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 March 31, 2015

 

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)

 

+8862-87126958

(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 March 31, 2015, there are 29,452,669 shares of common stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.

  

 

TABLE OF CONTENTS 

 

PART I.	FINANCIAL INFORMATION	F-1
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	F-1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	5
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	12
ITEM 4.	CONTROLS AND PROCEDURES	12
PART II.	OTHER INFORMATION	13
ITEM 1.	LEGAL PROCEEDINGS	13
ITEM 1A.	RISK FACTORS	13
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	13
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	13
ITEM 4.	MINE SAFETY DISCLOSURES	13
ITEM 5.	OTHER INFORMATION	13
ITEM 6.	EXHIBITS	14
SIGNATURES		15

 

 

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

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2015				December 31, 2014
		(UNAUDITED)
ASSETS
Current assets
Cash and equivalents		$	18,495,789			$	19,571,799
Marketable securities			2,483,631				2,437,006
Accounts receivable, net			3,753,543				7,706,273
Other current assets			1,097,864				574,467
Total current assets			25,830,827				30,289,545
Property, plant and equipment, net			1,067,264				1,061,762
Intangible assets			256,970				270,956
Goodwill			2,071,491				31,651
Long-term Investment			1,585,804				95,328
Other assets			843,395				587,522
TOTAL ASSETS		$	31,655,751			$	32,336,764
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Taxes payable		$	939,829			$	919,907
Other current liabilities			5,388,463				9,534,371
Deferred tax liability			19,195				37,662
Due to related parties			271,047				531,447
TOTAL CURRENT LIABILITIES			6,618,534				11,023,387
Long-term liabilities			7,630,255				7,500,645
TOTAL LIABILITIES			14,248,789				18,524,032
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, 29,452,669 and 29,100,503 issued and outstanding at March 31, 2015 and December 31, 2014			295				291
Additional paid-in capital			8,157,512				4,674,593
Statutory Reserves			1,449,946				1,388,014
Accumulated other comprehensive loss			(256,205	)			(350,881	)
Retained earnings			1,374,678				1,717,278
Stockholder’s equity attribute to parent’s shareholders			10,726,236				7,429,305
Noncontrolling interest			6,680,726				6,383,427
TOTAL STOCKHOLDERS’ EQUITY			17,406,962				13,812,732
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	31,655,751			$	32,336,764

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME / (LOSS)

(UNAUDITED)

 

		Three Months Ended March 31,
		2015				2014
Revenues		$	9,856,115			$	8,861,723
Cost of revenue			6,446,411				5,368,225
Gross profit			3,409,704				3,493,498
Operating expenses:
Selling			369,259				302,989
General and administrative			3,053,644				2,413,245
Total operating expense			3,422,903				2,716,234
Income (loss) from operations			(13,199	)			777,264
Other income:
Interest income			37,715				43,584
Other - net			13,015				72,944
Total other income			50,730				116,528
Income before income taxes			37,531				893,792
Income tax expense			129,629				243,600
Net income (loss)			(92,098	)			650,192
Net income attributable to the noncontrolling interests			188,568				394,794
Net income (loss) attributable to parent's shareholders			(280,666	)			255,398
Other comprehensive items
Foreign currency translation gain (loss)			94,676				(97,010	)
Other comprehensive income(loss)			-				-
attributable to parent's shareholder			94,676				(97,010	)
Other comprehensive items
attributable to  noncontrolling interest			108,730				80,402
Comprehensive income (loss) attributable to
parent's shareholders		$	(185,990	)		$	158,388
Comprehensive income (loss) attributable to
noncontrolling interest		$	297,298			$	314,392
Weighted average shares outstanding:
Basic and diluted			29,452,669				29,100,503
Income (loss) per share:
Basic and diluted		$	(0.01	)		$	0.01

