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.
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 94.6% of the total revenue of the Company for the year endedDecember 31, 2020 . As ofDecember 31, 2020 , we had 51 sales and service outlets (including the headquarters) with 5,299 sales professionals and 246 administrative staff in the Taiwan segment.
Through our Consolidated Affiliated Entities in the PRC segment, we had two
insurance agencies, one brokerage and 37 service outlets with 1,553 full-time
sales professionals and 100 administrative staff in the 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, 2020 , we had one sales and service outlet (including the headquarters) with no sales professionals and one administrative staff inHong Kong segment. 42 Table of Contents Impact of COVID-19 The coronavirus pandemic ("COVID-19") has resulted in global economic disruptions and numerous restrictions imposed by government authorities. We did not have any significant impact on the operations in the Taiwan segment due to the government's responses and actions taken to COVID-19. However, our business in the PRC segment experienced certain negative impacts, such as limited access to our staff in the PRC in the beginning of the outbreak and restrictions on business travel within the PRC and between Taiwan and the PRC. As COVID-19 and its duration remain uncertain, we have been monitoring and will continue to measure and modify our business to protect our customers, sales professionals and employees. The extent of the COVID-19 impact to the Company will depend on numerous factors and developments. Consequently, any potential impacts of COVID-19 remain highly uncertain and cannot be predicted with confidence.
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 including our identification of performance obligations and
significant assumptions in estimating variable consideration;
Recognition of stock-based compensations and the valuation of fair value to ? equity securities due to multi- performance targets with counter parties in the
arrangement; and
? Complexity in estimates of income taxes due to applications of tax rules in
different foreign jurisdictions.
For other significant accounting policies affecting our financial statements, see Note 1 to our 2020 consolidated financial statements.
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Results of Operations
Overview of the years ended
The following table shows the results of operations for the years endedDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 Change Percent Revenue$ 124,267,072 $ 95,919,338 $ 28,347,734 29.6 % Cost of revenue 87,695,053 65,342,976 22,352,077 34.2 % Gross profit 36,572,019 30,576,362 5,995,657 19.6 % Gross profit margin 29.4 % 31.9 % (2.5) % (7.8) % Operating expenses: Selling 3,226,109 2,707,176 518,933 19.2 %
General and administrative 26,955,278 20,214,659 6,740,619 33.3 % Total operating expenses 30,181,387 22,921,835
7,259,552 31.7 %
Income from operations 6,390,632 7,654,527
(1,263,895) (16.5) %
Other income (expenses): Interest income 453,536 453,184 352 0.1 % Interest expenses (202,239) (208,008) 5,769 (2.8) % Dividend income 390,030 367,557 22,473 6.1 % Other - net (590,319) 333,826 (924,145) (276.8) %
Total other income, net 51,008 946,559
(895,551) (94.6) %
Income before income tax 6,441,640 8,601,086
(2,159,446) (25.1) %
Income tax expense (3,407,868) (2,704,297) (703,571) 26.0 %
Net income 3,033,772 5,896,789 (2,863,017) (48.6) %
Less: net income attributable to the
noncontrolling interests (2,103,659) (2,837,941) 734,282 (25.9) %
Net income attributable to China United's
shareholders $ 930,113 $ 3,058,848 $ (2,128,735) (69.6) %
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 94.6% and 93.6% of total revenue for the years ended
December 31, 2020 and 2019, respectively; whereas commission revenue from sales
of property and casualty insurance products only contributed 5.4% and 6.1% of
total revenue for the years ended December 31, 2020 and 2019, 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$124.2 million for the year endedDecember 31, 2020 increased by$28.3 million (or 29.6%) compared to the total revenue of$95.9 million for the year endedDecember 31, 2019 . The increase was attributable primarily to the constant business growth in the Taiwan segment. For the years endedDecember 31, 2020 and 2019, the revenue generated respectively from Taiwan, PRC andHong Kong segments was as follows: Year Ended December 31, Geographic Areas 2020 2019 Change Percent Revenue Taiwan segment$ 117,524,429 $ 87,117,945 $ 30,406,484 34.9 % Percentage of revenue 94.6 % 90.8 % PRC segment 6,426,670 8,517,475 (2,090,805) (24.5) % Percentage of revenue 5.2 % 8.9 % Hong Kong segment 315,973 283,918 32,055 11.3 % Percentage of revenue 0.2 % 0.3 % Total revenue$ 124,267,072 $ 95,919,338 $ 28,347,734 29.6 % Overall revenue from our Taiwan segment increased by$30.4 million , or 34.9%, from$87.1 million for the year endedDecember 31, 2019 to$117.5 million for the same period endedDecember 31, 2020 . We continued to deliver solid financial results through our Taiwan segment due to the following reasons:
Uniwill had contributed
year 2020 after stock compensation arrangements entered with two non-related
(i) entities. The positioning of Uniwill is to target those high-net-worth
individual customers with strategies to sell investment-type insurance
policies.
We 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
(ii) we had offered because the individual customers 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.
We received more contingent commissions, which include trailing
(iii) commissions, persistency rate linked bonuses and some other service
allowance, for the year ended
in the sales of insurance products in the past recent years.
