |
2015 | |
$ | 120,629 | |
2016 | |
| 100,685 | |
2017 | |
| 23,755 | |
2018 | |
| 23,755 | |
2019 | |
| 22,276 | |
Thereafter | |
| 20,733 | |
Total | |
$ | 311,833 | |
NOTE 8 – LONG-TERM INVESTMENT
According to Taiwan regulatory requirements,
Law Broker is required to maintain a minimum of NT$3,000,000 ($99,920) in a separate account. Law Broker chose to buy government
bonds and has the right to trade such bonds with other debt or equity instruments. The amount, however, was defined as restricted
asset.
| |
September
30, 2014 | |
| |
Cost or | | |
Gross | | |
| |
| |
Amortized | | |
Unrealized | | |
Total | |
| |
Cost | | |
Gains (Losses) | | |
Fair Value | |
Government bonds | |
| 101,599 | | |
| (804 | ) | |
| 100,795 | |
| |
$ | 101,599 | | |
$ | (804 | ) | |
$ | 100,795 | |
| |
December 31,
2013 | |
| |
Cost or | | |
Gross | | |
| |
| |
Amortized | | |
Unrealized | | |
Total | |
| |
Cost | | |
Gains (Losses) | | |
Fair Value | |
Government bonds | |
| 101,599 | | |
| 696 | | |
| 102,295 | |
| |
$ | 101,599 | | |
$ | 696 | | |
$ | 102,295 | |
NOTE 9–OTHER ASSETS
The Company’s other assets consisted
of the following, as of September 30, 2014 and December 31, 2013:
| |
September
30, 2014 | | |
December
31, 2013 | |
Restricted cash | |
$ | 162,443 | | |
$ | 163,559 | |
Rental deposits | |
| 376,730 | | |
| 405,935 | |
Other | |
| 45,497 | | |
| 17,809 | |
Total other assets | |
$ | 584,670 | | |
$ | 587,303 | |
Restricted cash is a deposit in bank by
the Company in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies, and cannot
be withdrawn without the permission of the regulatory commission. Deposits include long-term leasing deposits.
NOTE 10 –ACQUISITION
On April 23, 2014, AHFL entered into a
capital increase agreement (“Agreement”) with Wong Chun Kwok Johnny (“Mr Wong”), the owner of Prime Financial
Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr Wong would increase PFAL’s
registered capital from HK$500,000 to HK$1,47,000, and AHFL would contribute HK$1,530,000, approximately $197,335, to PFAL’s
registered capital. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s
equity interest, respectively. The transaction was completed on April 30, 2014.
The FV of the net identifiable assets
of PFAL at acquisition date was $324,871, and 51% of which was $165,684. The Company recorded $31,651 excess of purchase price
over the FV of assets and liabilities acquired as goodwill. No intangible assets were identified as of the acquisition date. As
of September 30, 2014, there were no any indications of the impairment of the goodwill.
NOTE 11 – TAXES PAYABLE
The Company’s taxes payable consisted
of the following, as of September 30, 2014 and December 31, 2013:
| |
September
30, 2014 | | |
December
31, 2013 | |
PRC Tax | |
$ | 159,997 | | |
$ | 152,105 | |
Taiwan Tax | |
| 322,992 | | |
| 346,336 | |
Total tax payable | |
$ | 482,989 | | |
$ | 498,441 | |
PRC tax represents income tax and other
taxes accrued according to PRC tax law by our subsidiaries and CAE in the PRC. Taiwan tax represents income tax and other taxes
accrued according to Taiwan tax law by our subsidiaries and branches in Taiwan. Both will be settled within the next twelve months
according to the respective tax laws.
NOTE 12 – UNEARNED REVENUE
On June 10, 2013, AHFL entered into a
Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”).
The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within Taiwan by insurance agencies
or brokerage companies affiliated with AHFL or CUIS. The term of the Alliance Agreement is from April 15, 2013 to August 31, 2018.
Pursuance to the terms of the Alliance Agreement, AIATW paid AHFL the Execution Fee of $8,326,700 (NT$250,000,000, including the
tax of NT$11,904,762), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as
defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not
met by AHFL. On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “Supplemental Agreement”)
with AIATW. In the Supplemental Agreement, the performance targets and the provision about refunding the Execution Fee when the
performance targets are not met were revised. In the meantime, two parties agreed that the Alliance Agreement would be terminated
when AHFL’s ownership in Law Enterprise or Law Enterprise’s ownership in Law Broker changed by 30% or above. The term
of the Alliance Agreement is changed to the period from June 1, 2013 through December 31, 2020.
As of December 31, 2013, the Company booked
$1,586,038 as short-term liability since we expected to record this amount as revenue within the next twelve months. The remaining
balance of $6,344,152 was recorded as long-term liability (Note 14). According to the revised agreement, as of September 30, 2014,
the Company did not book any short-term unearned revenue since we did not expect to achieve the sales target within the next twelve
months, and the Company booked the whole $7,813,933 as long-term liability. For the nine months ended September 30, 2014 and 2013,
no income was recorded under the Alliance Agreement as performance targets were not met.
NOTE 13 – OTHER CURRENT LIABILITIES
Other current liabilities are as follows,
as of September 30, 2014 and December 31, 2013:
| |
September 30,
2014 | | |
December 31,
2013 | |
Commissions payable to sub agents | |
$ | 2,648,561 | | |
$ | 4,972,338 | |
Salary payable to administrative staff | |
| 353,178 | | |
| 76,600 | |
Due to previous shareholders of Jiangsu Law | |
| - | | |
| 84,238 | |
Due to previous shareholders of AHFL | |
| 750,910 | | |
| - | |
Withholding employee personal tax | |
| 288,990 | | |
| 326,652 | |
Accrued expenses | |
| 1,768,297 | | |
| 3,053,140 | |
Other | |
| 332,511 | | |
| 119,337 | |
Total other current
liabilities | |
$ | 6,142,447 | | |
$ | 8,632,305 | |
Commissions payable to sub-agents and
salaries payable to administrative staff are usually settled within 12 months. The amount due to previous shareholders of AHFL
is the remaining balance of the acquisition cost described in Note 1. 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 14 – LONG-TERM LIABILITIES
Long-term liabilities are as follows,
as of September 30, 2014 and December 31, 2013:
| |
September 30,
2014 | | |
December 31,
2013 | |
| |
| | | |
| | |
Long-term other payable | |
$ | - | | |
$ | 750,910 | |
Unearned revenue | |
| 7,813,933 | | |
| 6,344,152 | |
Total other current liabilities | |
$ | 7,813,933 | | |
$ | 7,095,062 | |
Long-term other payable as of December
31, 2013 is the result of the Company’s acquisition of AHFL as described in Note 1. It’s the cash payment to be made
to the selling shareholders of AHFL. On March 14, 2013, the payment deadline was extended to March 31, 2015. As of September 30,
2014, it was reclassified as short-term liabilities.
