CHINA UNITED INSURANCE SERVICE, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS - Insurance News Net

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.

Overview

We are a Delaware corporation, incorporated on June 4, 2010 by Mr. Mao, as a
holding company for both ZLI Holdings Limited (“CU Hong Kong”) and Action
Holdings Financial Limited (“AHFL”, a company incorporated in the British 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,
and Hong Kong. The insurance products that the Company’s subsidiaries sell are
underwritten by certain leading insurance companies in Taiwan, 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 95.6% of the total revenue of the
Company for the year ended December 31, 2021. As of December 31, 2021, we had 54
sales and service outlets (including the headquarters) with 5,569 sales
professionals and 276 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 32 service
outlets (including the headquarters) with 1,352 full-time sales professionals
and 124 administrative staff in the PRC segment as of December 31, 2021. Our PRC
segment contributed 4.3% of total revenue of the Company for the year ended
December 31, 2021.

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Our Hong 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 of December 31, 2021, we had one sales and
service outlet (including the headquarters) with no sales professionals and one
administrative staff in Hong Kong segment. Our Hong Kong segment contributed
0.1% of total revenue of the Company for the year ended December 31, 2021.

Impact of COVID-19

There has continued to be widespread impact from the coronavirus disease
(“COVID-19”) pandemic including potentially more contagious strains of COVID-19
such as the Delta and Omicron variants. It has created significant volatility
and uncertainty and economic disruption. The extent to which the pandemic
impacts our business and operations will depend on numerous evolving factors,
many of which are not within our control and which we may not be able to
accurately predict, including its duration and scope; the ultimate availability,
administration and effectiveness of vaccines around the world; governmental
actions that have been and continue to be taken in response to the pandemic,
including vaccine coverage; the impact of the pandemic on economic activity and
actions taken in response; the ability of our clients to pay their insurance
premiums which could impact our commission and fee revenues for our services;
and the long-term impact of employees working from home, including increased
technology costs.

The restrictions implemented might impact our business operation, particularly
from the first year commission (“FYC”) perspective. However, the decrease of FYC
is offset by the receiving more contingent commissions which earned from the
previous years. As a result, the total revenue of the Company in the year of
2021 is 5.7% higher compare to that one in the year of 2020.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.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;

Fair value measurement on earn-out provision – the recorded purchase prices for

all acquisitions include an estimation of the fair value of liabilities

associated with any potential earn-out provisions, where an earn-out is part of

the negotiated transaction. The determination of fair value of the earn-out
? provision involves the estimate and judgment on the forecast of operating

results of the seller and the future share price of the Company. Subsequent

changes in the fair value of earn-out obligations are recorded in the

consolidated statement of operation as a result of updated expectations for the

performance of the Company and the seller; 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

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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 Group entities’ domicile.

For other significant accounting policies and new accounting pronouncements
affecting our financial statements, see Note 1 to our 2021 consolidated
financial statements.

Results of Operations

Overview of the years ended December 31, 2021 and 2020

The following table shows the results of operations for the years ended December
31, 2021 and 2020:

Years Ended December 31,
2021 2020 Change Percent
Revenue $ 131,363,175 $ 124,267,072 $ 7,096,103 5.7 %
Cost of revenue 84,943,319 87,695,053 (2,751,734) (3.1) %
Gross profit 46,419,856 36,572,019 9,847,837 26.9 %
Gross profit margin 35.3 % 29.4 % 5.9 % 20.1 %

Operating expenses:
Selling 2,285,956 3,226,109 (940,153) (29.1) %
General and administrative 27,400,845 26,955,278 445,567 1.7 %
Total operating expenses 29,686,801

30,181,387 (494,586) (1.6) %

Income from operations 16,733,055

6,390,632 10,342,423 161.8 %

Other income (expenses):
Interest income 448,657 453,536 (4,879) (1.1) %
Interest expenses (183,927) (202,239) 18,312 (9.1) %
Dividend income 258,601 390,030 (131,429) (33.7) %
Fair value remeasurement on earn-out provisions (1,106,513) – (1,106,513) – %
Other – net 497,746 (590,319) 1,088,065 (184.3) %
Total other income (expense), net (85,436)

51,008 (136,444) (267.5) %

Income before income tax 16,647,619 6,441,640 10,205,979 158.4 %
Income tax expense (4,994,651)

(3,407,868) (1,586,783) 46.6 %

Net income 11,652,968

3,033,772 8,619,196 284.1 %
Less: net income attributable to the noncontrolling
interests

(5,422,847)

(2,103,659) (3,319,188) 157.8 %
Net income attributable to China United’s shareholders $ 6,230,121 $ 930,113 $ 5,000,008 569.8 %

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 in
Taiwan, the PRC and Hong Kong. We generate revenue primarily through our sales
force, which consists of individual sales professionals in our distribution and
service network.

