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.
We are a
Delawarecorporation, incorporated on June 4, 2010by 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 Taiwansegment and conduct brokerage and insurance agency services through the subsidiaries across Taiwan. Through our recent acquisitions and integrations, our Taiwansegment is able to achieve synergies among group companies and generate more commission revenues from marketing and selling insurance products. Revenues from the Taiwansegment 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 Taiwansegment. 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. 49 Table of Contents Our Hong Kongsegment 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 Kongsegment. Our Hong Kongsegment 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 that critical accounting policies involve the most complex, difficult and
estimates and subjective 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 clients seeking to transfer risk, and is compensated in
the form of commissions and fees of the respective insurance companies,
in accordance with the terms of each service agreement made by and between the
Company and insurance companies. The performance obligation is considered
complete and satisfied on the effective date of the linked policy, as such,
that is when the associated revenue is recognized. For income related to
commission of the first year, the Company will recognize the income when the
? the policies of individuals are effective; for revenue related to variables
consideration (mainly contingent commissions from subsequent years),
It is only recorded when it is probable that there will be a significant reversal in the amount
of the accumulated revenue recognized will not occur. However, those contingents
commissions are considered highly susceptible to factors outside the company.
control and depend on the actions of third parties (i.e. the occurrence of the
renewal or subsequent premiums paid by individual insureds), and the
uncertainty about how many years the contingency will last. Therefore, the
The company does not have high confidence to estimate the amount of these variables
consideration that will not be reversed in subsequent reporting periods, and
determines to recognize said consideration as income in the year in which
the renewal of the policy is effective;
Fair value measurement in the profit provision: the purchase prices recorded for
all acquisitions include an estimate of the fair value of liabilities
associated with any potential gain arrangement, where a gain is part of
the negotiated transaction. The determination of the fair value of the gain
? provision implies the estimation and judgment on the forecast of operation
seller’s results and the future price of the Company’s shares. subsequent
Changes in the fair value of profit obligations are recorded in the
consolidated statement of income as a result of the update of the expectations of
Company and vendor performance; Y
Complexity in income tax estimates – given the complexity and uncertainties
exist with respect to the interpretation of complex tax regulations and the
amount and schedule of future taxable income, the differences that arise between the
? actual results and assumptions made, or future changes to such assumptions,
could require future adjustments to tax revenues and expenses already
Recorded. The Company establishes tax provisions, based on
estimates, due to possible consequences of audits by the
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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 past tax experience
audits and divergent interpretations of tax regulations by the taxpayer
and the responsible tax authority. Such differences of interpretation may arise
on a wide variety of topics depending on the conditions prevailing in the
domicile of the respective Group entities.
For other significant accounting policies and new accounting pronouncements
affecting our financial statements, see Note 1 to our 2021 consolidated report.
Results of Operations
Summary of completed years
The following table shows the results of operations for the years ended
December 31, 2021and 2020: Years Ended December 31, 2021 2020 Change Percent Revenue $ 131,363,175 $ 124,267,072 $ 7,096,1035.7 % 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 non-controlling entity
(2,103,659) (3,319,188) 157.8%
Net income attributable to China United shareholders
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, 2021and 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, 2021and 2020, respectively. 51
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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 income from
mainly to the constant growth of the business in the
Year Ended December 31, Geographic Areas 2021 2020 Change Percent Revenue Taiwan segment
$ 125,636,326 $ 117,524,429 $ 8,111,8976.9 % 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 $ 7,096,1035.7 % Revenue from our Taiwansegment increased by $8.1 million, or 6.9%, from $117.5 millionfor the year ended December 31, 2020to $125.6 millionfor the same period ended December 31, 2021. We continued to deliver solid financial results through our Taiwansegment due to the following reasons:
Uniwill had contributed
(i) 2021. The increase in income of Uniwill for the year ended
mainly due to the high performance of the sale of investment-type insurance
The insurance company discontinued certain long-term care and disability
insurance products in the year 2020. Before this interruption, many
individual clients decided to insure long-term care and disability
insurance policy that we had offered because individual clients
(ii) believed that these insurance products provided more favorable conditions for
them than the others available in the market. Such an increase in 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, bonuses linked to the persistence rate and some other service
allowance, for the year ended
in sales of insurance products in recent years.
