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CHINA UNITED INSURANCE SERVICE, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
The following discussion of the results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this part. 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, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.
Overview
The Company primarily provides two broad categories of insurance products, life insurance products and property and casualty insurance products, inTaiwan and PRC. The Company also provides reinsurance brokerage services and insurance consulting services inHong Kong and Taiwan. The percentage of reinsurance brokerage services and insurance consulting services is less than 1% of our total revenue. The insurance products that the Company's subsidiaries sell are underwritten by some of the leading insurance companies inTaiwan and PRC,
respectively. (1) Life Insurance Products Total revenue from Taiwan segment's sales of life insurance products were 92.2% and 87.7% of the Company's total revenue for the three months endedSeptember 30, 2022 and 2021, respectively. Total revenue from PRC segment's sales of life insurance products were 2.1% and 3.3% of the Company's total revenue for the three months endedSeptember 30, 2022 and 2021, respectively. Total revenue from Taiwan segment's sales of life insurance products were 90.3% and 88.1% of the Company's total revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. Total revenue from PRC segment's sales of life insurance products were 2.9% and 4.3% of the Company's total revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. In addition to the periodic premium payment schedules, most of the individual life insurance products we distribute also 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. This means that once the Company sells a life insurance policy with a periodic premium payment schedule, it will be able 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 sustainable growth of life insurance sales in the PRC and Taiwan, we have invested significant resources ever since the incorporation of Anhou and Law Broker on developing our capability to distribute individual life insurance products with periodic payment schedules. We expect that sales of life insurance products will continue being our primary source of revenue in the next several years.
(2) Property and Casualty Insurance Products
Total revenue from Taiwan segment's sales of property and casualty insurance products were 5.7% and 8.1% of the Company's total revenue for the three months endedSeptember 30, 2022 and 2021, respectively. Total revenue from PRC segment's sales of property and casualty insurance products were nil and 0.9% of the Company's total revenue for the three months endedSeptember 30, 2022 and 2021, respectively. Total revenue from Taiwan segment's sales of property and casualty insurance products were 6.3% and 7.0% of the Company's total revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. Total revenue from PRC segment's sales of property and casualty insurance products were 0.4% and 0.5% of the Company's total revenue for the nine months endedSeptember 30, 2022
and
2021, respectively.
31
Table of Contents
As the impacts of COVID-19 and its duration remain uncertain, we have been monitoring and will continue to measure and modify our business attempting to keep our customers, sales professionals and employees healthy and safe. 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
A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires our management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Except for the accounting policy for disposal of subsidiary as described in Note 2 to this Form 10-Q for the quarter endedSeptember 30, 2022 , we have had no changes to our Critical Accounting Policies as described in our most recent Form 10-K for the year endedDecember 31, 2021 and believe that of our significant accounting and reporting policies, the more critical policies include our accounting for revenue recognition and estimate of income taxes. Our significant accounting policies are described in Note 1 of "Summary of Significant Accounting Policies" included within our 2021 Annual Report on Form 10-K filed with theSecurities and Exchange Commission .
Results of Operations- Three Months ended
Months ended
The following table shows the results of operations for the three months ended
32
Table of Contents
Three Months Ended September 30,
2022 2021
(Unaudited) (Unaudited) Change Percent
Revenue $ 32,648,269 $ 31,629,500 $ 1,018,769 3.2 %
Cost of revenue 20,014,864 17,066,959 2,947,905 17.3 %
Gross profit 12,633,405 14,562,541 (1,929,136) (13.2) %
Gross profit margin 38.7 % 46.0 % (7.3) % (15.9) %
Operating expenses (income):
Selling 872,974 397,628 475,346 119.5 %
General and administrative 6,351,001 7,189,914 (838,913) (11.7) %