The Company’s majority revenues are derived from the commissions from sales of
life insurance products. Total commission revenue from sales of life insurance
products accounted for 92.8% and 94.6% of total revenue for the years ended
December 31, 2021 and 2020, respectively; whereas commission revenue from sales
of property and casualty insurance products only contributed 7.2% and 5.4% of
total revenue for the years ended December 31, 2021 and 2020, respectively.

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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 will continuously be our primary
source of revenue in the next several years.

Our total revenue of $131.4 million for the year ended December 31, 2021
increased by $7.1 million (or 5.7%) compared to the total revenue of $124.3
million for the year ended December 31, 2020. The increase was attributable
primarily to the constant business growth in the Taiwan segment. For the years
ended December 31, 2021 and 2020, the revenue generated respectively from
Taiwan, PRC and Hong Kong segments was as follows:

Year Ended December 31,
Geographic Areas 2021 2020 Change Percent
Revenue
Taiwan segment $ 125,636,326 $ 117,524,429 $ 8,111,897 6.9 %
Percentage of revenue 95.6 % 94.6 %
PRC segment 5,691,835 6,426,670 (734,835) (11.4) %
Percentage of revenue 4.3 % 5.2 %
Hong Kong segment 35,014 315,973 (280,959) (88.9) %
Percentage of revenue 0.1 % 0.2 %
Total revenue $ 131,363,175 $ 124,267,072 $ 7,096,103 5.7 %

Revenue from our Taiwan segment increased by $8.1 million, or 6.9%, from $117.5
million for the year ended December 31, 2020 to $125.6 million for the same
period ended December 31, 2021. We continued to deliver solid financial results
through our Taiwan segment due to the following reasons:

Uniwill had contributed $6.7 million of the increased revenue during the year

(i) 2021. The increase in Uniwill’s revenue for the year ended December 31, 2021

mainly due to the high performance of selling investment-type insurance

policies.

The insurance company discontinued certain long-term care and disability

insurance products in the year of 2020. Prior to such discontinuation, many

individual customers decided to lock in the long-term care and disability

insurance policy that we had offered because the individual customers

(ii) believed that these insurances products provided more favorable terms to

them than the other ones available on the market. Such surge in the sales of

those insurance policies in 2020 had boosted the total sales in our
insurance policies. The surge in 2020 also caused the increase in
persistency rate linked bonuses during 2021.

We received more contingent commissions, which include trailing

(iii) commissions, persistency rate linked bonuses and some other service

allowance, for the year ended December 31, 2021 due to our continued growth

in the sales of insurance products in the past recent years.

Revenue from our PRC segment decreased by $0.7 million, or 11.4% to $5.7 million
for the year ended December 31, 2021 from $6.4 million for the same period ended
December 31, 2020. Decrease in revenue for the PRC segment was due to the
adverse impact on the outbreak of COVID-19. In addition, a new Chinese policy
for insurance products in August 2020 which requesting sales agents to have
audio and video recording during promotion of insurance, has increased
difficulties for sales agents to expand the market and promote insurance
products to individual customers.

The revenue in the Hong Kong segment primarily derived from reinsurance
commission on sales of insurance products from other insurers to Taiwan Life
Insurance Co., Ltd. (“Taiwan Life”) for risk management. Revenue from our Hong
Kong segment decreased by $0.3 million, or 88.9% to 0.04 million for the year
ended December 31, 2021 from $0.3 million for the same period ended December 31,
2020. Decrease in revenue was due to the termination of reinsurance agreements
and the discontinuation of travel insurance.

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.

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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 ended December 31, 2021 decreased by $2.8
million or 3.1%, to $84.9 million compared to $87.7 million for the year ended
December 31, 2020. The decrease in the cost of revenue was due to the impact of
outbreak of COVID-19 in Taiwan, resulting in a drop in first year commissions.
Related commission cost has also decreased correspondingly. In addition, the
increase of persistency rate linked bonuses from life insurance products for the
year ended December 31, 2021 also resulted in a higher gross margin. The cost of
revenue for property and casualty insurance products are immaterial for the
years ended December 31, 2021 and 2020.

