The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part of these financial
statements.
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.
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. On November 26, 2013, Anhou changed its name into Law Anhou Insurance Agency Co., Ltd..
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 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$1,530,000 to PFAL’s registered capital. Upon the completion
of capital increase by both parties, Mr. Wong and AHFL would own 49% and 51% of PFAL’s equity interest, respectively. The
transaction was completed on April 30, 2014.
The corporate structure as of June 30,
2014 is as follows:
On January 17 2014, the Company’s
Board of Directors approved a change in our fiscal year end to December 31 from June 30.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP’). Certain information and footnote disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been omitted as permitted by rules and regulations of the Securities and Exchange Commission (“SEC”).
The consolidated balance sheet as of December 31, 2013 was derived from the audited consolidated financial statements of China
United Insurance Service, Inc. and Subsidiaries. The accompanying unaudited consolidated financial statements should be read in
conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the
Company’s transition report on Form 10-KT for the six-month ended December 31, 2013.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of China United, its subsidiaries and CAE as shown in the organization structure in Note 1 above.
All significant intercompany transactions and balances were eliminated in consolidation.
Basis of Presentation
The Company’s financial statements
are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The functional currency for our subsidiaries in Taiwan is New Taiwan Dollar (“NT$”) 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 June 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 six months ended June 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 June 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 six months ended
June 30, 2014 and 2013, policy cancellations were $83,859 and $206,516, respectively. For the three months ended June 30, 2014
and 2013, policy cancellations were $25,870 and $75,575, 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, 2013and June 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 six months ended June 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 June 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 June 30, 2014, approximately $800,000 of the Company’s cash and equivalents held by financial institutions was insured,
and the remaining balance of approximately $20 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 six
months ended June 30, 2014 and 2013, the Company’s revenues from sale of insurance policies underwritten by these companies
were:
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Amount
|
|
|
% of Total Revenue
|
|
|
Amount
|
|
|
% of Total Revenue
|
|
Farglory Life Insurance Co.,Ltd.
|
|
$
|
5,875,262
|
|
|
|
28
|
%
|
|
$
|
7,146,333
|
|
|
|
33
|
%
|
Fubon Life Insurance Co.,Ltd.
|
|
|
3,504,605
|
|
|
|
17
|
%
|
|
|
4,418,727
|
|
|
|
21
|
%
|
AIA International Ltd.,Taiwan
|
|
|
3,250,003
|
|
|
|
15
|
%
|
|
|
NA
|
|
|
|
NA
|
|
TransGlobe Life Insurance Inc.
|
|
|
2,805,080
|
|
|
|
13
|
%
|
|
|
3,655,186
|
|
|
|
17
|
%
|
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Amount
|
|
|
% of Total Revenue
|
|
|
Amount
|
|
|
% of Total Revenue
|
|
Farglory Life Insurance Co.,Ltd.
|
|
$
|
3,994,028
|
|
|
|
32
|
%
|
|
$
|
3,470,139
|
|
|
|
35
|
%
|
Fubon Life Insurance Co.,Ltd.
|
|
|
2,066,209
|
|
|
|
17
|
%
|
|
|
1,839,982
|
|
|
|
19
|
%
|
AIA International Ltd.,Taiwan
|
|
|
2,152,635
|
|
|
|
17
|
%
|
|
|
NA
|
|
|
|
NA
|
|
TransGlobe Life Insurance Inc.
|
|
|
1,284,696
|
|
|
|
10
|
%
|
|
|
2,137,778
|
|
|
|
22
|
%
|
As of June 30, 2014 and 2013, the Company’s
accounts receivable from these companies were:
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
|
Amount
|
|
|
% of Total Accounts
Receivable
|
|
|
Amount
|
|
|
% of Total Accounts
Receivable
|
|
Farglory Life Insurance Co.,Ltd.
|
|
$
|
1,192,644
|
|
|
|
25
|
%
|
|
$
|
1,501,865
|
|
|
|
36
|
%
|
Fubon Life Insurance Co.,Ltd.
|
|
|
637,885
|
|
|
|
14
|
%
|
|
|
673,710
|
|
|
|
16
|
%
|
AIA International Ltd.,Taiwan
|
|
|
1,051,641
|
|
|
|
22
|
%
|
|
|
NA
|
|
|
|
NA
|
|
TransGlobe Life Insurance Inc.
