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China United Insurance Service, Inc. - Quarter Report: 2020 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

          QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

          TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

COMMISSION FILE NUMBER: 000-54884

CHINA UNITED INSURANCE SERVICE, INC.

(Exact name of registrant as specified in its charter)

Delaware

30-0826400

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

7F, No. 311 Section 3

Nan-King East Road

Taipei City, Taiwan

(Address of principal executive offices)

+8862-87126958

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yes   No  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

   

Name of each exchange on which
registered

N/A

 

N/A

 

N/A

As of October 30, 2020, there were 29,421,736 shares of common stock issued and outstanding, and 1,000,000 preferred shares issued and outstanding.

Table of Contents

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

   

5

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

31

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

39

ITEM 4.

CONTROLS AND PROCEDURES

39

PART II.

OTHER INFORMATION

40

ITEM 1.

LEGAL PROCEEDINGS

40

ITEM 1A.

RISK FACTORS

40

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

40

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

40

ITEM 4.

MINE SAFETY DISCLOSURES

40

ITEM 5.

OTHER INFORMATION

40

ITEM 6.

EXHIBITS

41

SIGNATURES

42

2

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievement expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described under Part 1 Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report, or that we filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

3

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OTHER PERTINENT INFORMATION

References in this quarterly report to “we,” “us,” “our” and the “Company” refer to China United Insurance Service, Inc., its subsidiaries and variable interest entities.

References to China or the PRC refer to the People’s Republic of China (excluding Hong Kong, Macao and Taiwan). References to Taiwan refer to Republic of China.

Unless context indicates otherwise, reference to the “Company” in this quarterly report refers to China United Insurance Service, Inc. and its subsidiaries. Reference to “AHFL” refers to the combined operations of Action Holdings Financial Limited and its Taiwan Subsidiaries (as defined below). Reference to “Anhou” refers to the combined operations of Law Anhou Insurance Agency Co., Ltd. and its subsidiaries.

Our business is conducted in Taiwan and China using New Taiwanese Dollars (“NT$” or “NTD”), the currency of Taiwan, Hong Kong Dollars (“HK$” or “HKD”), the currency of Hong Kong, and RMB, the currency of China, respectively, and our financial statements are presented in United States dollars (“USD”, “US$” or “$”). In this quarterly report, we refer to assets, obligations, commitments and liabilities in our financial statements in U.S. dollars. These dollar references are based on the exchange rate of NT$, HK$ and RMB to USD, determined as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of U.S. dollars which may result in an increase or decrease in the amount of our obligations (expressed in USD) and the value of our assets, including accounts receivable (expressed in USD).

4

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

    

September 30, 2020

    

December 31, 2019

(Amount in USD)

(Unaudited)

ASSETS

Current assets

Cash and cash equivalents

$

13,571,935

$

12,615,008

Time deposits

 

46,890,005

 

38,731,658

Accounts receivable

 

15,309,244

 

22,541,558

Contract assets

3,593,536

Marketable securities

1,214,712

290,153

Other current assets

 

1,751,824

 

1,810,962

Total current assets

 

82,331,256

 

75,989,339

Property and equipment, net

 

2,176,044

 

1,402,866

Right-of-use assets under operating leases

5,791,689

5,522,665

Intangible assets, net

 

387,986

 

518,264

Long-term investments

 

2,784,188

 

2,693,082

Restricted cash – noncurrent

 

63,779

 

43,492

Deferred tax assets

1,016,388

441,364

Other assets

 

3,776,728

 

2,631,350

TOTAL ASSETS

$

98,328,058

$

89,242,422

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Short-term loans

$

13,466,184

$

8,100,000

Commissions payable to sales professionals

10,466,205

12,545,730

Contract liabilities - current

1,609,155

1,781,975

Income tax payable - current

 

2,583,652

 

2,389,304

Operating lease liabilities - current

2,740,054

2,242,034

Due to related parties

 

190,933

 

462,859

Other current liabilities

 

7,306,157

 

9,875,209

Total current liabilities

 

38,362,340

 

37,397,111

Contract liabilities - noncurrent

271,375

1,049,258

Income tax payable - noncurrent

 

719,515

 

815,451

Operating lease liabilities - noncurrent

3,008,155

3,048,632

Other liabilities

 

1,365,689

 

1,180,478

TOTAL LIABILITIES

 

43,727,074

 

43,490,930

COMMITMENTS AND CONTINGENCIES

 

 

STOCKHOLDERS’ EQUITY

 