As described in Note 12, the Company recorded
$7,813,933 (NT$238,095,238, net of tax) received from AIATW as unearned revenue. According to the revised agreement, as of September
30, 2014, the Company did not book any short-term unearned revenue since we did not expect to achieve the sales target within
the next twelve months, and the Company booked the whole $7,813,933 as long-term liability. As of December 31, 2013, the Company
booked $6,344,152 as long-term liability for the same reason.
NOTE 15 – EQUITY
Reserves
According to Taiwan accounting rules and
corporation regulations, the company’s subsidiaries in Taiwan must appropriate 10% of net income to statutory reserves until
the accumulated reserve 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 (“CAE”) 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 equals 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 CAE did not appropriate such
reserve as they have accumulated losses.
NOTE 16– INCOME TAX
CU WFOE and the CAE 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. According to the requirement of local tax authorities, the
taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. 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 three years can be reversed.
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. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional
10% on any undistributed earnings to its shareholders. In June 2014, Law Enterprises decided not to distribute its earnings accumulated
as of December 31, 2013. Accordingly, NT$18,903,349, approximately $626,406, of additional tax was accrued, which is stated as
“income tax on undistributed earnings” on the income tax rate reconciliation tables below.
The balance of income tax payable as of
September 30, 2014 and December 31, 2013 is mainly the income tax accrued by the CAE 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 nine months ended September 30, 2014 and 2013:
| |
September 30,
2014 | | |
September 30,
2013 | |
US statutory rate | |
| 34 | % | |
| 34 | % |
Tax rate difference | |
| (40 | )% | |
| (19 | )% |
Change in tax status | |
| 1 | % | |
| (6 | )% |
Income tax on undistributed earnings | |
| 76 | % | |
| - | % |
Loss in subsidiaries | |
| 65 | % | |
| 6 | % |
Un-deductible and non-taxable
items | |
| 7 | % | |
| 5 | % |
Tax
per financial statements | |
| 143 | % | |
| 20 | % |
The following table reconciles the US
statutory rates to the Company’s effective tax rate for the three months ended September 30, 2014 and 2013:
| |
September 30,
2014 | | |
September 30,
2013 | |
US statutory rate | |
| 34 | % | |
| 34 | % |
Tax rate difference | |
| (8 | )% | |
| (15 | )% |
Change in tax status | |
| - | % | |
| 4 | % |
Income tax on undistributed earnings | |
| (1 | )% | |
| - | % |
Loss in subsidiaries | |
| (25 | )% | |
| (19 | )% |
Un-deductible and non-taxable items | |
| 2 | % | |
| - | % |
Tax per financial
statements | |
| 2 | % | |
| 4 | % |
Un-deductible and non-taxable items mainly represent un-deductible
expenses and the non-taxable income according to the PRC tax laws and the Taiwan tax laws.
NOTE 17 - 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 September 30, 2014 and December
31, 2013:
| |
September 30,
2014 | | |
December 31,
2013 | |
Due to Mr. Mao (Principal Shareholder
of the Company) | |
$ | 162,445 | | |
$ | 117,471 | |
Due to Mr. Zhu (Legal Representative of Jiangsu
Law) | |
| 2,249 | | |
| 2,265 | |
Due to Mrs. Li (Director
of CUIS) | |
| 35,062 | | |
| 35,062 | |
Total | |
$ | 199,756 | | |
$ | 154,798 | |
NOTE 18 – COMMITMENTS
Operating Leases
The Company has operating leases for its
offices. Rental expenses for the nine months ended September 30, 2014 and 2013 were $1,286,054 and $783,286, respectively. Rental
expenses for the three months ended September 30, 2014 and 2013 were $402,545 and $183,116, respectively. As of September 30,
2014, total future minimum annual lease payments under operating leases were as follows, by years:
Twelve months ended September 30, 2015 | |
$ | 1,493,247 | |
Twelve months ended September 30, 2016 | |
| 897,164 | |
Twelve months ended September 30, 2017 | |
| 188,041 | |
Thereafter | |
| 4,964 | |
Total | |
$ | 2,583,416 | |
NOTE 19 – 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 CAE 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 20 – GEOGRAPHICAL SALES
The geographical distribution of China
United’s revenue for the nine months ended September 30, 2014 and 2013 were as follows:
| |
Nine months ended September 30, | |
Geographical Areas | |
2014 | | |
2013 | |
PRC | |
$ | 2,137,652 | | |
$ | 1,782,886 | |
Taiwan | |
| 28,852,271 | | |
| 27,452,907 | |
| |
$ | 30,989,923 | | |
$ | 29,235,793 | |
The geographical distribution of China
United’s revenue for the three months ended September 30, 2014 and 2013 were as follows:
| |
Three months ended September 30, | |
Geographical Areas | |
2014 | | |
2013 | |
PRC | |
$ | 748,295 | | |
$ | 550,614 | |
Taiwan | |
| 9,046,763 | | |
| 7,217,715 | |
| |
$ | 9,795,058 | | |
$ | 7,768,329 | |
NOTE 21 – LOAN TO SHAREHOLDERS
Anhou Registered Capital Increase
On April 27, 2013, China Insurance Regulatory
Commission mandated any insurance agency have a minimum registered capital requirement of RMB50 million (approximately $ 8 million).
At the time, Anhou, a professional insurance agency with a PRC nationwide license, had a registered capital of RMB10 million (approximately
$ 1.6 million). To better implement its expansion strategies, Anhou intends to increase its registered capital to RMB50 million
so that it can set up new branches in any province beyond its current operations in Mainland China.
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 ($6,522,944). 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
entered into a binding VIE agreement with Anhou, the WFOE and certain existing shareholders of Anhou. The proceeds received from
the said loans by the Investor Borrowers were solely used to increase the registered capital of Anhou. As of September 30, 2014
and December 31, 2013, the loan was offset against equity.