Gain on disposal of nonfinancial assets
in Jiangsu Law (3,262,890) - (3,262,890) - %
Total operating expenses (income), net 3,961,085 7,587,542
(3,626,457) (47.8) %
Income from operations 8,672,320 6,974,999
1,697,321 24.3 %
Other income (expenses): Interest income 232,343 116,277 116,066 99.8 % Interest expenses (107,046) (47,701) (59,345) 124.4 % Foreign currency exchange gain (loss), net 1,240,704 (31,341) 1,272,045 (4,058.7) % Dividend income 7,521 499 7,022 1,407.2 % Other - net 4,574 253,960 (249,386) (98.2) %
Total other income, net 1,378,096 291,694
1,086,402 372.4 %
Income before income taxes 10,050,416 7,266,693
2,783,723 38.3 % Income tax expense (866,461) (1,908,078) 1,041,617 (54.6) % Net income 9,183,955 5,358,615 3,825,340 71.4 % Net income attributable to noncontrolling interests (2,284,110) (2,338,903) 54,793 (2.3) % Net income attributable to China United's shareholders 6,899,845 3,019,712
3,880,133 128.5 %
Other comprehensive items, net of tax: (6,711,878) 208,851
(6,920,729) (3,313.7) %
Comprehensive income 2,472,077 5,567,466 (3,095,389) (55.6) % Comprehensive income attributable to noncontrolling interests (118,808) (2,404,539) 2,285,731 (95.1) % Comprehensive income attributable to China United's shareholders$ 2,353,269 $ 3,162,927
$ (809,658) (25.6) % 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 inTaiwan , PRC andHong Kong . We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. For the three months endedSeptember 30, 2022 and 2021, the revenues generated from Taiwan, PRC andHong Kong were as follows: Geographic Areas Three Months Ended September 30, 2022 2021 Change Percent Revenue Taiwan segment$ 31,965,176 $ 30,291,212 $ 1,673,964 5.5 % Percentage of revenue 97.9 % 95.8 % PRC segment 682,836 1,337,946 (655,110) (49.0) % Percentage of revenue 2.1 % 4.2 % Hong Kong segment 257 342 (85) (24.9) % Percentage of revenue - % - %
Total revenue$ 32,648,269 $ 31,629,500 $ 1,018,769 3.2 % 33 Table of Contents Revenue from our Taiwan segment increased by$1.7 million from$30.3 million for the three months endedSeptember 30, 2021 to$32.0 million for the three months endedSeptember 30, 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 and Law Broker but partially offset by the foreign exchange fluctuation from the substantial depreciation of the NewTaiwan Dollar against theU.S. dollar. Revenue from our PRC segment decreased by$0.6 million from$1.3 million for the three months endedSeptember 30, 2021 to$0.7 million for the three months endedSeptember 30, 2022 . The overall insurance industry environment was declining during 2022 in PRC and customers in PRC were less willing to buy those insurance products in 2022, 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 toTaiwan Life Insurance Co., Ltd. ("Taiwan Life") for risk management. Revenue decrease from ourHong Kong segment for the three months endedSeptember 30, 2022 continued compared to that of the three months endedSeptember 30, 2021 due to the termination of certain of our reinsurance agreements and the discontinuation of travel insurance.
Cost of revenue and gross profit
The cost of revenue mainly consists of commissions paid to our sales professionals. The cost of revenue increased by$2.9 million from$17.1 million for the three months endedSeptember 30, 2021 to$20.0 million for the three months endedSeptember 30, 2022 . The increase in the cost of revenue was mainly resulted from the revenue increase of both Uniwill and Law Broker. In addition, the bonuses paid to agents also increased due to the outstanding sales performance from senior agents with higher commission rates.
Consequently, the gross profit margin decreased from 46.0% for the three months
ended
Selling expenses
Selling expenses were mainly incurred by Law Broker and Uniwill in connection with costs related to marketing and advertising. For the three months endedSeptember 30, 2022 , selling expenses were$0.9 million , reflecting an increase of$0.5 million , compared with$0.4 million of selling expenses for the three months endedSeptember 30, 2021 . The increase in the selling expenses was caused by the marketing activities during the three months endedSeptember 30, 2022 . For the same period in 2021, the adverse impact from the outbreak of COVID-19 inTaiwan had substantially restricted our marketing activities inTaiwan , leading to less selling expenses in such period.
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 three months ended September 30, 2022 , G&A
expenses were $6.4 million , reflecting a decrease of $0.8 million , compared with
$7.2 million of G&A expenses for the three months ended September 30, 2021 . The
decrease in the general and administrative expenses was attributed to the
recognition of compensation costs for the issuance of shares of common stock
during the three months ended September 30, 2021 .