Revenue from our PRC segment decreased by
$0.7 million, or 11.4% to $5.7 millionfor the year ended December 31, 2021from $6.4 millionfor 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 2020which 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 Kongsegment 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 Kongsegment decreased by $0.3 million, or 88.9% to 0.04 million for the year ended December 31, 2021from $0.3 millionfor the same period ended December 31, 2020. Decrease in revenue was due to the termination of reinsurance agreements and the discontinuation of travel insurance.
Other than the aforementioned analysis, we did not identify any known trends or
uncertainties that have had or are reasonably likely to have a material impact
on income or earnings.
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Cost of revenue and gross profit
Cost of revenue consists primarily of commissions paid on our sales
professionals Our commission policy for our sales professionals is designed to
break down the sales goal into smaller, achievable goals and provides more
incentives to our sales professionals to improve the achievement rate,
especially for freshman commissions.
The cost of revenue for the year ended
December 31, 2021decreased by $2.8 millionor 3.1%, to $84.9 millioncompared to $87.7 millionfor 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, 2021also resulted in a higher gross margin. The cost of revenue for property and casualty insurance products are immaterial for the years ended December 31, 2021and 2020.
Consequently, the gross profit margin increased from 29.4% 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 online marketing and advertising. Selling expenses decreased
$0.9 millionor 29.1% from $3.2 millionfor the year ended December 31, 2020to $2.3 millionfor the year ended December 31, 2021. Decrease in the selling expenses was caused by the adverse impact from the outbreak of COVID-19 in Taiwanthat restricted marketing activities for the year ended December 31, 2021.
General and adminsitrative expenses
G&A expenses are comprised primarily of salaries and benefits for our
administrative staff, office rental expenses, travel expenses, depreciation and
amortization, representation expenses and fees for professional services.
For the year end
December 31, 2021, G&A expenses were $27.4 million, reflecting an increase of $0.4 millionor 1.7%, compared with $27.0 millionfor 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, 2021was $0.09 million, reflecting a decrease of $0.14 millionor 267.5%, compared with net other income $0.05 millionfor 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
December 31, 2021. Income tax
For the year ended
December 31, 2021, income tax expense was $5.0 million, an increase of $1.6 millionor 46.6%, compared with $3.4 millionfor the year ended December 31, 2020. The increase in income tax was mainly due to the Uniwill's turnaround from loss to profit. 53
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Liquidity and Capital Resources
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 from
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 lines from banks.
Contractual obligations include other obligations related to compensation
(2) plans with Law Broker officials, amount owed to previous shareholders of
Commitment of capital related to the Joint Venture Agreement (the “JV
(3) Agreement”) with parties not related to AIlife, see Note 14 to our 2021
consolidated financial statement.
The following table represents a comparison of our cash flows for the years
2021 2020 Change Percent Net cash provided by operating activities
$ 13,775,488 $ 3,293,760 $ 10,481,728318.2 % 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, 2021was $13.8 millionin comparison with net cash of $3.3 millionprovided by operating activities for the year ended December 31, 2020. The increase of $10.5 millionor 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.
Net cash used in investing activities was
$9.4 millionfor the year ended December 31, 2021in comparison with net cash of $13.8 millionused in investing activities for the year ended December 31, 2020. The decrease in the cash outflows of $4.4 millionused in investing activities resulted from the increase of the proceeds from sales of marketable securities and long-term investment. 54 Table of Contents Financing activities Net cash provided by financing activities was $4.5 millionfor the year ended December 31, 2021in comparison with net cash of $5.4 millionused in financing activities for the year ended December 31, 2020. The cash inflows from the financing activities for the year ended December 31, 2021was 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 agreements
We had no off-balance sheet deals as of