CHINA UNITED INSURANCE SERVICE, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included in Item 8 of Part II, "Financial Statements and Supplementary Data" of this Form 10-K Report. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company's fiscal years ended in December and the associated quarters, months and periods of those fiscal years. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words "believe," "expect," "anticipate," "plan," "estimate," and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management's Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report. We undertake no obligation to update any forward-looking statements.
Overview
We are aDelaware corporation, incorporated onJune 4, 2010 byMr. Mao , as a holding company for bothZLI Holdings Limited ("CU Hong Kong") andAction Holdings Financial Limited ("AHFL", a company incorporated in theBritish Virgin Islands ). Our common stock is quoted over the counter under the ticker symbol "CUII" on the OTCQB. The Company primarily engages in brokerage and insurance agency services by providing two broad categories of insurance products, life insurance products and property and casualty insurance products, and conducts its business primarily in three geographic operating segments, Taiwan, the PRC, andHong Kong . The insurance products that the Company's subsidiaries sell are underwritten by certain leading insurance companies inTaiwan , the PRC and regions and countries near the PRC. We have three operating subsidiaries in our Taiwan segment and conduct brokerage and insurance agency services through the subsidiaries across Taiwan. Through our recent acquisitions and integrations, our Taiwan segment is able to achieve synergies among group companies and generate more commission revenues from marketing and selling insurance products. Revenues from the Taiwan segment continues to increase and contributed about 97.0% of the total revenue of the Company for the year endedDecember 31, 2022 . As ofDecember 31, 2022 , we had 66 sales and service outlets (including the headquarters) with 5,941 sales professionals and 289 administrative staff in the Taiwan segment. Through our Consolidated Affiliated Entities in the PRC segment, we had one insurance agency and one insurance brokerage company. We have total 27 service outlets (including the headquarters) with 1,218 full-time sales professionals and 108 administrative staff in the 53
Table of Contents
PRC segment as of
OurHong Kong segment mainly consists of one operating subsidiary, which acts as a broker for reinsurance products and earns commissions on sales of insurance products from other insurers. As ofDecember 31, 2022 , we had one sales and service outlet (including the headquarters) with no sales professionals and one administrative staff inHong Kong segment. OurHong Kong segment contributed 0.1% of total revenue of the Company for the year endedDecember 31, 2022 . The Company continues to diligently monitor and manage through the impact of the ongoing COVID-19 pandemic on all aspects of our business, attempting to keep our customers, sales professionals and employees healthy and safe. Although the extent of the COVID-19 impact to the Company will depend on numerous factors and developments, we do not expect the COVID-19 pandemic to materially impact our business and financial conditions in 2023 based on current trends.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the period. We make these estimates using the best information available when they are made. However, actual results could differ materially from those estimates.
We believe critical accounting policies involve the most complex, difficult and subjective estimates and judgments are as follows:
Revenue recognition - the majority of our revenue is derived from insurance
agency and brokerage services. The Company, through its subsidiaries and the
variable interest entity, sells insurance products provided by insurance
companies to customers who are seeking to transfer risk, and is compensated in
the form of commissions and fees from the respective insurance companies,
according to the terms of each service agreement made by and between the
Company and the insurance companies. The performance obligation is considered
complete and satisfied upon the effective date of the bound policy, as such,
that is when the associated revenue is recognized. For the revenue related to
first year commission, the Company will recognize the revenue when the
? individuals' policies are effective; for the revenue related to variable
consideration (primarily the contingent commissions for subsequent years), it
is only recorded when it is probable that a significant reversal in the amount
of cumulative recognized revenue will not occur. However, those contingent
commissions are considered highly susceptible to factors outside the Company's
control and depend on the actions of third parties (i.e., the occurrence of the
renewal or the subsequent premiums paid by individual policyholders), and the
uncertainty about how many years the contingency will last. Therefore, the
Company does not have high confidence to estimate the amount of such variables
considerations that will not be reversed in subsequent reporting periods, and
determines to recognize such considerations as revenue in the year when the
renewal of the policy is effective; and
Complexity in estimates of income taxes - given complexity and uncertainties
exist with respect to the interpretation of complex tax regulations and the
amount and timing of future taxable income, the differences arising between the
actual results and the assumptions made, or future changes to such assumptions,
could necessitate future adjustments to tax income and expense already
recorded. The Company establishes tax provisions, based on reasonable
? estimates, for possible consequences of audits by the tax authorities of the
respective counties in which it operates. The amount of such provisions is
based on various factors, such as experience of previous tax audits and
differing interpretations of tax regulations by the taxable entity and the
responsible tax authority. Such differences of interpretation may arise on a
wide variety of issues depending on the conditions prevailing in the respective
entities' domicile.