On October 20, 2013, the investor borrowers
increased Anhou’s registered capital by RMB 40 million ($6,522,944).
NOTE 22 – PREFERRED STOCK
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 Preferred Stock (“Series A
Stock”) outstanding as of September 30, 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.
The fair value of the 1,000,000 preferred
shares was $225,000 at the time of the preferred share issuance. The Fair value of the common shares was $200,000 at the time
of the preferred share issuance based on its market price at the date of the transaction. Therefore, the incremental value of
the preferred shares was $25,000. This amount may be deemed compensation.
From the qualitative aspect, the Company
notes the following regarding this deemed compensation:
Does not violate any debt or other contract
covenants;
Does not change any earnings or EPS trends;
Does not affect any previous earnings
or EPS guidance;
Does not affect any segment or class of revenue;
Does not affect any regulatory compliance
matters;
Does not affect cash compensation of management;
Does not involve concealment of an unlawful
act
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.
NOTE 23 – SUBSEQUENT EVENTS
The Company has evaluated all other subsequent
events through the date these consolidated financial statements were issued, and determine that there were no other subsequent
events or transactions that require recognition or disclosures in the consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this Management’s
Discussion and Analysis in conjunction with the Consolidated Financial Statements and Related Notes.
Overview
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 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 laws. 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 (“the PRC”).
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.
Law Anhou Insurance Agency Co., Ltd. (“Anhou”,
formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd.) was founded in Henan province of the PRC on October 9, 2003. Anhou
provides insurance agency services in the PRC.
On November 26, 2013, Anhou changed its
name into Law Anhou Insurance Agency Co., Ltd. and obtained its new business license. On December 18, 2013, Anhou obtained its
new Professional Insurance Agency License from local bureau of China Insurance Regulatory Commission (“CIRC”) which
reflects its new name. On February 26, 2014, Anhou completed the registration of the change of its registered address to Room
1906-1910, No. 215 Jiangdong Middle Road, Jianye District, Nanjing, Jiangsu Province with the local AIC of Jiangsu Province. The
new business license was issued to Anhou on February 26, 2014. Anhou obtained the Professional Insurance Agency License issued
by Jiangsu Bureau of CIRC on April 21, 2014. Anhou is in the process to complete the registration of the share pledge with local
AIC. Anhou’s previous headquarters located at Building 4K, Hesheng Plaza, No. 26 Yousheng South Road, Jinshui District,
Zhengzhou, Henan province, has been registered as the Henan branch office of Anhou and it obtained the Professional Insurance
Agency License issued by Henan Bureau of CIRC on January 3, 2014 and the business license issued by local AIC on January 9, 2014.
On September 26, 2013, several new PRC
individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong, Chen Li (“Anhou New Investors”)
and the original shareholders of Anhou, namely, Zhu Shuqin, Wei Qun, Fang Qunlei and Chen Yanxia (“Anhou Original Shareholders”)
entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed
to increase the registered capital of Anhou to RMB50 million (approximately $ 8 million), among which, Wang Yanyan would invest
RMB10 million ($1,633,179), accounting for 20%, Chen Zhaohui would invest RMB10 million ($1,633,179), accounting for 20%, Yue
Jing would invest RMB7.5 million ($1,224,871), accounting for 15%, Hou Weizhe would invest RMB5 million ($816,589), accounting
for 10%, Zhang Yong would invest RMB4.5 million ($734,930), accounting for 9%, and Chen Li would invest RMB3 million ($489,949),
accounting for 6%, of the registered capital of Anhou.
Due to PRC legal restrictions on foreign
ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital
requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong
Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, Hou Weizhe and Zhang Yong, to invest in Anhou on its behalf.
On October 24, 2013, Anhou completed the
registration with local Administration Industry and Commerce (“AIC”) on the above-mentioned capital increase. The
new business license was issued to Anhou on October 25, 2013.
The registered capital increase of Anhou
is in response to the recent promulgations of certain regulations by China Insurance Regulatory Commission (“CIRC”).
On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance
Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency
established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50
million (approximately $ 8 million). 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 (approximately
$ 8 million), can continuous operation of their existing business within the provinces where they have the registered office or
branch office, but shall not set up any new branches in any province where they do not have the registered office or any branch
office.
Prior to the capital increase, Anhou,
a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million (approximately
$1.6 million). The branch offices of Anhou currently are all in Henan province. To better implement its expansion strategies,
Anhou increased its registered capital to RMB50 million (approximately $ 8 million) to meet the requirement of CIRC so that it
can set up new branches in any province beyond its current operations in Mainland China.
On October 24, 2013, Anhou Original Shareholders
entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr.
Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer
Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer
price of RMB10 million ($1,633,178). Mr. Hu is currently the legal representative and the sole director of Anhou.
On October 24, 2013, Anhou completed the
share transfer registration with the local AIC. At the end of October 2013, Anhou completed its filing with local CIRC with respect
to its previously-conducted share transfer and capital increase.
Sichuan Kangzhuang Insurance Agency
Co., Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 2006 in Sichuan province in the PRC and provides insurance
agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting of shareholders, its shareholders
voted to sell their shares to Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed
between Anhou and each shareholder of Sichuan Kangzhuang.
Jiangsu
Law Insurance Broker Co., Ltd. (“Jiangsu Law”) was founded on September 19, 2005 in Jiangsu Province in the PRC and
provides insurance brokerage services in the PRC. On August 12, 2010, at Jiangsu Law’s general meeting of shareholders,
its shareholders voted to sell their shares to Anhou for RMB518,000 ($75,475) and Anhou increased Jiangsu Law’s paid-in
capital to RMB10,000,000 ($1,355,150) 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 Anhou and each shareholder of Jiangsu Law.
Due to PRC legal restrictions on foreign
ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications and capital
requirements of the investors, we operate our business primarily through our Consolidated Affiliated Entities (“CAE”)
in China. On January 17, 2011, CU WFOE and Anhou and Anhou Original Shareholders entered into a series of agreements known as
variable interest agreements (the “Old VIE Agreements”) pursuant to which CU WFOE has executed effective control over
Anhou through these contractual arrangements. As a result of the capital increase and the share transfer described above, on October
24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of variable interest agreements (the “VIE
Agreements”), including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the
previous Old VIE Agreements, other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements
were terminated by and among CU WFOE, Anhou and Anhou Original Shareholders on the same date. The Exclusive Business Cooperation
Agreement executed by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. We do not hold equity interests
in our CAE. However, through the VIE Agreements with these CAE and their respective shareholders, we effectively control, and
are able to derive substantially all of the economic benefits from, these CAE.