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three Months Ended March 31,
		2015				2014
Cash flows from operating activities:
Net income (Loss)		$	(92,098	)		$	650,192
Adjustments to reconcile net income to net cash
Depreciation and amortization			106,287				91,720
Gain on valuation of financial assets			(4,463	)			(1,354	)
Loss on disposal of fixed assets			1,525				7,398
Deferred tax benefit			(18,901	)			-
Changes in operating assets and liabilities:
Accounts receivable			4,035,097				3,715,345
Other current assets			(512,678	)			(434,604	)
Other assets			(115,544	)			(19,846	)
Tax payable			5,267				236,384
Other current liabilities			(4,267,422	)			(3,727,915	)
Net cash provided by (used in) operating activities			(862,930	)			517,320
Cash flows from investing activities:
Cash from acquisition			319				-
Purchase of property, plant and equipment			(69,927	)			(208,235	)
Purchase of intangible assets			(140,537	)			-
Net cash used in investing activities			(210,145	)			(208,235	)
Cash flows from financing activities:
Proceeds from related party borrowing			26,561				-
Repayment to related parties			(312,625	)			-
Net cash used in financing activities			(286,064	)			-
Foreign currency translation			283,129				(227,476	)
Net increase (Decrease) in cash and cash equivalents			(1,076,010	)			81,609
Cash and cash equivalents, beginning balance			19,571,799				18,070,093
Cash and cash equivalents, ending balance		$	18,495,789			$	18,151,702
SUPPLEMENTARY DISCLOSURE:
Interest paid		$	2,291			$	-
Income tax paid		$	9,882			$	6,489
SUPPLEMENTAL DISCLOSURES OF CASH FLOW FOR NON-CASH TRANSACTION:
Issuance of common stock for acquisition of GHFL		$	3,482,923			$	-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (UNAUDITED)

 

NOTE 1 – ORGANIZATION

 

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”).

 

The corporate structure as of March 31, 2015 is as follows:

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited accompanying condensed consolidated financial statements include the accounts of China United and its subsidiaries as shown in the organization structure in Note 1 above. All significant intercompany transactions and balances were eliminated in consolidation.

 

 

Basis of Presentation

  

The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.  

 

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2014, which were included in the Company’s 2014 Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of December 31, 2014, has been derived from the Company’s audited consolidated financial statements as of that date.

 

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 March 31, 2015, $1,012,273 of the Company’s cash and equivalents held by financial institutions, including $104,456 from discontinued operation, was insured, and the remaining balance of $17,483,516, including $55,409 from discontinued operation, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.

 

For the three months ended March 31, 2015 and 2014, the Company’s revenues from sale of insurance policies underwritten by these companies were:

 

		Three months ended March 31,
		2015								2014
		Amount				% of Total Revenue				Amount				% of Total Revenue
Farglory Life Insurance Co.,Ltd.		$	2,217,851				23	%		$	1,881,234				21	%
Fubon Life Insurance Co.,Ltd.			1,275,718				13	%			1,438,396				16	%
AIA International Ltd.,Taiwan			1,051,534				11	%			1,097,368				12	%
TransGlobe Life Insurance Inc.			1,108,691				11	%			1,520,384				17	%
CTBC Life Insurance Co., Ltd.			994,481				10	%			(*)				(*)

 

(*)

Revenue for the three months ended had not exceeded 10% or more of the consolidated revenue.

 

As of March 31, 2015 and December 31, 2014, the Company’s accounts receivable from these companies were:

 

		March 31, 2015								December 31, 2014
		Amount				% of Total Accounts Receivable				Amount				% of Total Accounts Receivable
Farglory Life Insurance Co.,Ltd.		$	931,172				25	%		$	2,150,294				28	%
Fubon Life Insurance Co., Ltd			449,579				12	%			963,118				12	%
AIA International Ltd.,Taiwan			224,089				6	%			1,098,879				14	%
TransGlobe Life Insurance Inc.			488,480				13	%			735,755				10	%
CTBC Life Insurance Co., Ltd			177,327				5	%			1,200,562				16	%

 

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.

 

 

Recent Accounting Pronouncements

 

In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented as a deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. Recognition and measurement guidance for debt issuance costs is not affected by this ASU. The ASU is effective for periods beginning after December 15, 2015, and the Company does not expect the implementation to have a material effect on its financial position or results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU is effective for the Company for periods beginning after December 15, 2016, and early adoption is not permitted. On April 1, 2015, the FASB voted to propose to defer the effective date for public entities to annual periods beginning after December, 15, 2017. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

 

 

The FASB has issued ASU No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.

 

NOTE 3 – CASH AND EQUIVALENTS

 

As of March 31, 2015 and December 31, 2014, our cash and equivalents primarily consisted of cash and certificates of deposits with original maturities 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:

 

		March 31, 2015
		Cost or				Gross
		Amortized				Unrealized				Total
		Cost				Gains (Losses)				Fair Value
Level 1 securities:
Stocks		$	28,278			$	1,527			$	29,805
Funds			2,408,728				45,098				2,453,826
		$	2,437,006			$	46,625			$	2,483,631

 

		December 31, 2014
		Cost or				Gross
		Amortized				Unrealized				Total
		Cost				Gains (Losses)				Fair Value
Level 1 securities:
Stocks		$	31,210			$	(2,932	)		$	28,278
Funds			2,532,475				(123,747	)			2,408,728
		$	2,563,685			$	(126,679	)		$	2,437,006

 

  

NOTE 5 – OTHER CURRENT ASSETS

 