54
Table of Contents
Disposal of subsidiary Jiangsu Law - the Company considers whether the sale of
an ownership interest in Jiangsu Law is deemed a transfer of nonfinancial
assets under ASC 610-20, Other Income - Gains and Losses from the Derecognition
of Nonfinancial Assets ("ASC 610-20"). In the process of evaluation, the
Company considers the articles provided by the Share Purchase Agreement that
Jiangsu Law shall retain its insurance agency license as the only asset
transferred to the third-party buyers. As such, the Company determines
substantially all of the fair value of the assets in Jiangsu Law promised to
third-party buyers is concentrated in the nonfinancial asset, which is the
? insurance agency license held by Jiangsu Law. Therefore, the disposal of
subsidiary Jiangsu Law is accounted for under ASC 610-20, where the gain or
loss recognized upon the derecognition of a nonfinancial asset is the
difference between the amount of consideration measured and allocated to that
distinct asset and the carrying amount of the distinct asset. Since the Company
no longer has a controlling financial interest in Jiangsu Law that holds the
insurance agency license after the local regulatory bureau approved the change
of shareholders of Jiangsu Law to third-party buyers in
derecognized the insurance agency license and recognized a gain when control of
the insurance agency license transferred to the counterparty.
For other significant accounting policies and new accounting pronouncements affecting our financial statements, see Note 2 to our 2022 consolidated financial statements.
55
Table of Contents
Results of Operations
Overview of the years ended
The following table shows the results of operations for the years endedDecember 31, 2022 and 2021: Years Ended December 31, 2022 2021 Change Percent Revenue$ 131,930,218 $ 131,363,175 $ 567,043 0.4 % Cost of revenue 86,846,265 84,943,319 1,902,946 2.2 % Gross profit 45,083,953 46,419,856 (1,335,903) (2.9) %
Gross profit margin 34.2 % 35.3 % (1.2) % (3.4) % Operating expenses (income): Selling 3,171,793 2,285,956 885,837 38.8 % General and administrative 27,035,082 27,400,845 (365,763) (1.3) % Gain on disposal of nonfinancial assets in Jiangsu Law (3,262,890) - (3,262,890) - %
Total operating expense (income), net 26,943,985 29,686,801
(2,742,816) (9.2) %
Income from operations 18,139,968 16,733,055
1,406,913 8.4 %
Other income (expenses): Interest income 721,300 448,657 272,643 60.8 % Interest expenses (382,685) (183,927) (198,758) 108.1 % Foreign currency exchange gain (loss), net 2,003,168 (140,371) 2,143,539 (1,527.1) % Dividend income 233,024 258,601 (25,577) (9.9) % Fair value remeasurement on earn-out provisions - (1,106,513) 1,106,513 (100.0) % Other - net 274,954 638,117 (363,163) (56.9) % Total other income (expense), net 2,849,761 (85,436)
2,935,197 (3,435.6) %
Income before income taxes 20,989,729 16,647,619
4,342,110 26.1 %
Income tax expense (3,979,409) (4,994,651) 1,015,242 (20.3) %
Net income 17,010,320 11,652,968 5,357,352 46.0 %
Less: net income attributable to the
noncontrolling interests (5,909,157) (5,422,847) (486,310) 9.0 %
Net income attributable to China
United's shareholders 11,101,163 6,230,121 4,871,042 78.2 %
Other comprehensive items, net of tax: (9,650,725) 1,176,146
(10,826,871) (920.5) %
Comprehensive income 7,359,595 12,829,114 (5,469,519) (42.6) % Comprehensive income attributable to noncontrolling interests (2,767,084) (5,823,574) 3,056,490 (52.5) % Comprehensive income attributable to China United's shareholders$ 4,592,511 $ 7,005,540
$ (2,413,029) (34.4) % Revenue As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies inTaiwan , the PRC andHong Kong . We generate revenue primarily through our sales force, which consists of individual sales professionals in our distribution
and
service network.
56
Table of Contents
The Company's majority of revenues are derived from the commissions from sales
of life insurance products. Total commission revenue from sales of life
insurance products accounted for 93.7% and 92.8% of total revenue for the years
ended December 31, 2022 and 2021, respectively; whereas commission revenue from
sales of property and casualty insurance products only contributed 6.3% and 7.2%
of total revenue for the years ended December 31, 2022 and 2021, respectively.