Consequently, the gross profit margin increased from 29.4% for the year ended
December 31, 2020 to 35.3% for the year ended December 31, 2021.

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 online marketing and advertising. Selling expenses decreased $0.9 million
or 29.1% from $3.2 million for the year ended December 31, 2020 to $2.3 million
for the year ended December 31, 2021. Decrease in the selling expenses was
caused by the adverse impact from the outbreak of COVID-19 in Taiwan that
restricted marketing activities for the year ended December 31, 2021.

General and administrative expenses

G&A expenses are principally comprised of salaries and benefits for our
administrative staff, office lease expenses, travel expenses, depreciation and
amortization, entertainment expenses, and professional service fees.

For the year end December 31, 2021, G&A expenses were $27.4 million, reflecting
an increase of $0.4 million or 1.7%, compared with $27.0 million for year ended
December 31, 2020. For the year ended December 31, 2021, the increase in the
general and administrative expenses was caused by the foreign exchange
fluctuation.

Other income (expenses)

Other income (expenses) mainly consisted of interest income, interest expenses,
gain or loss on valuation of financial assets, foreign currency exchange gain or
loss. Net other expenses for the year ended December 31, 2021 was $0.09 million,
reflecting a decrease of $0.14 million or 267.5%, compared with net other income
$0.05 million for the same period of 2020. The decrease in net other income
mainly due to the settlement of earn-out shares for the year ended December 31,
2021. However, the decrease was partially offset by exchange gains for the
year
ended December 31, 2021.

Income tax

For the year ended December 31, 2021, income tax expense was $5.0 million, an
increase of $1.6 million or 46.6%, compared with $3.4 million for the year ended
December 31, 2020. The increase in income tax was mainly due to the Uniwill’s
turnaround from loss to profit.

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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 December 31, 2021:

Payments due by period
Less than More than
Obligations Total 1 year 1-3 years 3-5 years 5 years
Debt obligations (1) $ 18,835,932 $ 18,835,932 $ – $ – $ –
Operating lease 6,569,058 3,193,004 3,235,817 140,237 –
Contractual obligations (2) 3,127,349 2,585,595 541,754 – –
Capital commitment (3) 10,293,322 –
– – 10,293,322
$ 38,825,661 $ 24,614,531 $ 3,777,571 $ 140,237 $ 10,293,322

(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, amount due to previous shareholders of

AHFL.

Capital commitment related to the Joint Venture Agreement (the “JV
(3) Agreement”) with non-related parties with AIlife, see Note 14 to our 2021

consolidated financial statements.

Cash flows

The following table represents a comparison of our cash flows for the years
ended December 31, 2021 and 2020:

Year Ended

December 31,

2021 2020 Change Percent
Net cash provided by operating activities $ 13,775,488 $ 3,293,760 $ 10,481,728 318.2 %
Net cash used in investing activities (9,446,329) (13,829,956) 4,383,627 (31.7) %
Net cash provided by financing activities 4,516,778 5,398,802 (882,024) (16.3) %

Operating activities

Net cash provided by operating activities for the year ended December 31, 2021
was $13.8 million in comparison with net cash of $3.3 million provided by
operating activities for the year ended December 31, 2020. The increase of $10.5
million or 318.2% was mainly due to the rise in persistency rate linked bonuses
and the turnaround of Uniwill, a subsidiary of the Company, from loss to profit
for the year ended December 31, 2021.

Investing activities

Net cash used in investing activities was $9.4 million for the year ended
December 31, 2021 in comparison with net cash of $13.8 million used in investing
activities for the year ended December 31, 2020. The decrease in the cash
outflows of $4.4 million used in investing activities resulted from the increase
of the proceeds from sales of marketable securities and long-term investment.

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Financing activities

Net cash provided by financing activities was $4.5 million for the year ended
December 31, 2021 in comparison with net cash of $5.4 million used in financing
activities for the year ended December 31, 2020. The cash inflows from the
financing activities for the year ended December 31, 2021 was mainly due to a
decrease in the net proceeds from additional borrowings under the revolving
credit agreements for the year ended December 31, 2021.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2021.