The Company’s other current assets consisted of the following as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
Prepaid rent and rent deposit		$	219,520			$	191,995
Refundable business tax			2,084				912
Interest receivable			123,123				-
Prepaid expenses			153,661				77,150
Other receivable			364,184				69,546
Current assets associated with discontinued operations			177,317				174,308
Other			57,975				60,556
Total other current assets		$	1,097,864			$	574,467

 

NOTE 6– PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment consisted of the following, as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31,2014
Office Equipment		$	1,064,041			$	1,026,426
Office Furniture			129,495				139,755
Leasehold improvements			509,479				478,154
Transportation equipment			89,670				89,240
Other equipment			96,900				64,002
Total			1,889,585				1,797,577
Less: accumulated depreciation			(822,321	)			(735,815	)
Total property, plant and equipment, net		$	1,067,264			$	1,061,762

 

NOTE 7 – INTANGIBLE ASSETS

 

As of March 31, 2015 and December 31, 2014, the Company’s intangible assets consisted the following:

 

		March 31, 2015				December 31, 2014
Software		$	480,956			$	462,903
Less accumulated amortization			(223,986	)			(191,947	)
Total other current assets		$	256,970			$	270,956

 

 

Estimated future intangible amortization as of March 31, 2015 is as follows:

 

Years ending March 31,		Amount
2015		$	116,836
2016			57,477
2017			25,207
2018			25,207
2019			15,194
Thereafter			17,049
Total		$	256,970

  

NOTE 8 – LONG-TERM INVESTMENT

 

 

The Company classifies its investments as available-for-sale in accordance with ASC 320 “Debt and Equity Securities”, Investments – Debt and Equity Securities, and are reported at fair value. Unrealized gains and losses as a result of changes in the fair value of the available-for-sale investments are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.

 

The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

 

As of March 31, 2015 and December 31, 2014, the Company’s long-term investment consisted the following:

 

		March 31, 2015				December 31, 2014
Equity Investment		$	1,488,829			$	-
Government Bonds			96,975				95,328
Total		$	1,585,804			$	95,328

 

The Company had the following long-term investment in equity:

 

Type		Investee		March 31, 2015 Investment Ownership				Amount
Cost		Genius Insurance Broker Co., Ltd			15.64	%		$	1,488,829

According to Taiwan regulatory requirements, Law Broker is required to maintain a minimum of NT$3,000,000 ($96,975) 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.

 

		March 31, 2015
		Cost or				Gross
		Amortized				Unrealized				Total
		Cost				Gains (Losses)				Fair Value
Government bonds			95,405				1,570				96,975
		$	95,405			$	1,570			$	96,975

 

		December 31, 2014
		Cost or				Gross
		Amortized				Unrealized				Total
		Cost				Gains (Losses)				Fair Value
Government bonds			95,405				(77	)			95,328
		$	95,405			$	(77	)		$	95,328

 

 

NOTE 9–OTHER ASSETS

 

The Company’s other assets consisted of the following as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
Restricted cash		$	81,845			$	162,906
Rental deposits			603,181				384,670
Prepaid intangible assets			132,102				-
Other			26,267				39,946
Total other assets		$	843,395			$	587,522

 

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 AND GOODWILL

 

(1) Acquisition of PFAL

 

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 capital contribution from HK$500,000 to HK$1,470,000, and AHFL would contribute HK$1,530,000, approximately $197,335, to PFAL’s capital contribution. 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 acquired and liabilities assumed acquired as goodwill. No intangible assets were identified as of the acquisition date. As of March 31,2015, there were no any indications of the impairment of the goodwill.

 

(2) Acquisition of GHFL

 

On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with the selling shareholder (Mr. Li Chwanhau, the director of the Company) of Genius Holdings Financial Limited ( “GHFL”), a company with limited liability incorporated under the laws of British Virgin Islands , to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock together with an granted option for 352,166 shares of common stock of CUIS (“Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary of CUIS. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”), a limited company incorporated under the laws of Taiwan, which in turn holds 15.64% issued and outstanding shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares incorporated under the laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary. Genius Broker is primarily engaged in broker business across Taiwan. On February 13, 2015, the acquisition was completed; the selling shareholder transferred 100% shares in GHFL to AHFL. The Option has been exercised by the selling shareholder on March 31, 2015. The total fair value of AHFL 352,166 shares ($1,771,395) and CUIS 352,166 option ($1,711,562) at acquisition date was $3,482,957. The Company recorded $2,039,840 excess of purchase price as goodwill.

