10-Q 1 v186359_10q.htm Unassociated Document

 
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, 2010

OR

o 
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______ to __________

COMMISSION FILE NUMBER:   001-34113

CHINA INSONLINE CORP.
(Exact name of registrant as specified in its charter)

Delaware
74-2559866
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
   

Room 42, 4F, New Henry House, 10 Ice House Street, Central, Hong Kong
(Address of principal executive offices)

(011) 00852-25232986
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Check whether the issuer (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 o No o
 
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 o 
Accelerated Filer o     
Non-Accelerated Filer o
Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.  Yes  o No x
 
As of May 14, 2010, there are 40,000,000 shares of common stock, par value $0.001 per share, issued and outstanding.
 

 
TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
 
 1
 
       
ITEM 1. FINANCIAL STATEMENTS.
    1  
         
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
    2  
         
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
    20  
         
ITEM 4. CONTROLS AND PROCEDURES.
    20  
         
PART II OTHER INFORMATION
    21  
         
ITEM 1. LEGAL PROCEEDINGS.
    21  
         
ITEM 1A. RISK FACTORS.
    21  
         
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
    21  
         
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
    21  
         
ITEM 5. OTHER INFORMATION.
    21  
         
ITEM 6. EXHIBITS
    22  
         
SIGNATURES
    24  
         
EXHIBIT 31.1
       
         
EXHIBIT 31.2
       
         
EXHIBIT 32.1
       
         
EXHIBIT 32.2
       

i

 
PART I
 
FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
CHINA INSONLINE CORP.
 
AND
 
SUBSIDIARIES
 
Condensed Consolidated Financial Statements
For The Three And Nine Months Ended March 31, 2010 and 2009
(Unaudited)
 
1

 
CHINA INSONLINE CORP.
 
AND
 
SUBSIDIARIES
 
TABLE OF CONTENTS
 
   
Page
 
   
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2010 (UNAUDITED) AND JUNE 30, 2009
    F-2  
         
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)  FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
    F-3  
         
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
    F-4  
         
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
    F-5 – F-17  
         
 
F-1

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
March 31, 2010
(Unaudited)
   
June 30,
2009
 
ASSETS
           
Cash and cash equivalents
  $ 422,475     $ 1,217,085  
Accounts receivable, net of allowance for doubtful accounts of $910,511
and $26,302 at March 31, 2010 and June 30, 2009,  respectively
    4,627       7,764,537  
Prepayments and deposits
    20,471,091       5,428,848  
Other receivables
    585,511       2,385  
Deferred taxes
    749,394       466,828  
Total Current Assets
    22,233,098       14,879,683  
                 
Fixed assets, net
    146,032       212,591  
Software, net
    9,649,170       2,963,136  
Prepayments for software
    -       6,981,952  
Goodwill
    4,473,787       4,473,787  
Deposits
    2,926       78,093  
Deferred taxes
    129,277       65,447  
Total Long-Term Assets
    14,401,192       14,775,006  
                 
TOTAL ASSETS
  $ 36,634,290     $ 29,654,689  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Accounts payable
  $ -     $ 150,514  
Other payables and accrued liabilities
    514,600       638,169  
Business tax payable
    2,719,834       2,097,456  
Amount due to director
    680,302       253,506  
Income taxes payable
    8,321,743       6,260,070  
Deferred taxes
    48,108       90,644  
Total Current Liabilities
    12,284,587       9,490,359  
                 
COMMITMENTS AND CONTINGENCY
               
                 
SHARHOLDERS’ EQUITY
               
Common stock, $.001 par value; 100,000,000 shares authorized;
40,000,000 shares issued and outstanding as of March 31, 2010 and
June 30, 2009, respectively
    40,000       40,000  
Additional paid-in capital
    86,360       86,360  
Retained earnings (restricted portion of $1,055,584 at
   March 31, 2010 and June 30, 2009)
    23,491,705       19,291,210  
Accumulated other comprehensive income
    731,638       746,760  
Total Shareholders’ Equity
    24,349,703       20,164,330  
                 
TOTAL LIABILITIES AND SHARHOLDERS’ EQUITY
  $ 36,634,290     $ 29,654,689  
 
See accompanying notes to condensed consolidated financial statements

F-2

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

   
Three Months Ended
March 31,
   
Nine Months Ended March 31,
 
   
2010
   
2009
   
2010
   
2009
 
                         
REVENUES, NET
  $ 670,232     $ 3,989,716     $ 9,454,739     $ 13,047,434  
                                 
COST OF SALES
    463,434       390,206       1,695,881       1,182,668  
GROSS PROFIT
    206,798       3,599,510       7,758,858       11,864,766  
                                 
Selling expenses
    4,113       62,082       36,861       228,409  
Advertising expenses
    -       90       -       1,906,559  
General and administrative expenses
    283,024       558,814       956,286       1,299,047  
Allowance for doubtful accounts
    -       -       884,018       934,987  
                                 
(LOSS) INCOME FROM OPERATIONS
    (80,339 )     2,978,524       5,881,693       7,495,764  
                                 
Loss on sale of fixed assets
    -       -       (5,307 )     -  
Interest (expense) income, net
    (17 )     1,448       32       24,332  
                                 
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES
    (80,356 )     2,979,972       5,876,418       7,520,096  
                                 
Income taxes
    24,739       785,778       1,675,923       2,072,274  
                                 
NET (LOSS) INCOME
    (105,095 )     2,194,194       4,200,495       5,447,822  
                                 
OTHER COMPREHENSIVE INCOME
                               
Foreign currency translation gain (loss)
    3,113       (10,681 )     (15,122 )     14,149  
COMPREHENSIVE (LOSS) INCOME
  $ (101,982 )   $ 2,183,513     $ 4,185,373     $ 5,461,971  
                                 
NET (LOSS) INCOME PER SHARE
                               
                                 
 - BASIC AND DILUTED
  $ 0.00     $ 0.05     $ 0.11     $ 0.14  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
                               
                                 
 - BASIC AND DILUTED
    40,000,000       40,000,000       40,000,000       40,000,000  
 
See accompanying notes to condensed consolidated financial statements

F-3

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Nine Months Ended March 31, 2010
   
Nine Months Ended March 31, 2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 4,200,495     $ 5,447,822  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
  Depreciation
    59,901       78,400  
  Amortization
    1,023,039       311,554  
  Loss on sale of fixed assets
    5,307       -  
  Deferred taxes
    (388,932 )     (387,788 )
  Allowance for doubtful accounts
    883,906       934,987  
Changes in operating assets and liabilities, net of effects of acquisition:
               
  Accounts receivable
    6,876,004       (2,568,904 )
  Other receivables
    (583,126 )     1,015,347  
  Prepayments and deposits
    (14,967,076 )     1,168,190  
  Accounts payable
    (150,514 )     138,265  
  Other payables and accrued liabilities
    (123,569 )     114,799  
  Business tax payable
    622,378       716,629  
  Income taxes payable
    2,061,673       2,467,397  
  Deferred revenue
    -       (63,583 )
Net cash (used in) provided by operating activities
    (480,514 )     9,373,115  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Acquisition of subsidiary, net of cash acquired
    -       (5,715,919 )
  Acquisition of equipment
    (1,840 )     (119,727 )
  Acquisition of software
    (725,431 )     (731,433 )
  Prepayment for software
    -       (6,921,547 )
  Proceeds from sale of fixed assets
    3,189       -  
Net cash used in investing activities
    (724,082 )     (13,488,626 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
  Advance from a director
    426,796       -  
  Repayment to a director
    -       (28,602 )
Net cash provided by (used in) financing activities
    426,796       (28,602 )
                 
NET DECRESASE IN CASH AND CASH EQUIVALENTS
    (777,800 )     (4,144,113 )
Effect of exchange rate changes on cash
    (16,810 )     14,901  
Cash and cash equivalents, at beginning of the period
    1,217,085       4,567,853  
CASH AND CASH EQUIVALENTS, END OF THE PERIOD
  $ 422,475     $ 438,641  
                 
SUPPLEMENTARY CASH FLOW INFORMATION:
               
  Interest paid
  $ -     $ -  
  Income taxes paid
  $ -     $ -  
 
See accompanying notes to condensed consolidated financial statements
 
F-4

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
1.           Organization and Principal Activities

China INSOnline Corp. (“CHIO”) was incorporated on December 23, 1988 as a Delaware corporation and commenced operations on January 1, 1989.