|
|
|
445,645
|
|
|
|
9
|
%
|
|
|
742,394
|
|
|
|
18
|
%
|
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 three months ended March 31, 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 six months ended June 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 June 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:
|
|
June 30, 2014
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Fair Value
|
|
Level 1 securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks
|
|
$
|
29,387
|
|
|
$
|
(779
|
)
|
|
$
|
28,608
|
|
Funds
|
|
|
2,550,622
|
|
|
|
1,177
|
|
|
|
2,551,799
|
|
|
|
$
|
2,580,009
|
|
|
$
|
398
|
|
|
$
|
2,580,407
|
|
|
|
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 June 30, 2014 and December 31, 2013:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Prepaid rent
|
|
$
|
262,427
|
|
|
$
|
121,361
|
|
Refundable business tax
|
|
|
178,603
|
|
|
|
177,615
|
|
Investment in current deposit
|
|
|
-
|
|
|
|
1,630,789
|
|
Others
|
|
|
277,456
|
|
|
|
399,912
|
|
Total other current assets
|
|
$
|
718,486
|
|
|
$
|
2,329,677
|
|
Refundable business tax, similar to VAT
in mainland China, represents business tax prepaid by Law Broker and Risk Management, 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 June 30, 2014 and December 31, 2013:
|
|
June 30, 2014
|
|
|
December 31,2013
|
|
Office Equipments
|
|
$
|
1,279,714
|
|
|
$
|
1,204,386
|
|
Office Furniture
|
|
|
112,247
|
|
|
|
111,699
|
|
Leasehold improvements
|
|
|
584,052
|
|
|
|
469,102
|
|
Vehicle
|
|
|
88,962
|
|
|
|
89,598
|
|
Other equipments
|
|
|
89,391
|
|
|
|
51,421
|
|
Total
|
|
|
2,154,366
|
|
|
|
1,926,206
|
|
Less: accumulated depreciation
|
|
|
(1,016,314
|
)
|
|
|
(885,017
|
)
|
Total property, plant and equipment, net
|
|
$
|
1,138,052
|
|
|
$
|
1,041,189
|
|
NOTE 7 – INTANGIBLE ASSETS
As of June 30, 2014 and December 31, 2013,
the Company’s intangible assets consisted the following:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Software
|
|
$
|
404,021
|
|
|
|
402,096
|
|
Less accumulated amortization
|
|
|
(146,505
|
)
|
|
|
(93,829
|
)
|
Total other current assets
|
|
$
|
257,516
|
|
|
|
308,267
|
|
Estimated future intangible amortization
as of June 30, 2014 is as follows:
Years ending June 30,
|
|
Amount
|
|
2015
|
|
$
|
105,836
|
|
2016
|
|
|
97,528
|
|
2017
|
|
|
17,988
|
|
2018
|
|
|
6,677
|
|
2019
|
|
|
6,677
|
|
Thereafter
|
|
|
22,810
|
|
Total
|
|
$
|
257,516
|
|
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.
|
|
June 30, 2014
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Fair Value
|
|
Government bonds
|
|
|
101,599
|
|
|
|
1,185
|
|
|
|
102,784
|
|
|
|
$
|
101,599
|
|
|
$
|
1,185
|
|
|
$
|
102,784
|
|
|
|
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 June 30, 2014 and December 31, 2013:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Restricted cash
|
|
$
|
162,398
|
|
|
$
|
163,559
|
|
Rental deposits
|
|
|
390,709
|
|
|
|
405,935
|
|
Other
|
|
|
50,308
|
|
|
|
17,809
|
|
Total other assets
|
|
$
|
603,415
|
|
|
$
|
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 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 June
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 June 30, 2014 and December 31, 2013:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
PRC Tax
|
|
$
|
154,092
|
|
|
$
|
152,105
|
|
Taiwan Tax
|
|
|
777,600
|
|
|
|
346,336
|
|
Total taxes payable
|
|
$
|
931,692
|
|
|
$
|
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) 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.
As of December 31, 2013, the Company booked $1,586,038 as short-term liability since we expect to record this amount as revenue
within the next twelve months. The remaining balance of $6,344,152 is recorded as long-term liability (Note 14). As of June 30,
2014, the Company booked $1,593,634 as short-term liability since we expect to record this amount as revenue within the next twelve
months. The remaining balance of $6,374,534 is recorded as long-term liability. For the six months ended June 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 June 30, 2014 and December 31, 2013:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Commissions payable to sub agents
|
|
$
|
3,996,494
|
|
|
$
|
4,972,338
|
|
Salary payable to administrative staff
|
|
|
315,092
|
|
|
|
76,600
|
|
Due to previous shareholders of Jiangsu Law
|
|
|
-
|
|
|
|
84,238
|
|
Due to previous shareholders of AHFL
|
|
|
750,910
|
|
|
|
-
|
|
Withholding employee personal tax
|
|
|
277,541
|
|
|
|
326,652
|
|
Accrued expenses
|
|
|
2,043,223
|
|
|
|
3,053,140
|
|
Other
|
|
|
258,324
|
|
|
|
119,337
|
|
Total other current liabilities
|
|
$
|
7,641,584
|
|
|
$
|
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 June 30, 2014 and December 31, 2013:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
Long-term other payable
|
|
$
|
-
|
|
|
$
|
750,910
|
|
Unearned revenue
|
|
|
6,374,534
|
|
|
|
6,344,152
|
|
Total other current liabilities
|
|
$
|
6,374,534
|
|
|
$
|
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 June 30, 2014,
it was reclassified as short-term liabilities.