 

 

The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of GHFL have been included in the unaudited condensed consolidated financial statements since the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values and the price were allocated as follows:

 

		February 13, 2015
Current assets		$	321
Long-term investment			1,488,829
Goodwill			2,039,840
Current liabilities			(46,033	)
Total purchase price		$	3,482,957

 

No supplemental pro forma information is presented for the acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.

  

NOTE 11 – TAXES PAYABLE

 

The Company’s taxes payable consisted of the following as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
PRC Tax		$	53,728			$	172,765
Taiwan Tax			886,101				747,142
Total tax payable		$	939,829			$	919,907

 

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– OTHER CURRENT LIABILITIES

 

Other current liabilities are as follows, as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
Commissions payable to sub agents		$	2,308,262			$	5,311,365
Salary payable to administrative staff			119,333				144,158
Due to previous shareholders of AHFL			750,910				750,910
Withholding employee personal tax			244,991				259,458
Accrued expenses			1,688,365				2,844,166
Current liabilities associated with discontinued operations			75				782
Other			276,527				223,532
Total other current liabilities		$	5,388,463			$	9,534,371

 

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. Withholding employee personal tax will be paid to local tax bureau within one month. Accrued expenses are mainly for operating expenses payable within the credit terms provided by suppliers. Other mainly represents short term payable for expenses such as training and travelling.

 

 

NOTE 13– LONG-TERM LIABILITIES

 

Long-term liabilities are as follows as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
Unearned revenue		$	7,630,255			$	7,500,645
Total other long-term liabilities		$	7,630,255			$	7,500,645

 

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.

 

According to the revised agreement, as of March 31, 2015, 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 $7,630,255 as long-term liability. For the three months ended March 31, 2015, no income was recorded under the Alliance Agreement as performance targets were not met.

 

NOTE 14– STATUTORY 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 15– INCOME TAX

 

CU WFOE and the VIEs in the PRC are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Except for Jiangsu Law, according to the requirement of local tax authorities, the tax basis is deemed as 10% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.

 

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. 

 

The following table reconciles the US statutory rates to the Company’s effective tax rate for the six months ended March 31, 2015 and 2014:

 

		Three months ended March 31, 2015				Three months ended March 31, 2014
US statutory rate			34	%			34	%
Tax rate difference			80	%			(23	)%
Tax base difference			(2	)%			-	%
Loss in subsidiaries			266	%			-	%
Write-off residual value of fixed assets			-	%			-	%
Un-deductible and non-taxable items			(33	)%			16	%
Tax per financial statements			345	%			27	%

 

Un-deductible and non-taxable items mainly represent un-deductible expenses according to PRC tax laws and the non-taxable tax income or loss.

  

NOTE 16- RELATED PARTY TRANSACTIONS

 

On February 13, 2015, CUIS and AHFL entered into an acquisition agreement with Mr. Li ChwanHau (the director of the company), the selling shareholder of Genius Holdings Financial Limited. (Please see detail in Note 10 (2))

 

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 March 31, 2015 and December 31, 2014, respectively:

 

		March 31, 2015				December 31, 2014
Due to Mr. Mao (Principal Shareholder of the Company)		$	236,101			$	214,165
Due to Mr. Zhu (Legal Representative of Jiangsu Law)			2,266				2,255
Due to Ms. Lee (Director of CUIS)			-				315,027
Due to Genius Broker			32,680				-
Total		$	271,047			$	531,447

 

On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Lee Shu-Fen (“Ms. Lee”), the Series A Director of the Company. Pursuant to the Loan Agreement, Ms. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before December 22, 2015. The entire loan and interest amount of $286 have been paid off in January 2015.

 

 

NOTE 17– COMMITMENTS

 

Operating Leases

  

The Company has operating leases for its offices. Rental expenses for the three months ended March 31, 2015 and 2014 were $410,459 and $416,253, respectively. At March 31, 2015, total future minimum annual lease payments under operating leases were as follows, by years:

 

Twelve months ended March 31, 2016		$	1,736,298
Twelve months ended March 31, 2017			777,038
Twelve months ended March 31, 2018			351,707
Twelve months ended March 31, 2019			67,916
Twelve months ended March 31, 2020			13,910
Thereafter			7,041
Total		$	2,953,910

 

Acquisition Agreement

 

On February 22, 2015, the Company and the selling shareholder of GHFL entered into an Amendment to the Acquisition Agreement dated February 13, 2015, pursuant to which if the Guaranteed Price per share is higher than the Average Price per share, then the Parties shall negotiate in good faith on an adjustment to the Purchase Price as necessary, if any.