CHIO and subsidiaries (collectively, the “Company”) is an Internet service and media company focusing on the People’s Republic of China (the “PRC”) insurance industry. With localized websites targeting Greater China, the Company primarily provides, through Beijing ZYTX Technology Co., Ltd (“ZYTX”), a network portal through its industry website, www.soobao.cn, to insurance companies, agents and consumers for advertising, online inquiry, news circulation, online transactions, statistic analysis and software development. The Company is also a licensed online motor vehicle, property and life insurance agent generating revenues through sales commissions from customers in the PRC

On October 28, 2008, Rise and Grow Limited (“Rise & Grow”) and ZYTX entered into a Share Purchase Agreement pursuant to which Rise & Grow acquired 100% ownership of Guang Hua Insurance Agency Company Limited (“GHIA”), a limited liability company organized under the laws of the PRC, through ZYTX to act as legal owner in China.  GHIA is an insurance agent company which operates in the PRC.  The consideration was US$5,846,244 (RMB40,000,000) in cash.  This share purchase transaction resulted in Rise & Grow obtaining 100% of the voting and beneficial interest in GHIA.

On April 2, 2009, Zhi Bao Da Tong (Beijing) Technology Co., Ltd changed its name into New Fortune Associate (Beijing) Information Technology Co., Ltd. (“NFA”).
 
In July 2009, the Financial Accounting Standards Board (“FASB”) launched the “FASB Accounting Standards Codification” (the “ASC”) as the single source of authoritative nongovernmental U.S. GAAP.  The FASB ASC did not change current U.S. GAAP, but simplified user access to all authoritative U.S. GAAP by organizing all the authoritative literature related to a particular topic in one place.  All existing accounting standard documents were superseded and all other accounting literature not included in the FASB ASC is now considered nonauthoritative.  The FASB ASC was effective for the Company’s financial statements for the quarter ended September 30, 2009.  The adoption of the FASB ASC did not have an impact on the Company’s consolidated financial statement.

2.           Basis of Presentation

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to Quarterly Reports on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed consolidated balance sheet information as of June 30, 2009 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that report.

F-5

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)

3.           Principles of Consolidation

The condensed consolidated financial statements included the accounts of CHIO and the following subsidiaries:

a)  
Rise & Grow – 100% subsidiary of CHIO;

b)  
ETI – 100% subsidiary of CHIO;

c)  
NFA – 100% subsidiary of Rise & Grow;

d)  
RZYC – 100% subsidiary of ETI;

e)  
ZYTX – a Variable Interest Entity (“VIE”) of NFA.  It does this by controlling ZYTX, through an Exclusive Technical Consulting and Service Agreement (the “Consulting Agreement”) and related transaction documents dated as of September 28, 2007 (collectively, the “Service Agreements”).

According to the Consulting Agreement, NFA has the exclusive right to provide technical consulting and other services to ZYTX, effectively restricting and controlling the operations of ZYTX.  Pursuant to Clause 1.3 of the Consulting Agreement, NFA, “shall be the sole and exclusive owner of all right, title and interests to any and all intellectual property rights arising from the performance of this Agreement (including but not limited to, copyrights, patent, know-how, commercial secrets and others), no matter whether it is developed by NFA or by ZYTX based on NFA’s intellectual property rights.”  Thus, NFA could substantially, solely and exclusively possess all intellectual property of ZYTX which comprise the core value and assets of ZYTX (ultimately, solely and exclusively possessed by the Company); and

f)  
GHIA – 100% subsidiary of Rise & Grow through ZYTX to act as legal owner in China.

ZYTX and GHIA are the major components of the Company’s condensed consolidated financial statements, representing over 99% of the assets and liabilities of the Company.

Inter-company accounts and transactions have been eliminated in consolidation.

4.           Summary of Significant Accounting Policies

(a)           Economic and Political Risks

The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy. The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti−inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

(b)           Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.
 
F-6

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
4.           Summary of Significant Accounting Policies (Continued)

(c)           Fair Value of Financial Instruments

The carrying value of financial instruments classified as current assets and current liabilities, such as accounts receivables, other receivables, prepayments and deposits, accounts payable, other payables and accrued liabilities, approximate fair value due to the short-term nature of the instruments.

The Company adopted Accounting Standards Codification (“ASC”) 820, Fair Value Measurements (formerly Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements) on January 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  ASC 820 establishes three levels of inputs that may be used to measure fair value:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short term maturity.  The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

The Company’s financial instruments include accounts receivable, prepayment and deposits, other receivables, accounts payable, other payables and accrued liabilities, business tax payable, amount due to director, income tax payable and deferred taxes. We estimated that the carrying amount approximates fair value due to their short-term nature.
 
F-7

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
4.           Summary of Significant Accounting Policies (Continued)

(d)           Revenue Recognition

Advertising

Advertising revenues are derived mainly from online advertising arrangements, which allow advertisers to place advertisements on particular areas of the Company’s web sites, in particular formats and over particular periods of time.  Such arrangements have generally included some combination of the following: website construction service, web site advertising and website maintenance services.  In accordance with ASC 605-25, Multiple-Element Arrangement (formerly Emerging Issues Task Force (“EITF”) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables), advertising arrangements involving multiple deliverables are broken down into single-element arrangements based on their relative fair value for revenue recognition purposes, when possible.

The details of revenue recognition of each type of advertising revenues are illustrated below:

·  
Website construction service, which is usually included in new advertising contract, mainly consist fee for design and computer coding of the new web site.  The service fee is recognized when the web site is completed.

·  
Website advertising is recognized ratably over the displayed period of the advertisement, which is typically one year.

·  
Website maintenance service is providing technically support and maintenance for the customers’ web sites.  Such services are generally on contract basis with service period for one year.  Revenue is recognized ratably over the contact period.

Under the guidance of ASC 985-605, Software Revenue Recognition (formerly the Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions), the Company determines vendor-specific objective evidence (“VOSE”) based on actual prices charged when the service is sold on a standalone basis.

Software Development

Software development revenue is recognized in accordance with ASC 985-605, when the outcome of a contract for software development can be estimated reliably, contract revenue and costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion that costs incurred to date bear to estimated total costs for each contract.  When the outcome of a contract cannot be estimated reliably, contract costs are recognized as an expense in the period in which they are incurred. Contract revenue is recognized to the extent of contract costs incurred that it is probable will be recoverable.  Where it is probable that the total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.
 
F-8

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)

4.           Summary of Significant Accounting Policies (Continued)

(e)           Revenue Recognition (Continued)

Insurance Commissions

Insurance revenues, net of discounts, represent commissions earned from performing agency-related services. Insurance commissions are recognized at the later of the date when the customer is initially billed or the insurance policy effective date.

In accordance with ASC 605-50-25, Vendor’s Accounting for Consideration Given to a Customer, (formerly EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product), cash consideration given to customers or resellers, for which the Company does not receive a separately identifiable benefit or cannot reasonably estimate fair value, are accounted for as a reduction of revenue rather than as an expense.

Cash consideration includes discounts and other offers that entitle a customer to receive a reduction in the price of a product.  For the nine months ended March 31, 2010 and 2009, the Company recognized $33,585 and $465,520, respectively, as a reduction of revenue for the discount offered to its customers.

(f)           Foreign Currency Translation

The accompanying financial statements are presented in United States dollars.  The functional currencies of the Company are the Renminbi (“RMB”) and the Hong Kong Dollar (“HKD”).  The financial statements are translated into United States Dollars (“US$” or “$”) from RMB and US$ from HKD at years-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses.  Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

   
March 31, 2010
   
June 30, 2009
   
March 31, 2009
 
Period end RMB: US$ exchange rate
    6.8361       6.83191       -  
Period average RMB: US$ exchange rate
    6.8377       -       6.8283  
Period end HKD: US$ exchange rate
    7.7647       7.7501       -  
Period average HKD: US$ exchange rate
    7.7554       -       7.7694  

(g)           Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive securities outstanding for the periods presented.