As described in Note 12, the Company recorded
$7,930,190 (NT$238,095,238, net of tax) received from AIATW as unearned revenue. As of June 30, 2014, the Company booked $1,593,634
as short-term liability since we expected to record this amount as revenue within the next twelve months. The remaining balance
of $6,374,534 was recorded 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$18,716,999, approximately $619,007, of additional tax was incurred, 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
June 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 six months ended June 30, 2014 and 2013:
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
US statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Tax rate difference
|
|
|
(24
|
)%
|
|
|
(18
|
)%
|
Change in tax status
|
|
|
-
|
|
|
|
(3
|
)%
|
Income tax on undistributed earnings
|
|
|
38
|
%
|
|
|
-
|
|
Loss in subsidiaries
|
|
|
20
|
%
|
|
|
3
|
%
|
Un-deductible and non-taxable items
|
|
|
5
|
%
|
|
|
-
|
%
|
Tax per financial statements
|
|
|
73
|
%
|
|
|
16
|
%
|
The following table reconciles the US statutory
rates to the Company’s effective tax rate for the three months ended June 30, 2014 and 2013:
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
US statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Tax rate difference
|
|
|
(26
|
)%
|
|
|
(24
|
)%
|
Change in tax status
|
|
|
-
|
|
|
|
(11
|
)%
|
Income tax on undistributed earnings
|
|
|
86
|
%
|
|
|
-
|
|
Loss in subsidiaries
|
|
|
26
|
%
|
|
|
17
|
%
|
Un-deductible and non-taxable items
|
|
|
10
|
%
|
|
|
9
|
%
|
Tax per financial statements
|
|
|
130
|
%
|
|
|
25
|
%
|
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 June 30, 2014 and December 31,
2013:
|
|
June 30, 2014
|
|
|
December 31,
2013
|
|
Due to Mr. Mao (Principal Shareholder of the Company)
|
|
$
|
126,754
|
|
|
$
|
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
|
|
$
|
164,065
|
|
|
$
|
154,798
|
|
NOTE 18 – COMMITMENTS
Operating Leases
The Company has operating leases for its
offices. Rental expenses for the six months ended June 30, 2014 and 2013 were $883,509, and $600,170, respectively. Rental expenses
for the three months ended June 30, 2014 and 2013 were $497,199 and $222,994, respectively. As of June 30, 2014, total future minimum
annual lease payments under operating leases were as follows, by years:
Twelve months ended June 30, 2015
|
|
$
|
1,747,509
|
|
Twelve months ended June 30, 2016
|
|
|
838,042
|
|
Twelve months ended June 30, 2017
|
|
|
173,347
|
|
Thereafter
|
|
|
119,413
|
|
Total
|
|
$
|
2,878,311
|
|
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 six months ended June 30, 2014 and 2013 were as follows:
|
|
Six months ended June 30,
|
|
Geographical Areas
|
|
2014
|
|
|
2013
|
|
PRC
|
|
$
|
1,389,357
|
|
|
$
|
1,232,272
|
|
Taiwan
|
|
|
19,805,508
|
|
|
|
20,235,192
|
|
|
|
$
|
21,194,865
|
|
|
$
|
21,467,464
|
|
The geographical distribution of China
United’s revenue for the three months ended June 30, 2014 and 2013 were as follows:
|
|
Three months ended June 30,
|
|
Geographical Areas
|
|
2014
|
|
|
2013
|
|
PRC
|
|
$
|
674,160
|
|
|
$
|
627,855
|
|
Taiwan
|
|
|
11,658,982
|
|
|
|
9,262,806
|
|
|
|
$
|
12,333,142
|
|
|
$
|
9,890,661
|
|
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 June 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 June 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
On August 8, 2014, Mr. Chung-Mei
Lo (“Mr. Lo”) resigned as the Chief Executive Officer (“CEO”) of the Company, effective immediately.
On August 8, 2014, the Company appointed Yi Hsiao Mao as the Chief Executive Officer of the Company, effective August 8,
2014.
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.