Most of the individual life insurance products we distribute allow the insured
to choose to make a single, lump-sum premium payment at the beginning of the
policy term. If a periodic payment schedule is adopted by the insured, a life
insurance policy can generate periodic payment of fixed premiums to the
insurance company for a specified period of time and enables the Company to
derive commission and fee income from that policy for an extended period of
time, sometimes up to 25 years. Because of this feature and the expected
sustained growth of life insurance sale, we have placed significant resources to
expand and sell the life insurance products with periodic payment schedules. We
expect that sales of life insurance products to continuously be our primary
source of revenue in the next several years.
Our total revenue of
Year Ended December 31,
Geographic Areas 2022 2021 Change Percent
Revenue
Taiwan segment $ 127,968,864 $ 125,636,326 $ 2,332,538 1.9 %
Percentage of revenue 97.0 % 95.6 %
PRC segment 3,847,076 5,691,835 (1,844,759) (32.4) %
Percentage of revenue 2.9 % 4.3 %
Hong Kong segment 114,278 35,014 79,264 226.4 %
Percentage of revenue 0.1 % 0.1 %
Total revenue $ 131,930,218 $ 131,363,175 $ 567,043 0.4 %
Revenue from our Taiwan segment increased by $2.4 million , or 1.9%, from $125.6
million for the year ended December 31, 2021 to $128.0 million for the same
period ended December 31, 2022 . The revenue in local currency was increased due
to the performance and operation bonus resulting from the sales of insurance
products increase from Uniwill but partially offset by the decrease in revenue
from Law Broker and the foreign exchange fluctuation from the substantial
depreciation of the New Taiwan Dollar against the U.S. dollar.
Revenue from our PRC segment decreased by $1.9 million , or 32.4% to $3.8 million
for the year ended December 31, 2022 from $5.7 million for the same period ended
December 31, 2021 . The overall insurance industry environment in PRC was
declining during 2022 due to the Covid-19 lockdown imposed by PRC government,
which resulted in the decrease of revenue in the PRC segment.
Revenue from the Hong Kong Segment was primarily derived from reinsurance
commission on sales of insurance products from other insurers for risk
management. Increase in revenue from our
Except the aforementioned analysis, we did not identify any know trends or uncertainties that have had or are reasonably likely to have a material impact on revenues or income.
Cost of revenue and gross profit
The cost of revenue mainly consists of commissions paid to our sales professionals. Our commission policy to our sales professionals designs to divide sales target into smaller and more attainable targets and provides more incentives to our sales professionals to improve the achievement rate, especially for the first-year commissions.
The cost of revenue for the year endedDecember 31, 2022 increased by$1.9 million or 2.2%, to$86.8 million compared to$84.9 million for the year endedDecember 31, 2021 . The increase in the cost of revenue was mainly resulted from the revenue increase of Uniwill. In addition, the bonuses paid to agents also increased due to the outstanding sales performance from senior agents with
higher commission rates.
57
Table of Contents
Consequently, the gross profit margin decreased from 35.3% for the year ended
Except the aforementioned analysis, we did not identify any know events that are reasonably likely to cause a material increase in our cost of revenue in the future. Selling expenses Selling expenses were mainly incurred by Law Broker and Uniwill in connection with marketing and advertising. Selling expenses increased$0.9 million or 38.8% from$2.3 million for the year endedDecember 31, 2021 to$3.2 million for the year endedDecember 31, 2022 . The increase in the selling expenses was caused by the increase of marketing activities during the year endedDecember 31, 2022 . For the same period in 2021, the adverse impact from the outbreak of COVID-19 inTaiwan had substantially restricted our marketing activities inTaiwan , resulting in less selling expenses during the year endedDecember 31, 2021 .
General and administrative expenses
General and administrative ("G&A") expenses are principally comprised of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees.
For the year endDecember 31, 2022 , G&A expenses were$27.0 million , reflecting a decrease of$0.4 million or 1.3%, compared with$27.4 million for year endedDecember 31, 2021 . The decrease in the general and administrative expenses was mainly attributed to the recognition of compensation costs for the issuance of shares of common stock for the year endedDecember 31, 2021 but partially offset by the recognition of severance pay arising from the disposal of the subsidiary Jiangsu Law inJune 2022 .
Gain on disposal of nonfinancial assets in Jiangsu Law
For the year endedDecember 31, 2022 , other operating income were$3.3 million generated from the disposal of nonfinancial assets in the subsidiary, Jiangsu Law.