(h)           Goodwill

In accordance with ASC 805, Business Combination (formerly SFAS No.141, Business Combination), the total purchase price in a business combination is allocated to their fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date, with amounts exceeding the fair values at the acquisition date, being recorded as goodwill. In accordance with ASC 350, Intangibles – Goodwill and Other (formerly SFAS No.142, Goodwill and Other Intangible Assets), goodwill is not amortized. Instead, it is tested for impairment on an accrual basis or more frequently whenever events or changes in circumstances indicate that goodwill may be impaired. For the period ended March 31, 2010, the Company did not identify any potential impairment related to its goodwill.

F-9

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
5.           Recent Accounting Pronouncements

In December 2007, ASC 810-10-65, Noncontrolling Interests in Consolidated Financial Statements (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51) changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings.  The adoption of ASC 810-10-65 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB approved ASC 820-10-65-4 (formerly FASB Staff Position (“FSP”) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment).

ASC 820-10-65-4 provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. ASC 820-10-65-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. We are required to adopt this FSP for our interim and annual reporting periods ending after June 15, 2009. This FSP does not require disclosures for periods presented for comparative purposes at initial adoption. This FSP requires comparative disclosures only for periods ending after initial adoption.

In March 2008, the FASB issued ASC 815, Derivative and Hedging, (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities), which expands disclosures to include information about the fair value of derivatives, related credit risks and a company’s strategies and objectives for using derivatives.  The adoption of ASC 815 did not have a material impact on its consolidated financial statements.

In June 2008, the FASB issued ASC 815-10-65-3, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (formerly EITF No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock), which is effective for fiscal years beginning after December 15, 2008. ASC 815-10-65-3 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which would qualify as a scope exception under ASC 815, Derivatives and Hedging (formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities).  ASC 815-10-65-3 was effective for the financial statements issued for fiscal years beginning after December 15, 2009.  The Company adopted ASC 815-10-65-3 and determined that no balance sheet reclassifications were necessary.

In April 2009, the FASB issued ASC 825-10-65, Interim Disclosures about Fair Value of Financial Instruments, (formerly FSP FAS 107-1 and ABP 28-1, Interim Disclosures about Fair Value of Financial Instruments), which requires disclosures about fair value of financial instruments in interim and annual reporting periods. The adoption of ASC 825-10-65 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued ASC 320-10-65-1, Recognition and Presentation of Other-Than-Temporary Impairments (formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to modify the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  The adoption of ASC 320-10-65-1 did not have a material impact on the Company’s consolidated financial statements.
 
F-10

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)

5.           Recent Accounting Pronouncements (Continued)

In May 2009, the FASB issued ASC 855, Subsequent Events (formerly SFAS 165, Subsequent Events), which establishes accounting and disclosure requirements for events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.  ASC 855 requires disclosure of the date through which the Company has evaluated subsequent events for recognition or disclosure. ASC 855 also requires events that provide additional evidence about conditions that existed at the date of the balance sheet and the related estimates to be recognized in the financial statements. Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before the financial statements are issued or available to be issued should not be recognized, but should be disclosed if material. The adoption of ASC 855 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”). FAS 167 amends FASB 46(R) to require an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity and amends certain guidance for determining whether an entity is a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement in a variable interest entity. FAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 and for all interim reporting periods after that and is not anticipated to have any material impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact of the adoption of FAS 167.  This recently issued but not yet enacted accounting standard has not been codified by the FASB. 

In October 2009, the FASB’s EITF revised its guidance on Revenue Recognition for Multiple-Deliverable Revenue Arrangements.  The revised guidance will enable companies to separately account for multiple revenue-generating activities (deliverables) that they perform for their customers.

Existing U.S. GAAP requires a company to use Vendor-Specific Objective Evidence (“VSOE”) or third party evidence of selling price to separate deliverables in a multiple-deliverable arrangement.  The revised guidance will allow the use of an estimated selling price, if neither VSOE nor third-party evidence is available.  The revised guidance will require additional disclosures of information about an entity’s multiple-deliverable arrangements.  The requirements of the revised guidance may be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted.  The Company is currently evaluating the impact of the update on its financial position and results of operations and does not plan to early or retroactively adopt the new guidance.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. This guidance is effective for the Company beginning March 1, 2010. The adoption of this guidance did not have an impact on its consolidated financial position or results of operations.

In April 2009, the FASB updated guidance related to fair-value measurements to clarify the guidance related to measuring fair-value in inactive markets, to modify the recognition and measurement of other-than-temporary impairments of debt securities, and to require public companies to disclose the fair values of financial instruments in interim periods. This updated guidance became effective for the Company beginning June 1, 2009. The adoption of this guidance did not have an impact on the Company’s consolidated financial position or results of operations.

F-11

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)

6.           Prepayments and Deposits

Prepayments and deposits represent the following:
   
March 31, 2010
   
June 30,
2009
 
   
(Unaudited)
       
Electronic products
  $ 20,435,629     $ 5,386,497  
Financial consultant
    30,000       30,000  
Rents
    2,829       12,351  
Other
    2,633       -  
    $ 20,471,091     $ 5,428,848  

On October 15, 2009, the Company amended an agreement for the purchase of electronic products for the promotion of the insurance agency business amounting to $20,479,514 (RMB140,000,000).  For the nine months ended March 31, 2010, the Company made a 99% prepayment for the products of $20,435,629 (RMB139,700,000). As part of the business restructuring, the Company is planning to sell its subsidiary ZYTX to potential buyer, which will include the prepayment of electronic products in ZYTXs balance sheet. Also see Notes 10 and 13.

Prepaid rents represent rents prepaid to landlords, for the period from one to eleven months in accordance with the operating lease agreement, for the offices of the Company.

7.           Other Receivables

On January 22, 2010, the Company advanced an unsecured loan of $585,129 (RMB4,000,000) to an unrelated party at an interest rate of 4.86% per annum and it is repayable on August 22, 2010.

8.           Software

Software consists of the following by segment:
 
   
March 31, 2010
   
June 30, 2009
 
At cost:
 
(Unaudited)
       
Online insurance advertising
  $ 8,012,630     $ 2,115,712  
Insurance agency
    3,242,085       1,429,929  
      11,254,715       3,545,641  
Less: Accumulated amortization
               
Online insurance advertising
    414,193       300,242  
Insurance agency
    1,191,352       282,263  
      1,605,545       582,505  
                 
Software, net
  $ 9,649,170     $ 2,963,136  

There were five software packages and three software packages used in the Company’s two segments as of March 31, 2010 and June 30, 2009, respectively.  Amortization expense for the nine months ended March 31, 2010 and 2009 was $1,023,039 and $311,554, respectively.

Amortization expense for the next five years and thereafter is as follows:

Year ending June 30,
 
Amount
 
2010
  $ 620,778  
2011
    1,241,556  
2012
    1,241,556  
2013
    1,241,556  
2014
    1,241,556  
Thereafter
    4,062,168  
Total
  $ 9,649,170  
 
F-12

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
9.           Taxes

(a) Corporation Income Tax (“CIT”)

The Company has not recorded a provision for U.S. federal income taxes for the period ended March 31, 2010 due to the net operating loss carry forward in the United States.

On March 16, 2007, the National People’s Congress of China approved the new Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), which was effective from January 1, 2008.  Prior to January 1, 2008, the CIT rate applicable to the Company’s subsidiary in the PRC was 33%. As from January 1, 2008, the applicable CIT rate for NFA, the wholly owned subsidiary, is 25%.

Of the $8,321,743 of income taxes payable at March 31, 2010, $8,315,463 represents the amount of income taxes payable by NFA.  Of the $8,315,463 of income taxes payable by NFA, $4,508,167 was due on April 30, 2009 and $3,807,296 was due on April 30, 2010.  The Company has been negotiating with the tax authorities to defer the payment of CIT due on April 30, 2009 and April 30, 2010 without interest or penalties, and the Company is awaiting the final ruling from the tax authorities.

ZYTX, a VIE of the Company, enjoys a favorable tax rate of 15% as it is considered as a high technology company by the Chinese government. ZYTX is also entitled to a full exemption from CIT for the first two years from January 1, 2007 to December 31, 2008.  Starting from January 1, 2009, the CIT rate of ZYTX is 15%.  ZYTX is exempted from CIT for the six months period from July 1, 2008 to December 31, 2008 and for 15% for the twelve months period from January 1, 2009 to December 31, 2009.  For the nine months ended March 31, 2010, the CIT for ZYTX was $0 as ZYTX has transferred all its net income to its primary beneficiary, NFA.