Overall revenue from our PRC segment decreased by$2.1 million , or 24.5% to$6.4 million for the year endedDecember 31, 2020 from$8.5 million for the same period endedDecember 31, 2019 . 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 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 theHong Kong segment primarily derived from reinsurance commission on sales of insurance products from other insurers toTaiwan Life Insurance Co., Ltd. ("Taiwan Life") for risk management. Overall revenue from ourHong Kong segment for the year endedDecember 31, 2020 remained consistent with the same period in 2019. 45
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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 endedDecember 31, 2020 increased by$22.4 million or 34.2%, to$87.7 million compared to$65.3 million for the year endedDecember 31, 2019 . This increase was primarily due to increases in the direct commission cost as a result of the growth of the first-year commissions earned from insurance companies. In addition, the growth in the revenue also resulted in increasing indirect commission cost due to the high achievement rate of the sales target. Accordingly, the cost of revenue increased more than the proportional increase of revenue, causing a decrease in the gross profit margin by 2.5% from 31.9% for the year endedDecember 31, 2019 to 29.4% for the year endedDecember 31, 2020 .
Selling expenses
Selling expenses were mainly incurred by Law Broker and Uniwill in connection with online marketing and advertising. Selling expenses increased 0.5 million or 19.2% from 2.7 million for the year endedDecember 31, 2019 to 3.2 million for the same period endedDecember 31, 2020 . As a result, the Company incurred more expenses for Uniwill's branding during the year 2020.
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 endDecember 31, 2020 , G&A expenses were$27.0 million , reflecting an increase of$6.7 million or 33.3%, compared with$20.2 million for year endedDecember 31, 2019 . During the year of 2020, the Company recognized costs of$1.4 million related to stock-based compensation arrangements. Moreover, our revenue growth led to increases in performance bonus to employees and sales taxes during the year of 2020. We also incurred more general expenses due to business expansions of Uniwill and penalties related to a tax matter in the Taiwan segment for the year endedDecember 31, 2020 .
Other income (expenses)
Other income (expense) mainly consisted of interest income, interest expenses, gain or loss on valuation of financial assets, foreign currency exchange gain or loss. Net other income for the year endedDecember 31, 2020 was$0.1 million , reflecting a decrease of$1.0 million or 94.6%, compared with$0.9 million for the same period of 2019. The significant decreases in net other income was mainly associated with to foreign currency exchange losses recognized during the year of 2020 due to the continued appreciation of the NewTaiwan Dollar against the US dollar. Income tax
For the year endedDecember 31, 2020 , income tax expense was$3.4 million , an increase of$0.7 million or 26.0%, compared with$2.7 million for the year endedDecember 31, 2019 . The increase was mainly due to a supplementary tax payment of$0.3 million related to withholding tax matters and more taxes on undistributed earning accrued because of more revenues generated in the Taiwan segment during the year of 2020.
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,
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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.
Cash flows
The following table represents a comparison of our cash flows for the years
ended
Year Ended December 31,
2020 2019 Change Percent
Net cash provided by operating
activities $ 3,293,760 $ 5,411,847 $ (2,118,087) (39.1) %
Net cash used in investing activities (13,829,956) (13,137,888) (692,068) 5.3 %
Net cash provided by (used in) financing
activities 5,398,802 (354,454) 5,753,256 (1,623.1) %
Operating activities
Net cash provided by operating activities for the year ended December 31, 2020
was $3.3 million in comparison with net cash of $5.4 million provided by
operating activities for the year ended December 31, 2019 . The decrease of $2.1
million or 39.1% was mainly due to more general operating expenditures paid
during the year of 2020 as a result of the business expansion of Uniwill.
Investing activities
Net cash used in investing activities was$13.8 million for the year endedDecember 31, 2020 in comparison with net cash of$13.1 million used in investing activities for the year endedDecember 31, 2019 . The increase in the cash outflows of 0.7 million used in investing activities resulted from purchases of more equipment during the year of 2020.
Financing activities
Net cash provided by financing activities was$5.4 million for the year endedDecember 31, 2020 in comparison with net cash of$0.4 million used in financing activities for the year endedDecember 31, 2019 . The cash inflows from the financing activities for the year endedDecember 31, 2020 was mainly due to the proceeds of$27.2 million but offset by the repayments of credit facilities of$21.5 million .
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Contractual Obligations
The following represents a summary of the Company's contractual commitments 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) $ 14,159,108 $ 14,159,108 $ - $ - $ -
Operating lease 6,759,612 3,193,794 2,930,087 635,731 -
Contractual obligations (2) 3,263,132 3,025,692 237,440 - -
Capital commitment (3) 10,684,807 -
- - 10,684,807
$ 34,866,659 $ 20,378,594 $ 3,167,527 $ 635,731 $ 10,684,807 (1) Debt obligations include our revolving credit facilities from banks.
Contractual obligations include operating lease obligations and other (2) obligations related to compensation plans with Law Broker's officers, amount
due to previous shareholders of AHFL, and a Strategic Alliance Agreement with
AIATW.
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Capital commitment related to the Joint Venture Agreement (the "JV (3) Agreement") with non-related parties with AIlife, see Note 12 to our 2020
consolidated financial statements.
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