Our CAE in China are VIE through
which part of our insurance services are operated. It is through the VIE Agreements that we have effective control of the CAE,
which allows us to consolidate the financial results of the CAE in our financial statements. If Anhou and its shareholders
fail to perform their obligations under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that
give us effective control. Furthermore, if we are unable to maintain effective control of our CAE, we would not be able to continue
to consolidate the CAE’s financial results with our financial results. For more information see “Risk Factors-Risks
Related to Our Corporate Structure.”
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.
Mr. Mao has extensive experience in the
insurance agency and brokerage industry and has acted as the chairman of the board of Law Broker. Under the leadership of Mr.
Mao, Law Broker has grown into one of the top insurance brokerage firms in Taiwan, has sustained stable growth for the past decades
and generated substantial shareholder value for its stockholders. The management of the Company wanted Mr. Mao to apply his years
of experience in insurance industry into the Company’s expansion and to lead its growth. As a result the Company approached
Mr. Mao to discuss the possibility of Mr. Mao to play more of a managerial role and commit more time on the strategy design and
operation of the Company and its subsidiaries. To ensure the consistently implementation of strategies and policies of the Company,
through mutual discussion and negotiations, both the Company and Mr. Mao (and subsequently a majority of the shareholders) agreed
to the reclassification, pursuant to which, 1,000,000 shares of Series A Convertible Preferred Stock (with 1 to 10 special voting
power) were issued to Mr. Mao in replacement of the 1,000,000 shares of Common Stock previously held by Mr. Mao. In exchange for
the reclassification, Mr. Mao agreed to be engaged by the Company as its Chief Executive Officer within 6 months after July 2,
2012 or according to a timetable otherwise agreed upon. On August 8, 2014, the Board of Directors appointed Mr. Mao as the Chief
Executive Officer, effective immediately.
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. The preferred stock has no material quantitative preferences over common stock,
such as liquidation preferences and dividend preferences, and it specifically granted equal status to common stock pursuant to
the terms of the Certificate of Designation. Each holder of common stock is entitled to one vote for each share of common stock
held of record by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company;
while each holder of Series A Preferred Stock is entitled to ten votes for each share of Series A Preferred Stock held of record
by such holder as of the applicable record date on any matter submitted to a vote of the stockholders of the Company.
On August 24, 2012, the Company
acquired all of the issued and outstanding shares 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.
AHFL holds 65.95% of the issued
and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under
the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% 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” collectively with “Law Enterprise”, “Law Broker”
and “Law Agent”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”), a LLC incorporated
in Taiwan on June 3, 2000.
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.
On April 23, 2014, AHFL entered
into a capital increase agreement (“Agreement”) with Wong Chun Kwok Johnny (“Mr Wong”), the owner of Prime
Financial Asia Ltd (PFAL) which is a re-insurance broker company resided in Hong Kong. Upon the Agreement, Mr Wong would increase
PFAL’s registered capital from HK$500,000 to HK$1,47,000, and AHFL would contribute HK$1,530,000 to PFAL’s registered
capital. Upon the completion of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity
interest, respectively. The transaction was completed on April 30, 2014.
As of September 30, 2014, through
our CAE, we had two insurance agencies, one brokerage and 39 service outlets with 886 full-time sales professionals and 90 administrative
staff in Henan, Sichuan and Jiangsu provinces in China. In addition, through Law Insurance Broker Co., Ltd., we had 27 sales and
service outlets (including the headquarters) with 1628 full-time sales professionals, 393 part-time sales professionals and 145
administrative staff in Taiwan.
On January 17 2014, the Company’s
Board of Directors approved a change in our fiscal year end to December 31 from June 30.
Critical Accounting Policies
The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements. The preparation
of financial statements in conformity with Accounting Principles generally accepted in the United States of America (“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 period. Management makes these estimates using the best information available when they are made.
However, actual results could differ materially from those estimates. While there are a number of significant accounting policies
affecting the Company’s financial statements; the Company believes the following critical accounting policies involve the
most complex, difficult and subjective estimates and judgments The Company has not made any material changes in the methodology
used in these accounting polices during the past two years.
Principles of consolidation
The accompanying consolidated financial
statements include the accounts of China United, its subsidiaries and CAE as shown in the organization structure in Note 1 above.
All significant intercompany transactions and balances were eliminated in consolidation.
Accounts receivable
The Company reviews its accounts receivable
regularly to determine if a bad debt allowance is necessary at each reporting period 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 September 30, 2014 and December 31, 2013.
Revenue recognition
The Company’s revenue is from insurance
agency and brokerage services. The Company, through its subsidiaries and CAEs, 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 nine months ended
September 30, 2014 and 2013, policy cancellations were $83,859 and $254,107, respectively. For the three months ended September
30, 2014 and 2013, policy cancellations were $0 and $47,591, 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 September 30, 2014 and December 31, 2013, 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. In connection with the acquisition of China
entities, the Company is required to comply with the information return reporting requirements such as Foreign Bank Accounts Reporting
(FBAR), Information Return on Foreign-Owned U.S. Corporation or U.S. Corporation owning certain foreign corporation (Under Section
6038A and 6038C of Internal Revenue Code, etc.). The Company failed to comply with such requirements for the years of 2010, 2011
and 2012. The potential penalty is estimated to be $370,000, which has been accrued in the three months ended December 31, 2013,
and it has not been paid during the nine months ended September 30, 2014.
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 of long-lived assets was recognized
for the nine months ended September 30, 2014 and 2013.
Goodwill
Goodwill arose from the acquisition of
Sichuan Kangzhuang and PFAL. 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. Sichuan Kangzhuang has been suffering net loss since the acquisition,
indicating the impairment of goodwill. As of December 31, 2013, the carrying value of the goodwill that arose from the acquisition
of Sichuan Kangzhuang was fully impaired. Accordingly, we recorded a goodwill impairment loss of $122,250 in the three months
ended December 31, 2013. As of September 30, 2014, there were no any indications of the impairment of goodwill that arose from
the acquisition of PFAL.
Preferred Stock
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 Preferred Stock
(“Series A Stock”) outstanding as of September 30, 2014, which was classified as equity.