The applicable CIT rate for GHIA is 25%.  For the nine months ended March 31, 2010, the CIT for GHIA was $6,280, which should be payable on April 30, 2010.  The Company has been negotiating with the tax authorities to defer the payment of CIT due on April 30, 2010 without interest or penalties, and the Company is awaiting the final ruling from the tax authorities.

Some of the tax concession granted to eligible companies prior to the new CIT law is grand fathered. The new CIT Law has an impact on the deferred tax assets and liabilities of the Company. The Company adjusted deferred tax balances as of March 31, 2010 and June 30, 2009 based on the current applicable tax rate and will continue to assess the impact of such new law in the future. Effects arising from the enforcement of the new CIT Law were reflected into the accounts by best estimates.

Pursuant to the Inland Revenue Ordinance of Hong Kong, Rise & Grow is subject to Hong Kong Profits Tax at 16.5% for the period ended March 31, 2010 and the year ended June 30, 2009. As Rise & Grow has no assessable profits for the nine months ended March 31, 2010 and the year ended June 30, 2009, no provision for profits tax has been made.

Computed “expected” expense of the Company was calculated using 25% income tax rate for the nine and three months ended March 31, 2010 and 2009, respectively.

Income tax expense is summarized as follows:

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Computed “expected” expense
  $ (20,089 )   $ 744,993     $ 1,469,105     $ 1,880,024  
Favorable tax rate effect
    12,977       6,323       120,404       157,769  
Permanent differences
    31,851       34,462       86,414       34,481  
Income tax expense
  $ 24,739     $ 785,778     $ 1,675,923     $ 2,072,274  
 
F-13

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
9.           Taxes (Continued)

(a)           Corporation Income Tax (“CIT”) (Continued)

Provision for income tax expense is summarized as follows:

   
Three Months ended
March 31,
   
Nine Months ended
March 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Current
  $ 64,981     $ 830,346     $ 2,065,036     $ 2,412,907  
Deferred
    (40,242 )     (44,568 )     (389,113 )     (340,633 )
Income tax expense
  $ 24,739     $ 785,778     $ 1,675,923     $ 2,072,274  

The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows:

   
March 31, 2010
   
June 30, 2009
 
Deferred tax assets:
 
(Unaudited)
       
Social welfare expenses
  $ 39,668     $ 39,693  
Consumable expenses
    2,792       6,271  
Discounts allowed
    1,489       1,490  
Business tax
    472,054       358,915  
Allowance for doubtful accounts
    136,577       3,945  
Tax loss
    86,964       56,500  
Amortization
    7,040       -  
Depreciation
    705       -  
Other
    2,091       14  
  Total current deferred tax assets
    749,380       466,828  
                 
Amortization
    125,829       56,727  
Depreciation
    3,448       8,720  
  Total long-term deferred tax assets
    129,277       65,447  
                 
Total deferred tax assets
    878,657       532,275  
                 
Deferred tax liabilities:
               
Commission income
    5,446       5,449  
Rental  income
    -       21,053  
Disposal income
    -       38,786  
Consultancy fee
    4,506       4,509  
Amortization
    38,070       18,997  
Depreciation
    -       1,764  
Other
    86       86  
  Total current deferred tax liabilities
    48,108       90,644  
                 
                 
Net deferred tax assets
  $ 830,549     $ 441,631  

The Company adopted ASC 740, Income Tax (formerly FIN 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109), on January 1, 2007. The Company did not have any material unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing ASC 740.
 
F-14

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
9.           Taxes (Continued)

(b)  
Business Tax

Pursuant to the relevant PRC tax laws, the Company is subject to business tax at 5% of the gross sales, excluding software development income.  For the periods ended March 31, 2010 and 2009, the Company incurred a total business tax of $598,608 and $1,038,636, respectively, which is included in the cost of sales in the accompanying condensed consolidated statement of income and comprehensive income.

The business tax payable is $2,719,834 and $2,097,456 at March 31, 2010 and June 30, 2009, respectively.  Of the $2,719,834 of business tax payable at March 31, 2010, $1,495,788 was due on April 30, 2009 and $1,224,046 was due on April 30, 2010.  The Company has been negotiating with the tax authorities to defer the payment of business tax which was due on April 30, 2009 and April 30, 2010 without interest or penalties, and the Company is awaiting the final ruling from the tax authorities.

10.           Commitments and Contingency

(a)           Lease Commitments

The Company occupies office spaces leased from third parties.  For the nine months ended March 31, 2010 and 2009, the Company recognized $86,846 and $252,499, respectively, as rental expense for these spaces.  As of March 31, 2010, the Company has outstanding commitments with respect to non-cancelable operating leases as follows:

Year Ending June 30,
 
Amount
 
2010
  $ 7,898  
2011
    18,428  
    $ 26,326  

(b)           Purchase of Electronic Products

As of March 31, 2010, the Company has outstanding commitments of $43,885 (Rmb300,000) with respect to the purchase of electronic products of $20,479,514 (Rmb140,000,000) due within one year as follows:

Payment Due Dates
 
Amount
 
       
After the receipt of the last shipment of product
  $ 43,885  

Subject to the request from the supplier on May 10, 2010, the Company agreed to extend the delivery dates for the electronic products as below:

Expected Product Delivery Dates
 
Units
 
       
July 31, 2010
    40,000  
August 31, 2010
    30,000  
      40,000  
 
F-15

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
 
10.           Commitments and Contingency (Continued)

(c)           Pledge of common stock by significant shareholder

Mr. Zhengyu Wang, a significant shareholder, entered into a loan agreement dated January 8, 2010 with Argyll Investments, LLC, and pledged 2,000,000 common stock of the Company to secure a personal loan of $554,400 at an interest rate of 4% per annum for 36 months.

Mr. Zhengyu Wang, a significant shareholder, entered into a loan agreement dated February 16, 2010 with Argyll Investments, LLC, and pledged 2,000,000 common stock of the Company to secure a personal loan of $705,600 at an interest rate of 4% per annum for 36 months.
 
11.           Certain Risks and Concentrations

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Company has $316,227 and $1,207,171 in bank deposits in the banks in China, which constitutes about 98.9% and 99.9% of its total cash and cash equivalents as of March 31, 2010 and June 30, 2009, respectively.  Historically, deposits in Chinese banks are secured due to the state policy on protecting depositors’ interests.  However, China promulgated a new Bankruptcy Law in August 2006, which came into effect on June 1, 2007.  The new Bankruptcy Law contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks.  Under the new Bankruptcy Law, a Chinese bank may go bankrupt.  In addition, since China’s concession to World Trade Organization, foreign banks have been gradually permitted to operate in China and have been severe competitors against Chinese banks in many aspects, especially since the opening of RMB businesses to foreign banks in late 2006.

Therefore, the risk of bankruptcy of the bank in which that the Company has deposits has increased.  In the event of bankruptcy of the bank which holds the Company’s deposits, the Company is unlikely to recover its deposits back in full since it is unlikely to be classified as a secured creditor based on PRC laws.

As of March 31, 2010, accounts receivable consist primarily of insurance agency of 100%. As of June 30, 2009, accounts receivable consist primarily of software development clients and insurance agents of online insurance advertising, approximately 15% and 84%, respectively.  Regarding the Company’s online advertising and insurance agency operations, no individual customer accounted for more than 10% of total net revenues for the nine months ended March 31, 2010 and year ended June 30, 2009.