Other income (expenses), net
Other income mainly consisted of interest income, interest expenses, gain or loss on valuation of financial assets and foreign currency exchange gain or loss. Net other income for the year endedDecember 31, 2022 was$2.8 million , reflecting an increase of$2.9 million or 3,435.6%, compared with net other expense$0.1 million for the same period of 2021. The increase in other income was mainly due to the foreign currency exchange gain recognized from foreign currency time deposits and intercompany transactions that will be paid back in currency other than the functional currency because of the substantial depreciation of the NewTaiwan Dollar against theU.S. dollar during the year endedDecember 31, 2022 and the settlement expense of earn-out shares for the year endedDecember 31, 2021 . Income tax
For the year endedDecember 31, 2022 , income tax expense was$4.0 million , a decrease of$1.0 million or 20.3%, compared with$5.0 million for the year endedDecember 31, 2021 . The decrease in tax expenses was mainly due to the reversal of valuation allowance. For the reason of reversal of valuation allowance, please refer to Note 21 to our 2022 consolidated financial statements.
Other comprehensive items
Other comprehensive items mainly consisted of foreign currency translation gain or loss. Foreign currency translation loss was$9.7 million , reflecting a decrease of$10.9 million , compared with foreign currency translation gain of$1.2 million for the year endedDecember 31, 2021 . The decrease was mainly due to a larger foreign currency translation loss resulted from the substantial depreciation of the NewTaiwan Dollar against theU.S. dollar for net assets of Taiwan segment for the year endedDecember 31, 2022 . 58
Table of Contents
Liquidity and Capital Resources
Cash requirements
Our primary sources of liquidity are cash and cash equivalents, time deposits, marketable securities, and cash generated from operations. Cash available from operations, including our cash, time deposits, and borrowings under our revolving line of credit, will be sufficient for our working capital needs, including commissions payable to sales professionals, performance bonus payable to management, payments of tax liabilities, marketing and adverting needs to promoting sales, as well as purchase of equipment. However, future business opportunities may cause a change in our estimate.
Contractual cash obligations
The following represents a summary of the Company's contractual cash obligations
and related scheduled maturities as of
Payments due by period
Less than More than
Obligations Total 1 year 1-3 years 3-5 years 5 years
Debt obligations (1) $ 21,009,464 $ 21,009,464 $ - $ - $ -
Operating lease 7,341,134 3,589,189 3,111,693 640,252 -
Contractual obligations (2) 2,745,128 2,256,282 488,846 - -
Capital commitment (3) 9,288,077 -
- - 9,288,077
$ 40,383,803 $ 26,854,935 $ 3,600,539 $ 640,252 $ 9,288,077 (1) Debt obligations include our revolving credit facilities from banks.
Contractual obligations include other obligations related to compensation (2) plans with Law Broker's officers, and amount due to previous shareholders of
AHFL.
(3) Capital commitment related to the Joint Venture Agreement (the "JV
Agreement") with non-related parties with AIlife is NTD 285 million.
Cash flows
The following table presents a comparison of the net cash provided by operating
activities, net cash used in investing activities and net cash provided by
financing activities for the year ended
Year Ended
2022 2021 Change Percent
Net cash provided by operating activities $ 13,632,776 $ 13,775,488 $ (142,712) (1.0) %
Net cash used in investing activities (7,371,488) (9,446,329) 2,074,841 (22.0) %
Net cash provided by financing activities 3,076,561 4,516,778(1,440,217) (31.9) %
Operating activities
Net cash provided by operating activities for the year endedDecember 31, 2022 , was$13.6 million compared with net cash of$13.8 million provided by operating activities forDecember 31, 2021 . The decrease of$0.2 million or 1.0% was mainly recognized gains on the disposal of nonfinancial assets in Jiangsu Law and unrealized foreign currency exchange gains but partially offset by the higher growth of net income for the year endedDecember 31, 2022 , compared with that of the same period in 2021. 59 Table of Contents Investing activities Net cash used in investing activities was$7.4 million for the year endedDecember 31, 2022 in comparison with net cash of$9.5 million used in investing activities for the year endedDecember 31, 2021 . The decrease in outflow was due to inflow from disposal of subsidiary, which was partially offset by the increased outflow for time deposit purchases.
Financing activities
Net cash provided by financing activities was$3.1 million for the year endedDecember 31, 2022 in comparison with net cash of$4.5 million provided in financing activities for the year endedDecember 31, 2021 . The decrease was mainly due to the decrease in net proceeds from additional borrowings under the revolving credit agreements during the year endedDecember 31, 2022 .
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
© Edgar Online, source