 

NOTE 18- DISCONTINUED OPERATION 

 

In the fourth quarter of 2014, the shareholders of the Law Management and Law Agent made the resolution to dissolve Law Management and Law Agent, respectively, because those companies have not been in operation. The dissolution of Law Management and Law Agent was approved by the Taiwan (R.O.C) Government on November 26, 2014 and on January 13, 2015, respectively. Abide by the law in Taiwan, the liquidator was appointed by the shareholders of the Law Management and Law Agent and the liquidator shall complete the liquidation process no later than six months from the appointment date. Both Law Management and Law Agent are under the process of liquidation as of now.

 

Law Management and Law Agent were acquired by the Company together with their parent Company, Law Enterprise, on August 24, 2012. The combined Total Assets and Total Liabilities of Law Management and Law Agent as of March 31, 2015 and December 31, 2014 are as follows:

 

		As of March 31, 2015				As of  December 31, 2014
Total Assets (including cash)			337,182				334,512
Total Liabilities			259,656				255,954

 

The combined Revenue, Net Loss and EPS of Law Management and Law Agent for the three months ended March 31, 2013 and the years ended December 31, 2014 are as follows:

 

		Three Months Ended March 31, 2015				Year Ended December 31, 2014
Revenue			-				-
Net Loss			(2,362	)			(3,270	)
EPS			-				-

  

NOTE 19– FINANCIAL RISK MANAGEMENT AND FAIR VALUE

  

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. 

 

(a)	Credit risk

 

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.

 

(b)	Liquidity risk

 

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.

 

(c)	Currency risk

 

The functional currency for the subsidiaries in Taiwan is NT$ and the functional currency for the subsidiaries and VIEs in PRC is RMB. The financial statements of the Company are in USD. The fluctuation of NT$ and RMB will affect our operating results expressed in USD. The Company reviews its foreign currency exposures. The management does not consider its present foreign exchange risk to be significant.

 

NOTE 20– GEOGRAPHICAL REVENUE

 

The geographical distribution of China United’s revenue for the three months ended March 31, 2015 and 2014 were as follows:

 

		Three months ended March 31,
Geographical Areas		2015				2014
PRC		$	1,245,575			$	715,197
Taiwan			8,610,540				8,146,526
		$	9,856,115			$	8,861,723

 

 

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 ($6,389,925). 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 ($4,712,570))

 

2.

Mr. Chen Li, PRC citizen (RMB3,000,000 ($479,244))

 

3.

Ms. Yue Jing, PRC citizen (RMB7,500,000 ($1,198,111))

 

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 March 31, 2015 and December 31, 2014, the loan was offset against equity.

  

On October 20, 2013, the investor borrowers increased Anhou’s registered capital by RMB 40 million ($6,389,925).

 

NOTE 22 – 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 CONDITIONS AND RESULTS OF OPERATIONS.

 

The following discussion of the results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.

 

Overview

 

We provide two broad categories of insurance products, life insurance products and property and casualty insurance products, in Taiwan and People’s Republic of China (“PRC”). The insurance products that the Company’s subsidiaries sell are underwritten by some of leading insurance companies in Taiwan and PRC, respectively.

 

(1)

Life Insurance Products

 

Total net revenues from Taiwan life insurance products were 81.17% and 86.02% of total net revenues for the three months ended March 31, 2015 and 2014, respectively. Total net revenues from PRC life insurance products were 11.81% and 7.03% of total net revenues for the three month ended March 31, 2015 and 2014, respectively.

 

In addition to the periodic premium payment schedules, most of the individual life insurance products we distribute also allow the insured to choose to make a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured, a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time. This means that once the Company sells a life insurance policy with a periodic premium payment schedule, they will be able to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years. Because of this feature and the expected sustained growth of life insurance sales in China and Taiwan, we have focused significant resources ever since the incorporation of Anhou and Law Broker on developing our capability to distribute individual life insurance products with periodic payment schedules. We expect that sales of life insurance products will continuously be our primary source of revenue in the next several years.

  

(2)

Property and Casualty Insurance Products

 

Taiwan subsidiary commenced sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenues from Taiwan property and casualty insurance products were 6.19% and 5.91% of total net revenues for the three months ending March 31, 2015 and 2014, respectively. CAE commenced its sales of commercial property insurance in 2009 and developed its automobile insurance business in 2010. Total net revenues from PRC property and casualty insurance products were 0.83% and 1.04% of total net revenues for the three months ending March 31, 2015 and 2014, respectively.

 

Critical Accounting Policies and Estimates

 

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2 of “Summary of Significant Accounting Policies” included within our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Following is a discussion of the accounting policies that we believe involve the most difficult, subjective or complex judgments and estimates.