The concentration of sales for the nine months ended March 31, 2010 and 2009, and accounts receivable at March 31, 2010 and June 30, 2009 are summarized as follows:

   
Sales
   
Accounts Receivable
 
   
March 31, 2010
   
March 31, 2009
   
March 31, 2010
   
June 30, 2009
 
Software Development
 
(Unaudited)
   
(Unaudited)
   
(Unaudited)
       
  Company A
    60 %     -       -       -  
  Company B
    12 %     -       -       -  
  Company C
    -       10 %     -       -  
  Company D
    -       10 %     -       -  
  Company E
    -       4 %     -       -  
  Company F
    -       -       -       10 %
  Company G
    -       -       -       5 %
      72 %     24 %     0 %     15 %
                                 
Online Insurance Advertising
    27 %     75 %     0 %     84 %
                                 
Insurance Agency
    1 %     1 %     100 %     1 %
                                 
Total
    100 %     100 %     100 %     100 %
                                 

F-16

 
CHINA INSONLINE CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)

12.           Segment Information

Based on criteria established by ASC 280, Segment Reporting, (formerly SFAS 131, Disclosures about Segments of an Enterprise and Related Information), the Company operates three business segments for the three and nine months ended March 31, 2010 and 2009, which are software development, online insurance advertising and insurance agency within the PRC.  The following is the summary information by segment as of March 31, 2010 and June 30, 2009 and for the three and nine months ended March 31, 2010 and 2009:
 
   
Software Development
   
Online Insurance Advertising
   
Insurance Agency
   
Administra-tion
   
Total
 
Nine Months Ended March 31, 2010
 
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenue, net
  $ 6,815,157     $ 2,596,156     $ 32,890     $ 10,536     $ 9,454,739  
Cost of sales
    57,699       378,530       807,619       452,033       1,695,881  
Gross profit (loss)
  $ 6,757,458     $ 2,217,626     $ (774,729 )   $ (441,497 )   $ 7,758,858  
                                         
Three Months Ended March 31, 2010
                                       
Revenue, net
  $ -     $ 658,280     $ 4,700     $ 7,252     $ 670,232  
Cost of sales
    -       111,960       334,719       16,755       463,434  
Gross profit (loss)
  $ -     $ 546,320     $ (330,019 )   $ (9,503 )   $ 206,798  
                                         
March 31, 2010
                                       
Long-lived assets
  $ 29,537     $ 7,024,917     $ 7,140,006     $ 206,732     $ 14,401,192  
Current assets
  $ -     $ -     $ 20,468,215     $ 1,764,883     $ 22,233,098  
                                         
Nine Months Ended March 31, 2009
                                       
Revenue, net
  $ 3,254,893     $ 9,790,377     $ 2,164     $ -     $ 13,047,434  
Cost of sales
    35,502       614,158       60,580       472,428       1,182,668  
Gross profit (loss)
  $ 3,219,391     $ 9,176,219     $ (58,416 )   $ (472,428 )   $ 11,864,766  
                                         
Three Months Ended March 31, 2009
                                       
Revenue, net
  $ 1,318,584     $ 2,672,412     $ (1,280 )   $ -     $ 3,989,716  
Cost of sales
    3,174       173,788       23,135       190,109       390,206  
Gross profit (loss)
  $ 1,315,410     $ 2,498,624     $ (24,415 )   $ (190,109 )   $ 3,599,510  
                                         
June 30, 2009
                                       
Long-lived assets
  $ 53,592     $ 1,817,578     $ 12,648,168     $ 255,668     $ 14,775,006  
Current assets
  $ 1,214,889     $ 6,528,069     $ 92,470     $ 7,044,255     $ 14,879,683  

13.         Subsequent Event

On May 18, 2010, the Board of the Company approved an internal restructure plan which would lead the Company to concentrate its resources on the online insurance agency business.  NFA and ZYTX that include all assets from the software development and online insurance advertising segments, and plan to sell the Company's Subsidiaries at market price.  The Company is currently identifying potential buyers for these Subsidiaries.
 
F-17


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Forward Looking Statements
 
The following is our management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes” “anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”, “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this report.
 
Acquisition of Rise & Grow
 
On December 18, 2007 (the “Closing Date”), China INSOnline Corp., formerly known as Dexterity Surgical, Inc. (“Dexterity Surgical”) and hereinafter, “CHIO” and together with its subsidiaries, the “Company”, entered into a Share Exchange Agreement (the “Exchange Agreement”) with Rise and Grow Limited, an inactive Hong Kong limited holding company (“Rise & Grow”) and Newise Century Inc., a British Virgin Islands company and the sole stockholder of Rise & Grow (the “Stockholder”). As a result of the share exchange, CHIO acquired all of the issued and outstanding securities of Rise & Grow from the Stockholder in exchange for Twenty-Six Million Four Hundred Thousand (26,400,000) newly-issued shares of CHIO’s common stock, par value $0.001 per share (“Common Stock”). As a result of the exchange, Rise & Grow became our wholly-owned and chief operating subsidiary. We currently have no other business operations other than those of Rise & Grow.
 
The following is disclosure regarding CHIO, Rise & Grow and the wholly-owned operating subsidiary of Rise & Grow, New Fortune Associate (Beijing) Information Technology Co., Ltd. (formerly known as Zhi Bao Da Tong (Beijing) Technology Co. Ltd. and hereinafter, “NFA”), a company formed under the laws of the People’s Republic of China (the “PRC”) and doing business in the PRC.  Since the Closing Date, the operations of Rise & Grow, through its operating subsidiary, NFA, are the only operations of CHIO.
 
Effective March 17, 2008, the Common Stock of CHIO began trading under a new ticker symbol, “CHIO.OB” on the Over-The-Counter Bulletin Board. CHIO changed its ticker symbol from “DEXT.OB” to “CHIO.OB” as a result of the Company’s name change from “Dexterity Surgical, Inc.” to “China INSOnline Corp.”, which such name change became effective as of February 26, 2008.
 
Effective July 1, 2008, the Common Stock of CHIO began trading under the same ticker symbol “CHIO” on the NASDAQ Capital Market.
 
Organizational Structure of Rise & Grow, NFA, ZYTX, GHIA, Ever Trend and Run Ze Yong Cheng
 
Rise & Grow was formed on February 10, 2006 as a Hong Kong limited company. NFA was established and incorporated by Rise & Grow and commenced business on September 6, 2007. Rise & Grow’s sole business is to act as a holding company for NFA. NFA was formed by Rise & Grow for the purpose of developing computer and network software and related products and to promote the development of high-tech industries in the field of Chinese information technology. It does this by controlling, through an Exclusive Technical Consulting and Service Agreement and related transaction documents dated as of September 28, 2007 (collectively, the “Service Agreements”), Beijing Zhi Yuan Tian Xia Technology Co., Ltd. (“ZYTX”), a limited liability company duly established on October 8, 2006 and validly existing under the PRC.
 
Pursuant to the Service Agreements, NFA shall provide on-going technical services and other services to ZYTX in exchange for substantially all net income of ZYTX. In addition, Mr. Zhenyu Wang and Ms. Junjun Xu have pledged all of their shares in ZYTX to NFA, representing one hundred percent (100%) of the total issued and outstanding capital stock of ZYTX, as collateral for non-payment under the Service Agreements or for fees on technical and other services due to us thereunder. We have the power to appoint all directors and senior management personnel of ZYTX. Currently, ZYTX is sixty percent (60%) owned by Mr. Zhenyu Wang, CHIO’s Chairman of the Board, and forty percent (40%) owned by Junjun Xu, CHIO’s Chief Executive Officer and a director.
 
2


On October 28, 2008, Rise & Grow and ZYTX entered into a Share Purchase Agreement pursuant to which Rise & Grow acquired 100% ownership of Guang Hua Insurance Agency Company Limited (“GHIA”), a limited liability company organized under the laws of the PRC, through ZYTX to act as legal owner in China.  GHIA is an insurance agent company which operates in the PRC.  The consideration was US$5,846,244 (RMB$40,000,000) in cash.  This share purchase transaction resulted in Rise & Grow obtaining 100% of the voting and beneficial interest in GHIA.

On January 14, 2010, the Company acquired a Hong Kong limited company, Ever Trend Investment Limited (“ETI”), for investment holding purpose.

On March 25, 2010, Run Ze Yong Cheng (Beijing) Technology Co. Limited (“RZYC”), a company registered in the PRC, was established and incorporated by ETI as a wholly foreign owned enterprise for future business development purposes.  According to the relevant regulation the registered capital of RMB100,000 should be injected on or before September 24, 2010.  ETI’s sole business is to act as a holding company for RZYC.

Business of the Company
 
We are an Internet service and media company focusing on the PRC insurance industry. With localized websites targeting Greater China, the Company primarily provides, through ZYTX, a network portal through its industry website, www.soobao.cn (hereinafter also referred to as “Soobao”), to insurance companies, agents and consumers for advertising, online inquiry, news circulation, online transactions, statistic analysis and software development. The Company is also a licensed online motor vehicle, property and life insurance agent generating revenues through sales commissions from customers in the PRC.