Gain on disposal of nonfinancial assets in Jiangsu Law
For the three months ended
million
subsidiaries, 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. Other income were$1.4 million , reflecting an increase of$1.1 million , compared with the other income of$0.3 million for the three months endedSeptember 30, 2021 . The increase in other income was mainly due to the foreign currency exchange gain recognized from foreign currency time deposits assets and intercompany receivable and payable because of the substantial depreciation of the NewTaiwan Dollar against theU.S. dollar and Chinese Yuan during the third quarter of 2022. 34 Table of Contents Income tax expense
For the three months ended
million
income tax expense of
2021
valuation allowance, with respect to reason of reversal of valuation allowance,
please refer to Note14.
Other comprehensive items Other comprehensive items mainly consisted of foreign currency translation gain or loss. The foreign currency translation loss was$6.7 million , reflecting a decrease of$6.9 million , compared with foreign currency translation gain of$0.2 million for the three months endedSeptember 30, 2021 . The decrease was mainly due to a larger foreign currency translation loss resulted from the substantial depreciation of the NewTaiwan Dollar against the U .S. dollar for the three months endedSeptember 30, 2022 .
Results of Operations- Nine Months ended
Months ended
The following table shows the results of operations for the nine months ended
Nine Months Ended September 30,
2022 2021
(Unaudited) (Unaudited) Change Percent
Revenue $ 95,284,500 $ 95,133,297 $ 151,203 0.2 %
Cost of revenue 60,354,318 59,576,604 777,714 1.3 %
Gross profit 34,930,182 35,556,693 (626,511) (1.8) %
Gross profit margin 36.7 % 37.4 % (0.7) % (1.9) %
Operating expenses (income):
Selling 1,990,805 1,073,702 917,103 85.4 %
General and administrative 19,094,349 19,470,001 (375,652) (1.9) %
Gain on disposal of nonfinancial assets
in Jiangsu Law (3,262,890) - (3,262,890) - %
Total operating expenses (income), net 17,822,264 20,543,703
(2,721,439) (13.2) %
Income from operations 17,107,918 15,012,990
2,094,928 14.0 %
Other income (expenses): Interest income 498,395 330,054 168,341 51.0 % Interest expenses (229,185) (136,807) (92,378) 67.5 % Foreign currency exchange gain (loss), net 2,682,717 (130,527) 2,813,244 (2,155.3) % Dividend income 219,890 251,827 (31,937) (12.7) % Other - net 127,855 513,569 (385,714) (75.1) %
Total other income, net 3,299,672 828,116
2,471,556 298.5 %
Income before income taxes 20,407,590 15,841,106
4,566,484 28.8 % Income tax expense (3,565,730) (4,308,482) 742,752 (17.2) % Net income 16,841,860 11,532,624 5,309,236 46.0 % Net income attributable to noncontrolling interests (5,378,928) (4,911,643) (467,285) 9.5 % Net income attributable toChina United's shareholders 11,462,932 6,620,981
4,841,951 73.1 %
Other comprehensive items, net of tax: (13,377,127) 716,903
(14,094,030) (1,966.0) %
Comprehensive income 3,464,733 12,249,527 (8,784,794) (71.7) % Comprehensive income attributable to noncontrolling interests (993,950) (5,163,181) 4,169,231 (80.7) % Comprehensive income attributable to China United's shareholders$ 2,470,783 $ 7,086,346
$ (4,615,563) (65.1) % 35 Table of Contents 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 , PRC andHong Kong . We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. For the nine months endedSeptember 30, 2022 and 2021, the revenues generated from Taiwan, PRC andHong Kong were as follows: Geographic Areas Nine Months Ended September 30, 2022 2021 Change Percent Revenue Taiwan segment$ 92,085,528 $ 90,439,019 $ 1,646,509 1.8 % Percentage of revenue 96.6 % 95.1 % PRC segment 3,115,764 4,554,515 (1,438,751)
(31.6) % Percentage of revenue 3.3 % 4.8 % Hong Kong segment 83,208 139,763 (56,555) (40.5) % Percentage of revenue 0.1 % 0.1 %
Total revenue$ 95,284,500 $ 95,133,297 $ 151,203
0.2 %
Revenue from our Taiwan segment increased by$1.7 million from$90.4 million for the nine months endedSeptember 30, 2021 to$92.1 million for the nine months endedSeptember 30, 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 foreign exchange fluctuation from the substantial depreciation of the NewTaiwan Dollar against theU.S. dollar. Revenue from our PRC segment decreased by$1.4 million from$4.5 million for the nine months endedSeptember 30, 2021 to$3.1 million for the nine months endedSeptember 30, 2022 . The overall insurance industry environment in PRC was declining during 2022 and customers in PRC were less willing to buy those insurance products in 2022, 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 to Taiwan Life for risk management. Decrease in revenue from ourHong Kong segment for the nine months endedSeptember 30, 2022 continued compared to that of the nine months endedSeptember 30, 2021 due to the termination of certain reinsurance agreements and the discontinuation of travel insurance.