 

 

Accrued Expense

 

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. The estimation basis of the majority of the accrued expenses is dependent on our sales force’s achievement of the sales targets identified by our clients. Examples of estimated accrued expenses include brokerage commission bonus, such as bonus payable to our sales agents, and incentive program rewards, such as the estimated expenditures to fund the reward programs. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.

 

Long-term investment

 

The Company classifies its investments as available-for-sale in accordance with ASC 320 “Debt and Equity Securities”, Investments – Debt and Equity Securities, and are reported at fair value. Unrealized gains and losses as a result of changes in the fair value of the available-for-sale investments are recorded as a separate component within accumulated other comprehensive income in the accompanying consolidated balance sheets.

 

The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

 

Recent Accounting Pronouncements

 

In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented as a deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. Recognition and measurement guidance for debt issuance costs is not affected by this ASU. The ASU is effective for periods beginning after December 15, 2015, and the Company does not expect the implementation to have a material effect on its financial position or results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU is effective for the Company for periods beginning after December 15, 2016, and early adoption is not permitted. On April 1, 2015, the FASB voted to propose to defer the effective date for public entities to annual periods beginning after December, 15, 2017. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

 

The FASB has issued ASU No. 2014-12, Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial position and results of operations.

 

  

Overview of the three months ended March 31, 2015 and 2014

 

The following table shows the results of operations for the three months ended March 31, 2015 and 2014:

 

		Three Months Ended March 31,
		2015				2014
		(Unaudited)				(Unaudited)				Change				Percent
Revenues		$	9,856,115			$	8,861,723			$	994,392				11	%
Cost of revenue			6,446,411				5,368,225				1,078,186				20	%
Gross profit			3,409,704				3,493,498				(83,794	)			-2	%
Gross profit margin			35	%			39	%			-8	%			-21	%
Operating expenses:
Selling			369,259				302,989				66,270				22	%
General and administrative			3,053,644				2,413,245				640,399				27	%
Total operating expenses			3,442,903				2,716,234				706,669				26	%
Income (loss) from operations			(13,199	)			777,264				(790,463	)			-102	%
Other income (expenses):
Interest income			37,715				43,584				(5,869	)			-13	%
Other - net			13,015				72,944				(59,929	)			-82	%
Total other income (expenses)			50,730				116,528				(65,798	)			-56	%
Income (loss) before income taxes			37,531				893,792				(856,261	)			-96	%
Income tax expense			129,629				243,600				(113,971	)			-47	%
Net income (loss)			(92,098	)			650,192				(742,290	)			-114	%
Net income attributable to the noncontrolling interests			188,568				394,794				(206,226	)			-52	%
Net income (loss) attributable to parent's shareholders			(280,666	)			255,398				(536,064	)			-210	%

 

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 in both Taiwan and People’s Republic of China (“PRC”). We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. For the three months ended March 31, 2015 and 2014, the revenue generated respectively from Taiwan and PRC is as follows:

 

		Three months ended March 31,
Geographical Areas		2015				2014
PRC		$	1,245,575			$	715,197
Taiwan			8,610,540				8,146,526
		$	9,856,115			$	8,861,723

 

During the three months ended March 31, 2015, 87.36% and 12.64% of our revenues in our unaudited consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities (“CAE”) in PRC, respectively. During the three months ended March 31, 2014, 91.93% and 8.07% of our revenues in our unaudited consolidated financial statements were derived from our Taiwan Subsidiaries and CAE, respectively.

 

 

Total revenues increased by $994,392, or 11%, from $8,861,723 for the three months ended March 31, 2014 to $9,856,115 for the three months ended March 31, 2015, which is mainly due to the increase of the revenue in Taiwan and PRC for following reasons,

 

	a)	The sales of the products of Farglory Life Insurance Co., Ltd (“Farglory”) increased in 2015 because Farglory bundles its life insurance products to better customize each of its clients’ appeals. By combining insurance contracts with diversified term, premium, and coverage arrangements, the increased flexibility of the products of Farglory drew more attentions from the company’s customer and thus boosting the sales performance for the period ended March 31, 2015.
	b)	The sales of the products of CTBC Life Insurance Co., Ltd. (“CTBC”) increased in 2015 because China Trust has its long-lasting soundly reputation in the local Taiwan market. Many of its insurance products are among the best seller of the company’s items. In fourth quarter of 2014, CTBC launched a newly designed insurance product focuses on the coverage of the handicap medical care that provides the solution for the absence of the coverage from the government funded health insurance, leading to the increased demands from the customers in the first quarter of 2015 compared with that of 2014.
	c)	The company relocated its headquarter from Henan to Nanjing in the year of 2014 and tried to exploit more and more local markets and to expand its customer base in the PRC area. By setting up more and more business branch, accompanying with the company’s improved capability to serve more customers in different provinces, the company has gained its notability in China and thus generating more and more revenue for the period ended March 31, 2015.