 

Preferred stock, par value $0.00001, 10,000,000 authorized, 1,000,000 issued and outstanding

 

10

 

10

Common stock, par value $0.00001, 100,000,000 authorized, 29,421,736 issued and outstanding

 

294

 

294

Additional paid-in capital

 

8,190,449

 

8,190,449

Statutory reserves

 

8,228,904

 

8,228,904

Retained earnings

 

12,191,120

 

9,402,294

Accumulated other comprehensive income

 

1,715,678

 

417,015

Total stockholders' equity attribute to the Company's shareholders

 

30,326,455

 

26,238,966

Noncontrolling interests

 

24,274,529

 

19,512,526

TOTAL STOCKHOLDERS' EQUITY

 

54,600,984

 

45,751,492

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

98,328,058

$

89,242,422

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

(Amount in USD)

 

Revenue

$

33,235,952

$

23,266,852

$

91,200,916

$

64,449,994

Cost of revenue

 

21,269,044

 

14,374,811

 

63,261,959

 

41,805,241

Gross profit

 

11,966,908

 

8,892,041

 

27,938,957

 

22,644,753

Operating expenses:

 

 

 

 

Selling

 

926,004

 

744,429

 

1,783,692

 

1,741,372

General and administrative

 

5,705,115

 

4,706,802

 

18,614,446

 

12,934,838

Total operating expense

 

6,631,119

 

5,451,231

 

20,398,138

 

14,676,210

Income from operations

 

5,335,789

 

3,440,810

 

7,540,819

 

7,968,543

Other income (expenses):

 

 

 

 

Interest income

 

100,266

 

138,408

 

325,168

 

356,896

Interest expenses

 

(33,443)

 

(64,372)

 

(153,703)

 

(144,515)

Dividend income

 

2,368

 

(720)

 

321,603

 

309,903

Other - net

 

23,648

 

(180,560)

 

94,796

 

134,122

Total other income (expense), net

 

92,839

 

(107,244)

 

587,864

 

656,406

Income before income taxes

 

5,428,628

 

3,333,566

 

8,128,683

 

8,624,949

Income tax expense

 

(1,364,725)

 

(933,985)

 

(2,893,297)

 

(2,254,086)

Net income

 

4,063,903

 

2,399,581

 

5,235,386

 

6,370,863

Less: net income attributable to noncontrolling interests

 

(1,277,587)

 

(1,071,427)

 

(2,446,560)

 

(2,557,603)

Net income attributable to the Company's shareholders

 

2,786,316

 

1,328,154

 

2,788,826

 

3,813,260

Other comprehensive income (loss) items:

 

 

 

 

Foreign currency translation gain (loss)

 

1,106,349

 

(186,331)

 

2,066,175

 

(782,667)

Other

 

(201)

 

 

(317)

 

Total other comprehensive income (loss)

1,106,148

(186,331)

2,065,858

(782,667)

Comprehensive income

5,170,051

2,213,250

7,301,244

5,588,196

Less: comprehensive income attributable to noncontrolling interests

(1,709,453)

(1,044,640)

(3,213,755)

(2,311,894)

Comprehensive income attributable to the Company's shareholders

$

3,460,598

$

1,168,610

$

4,087,489

$

3,276,302

Weighted average shares outstanding

 

 

 

 

Basic and diluted

29,421,736

29,421,736

29,421,736

29,432,047

Earnings per share attributable to the Company's shareholders

 

 

  

 

 

Basic and diluted

$

0.092

$

0.044

$

0.092

$

0.125

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

Accumulated

Additional

Other

Common

Preferred

Paid-in

Statutory

Comprehensive

Retained

Noncontrolling

Total

    

Stock

    

Amount

    

Stock

    

Amount

    

Capital

    

Reserves

    

Income

    

Earnings

    

Total

    

Interests

    

Equity

(Amount in USD)

Balance June 30, 2020

 

29,421,736

$

294

1,000,000

$

10

$

8,190,449

$

8,228,904

$

1,041,396

$

9,404,804

$

26,865,857

$

22,565,076

$

49,430,933

Foreign currency translation gain

 

 

 

 

 

 

 

674,414

 

 

674,414

 

431,935

 

1,106,349

Other comprehensive loss

 

 

 

 

 

 

 

(132)

 

 

(132)

 

(69)

 

(201)

Net income

 

 

 

 

 

 

 

 

2,786,316

 

2,786,316

 

1,277,587

 

4,063,903

Balance September 30, 2020

 