Section 480-10-25 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies
an obligation of the issuer. Section 480-10-05-2 classifies all of the following as examples of an obligation:
a. An entity incurs a conditional
obligation to transfer assets by issuing (writing) a put option that would, if exercised, require the entity to repurchase its
equity shares by physical settlement. (Further, an instrument that requires the issuer to settle its obligation by issuing another
instrument [for example, a note payable in cash] ultimately requires settlement by a transfer of assets.)
b. An entity incurs a conditional
obligation to transfer assets by issuing a similar contract that requires or could require net cash settlement.
c. An entity incurs a conditional
obligation to issue its equity shares by issuing a similar contract that requires net share settlement.
The Series A Preferred Stock does not
fall into any of the above categories as an obligation. The preferred stock is convertible in to a fixed number of common shares
(one for one). Therefore, the preferred stock has been classified as equity.
Segment Reporting
The Company follows FASB ASC Topic 280,
“Segment Reporting” for its segment reporting. For the nine months ended September 30, 2014 and 2013, the Company
managed and reviewed its business as two operating segments. The business of CU WOFE and CAE in PRC was managed and reviewed as
PRC segment. The business of AHFL and its subsidiaries in Taiwan was managed and reviewed as Taiwan segment.
ASC-280-10-50-12 states, a public entity
shall report separately information about an operating segment that meets any of the following quantitative thresholds:
a. Its reported revenue, including
both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal
and external, of all operating segments.
b. The absolute amount of its
reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:
1. The combined reported profit
of all operating segments that did not report a loss
2. The combined reported loss
of all operating segments that did report a loss.
c. Its assets are 10 percent
or more of the combined assets of all operating segments.
The PRC segment does not meet any of the
above quantitative thresholds and Taiwan segment is substantially all of the reported consolidated amounts. Therefore, we are
not reporting these two segments separately.
Recent Accounting Pronouncements
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 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.
In May 2014, the FASB issued ASU
No. 2014-09, Revenue from Contracts with Customers, (“ASU 2-14-09”). ASU 2-14-09 amends revenue recognition principles
and provides a single set of criteria for revenue recognition among all industries. This new standard provides a five step framework
whereby revenue is recognized when promised goods or services are transferred to a customer at amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosure
pertaining to revenue recognition in both interim and annual periods. ASU 2014-09 is effective for interim and annual periods
beginning after December 15, 2016. We are currently evaluating the potential impact that ASU 2014-09 may have on our financial
position and results of operations.
Results of Operations
Comparison of the three months ended September 30, 2014
and 2013
The following table shows the
results of operations for the three months ended September 30, 2014 and 2013:
| |
Three Months
Ended September 30, | | |
| | |
| |
| |
2014 | | |
2013 | | |
Change | | |
Percent | |
| |
(UNAUDITED) | | |
(UNAUDITED) | | |
| | |
| |
Revenues | |
$ | 9,795,058 | | |
$ | 7,768,329 | | |
$ | 2,026,729 | | |
| 26 | % |
Cost of revenue | |
| 5,984,679 | | |
| 6,003,344 | | |
| (18,665 | ) | |
| (0.3 | )% |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 3,810,379 | | |
| 1,764,985 | | |
| 2,045,394 | | |
| 116 | % |
Gross profit margin | |
| 39 | % | |
| 23 | % | |
| 16 | % | |
| 70 | % |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling | |
| 1,703,365 | | |
| 1,045,617 | | |
| 657,748 | | |
| 63 | % |
General and administrative | |
| 3,114,005 | | |
| 2,325,135 | | |
| 788,870 | | |
| 34 | % |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| (1,006,991 | ) | |
| (1,605,767 | ) | |
| 598,776 | | |
| (37 | )% |
| |
| | | |
| | | |
| | | |
| | |
Other income | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 54,001 | | |
| 32,096 | | |
| 21,905 | | |
| 68 | % |
Other - net | |
| 158,359 | | |
| 116,656 | | |
| 41,703 | | |
| 36 | % |
Total other income | |
| 212,360 | | |
| 148,752 | | |
| 63,608 | | |
| 43 | % |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) before income taxes | |
| (794,631 | ) | |
| (1,457,015 | ) | |
| 662,384 | | |
| (45 | )% |
Income tax expense | |
| (12,753 | ) | |
| (57,067 | ) | |
| 44,314 | | |
| (78 | )% |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (781,878 | ) | |
| (1,399,948 | ) | |
| 618,070 | | |
| (44 | )% |
Net income attributable to the noncontrolling
interests | |
| 27,876 | | |
| 383,072 | | |
| (355,196 | ) | |
| (93 | )% |
Net income (loss) attributable to parent's
shareholders | |
$ | (754,002 | ) | |
| (1,016,876 | ) | |
$ | 262,874 | | |
| (26 | )% |
Revenues
As a distributor of insurance products,
we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of
premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists
of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market
in Taiwan. For three months ended September 30, 2014 and 2013, the revenue generated respectively from Taiwan and PRC is as follows:
| |
Three months ended September 30, | |
Geographical Areas | |
2014 | | |
2013 | |
PRC | |
$ | 748,295 | | |
$ | 550,614 | |
Taiwan | |
| 9,046,763 | | |
| 7,217,715 | |
| |
$ | 9,795,058 | | |
$ | 7,768,329 | |
During the three months ended September
30, 2014, 92.36% and 7.64% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries
and CAE, respectively. For the three months ended September 30, 2013, 92.91% and 7.09% of our revenues in our consolidated financial
statements were derived from our Taiwan subsidiaries and CAE, respectively.
Total revenues increased by $2,026,729,
or 26%, from $7,768,329 for the three months ended September 30, 2013 to $9,795,058 for the three months ended September 30, 2014,
which is due to the increase of the revenue in Taiwan for following reasons,
| a) | After we entered into a Strategic Alliance
Agreement with AIA International Limited Taiwan Branch (“AIATW”) in June
2013, the sales of insurance products of AIATW increased stably. |
| b) | The sales of the products of Shin Kong
Life Insurance Co., Ltd. continue to increase because sub-agents were stimulated by the
notice that the Company will stop selling those products from August 2014. In addition,
according to the new regulation pronounced by the Financial Supervisory Commission, R.O.C.(Taiwan),
the Company has to stop selling four insurance products of Farglory Life Insurance Co.,Ltd.
and eight insurance products of Fubon Life Insurance Co., Ltd. from the middle of September
2014. Similarly, the sales of sub-agents for these products increased in July and August. |
Cost of revenue and gross profit
The cost of revenue mainly consists of
commissions paid to our sales agents. Therefore, generally, the cost of revenue changed with the same direction of change in the
revenue. However, compared to the three months ended September 30, 2013, the cost of revenue for the three months ended September
30, 2014 decreased by $18,665 or 0.3%. This is because the Company decided to grant several kinds of bonus to the sub-agents,
including special allowance, high-performance awards, practicing bonus, etc. in the three months ended September 30, 2013, while
in 2014 such bonuses and awards were granted in the three months ended June 30.