Today, the Company offers online insurance products and services in China including (a) a network portal for the Chinese insurance industry (www.soobao.cn), offering industry players a forum for advertising products and services, (b) website construction and software development services for marketing teams in the insurance industry, (c) insurance agency services (whereby the Company generates sales commissions on motor vehicle insurance, property insurance and life insurance) and (d) accompanying client support services.
 
On September 28, 2007, NFA signed the following Service Agreements with ZYTX and its stockholders:
 
 
·
Exclusive Technology Consultation Service Agreement, by and between ZYTX and NFA, through which NFA will provide, exclusively for both parties, technology consultation services to the Company and receive payments periodically;
 
 
·
Exclusive Equity Interest Purchase Agreements, by and between each of ZYTX’s stockholders and NFA, through which NFA is entitled to exclusively purchase all of the outstanding shares of capital stock of ZYTX from its current stockholders upon certain terms and conditions, especially upon it is allowable under the PRC laws and regulations;
 
 
·
Equity Interest Pledge Agreements, by and between each of ZYTX’s stockholders and NFA, through which the current stockholders of ZYTX have pledged all their respective shares in ZYTX to NFA. These Equity Interest Pledge Agreements guarantee the cash-flow payments under the Exclusive Technology Consultation Service Agreement; and
 
 
·
Powers of Attorney, executed by each of the ZYTX’s stockholders, through which NFA is entitled to perform the equity right of ZYTX’s stockholders.
 
Powers of Attorney were also executed by the two (2) owners of ZYTX empowering NFA to act on their behalf, and NFA has the full authority to perform all of the rights bestowed upon them as a shareholder of ZYTX and control over said equity interests in ZYTX.  These rights include: (i) the right to attend shareholder meetings, (ii) signatory authority for shareholder resolutions, (iii) the performance of all rights as a shareholder, including voting rights and the right to partially or wholly transfer, assign or pledge the equity interest in ZYTX, (v) a right to appoint legal representatives, board members, executive directors and other senior management officers, (vi) the right to execute and perform the obligations of a certain Transfer Agreement referenced in the Equity Purchase Agreements, (vii) the right to transfer, allocate, or use the dividends-in-cash and other non cash income as directed by ZYTX, (viii) the right to perform all the necessary rights incurred from ZYTX’s equity interest and (ix) the right to re-consign all the matters and rights under the Powers of Attorney to any other individual(s) or other legal person(s).

In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN 46R”), an Interpretation of Accounting Research Bulletin No. 51, a Variable Interest Entity (a “VIE”) is to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. After executing the above agreements, ZYTX is now considered a VIE and NFA its primary beneficiary.
 
3


On October 28, 2008, Rise & Grow and ZYTX entered into a Share Purchase Agreement which Rise & Grow acquired 100% ownership of Guang Hua Insurance Agency Company Limited (“GHIA”), a limited liability company organized under the laws of the PRC, through ZYTX to act as legal owner in China.  GHIA is an insurance agent company which operates in the entire nation of the PRC.  The consideration was US$5,846,244 (RMB40,000,000) in cash.  This share purchase transaction resulted in Rise & Grow obtaining 100% of the voting and beneficial interest in GHIA.
 
On April 2, 2009, Zhi Bao Da Tong (Beijing) Technology Co., Ltd changed its name into New Fortune Associate (Beijing) Information Technology Co., Ltd.

On January 14, 2010, the Company acquired a Hong Kong limited company, Ever Trend Investment Limited (“ETI”), for investment holding purpose.

On March 25, 2010, Run Ze Yong Cheng (Beijing) Technology Co. Limited (“RZYC”), a company registered in the PRC, was established and incorporated by ETI as a wholly foreign owned enterprise for future business development purposes.  According to the relevant regulation the registered capital of RMB100,000 should be injected on or before September 24, 2010.  ETI’s sole business is to act as a holding company for RZYC.
 
Restructuring of the Business Operation

On May 18, 2010, the Board of the Company approved an internal restructure plan which would lead the Company to concentrate its resources on the online insurance agency business.  NFA and ZYTX and their operating segments, including all assets from the software development and online insurance advertising segments, may be sold to third parties at market price.  The Company is currently identifying potential buyers for these segments.
 
After the restructuring, the Company would retain the online insurance agency business and focus on its products and services in the following areas:
 
 
·
With respect to the Company’s motor vehicle insurance sales business, the Company plans to provide motor vehicle-owners with more value-added services following the purchase of motor vehicle insurance and the Company plans to improve its membership club programs in the area of motor vehicle insurance; and
 
 
·
The Company plans to gradually grow its property insurance and life insurance business as an insurance agent by utilizing third-party insurance brokers and by choosing cost-effective products. With online product optimization and the ability to compare products online in real-time, the Company will be able to choose more suitable insurance, enhance customer insurance purchasing efficiency and reduce costs.


4

 
Employees
 
With the anticipated business restructuring as discussed above, the Company will be keeping its current employees and do not plan to employ any significant amounts of employees in the following year. The Company reviews this plan from time and will adjust it accordingly as necessary.
 
Cash Requirements

As of the date of this report, all of our capital is equity capital and we do not have any debt financing with any bank or other financial institutions, except for the advance from our director. As our business develops, the Company considers raising additional funds if conditions are suitable.
 
Summary of Significant Accounting Policies
 
Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying value of financial instruments classified as current assets and current liabilities, such as accounts receivables, other receivables, prepayments and deposits, accounts payable, other payables and accrued liabilities, approximate fair value due to the short-term nature of the instruments.

The Company adopted Accounting Standards Codification (“ASC”) 820 Fair Value Measurements (formerly Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements) on January 1, 2008 for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
 
5


ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  ASC 820 establishes three levels of inputs that may be used to measure fair value:

·  
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
·  
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
·  
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short term maturity.  The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

The Company’s financial instruments include accounts receivable, prepayment and deposits, other receivables, accounts payable, other payables and accrued liabilities, business tax payable, amount due to director, income tax payable and deferred taxes. We estimated that the carrying amount approximates fair value due to their short-term nature.

Revenue Recognition

Advertising

Advertising revenues are derived mainly from online advertising arrangements, which allow advertisers to place advertisements on particular areas of the Company’s websites, in particular formats and over particular periods of time.  Such arrangements have generally included some combination of the following: website construction services, website advertising and website maintenance services.  In accordance with ASC 605-25, “Multiple-Element Arrangement” (formerly Emerging Issues Task Force (“EITF”) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables), advertising arrangements involving multiple deliverables are broken down into single-element arrangements based on their relative fair value for revenue recognition purposes, when possible.

The details of revenue recognition of each type of advertising revenues are illustrated below:

·  
Website construction services, which are usually included in new advertising contracts, mainly consist of fees for design and computer coding of the new website.  The service fee is recognized when the website is completed and wired in the server.

·  
Website advertising is recognized ratably over the displayed period of the advertisement, which is typically one year.

·  
Website maintenance service is providing technically support and maintenance for the customers’ websites.  Such services are generally on contract basis with service period for one year.  Revenue is recognized ratably over the contact period.

Under the guidance of ASC 985-605 Software Revenue Recognition (formerly the Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions), the Company determines vendor-specific objective evidence (“VOSE”) based on actual prices charged when the service is sold on a standalone basis.

Software Development

Software development revenue is recognized in accordance with ASC 985-605, when the outcome of a contract for software development can be estimated reliably, contract revenue and costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion that costs incurred to date bear to estimated total costs for each contract.  When the outcome of a contract cannot be estimated reliably, contract costs are recognized as an expense in the period in which they are incurred. Contract revenue is recognized to the extent of contract costs incurred that it is probable will be recoverable.  Where it is probable that the total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.
 
6


Insurance Commissions

Insurance revenues, net of discounts, represent commissions earned from performing agency-related services. Insurance commissions are recognized at the later of the date when the customer is initially billed or the insurance policy effective date.

In accordance with ASC 605-50-25, Vendor’s Accounting for Consideration Given to a Customer, (formerly EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product), cash consideration given to customers or resellers, for which the Company does not receive a separately identifiable benefit or cannot reasonably estimate fair value, are accounted for as a reduction of revenue rather than as an expense.