29,421,736

$

294

1,000,000

$

10

$

8,190,449

$

8,228,904

$

1,715,678

$

12,191,120

$

30,326,455

$

24,274,529

$

54,600,984

Accumulated

Additional

Other

Common

Preferred

Paid-in

Statutory

Comprehensive

Retained

Noncontrolling

Total

    

Stock

    

Amount

    

Stock

    

Amount

    

Capital

    

Reserves

    

Income

    

Earnings

    

Total

    

Interests

    

Equity

(Amount in USD)

Balance December 31, 2019

 

29,421,736

$

294

1,000,000

$

10

$

8,190,449

$

8,228,904

$

417,015

$

9,402,294

$

26,238,966

$

19,512,526

$

45,751,492

Compensation cost in connection with issuance of preferred stock on the Company’s subsidiary, Uniwill, to nonemployees

1,547,229

1,547,229

Business acquisition

 

 

 

 

 

 

 

 

 

 

1,019

 

1,019

Foreign currency translation gain

 

 

 

 

 

 

 

1,298,872

 

 

1,298,872

 

767,303

 

2,066,175

Other comprehensive loss

 

 

 

 

 

 

 

(209)

 

 

(209)

 

(108)

 

(317)

Net income

 

 

 

 

 

 

 

 

2,788,826

 

2,788,826

 

2,446,560

 

5,235,386

Balance September 30, 2020

 

29,421,736

$

294

1,000,000

$

10

$

8,190,449

$

8,228,904

$

1,715,678

$

12,191,120

$

30,326,455

$

24,274,529

$

54,600,984

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Accumulated

Additional

Other

Common

Preferred

Paid-in

Statutory

Comprehensive

Retained

Noncontrolling

Total

    

Stock

    

Amount

    

Stock

    

Amount

    

Capital

    

Reserves

    

Loss

    

Earnings

    

Total

    

Interests

    

Equity

(Amount in USD)

Balance June 30, 2019

 

29,421,736

$

294

1,000,000

$

10

$

8,190,449

$

8,058,094

$

(548,732)

$

8,999,362

$

24,699,477

$

17,648,448

$

42,347,925

Appropriation of reserves

(1,760)

1,760

Acquisition of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(30,150)

 

(30,150)

Foreign currency translation loss

 

 

 

 

 

 

 

(159,544)

 

 

(159,544)

 

(26,787)

 

(186,331)

Net income

 

 

 

 

 

 

 

 

1,328,154

 

1,328,154

 

1,071,427

 

2,399,581

Balance September 30, 2019

 

29,421,736

$

294

1,000,000

$

10

$

8,190,449

$

8,056,334

$

(708,276)

$

10,329,276

$

25,868,087

$

18,662,938

$

44,531,025

Accumulated

Additional

Other

Common

Preferred

Paid-in

Statutory

Comprehensive

Retained

Noncontrolling

Total

    

Stock

    

Amount

    

Stock

    

Amount

    

Capital

    

Reserves

    

Loss

    

Earnings

    

Total

    

Interests

    

Equity

(Amount in USD)

Balance December 31, 2018

 

29,452,669

$

295

1,000,000

$

10

$

8,190,449

$

7,299,123

$

(171,318)

$

7,273,227

$

22,591,786

$

16,351,044

$

38,942,830

Appropriation of reserves

 

 

 

 

 

757,211

(757,211)

Foreign currency translation loss

 

 

 

 

 

 

 

(536,958)

 

 

(536,958)

 

(245,709)

 

(782,667)

Retirement of common stock

(30,933)

(1)

(1)

(1)

Net income

 

 

 

 

 

 

 

 

3,813,260

 

3,813,260

 

2,557,603

 

6,370,863

Balance September 30, 2019

 

29,421,736

$

294

1,000,000

$

10

$

8,190,449

$

8,056,334

$

(708,276)

$

10,329,276

$

25,868,087

$

18,662,938

$

44,531,025

The accompanying notes are an integral part of these condensed consolidated financial statements.