The gross profit for the three months
ended September 30, 2014 increased by $2,045,394 or 116%, to $3,810,379, compared to $1,764,985 for the three months ended September
30, 2013. The gross profit ratio increased to 39% for the three months ended September 30, 2014 from 23% for the three months
ended September 30, 2013. The increase was mainly because of the change in the bonus and awards granted to the sub-agents mentioned
above.
Selling expenses
Selling expenses mainly occurred in Law
Broker, representing the expense for marketing promotion. The selling expense for the three months ended September 30, 2014 increased
by $657,748 or 63%, to $1,703,365 compared to $1,045,617 for the three months ended September 30, 2013. The increase is mainly
due to the advertizing expense spent in publicity of the company’s brand.
General and administrative expenses
The general and administrative (“G&A”)
expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses,
depreciation and amortization, entertainment expenses, and professional service fees to the auditor and attorney.
For the three months ended September 30,
2014, G&A expenses were $3,114,005, increased by $788,870, or 34%, compared with $2,325,135 for the three months ended September
30, 2013, which mainly due to the rate of the business tax directly related to sales in Taiwan Subsidiaries increased from 2%
to 5% from July 2014. In addition, the G&A expense increased in Anhou due to the relocation expense of moving the Company’s
headquarter to Nanjing and setup expense of opening an outlet in Yunnan by Anhou.
Other income
Net other income for the three months
ended September 30, 2014 and 2013 was $212,360 and $148,752, respectively which mainly consist of interest income, gain (loss)
on change of fair value of marketable securities and rental income of sub-leased spare offices and garage. Compared with the three
months ended September 30, 2013, other income increased due to the increase of the rental income.
Income tax
For the three months ended September 30, 2014, the Company
has a credit of income tax of $12,753, while in the comparable period of 2013, the Company has a credit of income tax of $57,067.
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. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional
10% on any undistributed earnings to its shareholders. In the three months ended September 30, 2014, the Company’ suffered
a loss and accordingly generated a credit of income tax expense.
CU WFOE and the CAEs 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. According to the requirement of local tax authorities, the
taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. 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 three years can be reversed. In the three months ended September
30, 2013, the Company reversed tax payable of $57,359 accordingly.
Comparison of the nine months ended September 30, 2014
and 2013
The following table shows the
results of operations for the nine months ended September 30, 2014 and 2013:
| |
Nine Months
Ended September 30, | | |
| | |
| |
| |
2014 | | |
2013 | | |
Change | | |
Percent | |
| |
(UNAUDITED) | | |
(UNAUDITED) | | |
| | |
| |
Revenues | |
$ | 30,989,923 | | |
$ | 29,235,793 | | |
$ | 1,754,130 | | |
| 6 | % |
Cost of revenue | |
| 19,683,245 | | |
| 17,539,790 | | |
| 2,143,455 | | |
| 12 | % |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 11,306,678 | | |
| 11,696,003 | | |
| (389,325 | ) | |
| (3 | )% |
Gross profit margin | |
| 36 | % | |
| 40 | % | |
| (4 | )% | |
| (10 | )% |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling | |
| 2,444,031 | | |
| 1,772,004 | | |
| 672,027 | | |
| 38 | % |
General and administrative | |
| 8,433,578 | | |
| 6,763,354 | | |
| 1,670,224 | | |
| 25 | % |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| 429,069 | | |
| 3,160,645 | | |
| (2,731,576 | ) | |
| (86 | )% |
| |
| | | |
| | | |
| | | |
| | |
Other income | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 147,954 | | |
| 80,161 | | |
| 67,793 | | |
| 85 | % |
Other - net | |
| 244,260 | | |
| 383,173 | | |
| (138,913 | ) | |
| (36 | )% |
Total other income | |
| 392,214 | | |
| 463,334 | | |
| (71,120 | ) | |
| (15 | )% |
| |
| | | |
| | | |
| | | |
| | |
Income before income taxes | |
| 821,283 | | |
| 3,623,979 | | |
| (2,802,696 | ) | |
| (77 | )% |
Income tax expense | |
| 1,171,602 | | |
| 731,192 | | |
| 440,410 | | |
| 60 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
| (350,319 | ) | |
| 2,892,787 | | |
| (3,243,106 | ) | |
| (112 | )% |
Net income attributable to the noncontrolling
interests | |
| (524,522 | ) | |
| (1,214,136 | ) | |
| 689,614 | | |
| (57 | )% |
Net income (loss) attributable to parent's
shareholders | |
$ | (874,841 | ) | |
| 1,678,651 | | |
$ | (2,553,491 | ) | |
| (152 | )% |
Revenues
As a distributor of insurance products,
we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of
premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists
of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market
in Taiwan. For nine months ended September 30, 2014 and 2013, the revenue generated respectively from Taiwan and PRC is as follows:
| |
Nine months ended September 30, | |
Geographical Areas | |
2014 | | |
2013 | |
PRC | |
$ | 2,137,652 | | |
$ | 1,782,886 | |
Taiwan | |
| 28,852,271 | | |
| 27,452,907 | |
| |
$ | 30,989,923 | | |
$ | 29,235,793 | |
During the nine months ended September
30, 2014, 93.10% and 6.90% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries
and CAE, respectively. For the nine months ended September 30, 2013, 93.90% and 6.10% of our revenues in our consolidated financial
statements were derived from our Taiwan subsidiaries and CAE, respectively.