Cash consideration includes discounts and other offers that entitle a customer to receive a reduction in the price of a product.  For the nine (9) months ended March 31, 2010 and 2009, the Company recognized $33,585 and $465,520, respectively, as a reduction of revenue for the discount offered to its customers.

Goodwill

In accordance with ASC 805 Business Combination (formerly SFAS No.141, Business Combination), the total purchase price in a business combination is allocated to their fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date, with amounts exceeding the fair values at the acquisition date being recorded as goodwill. In accordance with ASC 350, Intangibles – Goodwill and Other (formerly SFAS No.142, Goodwill and Other Intangible Assets), goodwill is not amortized. Instead, it is tested for impairment on an accrual basis or more frequently whenever events or changes in circumstances indicate that goodwill may be impaired. For the period ended March 31, 2010, the Company did not identify any potential impairment related to its goodwill.

Recent Accounting Pronouncements

In December 2007, ASC 810-10-65, Noncontrolling Interests in Consolidated Financial Statements (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51) changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings.  The adoption of ASC 810-10-65 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB approved ASC 820-10-65-4 (formerly FASB Staff Position (“FSP”) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment).

ASC 820-10-65-4 provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. ASC 820-10-65-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. We are required to adopt this FSP for our interim and annual reporting periods ending after June 15, 2009. This FSP does not require disclosures for periods presented for comparative purposes at initial adoption. This FSP requires comparative disclosures only for periods ending after initial adoption.

In March 2008, the FASB issued ASC 815, Derivative and Hedging, (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities), which expands disclosures to include information about the fair value of derivatives, related credit risks and a company’s strategies and objectives for using derivatives.  The adoption of ASC 815 did not have a material impact on its consolidated financial statements.

In June 2008, the FASB issued ASC 815-10-65-3, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (formerly EITF No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock), which is effective for fiscal years beginning after December 15, 2008. ASC 815-10-65-3 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which would qualify as a scope exception under ASC 815, Derivatives and Hedging (formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities).  ASC 815-10-65-3 was effective for the financial statements issued for fiscal years beginning after December 15, 2009.  The Company adopted ASC 815-10-65-3 and determined that no balance sheet reclassifications were necessary.
 
7


In April 2009, the FASB issued ASC 825-10-65, Interim Disclosures about Fair Value of Financial Instruments, (formerly FSP FAS 107-1 and ABP 28-1, Interim Disclosures about Fair Value of Financial Instruments), which requires disclosures about fair value of financial instruments in interim and annual reporting periods. The adoption of ASC 825-10-65 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued ASC 320-10-65-1, Recognition and Presentation of Other-Than-Temporary Impairments (formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to modify the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  The adoption of ASC 320-10-65-1 did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued ASC 855, Subsequent Events (formerly SFAS 165, Subsequent Events), which establishes accounting and disclosure requirements for events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.  ASC 855 requires disclosure of the date through which the Company has evaluated subsequent events for recognition or disclosure. ASC 855 also requires events that provide additional evidence about conditions that existed at the date of the balance sheet and the related estimates to be recognized in the financial statements. Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before the financial statements are issued or available to be issued should not be recognized, but should be disclosed if material. The adoption of ASC 855 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”). FAS 167 amends FASB 46(R) to require an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity and amends certain guidance for determining whether an entity is a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement in a variable interest entity. FAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 and for all interim reporting periods after that and is not anticipated to have any material impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact of the adoption of FAS 167.  This recently issued but not yet enacted accounting standard has not been codified by the FASB.  See Note 1.

In October 2009, the FASB’s EITF revised its guidance on Revenue Recognition for Multiple-Deliverable Revenue Arrangements.  The revised guidance will enable companies to separately account for multiple revenue-generating activities (deliverables) that they perform for their customers.

Existing U.S. GAAP requires a company to use VSOE or third party evidence of selling price to separate deliverables in a multiple-deliverable arrangement.  The revised guidance will allow the use of an estimated selling price, if neither VSOE nor third-party evidence is available.  The revised guidance will require additional disclosures of information about an entity’s multiple-deliverable arrangements.  The requirements of the revised guidance may be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted.  The Company is currently evaluating the impact of the update on its financial position and results of operations and does not plan to early or retroactively adopt the new guidance.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. This guidance is effective for the Company beginning March 1, 2010. The Company does not expect the adoption will have an impact on its consolidated financial position or results of operations.

In April 2009, the FASB updated guidance related to fair-value measurements to clarify the guidance related to measuring fair-value in inactive markets, to modify the recognition and measurement of other-than-temporary impairments of debt securities, and to require public companies to disclose the fair values of financial instruments in interim periods. This updated guidance became effective for the Company beginning June 1, 2009. The adoption of this guidance did not have an impact on the Company’s consolidated financial position or results of operations. See Note 5 - Fair Value Measurements for the disclosure required under the updated guidance.
 
8


Results of Operations For the Three (3) Months Ended March 31, 2010 Compared To the Three (3) Months Ended March 31, 2009
 
Our operating results are presented on a condensed consolidated basis for the three (3) months ended March 31, 2010, as compared to the three (3) months ended March 31, 2009.
 
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the three (3) months ended March 31, 2010 and 2009:

   
2010
 
2009
   
Variance
 
                                     
REVENUES
  $ 670,232       100 %   $ 4,091,607       103 %   $ (3,421,375 )     (84 %)
DISCOUNT ALLOWED
    -       0 %     101,891       3 %     (101,891 )     (100 %)
REVENUES, NET
    670,232       100 %     3,989,716       100 %     (3,319,484 )     (83 %)
COST OF SALES
    463,434       69 %     390,206       10 %     73,228       19 %
GROSS PROFIT
    206,798       31 %     3,599,510       90 %     (3,392,712 )     (94 %)
Selling expenses
    4,113       1 %     62,082       2 %     (57,969 )     (93 %)
Advertising expenses
    -       0 %     90       1 %     (90 )     (100 %)
General and administrative expenses
    283,024       42 %     558,814       13 %     (275,790 )     (49 %)
(LOSS)INCOME FROM OPERATIONS
    (80,339 )     (12 %)     2,978,524       75 %     (3,058,863 )     (102 %)
Interest (expense) income, net
    (17 )     0 %     1,448       0 %     (1,465 )     (101 %)
(LOSS) INCOME BEFORE TAXES
    (80,356 )     (12 %)     2,979,972       75 %     (3,060,328 )     (103 %)
Income taxes
    24,739       4 %     785,778       20 %     (761,039 )     (97 %)
NET (LOSS) INCOME
  $ (105,095 )     (16 %)   $ 2,194,194       55 %   $ (2,299,289 )     (105 %)

Revenues
 
The Company’s consolidated revenues were $670,232 for the three (3) months ended March 31, 2010, which represents a $3,421,375 or 84% decrease from $4,091,607 for the three (3) months ended March 31, 2009. This decrease was primarily the result of a decline in our online advertising income and software development income.
 
   
2010 
     
2009 
     
Variance 
 
Software development
  $ -       0 %   $ 1,318,585       33 %   $ (1,318,585 )     (100 %)
Online insurance advertising
    658,280       98 %     2,672,412       65 %     (2,014,132 )     (75 %)
Insurance agency
    4,700       1 %     100,610       2 %     (95,910 )     (95 %)
Others
    7,252       1 %  
- 
      0 %     7,252       100 %
Total Revenues
  $ 670,232       100 %   $ 4,091,607       100 %   $ (3,421,375 )     (84 %)

Online insurance advertising revenue decreased by 75%, or $2,014,132, to $658,280 during the three (3) months ended March 31, 2010 from $2,672,412 during the three (3) months ended March 31, 2009.  This decrease is due to the fact that we were temporarily unable to obtain purchase orders from certain insurance agencies and insurance serving companies during the fiscal quarter ended March 31, 2010. Purchase orders from the insurance agencies and insurance serving companies during the first part of the fiscal quarter ended June 30, 2010 have increased compared with the purchase orders we received during the fiscal quarter ended March 31, 2010 and we expect that our business will resume to normal levels during the next few fiscal quarters.

Software development revenues decreased by $1,318,585, or 100%, to $0 during the three (3) months ended March 31, 2010 from $1,318,585 during the three (3) months ended March 31, 2009.  This significant decrease was primarily due to the fact that we were temporarily unable to obtain purchase orders from certain customers in our software development market during the fiscal quarter ended March 31, 2010. We expect that our business will resume to normal levels during the next few fiscal quarters.
 