8

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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended

September 30, 

(Amount in USD)

    

2020

    

2019

Cash flows from operating activities:

Net income

$

5,235,386

$

6,370,863

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Compensation cost in connection with issuance of preferred stock on the Company’s subsidiary, Uniwill, to nonemployees

1,547,229

Depreciation and amortization

 

694,862

 

498,178

Amortization of bond premium

 

202

 

Gain on sales of marketable securities

(104,208)

(18,970)

Gain on valuation of financial assets

(48,904)

(24,296)

Loss on disposal of equipment

45,306

20,733

Loss on disposal of a subsidiary

5,645

Deferred income tax

 

(98,596)

 

(66,746)

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

7,775,347

 

4,473,238

Contract assets

(3,494,823)

(3,304,938)

Other current assets

 

234,614

 

(265,401)

Other assets

 

(1,512,399)

 

(3,126,292)

Commissions payable to sales professionals

 

(2,439,637)

 

(735,625)

Contract liabilities

(1,019,695)

(335,879)

Income tax payable

 

33,874

 

169,161

Other current liabilities

 

(2,565,675)

 

22,573

Other liabilities

 

140,468

 

80,562

Net cash provided by operating activities

 

4,428,996

 

3,757,161

Cash flows from investing activities:

 

 

  

Cash received from issuance of preferred stock on the Company’s subsidiary, Uniwill, to nonemployees

371

Purchases of time deposits

 

(53,753,884)

 

(41,901,757)

Proceeds from maturities of time deposits

 

47,141,011

 

31,802,019

Purchases of marketable securities

 

(950,791)

 

(315,442)

Proceeds from sales of marketable securities

 

215,832

 

364,748

Purchase of equipment

(1,250,361)

(454,612)

Proceeds from disposal of equipment

3,008

22,557

Purchase of intangible assets

 

(51,797)

 

(71,568)

Net cash used in investing activities

 

(8,646,611)

 

(10,554,055)

Cash flows from financing activities:

 

  

 

  

Proceeds from short-term loans

 

38,774,384

 

21,539,897

Repayment of short-term loans

 

(33,560,000)

 

(19,542,276)

Proceeds from related party borrowing

 

(275,573)

 

116,581

Net cash provided by financing activities

4,938,811

 

2,114,202

 

Foreign currency translation

 

256,018

 

(366,421)

Net decrease in cash, cash equivalents and restricted cash

 

977,214

 

(5,049,113)

Cash, cash equivalents and restricted cash, beginning balance

 

12,658,500

 

20,639,771

Cash, cash equivalents and restricted cash, ending balance

$

13,635,714

$

15,590,658

SUPPLEMENTARY DISCLOSURE:

Interest paid

$

160,978

$

151,011

Income tax paid

$

3,298,391

$

2,023,938

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CHINA UNITED INSURANCE SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amount in USD)

NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

China United Insurance Service, Inc. (“China United”, “CUII”, or the “Company”) is a Delaware corporation, organized on June 4, 2010 by Yi-Hsiao Mao, a Taiwan citizen, as a listing vehicle for both ZLI Holdings Limited (“CU Hong Kong”) and Action Holdings Financial Limited (“AHFL,” a company incorporated in the British Virgin Islands). 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 manages its business through aggregating them into three geographic operating segments, Taiwan, PRC, and Hong Kong. The Company’s common stock currently trades over the counter under the ticker symbol “CUII” on the OTC Pink market.

In May 2019, AHFL entered into an agreement to make capital contributions of $485,909 (NTD15,000,000) to AIlife International Investment Co., Limited (“AIlife”, formerly known as “Ilife”). After the transaction, the Company owned 93.75% of AIlife. In July 2019, AHFL acquired the remaining 6.25% shares of AIlife, which became the Company's wholly owned subsidiary. The business objective of AIlife is to obtain a non-exclusive license covering certain information technology systems from Law Broker and generate revenues from marketing and making the technologies available to insurance intermediary companies.

O June 4, 2019, AIlife entered into an acquisition agreement with the selling shareholder of Uniwill Insurance Broker Co., Ltd (“Uniwill”). Pursuant to the acquisition agreement, AIlife agreed to pay $14,535 (NTD 450,000) in exchange for the insurance brokerage licenses issued to Uniwill by the Taiwanese government, along with right to the Uniwill company name and $6,455 (NTD 200,000) of legal deposits. The Company has no intention of operating the Uniwill existing brokerage business nor retaining any of its sales personnel. Therefore, the acquisition is accounted as an assets purchase.

On November 15, 2019, AIlife, Cyun-Jhan Enterprise Co., Ltd. (“Cyun-Jhan”), and Jian-Zao International Industrial Co., Ltd. (“Jian-Zao” and, collectively with AIlife and Cyun-Jhan, the “Parties”) entered into a Joint Venture Agreement (the “JV Agreement”). Under the terms of the JV Agreement, the Parties agreed to invest funds, labor and technology into Uniwill. Under the terms of the JV Agreement, the paid-in capital of Uniwill should increase to an aggregate amount of $13.3 million (NTD 400 million) by AIlife, provided that the other two parties achieve performance goals no later than December 31, 2021. On August 15, 2019, AIlife increased and completed the capital injections in Uniwill to the amount of $3.3 million.