Total revenues increased by $1,754,130,
or 6%, from $29,235,793 for the nine months ended September 30, 2013 to $30,989,923 for the nine months ended September 30, 2014,
which is due to the increase of the revenue in Taiwan for following reasons,
| a) | After we entered into a Strategic Alliance
Agreement with AIA International Limited Taiwan Branch (“AIATW”) in June
2013, the sales of insurance products of AIATW increased stably. |
| b) | The sales of the products of Shin Kong
Life Insurance Co., Ltd. increased since May 2014 because sub-agents were stimulated
by the notice that the commission ratio of those products would be reduced from June
2014. |
Cost of revenue and gross profit
The cost of revenue mainly consists of
commissions paid to our sales agents. The cost of revenue for the nine months ended September 30, 2014 increased by $2,143,455
or 12%, to $19,683,245 compared to $17,539,790 for the nine months ended September 30, 2013. The cost of revenue increased with
the increase in revenue. In addition,
| a) | In 2013, several kinds of bonus to
the sub-agents, including special allowance, high-performance awards, practicing bonus,
etc which was granted to the subagents in the nine months ended September 2014 was granted
by the Company in the three months ended December 31. |
| b) | Compared with the comparable period
of 2013, the share of the first-year commission (FYC) revenue in the total revenue increased.
Accordingly, the cost matched with the FYC revenue increased by approximately $1.7 million
($NT 49 million). Compared with the commission cost of other products, the cost of the
FYC is higher. |
The gross profit for the nine months ended
September 30, 2014 decreased by $389,325, or 3%, to $11,306,678 compared to $11,696,003 for the nine months ended September 30,
2013. The gross profit ratio decreased to 36% for the nine months ended September 30, 2014 from 40% for the nine months ended
September 30, 2013. The decrease was mainly because the bonuses and awards to subagents increased and the share of revenue from
the FYC increased in the total revenue compared to the nine months ended September 30, 2013.
Selling expenses
Selling expenses were mainly occurred
in Law Broker, representing the expense for marketing promotion. The selling expense for the nine months ended September 30, 2014
increased by $672,027 or 38%, to $2,444,031 compared to $1,772,004 for the nine months ended September 30, 2013, which is due
to the advertizing expense spent in publicity of the company’s brand.
General and administrative expenses
The general and administrative (“G&A”)
expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses,
depreciation and amortization, entertainment expenses, and professional service fees to the auditor and attorney.
For the nine months ended September 30,
2014, G&A expenses were $8,433,578, increased by $1,670,224, or 25%, compared with $6,763,354 for the nine months ended September
30, 2013, which mainly due to the rate of the business tax directly related to sales in Taiwan Subsidiaries increased from 2%
to 5% from July 2014. In addition, the G&A expense increased in Anhou due to the relocation expense of moving the Company’s
headquarter to Nanjing and setup expense of opening an outlet in Yunnan by Anhou.
Other income
Net other income for the nine months ended
September 30, 2014 and 2013 was $392,214 and $463,334, respectively which mainly consist of interest income, gain (loss) on change
of fair value of marketable securities and rental income of sub-leased spare offices and garage. Compared with the nine months
ended September 30, 2013, other income seems decreased due to the decrease of the rental income.
Income tax
For the nine months ended September 30, 2014, the income tax
expense were $1,171,602, increased by $440,410, or 60%, compared with $731,192 for the nine months ended September 30, 2013.
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. In the meanwhile, Income Tax Law of Taiwan provides that a company is taxed at additional
10% on any undistributed earnings to its shareholders. In June 2014, Law Enterprises decided not to distribute its earnings accumulated
as of December 31, 2013. Accordingly, NT$18,716,999, approximately $619,007, of income tax was accrued for the undistributed earnings.
CU WFOE and the CAEs 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. According to the requirement of local tax authorities, the
taxable income of Jiangsu Law is deemed as 10% of total revenue, instead of the income before income tax. 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 three years can be reversed. In the nine months ended September
30, 2013, the Company reversed tax payable of $218,338 accordingly.
Liquidity and Capital Resources
The following table represents a comparison of the net cash
provided by operating activities, investing activities and financing activities for the nine months ended September 30, 2014 and
2013.
| |
Nine Months
Ended September 30, | | |
| | |
| |
| |
2014 | | |
2013 | | |
| | |
| |
| |
(UNAUDITED) | | |
(UNAUDITED) | | |
Change | | |
Percent | |
Net cash provided by operating activities | |
$ | 250,958 | | |
| 8,515,815 | | |
$ | (8,264,857 | ) | |
| (97 | )% |
Net cash provided by in investing activities | |
| 1,281,917 | | |
| 2,878,854 | | |
| (1,596,937 | ) | |
| (55 | )% |
Net cash provided by (used in) financing activities | |
| 45,527 | | |
| (5,948,858 | ) | |
| 5,994,385 | | |
| 101 | % |
Operating activities
Net cash provided by operating activities
during the nine months ended September 30, 2014 was $250,958, significantly decreased in comparison with $8,515,815, net cash
provided by operating activities during the nine months ended September 30, 2013. The decrease is mainly because AHFL entered
into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”)
in June 2013. Then AHFL received an Execution Fee of approximately $8.3 million from AIATW, which is recorded as unearned revenue
by the Company. In addition, compared with the nine months ended September 30, 2013, the Company’s income from operations
decreased by approximately $2.7 million, which is the other factor that result in the decrease of net cash provided by the operating
activities.
Investing activities
Net cash provided by investing activities
was $1,281,917 and $2,878,854 in the nine months ended September 30, 2014 and 2013, respectively. Selling investment in current
deposit or marketable securities is the main cash inflow provided by the Company’s investing activities. During the nine
months ended September 30, 2013, the Company received approximately $3.2 million from the sales of marketable securities, while
during the nine months ended September 30, 2014, the Company received approximately $1.6 million from the sales of current deposit.
Financing activities
The Company’s main financing activity
was with the related parties. In the nine months ended September 30, 2014, the Company has a net cash inflow of $45,527 borrowed
from the related parties for the normal business expenses, while during the nine months ended September 30, 2013, the Company
has net cash outflow of $5,948,858 with the related parties. Therein, $639,481 was repaid to the related parties and $5,309,377
was lent to the shareholders of Anhou as described below.
Intercompany Loan and Loans to Unrelated Third Parties
On April 27, 2013, the China Insurance
Regulatory Commission (“CIRC”) issued the Decision on Revising the Provisions of the Supervision and Administration
of Specialized Insurance Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC mandated
any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital
requirement of RMB50 million (approximately $ 8 million). 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 (approximately $8 million) can continue to operate its existing business within the provinces where they have a
registered office or branch office, but shall not set up any new branches in any provinces where it has no registered office or
a branch office.