Cost of revenue and gross profit
The cost of revenue mainly consists of commissions paid to our sales
professionals. The cost of revenue for the nine months ended
remained consistent with the same period in 2021.
Consequently, the gross profit margin slightly decreased from 37.4% for the nine months endedSeptember 30, 2021 to 36.7% for the nine months endedSeptember 30, 2022 . Selling expenses Selling expenses were mainly incurred by Law Broker and Uniwill in connection with marketing and advertising. For the nine months endedSeptember 30, 2022 , selling expenses were$2.0 million , reflecting an increase of$ 0.9 million , compared with that of$1.1 million of selling expenses for the nine months endedSeptember 30, 2021 . The increase in the selling expenses was caused by the increase of marketing activities during the nine months endedSeptember 30, 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 nine months endedSeptember 30, 2021 . 36 Table of Contents
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. 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 nine months ended September 30, 2021
but partially offset by the recognition of severance pay arising from the
disposal of the subsidiary Jiangsu Law in June, 2022.
Gain on disposal of nonfinancial assets in Jiangsu Law
For the nine months endedSeptember 30, 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. Other income during the nine months endedSeptember 30, 2022 was$3.3 million , reflecting an increase of$2.5 million , compared with that of$0.8 million for the nine months endedSeptember 30, 2021 . The increase in other income was mainly due to the foreign currency exchange gain recognized from foreign currency time deposits assets because of the substantial depreciation of the NewTaiwan Dollar against theU.S. dollar and during the nine months endedSeptember 30, 2022 . Income tax expense For the nine months endedSeptember 30, 2022 , income tax expense was$3.6 million , reflecting a decrease of$0.7 million or 17.2%, compared with that of$4.3 million for the nine months endedSeptember 30, 2021 . The decrease in tax expenses was mainly due to the reversal of valuation allowance, with respect to reason of reversal of valuation allowance, please refer to Note14.
Other comprehensive items
Other comprehensive items mainly consisted of foreign currency translation gain or loss. Foreign currency translation loss were$13.4 million , reflecting a decrease of$14.1 million , compared with foreign currency translation gain of$0.7 million for the nine months endedSeptember 30, 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 the nine months endedSeptember 30, 2022 .
Liquidity and Capital Resources
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 nine-month periods endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 Change Percent
Net cash provided by operating activities
Net cash used in investing activities
(14,499,782) (4,061,826) (10,437,956) 257.0 % Net cash provided by financing activities 2,445,876 3,886,078 (1,440,202) (37.1) % Operating activities Net cash provided by operating activities during the nine months endedSeptember 30, 2022 was$12.2 million , reflecting an increase of$3.3 million or 36.4% in comparison with that of$8.9 million during the nine months endedSeptember 30, 2021 . The increase in cash inflows was mainly due to higher net income and the collection form accounts receivable for the nine months endedSeptember 30, 2022 compared with that of the same period in 2021. 37 Table of Contents Investing activities Net cash used in investing activities during the nine months endedSeptember 30, 2022 was$14.5 million , reflecting an increase of$10.4 million or 257.0% in comparison with that of$4.1 million for the nine months endedSeptember 30, 2021 . Increases in the cash used in the investing activities mainly resulted from the increase of the purchases of time deposits during nine months endedSeptember 30, 2022 . However, the cash outflow was offset by proceeds from disposal of nonfinancial assets in subsidiary and proceeds from maturities
of time deposits. Financing activities
Net cash provided by financing activities was$2.4 million during the nine months endedSeptember 30, 2022 , which decreased by$1.4 million from that of$3.8 million during the same period of 2021. The decrease was mainly due to the decrease in net proceeds from additional borrowings under the revolving credit agreements and partially offset by the decrease of repayment of related party borrowings during the nine months endedSeptember 30, 2022 .
Contractual Obligations
There have been no significant changes to the Company's contractual obligations
as disclosed in the Company's 2021 Annual Report on Form 10-K.
Off Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of
VERICITY, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2022 and 2021
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