 

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 three months ended March 31, 2015 increased by $1,078,186 or 20%, to $6,446,411 compared to $5,368,225 for the three months ended March 31, 2014. The cost of revenue increased with the increase in revenue.

 

a)

Direct commission cost: Compared with the comparable period of 2014, the share of the first-year commission (FYC) revenue in the total revenue increased. Accordingly, the cost matched with the FYC revenue increased. Compared with the commission cost of other types of commission revenue, the cost of the FYC is higher.

 

b)

Indirect commission cost: With the increase in sales, indirect commission cost, including special allowance, high-performance awards, practicing bonus, etc. increased compared to the comparable period of 2014.

 

The gross profit for the three months ended March 31, 2015 decreased by $83,794 or 2%, to $3,409,704 compared to $3,493,498 for the three months ended March 31, 2014. The gross profit ratio decreased to 35% for the three months ended March 31, 2015 from 39% for the three months ended March 31, 2014. 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 three months ended March 31, 2014.

  

Selling expenses

 

Selling expenses were mainly occurred in Law Broker, representing the expense for marketing promotion. The selling expense for the three months ended March 31, 2015 increased by $66,270 or 22%, to $369,259 compared to $302,989 for the three months ended March 31, 2014. The increase is mainly due to the advertising 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 March 31, 2015, G&A expenses were $3,053,644, increased by $640,399, or 27%, compared with $2,413,245 for the three month ended March 31, 2014, 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. The rate of the subject business tax was back to 2% from March 2015. In addition, the G&A expense increased in Anhou due to the fact the company recently moved its headquarters to Nanjing in April 2014 and requires more expenditures to start the business operation and increased the number of employee in Nanjing.

 

Other income

 

Net other income for the three months ended March 31, 2015 was $50,730 and the net other income for the three months ended March 31, 2014 was $116,528. Other income (expense) mainly consists of interest income; gain on change of fair value of marketable securities and loss on disposal of fixed assets. Compared with the three month ended March 31, 2015, other income decreased due to the decrease of the non-operating income.

 

Income tax

 

For the three months ended March 31, 2015, the income tax expense was $129,629, decreased by $113,971, or 47%, compared with $243,600 for the three months ended March 31, 2014. The decrease was mainly due to the decreased income before income tax for the three months ended March 31, 2015 compared to that for the three months ended March 31, 2014.

 

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.

 

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%.

 

Liquidity and Capital Resources

 

The following table represents a comparison of the net cash provided by operating activities, net cash provided by (used in) investing activities, net cash used in financing activities and net cash used in financing activities for the three months ended March 31, 2015 and 2014:

 

		Three Months Ended March 31,
		2015				2014
		(UNAUDITED)				(UNAUDITED)				Change				Percent
Net cash provided by (used in) operating activities		$	(862,930	)		$	517,320				(1,380,250	)			-267	%
Net cash used in investing activities			(210,145	)			(208,235	)			(1,910	)			1	%
Net cash used in financing activities			(286,064	)			-				(286,064	)			(100	%)

 

Operating activities

 

Net cash used in operating activities during three months ended March 31, 2015 was $862,930, significantly decreased in comparison with $517,320, net cash provided by operating activities during three months ended March 31, 2014. The decrease was mainly due to the decrease net income by $742,290 and other current liabilities.

  

Investing activities

 

Net cash used in investing activities was $210,145 during the three months ended March 31, 2015, which is mainly due to purchase of office equipment and intangible assets during the period. The net cash used in investing activities was $208,235 for the three months ended March 31, 2014, which is mainly due to same reasons as 2015.

 

 

Financing activities

 

Net cash used in financing activities was $286,064 during the three months ended March 31, 2015, which is the result of repayment for the borrowings from the Company’s related parties. For the three months ended March 31, 2014, the company didn’t have any cash used in or provided by financing activities.

 

Related Party Loan and Loans to Unrelated Third Parties

 

Anhou Registered Capital Increase

 

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.

  

Prior to the capital increase, 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 were 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 ($6,389,925). 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 ($6,389,925). 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 ($4,712,570)

Mr. Chen: RMB3,000,000 ($479,244)

Ms. Yue: RMB7,500,000 ($1,198,111)

 

On October 20, 2013, the Investor Borrowers, through certain nominees, increased Anhou’s registered capital by RMB 40 million ($6,389,925).