Anhou, a professional insurance agency
with a PRC nationwide license, used to have a registered capital of RMB10 million (approximately $1.6 million). The branch offices
of Anhou currently are all in Henan province. To better implement its expansion strategies, Anhou intended to increase its registered
capital to RMB50 million (approximately $8 million) to meet the requirement of CIRC so that it can set up new branches in any
province beyond its current operations in Mainland China.
Due to certain restrictions on direct
foreign investment in insurance agency business under current PRC legal regime, Anhou has sought certain investments made by the
Investor Borrowers and they may need funds through individual loans. Upon the completion of the contemplated increase of registered
capital of Anhou, each Investor Borrower shall, or cause their designated persons to, enter into the Variable Interest Entities
Agreement with CU WFOE, Anhou and other parties so as to consolidate any additional VIE interest generated from the said registered
capital increase into the Company.
On June 9, 2013, AHFL entered into a Loan
Agreement (the “Company Loan Agreement”) with CU Hong Kong.
Under the Company Loan Agreement, AHFL
agreed to provide a loan to the CU Hong Kong with the principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,522,944).
The term for such was ten years which could be extended upon the agreement of the parties. The amount of such loan was remitted
to the account of CU Hong Kong on August 30, 2013.
In August 2013, the CU Hong Kong entered
into several Loan Agreements (collectively, the “Investor Loan Agreements”) with the following unrelated parties:
Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong Kong, Mr. Chen Li and Ms. Yue Jing,
both PRC citizens (collectively, the “Investor Borrowers”).
Under the Investor Loan Agreements, the
Investor Borrowers loaned cash from CU Hong Kong for their investment in Anhou and CU Hong Kong agreed to provide certain loans
to each of the Investor Borrowers with an aggregate principal amount equal to the US Dollar equivalent of RMB40,000,000 ($6,522,944).
The term for such loans was ten years which could be extended upon the agreement of the parties. Pursuant to the Investor Loan
Agreements, each of the Investor Borrowers covenants to enter into certain Variable Interest Entities Agreements with Anhou, CU
WFOE and certain existing shareholders of Anhou. The proceeds received from the said loans by the Investor Borrowers shall be
solely used to increase the registered capital of Anhou, and CU Hong Kong may determine the repayment methods including transferring
of the Investor Borrowers’ corresponding registered capital in Anhou or through other manner as full payment of the loans
subject to terms and conditions therein in the event that the Investor Borrowers fails to repay the loan in currency to CU Hong
Kong.
The specific amounts loaned to the Investor
Borrowers were as follows:
Able Capital Holding Co., Ltd.: RMB29,500,000
($4,817,896)
Mr. Chen: RMB3,000,000 ($489,949)
Ms. Yue: RMB7,500,000 ($1,224,871)
On October 20, 2013, the Investor Borrowers,
through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,522,944).
On a going forward basis, the Company’s
primary requirements for cash over the next 12 months consist of:
· |
providing insurance agency services to its existing clients in its existing
branches; |
· |
developing new clients; |
· |
promoting sales activities; |
· |
opening more branches in China; and |
· |
expanding business scale in China, through mergers & acquisitions. |
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 September 30, 2014 and December
31, 2013:
| |
September 30,
2014 | | |
December 31,
2013 | |
Due to Mr. Mao (Shareholder of
the Company) | |
$ | 162,445 | | |
$ | 117,471 | |
Due to Mr. Zhu (Legal Representative of Jiangsu
Law) | |
| 2,249 | | |
| 2,265 | |
Due to Mrs. Li (Director
of CUIS) | |
| 35,062 | | |
| 35,062 | |
Total | |
$ | 199,756 | | |
$ | 154,798 | |
Off Balance Sheet Arrangements
As of September 30, 2014, the Company
had no off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK.
Not Applicable.
ITEM 4. INTERNAL CONTROLS OVER
FINANCIAL REPORTING.
Evaluation of Disclosure Controls and Procedures
As required by SEC Rule 13a-15(b) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with
the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Exchange Act) as of September 30, 2014. Based on that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that as of September 30, 2014, our disclosure controls and procedures
were effective to ensure the information required to be disclosed by an issuer in the reports it files or submits under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms relating to us, and was accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in internal control over financial reporting
During the three months ended September 30, 2014, there were
no changes in our internal control over financial reporting identified in connection with the evaluation performed during the
fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect our internal
control over financial reporting.
PART II. OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed
in our annual report on Form 10-KT for the transitional period ended December 31, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION.
Anhou
has completed its tax registration with Jiangsu tax authorities and is in the process
to complete the registration of share pledge with the local AIC.
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.1 |
|
Translation of Loan Agreement between Law Enterprise and AHFL, dated September 15, 2014
(incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed with the Securities Exchange Commission on
September 23, 2014). |
10.2 |
|
Amendment to Strategic Alliance Agreement (incorporated by reference to Exhibit 10.1 of
Current Report on Form 8-K filed with the Securities Exchange Commission on September 30, 2014). |
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934 |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934 |
32.1* |
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
32.2* |
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
*The certifications attached as Exhibits 32.1 and 32.2 accompany
this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: November 10, 2014 |
By: |
/s/ Mao Yi Hsiao |
|
Name: |
Mao Yi Hsiao |
|
Its: |
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
Date: November 10, 2014 |
By: |
/s/ Chuang Yung Chi |
|
Name: |
Chuang Yung Chi |
|
Its: |
Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
I, Mao Yi Hsiao, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of China
United Insurance Service, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of the registrant's Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 10, 2014 |
/s/ Mao Yi Hsiao |
|
Mao Yi Hsiao |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
I, Chuang Yung Chi, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of China
United Insurance, Service, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of the registrant's Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 10, 2014 |
/s/ Chuang Yung Chi |
|
Chuang Yung Chi |
|
Chief Financial Officer |
|
(Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350,
CHAPTER 63 OF TITLE 18,
UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officer of China United Insurance Service,
Inc. (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the
period ended September 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of the Company.
Date: November 10, 2014 |
/s/ Mao Yi Hsiao |
|
Mao Yi Hsiao |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350,
CHAPTER 63 OF TITLE 18,
UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officer of China United Insurance Service,
Inc. (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the
period ended September 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of the Company.
Date: November 10, 2014 |
/s/ Chuang Yung Chi |
|
Chuang Yung Chi |
|
Chief Financial Officer |
|
(Principal Accounting Officer) |
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