Revenue from our insurance agency services during the three (3) months ended March 31, 2010 decreased by $95,910, or 95%, to $4,700 from $100,610 during the same period in 2009.  This decrease is mainly due to the fact that we were temporarily unable to obtain purchase orders from certain insurance agencies and insurance serving companies during the fiscal quarter ended March 31, 2010. Purchase orders from the insurance agencies and insurance serving companies during the first part of the fiscal quarter ended June 30, 2010 have increased compared with the purchase orders we received during the fiscal quarter ended March 31, 2010 and we expect that our business will resume to normal levels during the next few fiscal quarters.
 
9

 
Cost of Sales
 
The Company’s consolidated cost of sales (“COS”) during the three (3) months ended March 31, 2010 increased by $73,228, or 19%, from $390,206 or 10% of our net revenues to $463,434 or 69% of net revenues.  This increase is primarily attributable to the significant increase in amortization of $402,282, or 100%, due to amortization of the application software for revenue earning activities that occurred during the three (3) months ended March 31, 2010.

   
2010
   
2009
   
Variance
 
                                     
Business tax and levies
  $ 53,226       11 %   $ 342,625       87 %   $ (289,399 )     (84 %)
Salaries and allowances
    3,951       1 %     38,057       10 %     (34,106 )     (90 %)
Depreciation
    3,110       1 %     3,522       1 %     (412 )     (12 %)
Amortization
    402,282       87 %  
- 
      0 %     402,282       100 %
Other
    865       0 %     6,002       2 %     (5,137 )     (86 %)
Total Cost of Sales
  $ 463,434       100 %   $ 390,206       100 %   $ 73,228       19 %

Gross Profit
 
The Company’s consolidated gross profit during the three (3) months ended March 31, 2010 decreased by $3,392,712, or 94%, to $206,798 from $3,599,510 during the three (3) months ended March 31, 2009.  This decrease is attributable to the significant decrease in revenue and also increase in amortization of our software system.

Selling Expenses

Selling expenses decreased by $57,969 or 93%, to $4,113 for the three (3) months ended March 31, 2010, as compared to $62,082 for the three (3) months ended March 31, 2009. This decrease is primarily attributable to our efforts of reducing operating costs and reducing employee headcount in order to maintain our competitiveness in a turbulent market.

   
2010
   
2009
   
Variance
 
                                     
Salaries and allowances
  $ 3,350       82 %   $ 58,964       95 %   $ (55,614 )     (94 %)
Depreciation
    743       18 %     721       1 %     22       3 %
Office expenses
 
- 
      0 %     1,188       2 %     (1,188 )     (100 %)
Other
    20       0 %     1,209       2 %     (1,189 )     (98 %)
    $ 4,113       100 %   $ 62,082       100 %   $ (57,969 )     (93 %)

Advertising Expenses

No advertising and promotion expenses were incurred during the three (3) months ended March 31, 2010, as compared to $90, or 1% of our net revenue, during the three (3) months ended March 31, 2009. This 100% decrease is attributable to the suspension of our advertising and promotion campaign during the three (3) months ended March 31, 2010 in light of the global financial crisis and our belief that such campaign would not have yielded a significant improvement in sales.

General and Administrative Expenses

General and administrative (“G&A”) expenses were $283,024, or 42% of our net revenues, during the three (3) months ended March 31, 2010 as compared to $558,814, or 14% of our net revenues, during the three (3) months ended March 31, 2009. This decrease of $275,790 or 49% is mainly attributable to the decrease of amortization of our software system, which was classified into COS during the three (3) months ended March 31, 2010, and the decrease in the allowance for doubtful accounts.

   
2010
   
2009
   
Variance
 
                                     
Salaries and allowances
  $ 79,031       27 %   $ 160,732       28 %   $ (81,701 )     (51 %)
Rental
    28,048       10 %     96,271       17 %     (68,223 )     (71 %)
Building management fee
 
- 
      0 %     17,178       3 %     (17,178 )     (100 %)
Depreciation
    7,849       3 %     20,444       4 %     (12,595 )     (62 %)
Amortization
    -       0 %     109,708       20 %     (109,708 )     (100 %)
Travel & accommodations
    58,058       21 %     11,859       2 %     46,199       390 %
Legal & professional fees
    82,652       29 %     88,036       16 %     (5,384 )     (6 %)
Others
    27,386       10 %     54,586       10 %     (27,200 )     (50 %
    $ 283,024       100 %   $ 558,814       100 %   $ (275,790 )     (49 %)
 
10

 
Legal and professional fees were a major component of our G&A expenses, representing 29% and 16% of our total G&A expenses during the three (3) months ended March 31, 2010 and 2009, respectively.  Legal and professional fees decreased by $5,384, or 6%, during the three (3) months ended March 31, 2010.  This decrease was due to the decrease in reimbursement expenses from the professional.

Interest Income (Expense), Net

Net interest expense during the three (3) months ended March 31, 2010 was $17, which represents a $1,465 or 101% decrease from $1,448 of net interest income during the three (3) months ended March 31, 2009.

Income Taxes
 
Income taxes during the three (3) months ended March 31, 2010 decreased by $761,039, or 97%, to $24,739 from $785,778 during the three (3) months ended March 31, 2009.  This decrease is attributable to the decrease in the operating income of the Company during the three (3) months ended March 31, 2010.

Net (Loss) Income
 
Net loss for the three (3) months ended March 31, 2010 was $105,095, which represents a $2,299,289 or 105% decrease from $2,194,194 of net income during the three (3) months ended March 31, 2009. This decrease is attributable to the decrease in the operating income of the Company during the three (3) months ended March 31, 2010.

Results by Segment
 
The Company determined that there were three (3) reportable business segments during the three (3) months ended March 31, 2010 and 2009 within the PRC, which are software development, online insurance advertising and insurance agency.  Each segment is described below.

Software Development
 
   
2010
   
2009
   
Variance
 
                                     
Revenues, net
  $ -       -     $ 1,318,585       100 %   $ (1,318,585 )     (100 %)
COS
    -       -       3,174       1 %     (3,174 )     (100 %)
Gross profit
  $ -       -     $ 1,315,411       99 %   $ (1,315,411 )     (100 %)

Revenues from software development during the three (3) months ended March 31, 2010 decreased by $1,318,585, or 100%, to $0 from $1,318,585 during the three (3) months ended March 31, 2009.  This decrease is attributable to no new  project started during the three (3) months ended March 31, 2010.

   
2010
   
2009
   
Variance
 
                                     
Salaries and allowances
  $ -       -     $ -       0 %   $ -       -  
Depreciation
    -       -       3,174       100 %     (3,174 )     (100 %)
Other
    -               -       0 %     -       -  
    $ -       -     $ 3,174       100 %   $ (3,174 )     (100 %)

Online Insurance Advertising
  
   
2010
   
2009
   
Variance
 
                                     
Revenues, net
  $ 658,280       100 %   $ 2,672,412       100 %   $ (2,014,132 )     (75 %)
COS
    111,960       17 %     173,788       7 %     (61,828 )     (36 %)
Gross profit
  $ 546,320       83 %   $ 2,498,624       93 %   $ (1,952,304 )     (78 %)

Revenues from our online insurance advertising segment during the three (3) months ended March 31, 2010 decreased by $2,014,132, or 75%, to $658,280 from $2,672,412 during the three (3) months ended March 31, 2009.  This decrease is due to the fact that we were temporarily unable to obtain purchase orders from certain insurance agencies and insurance serving companies during the fiscal quarter ended March 31, 2010. Purchase orders from the insurance agencies and insurance serving companies during the first part of the fiscal quarter ended June 30, 2010 have increased compared with the purchase orders we received during the fiscal quarter ended March 31, 2010 and we expect that our business will resume to normal levels during the next few fiscal quarters.
 
The Company GP ratio decreased to 83% for the three (3) months ended March 31, 2010 from 93% for the three months (3) ended March 31, 2009.  This decrease is attributable to the reduction of revenue for the  three (3) months ended March 31, 2010, even through the COS was decreased by 36% or $61,828, to $111,960 for the three (3) months ended March 31, 2010, from $173,788 for the three (3) months ended March 31, 2009.
 
11


   
2010