 

Related Party Loan

 

On December 23, 2014, AHFL entered into a Loan Agreement (the “Loan Agreement”) with Lee Shu-Fen (“Ms. Lee”), the Series A Director of the Company. Pursuant to the Loan Agreement, Ms. Lee provided a loan in the amount of $314,644 (NTD10 million) (the “Loan”) to AHFL. The term for the Loan is from December 23, 2014 to December 22, 2015 with a fixed interest rate at 1.5%. The principal amount of the Loan together with the accrued interest shall be paid in one lump sum before December 22, 2015. In January 2015, the principal amount of this loan together with the accrued interests was fully repaid by AHFL. The entire loan and interest amount of $286 has been paid off in January 2015.

 

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 March 31, 2015 and December 31, 2014, respectively:

 

		March 31, 2015				December 31, 2014
Due to Mr. Mao (Principal Shareholder of the Company)		$	236,101			$	214,165
Due to Mr. Zhu (Legal Representative of Jiangsu Law)			2,266				2,255
Due to Ms. Lee (Director of CUIS)			-				315,027
Due to Genius Broker			32,680				-
Total		$	271,047			$	531,447

   

Contractual Obligations

 

The Company has operating leases for its offices. Rental expenses for the three months ended March 31, 2015 and 2014 were $410,459 and $416,253, respectively. At March 31, 2015, total future minimum annual lease payments under operating leases were as follows, by years:

 

Twelve months ended March 31, 2016		$	1,736,298
Twelve months ended March 31, 2017			777,038
Twelve months ended March 31, 2018			351,707
Twelve months ended March 31, 2019			67,916
Twelve months ended March 31, 2020			13,910
Thereafter			7,041
Total		$	2,953,910

 

Acquisition Agreement

 

On February 22, 2015, the Company and the selling shareholder of GHFL entered into an Amendment to the Acquisition Agreement dated February 13, 2015, pursuant to which if the Guaranteed Price per share is higher than the Average Price per share, then the Parties shall negotiate in good faith on an adjustment to the Purchase Price as necessary, if any.

  

 

Off Balance Sheet Arrangements

 

We have not participated in any transactions with unconsolidated entities, such as special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates.

 

Interest Rate Sensitivity

As of March 31, 2015, we had cash of RMB 20 million, approximately $3.3 million, and NT $469 million, approximately $15 million. We hold our cash for working capital purposes. Declines in interest rates would reduce future interest income. For the three months ended March 31, 2015, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.

 

Foreign Currency Risk

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. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. The management does not consider its present foreign exchange risk to be significant.

 

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 March 31, 2015. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of March 31, 2015, 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 March 31, 2015, 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-K for the fiscal year period ended December 31, 2014.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

On February 13, 2015, China United Insurance Service, Inc. (“CUII” or the “Company”) and Action Holdings Financial Limited (“AHFL”) entered into an acquisition agreement (the “Acquisition Agreement”) with Mr. LI CHWAN HAU, the selling shareholder of Genius Holdings Financial Limited (the “Selling Shareholder”), a company with limited liability incorporated under the laws of British Virgin Islands (“GHFL”), to issue 352,166 fully paid and non-assessable shares of AHFL Common Stock (“AHFL Shares”) together with an granted put option for 352,166 shares of common stock of CUII (“Put Option”), in exchange for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL.

 

On February 22, 2015, the Company and AHFL entered into an Amendment to the Acquisition Agreement (the “Amendment”) with the Selling Shareholder, pursuant to the Amendment, on the fourth anniversary date of the closing date of the acquisition, if the Guaranteed Price per share is higher than the Average Price per share, then CUII, AHFL and the Selling Shareholder shall negotiate in good faith on an adjustment to the purchase price as necessary, if any. Details of which shall be set forth in a separate agreement.

 

On March 31, 2015, the Put Option has been exercised by the Selling Shareholder by the transfer of the 352,166 share of GHFL held by him back to CUII as the consideration, and the Company has issued 352,166 shares of common stock of CUII to the Selling Shareholders on April 29, 2015.  

 

The issuance of the Put Option and the shares issued pursuant to the exercise of the Put Option was made pursuant to an exemption from registration in Regulation S under the Securities Act of 1933, as amended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

  

ITEM 5. OTHER INFORMATION.

 

The information contained in “Part II: Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds” of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

 

ITEM 6. EXHIBITS

 

(a)

Exhibits:

 

Exhibit
Number		Description of Exhibit
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:  May 18, 2015	By:	/s/ Mao Yi Hsiao
	Name:	Mao Yi Hsiao
	Its:	Chief Executive Officer
		(Principal Executive Officer)
Date: May 18, 2015	By:	/s/ Chuang Yung Chi
	Name:	Chuang Yung Chi
	Its:	Chief Financial Officer
		(Principal Financial and Accounting Officer)