Uniwill issued a total of 9,608 preferred shares to Cyun-Jhan and Jian-Zao for cash and recognized compensation cost of $1,547,229 after the performance goals of the first stage were achieved on February 10, 2020 (the "Grant Date"). The holders of 9,608 shares of preferred stocks participate in daily operating and entitle to have the rights of share 50% of earnings of Uniwill. Each share of the preferred stock issued has 1,000 voting rights in shareholder's meeting. In addition, the holders of the preferred stocks are eligible to convert the preferred stocks to common stocks of Uniwill at a ratio of 1 preferred share to 1,000 common shares upon the achievement of the performance goals of stage two set forth in the JV Agreement. As of September 30, 2020, the performance goals of the second stage was not fulfilled.

On May 27, 2020, the Company completed the acquisition of Rays Technology Corporation ("Rays") for its 90% equity interest. The consideration to acquire 27,000 shares of Ray was US$9,177 (NTD 270,000). The acquisition is accounted as a business purchase. The Company did not recognize any goodwill or gain on bargain purchase as a result of the net asset value acquired approximating to the consideration paid.

On July 2, 2020, the Company had liquidated a subsidiary in the PRC, Prime Management Consulting (Nanjing) Co., Limited and recognized a loss on disposal of a subsidiary of $5,645 for the three and nine months ended September 30, 2020.

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In January 2020, the World Health Organization declared an outbreak of the coronavirus (COVID-19) to be a Public Health Emergency of International Concern, subsequently declared COVID-19 a global pandemic, and recommended containment and mitigation measures worldwide on March 11, 2020. We had experienced some adverse impacts on our business in the PRC Segment, 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. Even though the operations in the PRC segment fully resumed in the second quarter of 2020, the pandemic has created global economic uncertainties and led to negative impact on the financial markets. The extent of the COVID-19 impact to the Company will depend on numerous factors and developments related to COVID-19. Consequently, any potential impacts of COVID-19 remain highly uncertain and cannot be predicted with confidence.

The corporate structure as of September 30, 2020 is as follows:

Graphic

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of China United, its subsidiaries and variable interest entities as shown in the corporate structure in Note 1. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the consolidated financial statements for prior year to the current year’s presentation. Such reclassifications have no effect on net income as previously reported.

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Basis of Presentation

The condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

These condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019, which were included in the Company’s 2019 Annual Report on Form 10-K (“2019 Form 10-K”). The accompanying consolidated balance sheet as of December 31, 2019, has been derived from the Company’s audited consolidated financial statements as of that date.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results may differ from those estimates and assumptions.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable includes commission receivables stated at net realizable values. The Company reviews its accounts receivable regularly to determine if a bad debt allowance is necessary at each quarter-end. Management reviews the composition of accounts receivable and analyzes the age of receivables outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance. No allowance was deemed necessary as of September 30, 2020 and December 31, 2019.

Foreign Currency Transactions

The Company’s financial statements are presented in U.S. dollars ($), which is the Company’s reporting and functional currency. The functional currencies of the Company’s subsidiaries are NTD, RMB and HKD. The resulting translation adjustments are reported under other comprehensive income in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 220 (“ASC 220”), “Reporting Comprehensive Income”. Gains and losses resulting from the translation of foreign currency transactions are reflected in the consolidated statements of operations and other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currency are translated at the functional currency using the rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the consolidated statements of operations and other comprehensive income (loss).

The Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD, RMB and HKD into U.S. dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for condensed consolidated financial statements are as follows:

Average Rate for the Nine Months Ended

September 30, 

    

2020

    

2019

New Taiwan dollar (NTD)

NTD

29.770854

 

NTD

31.032055

China yuan (RMB)

RMB

6.994085

 

RMB

6.861782

Hong Kong dollar (HKD)

HKD

7.757236

 

HKD

7.837965

United States dollar ($)

$

1.000000

 

$

1.000000

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Exchange Rate at

    

September 30, 2020

    

December 31, 2019

New Taiwan dollar (NTD)

NTD

28.953074

 

NTD

29.953143

China yuan (RMB)

RMB

6.801266

 

RMB

6.966764

Hong Kong dollar (HKD)

HKD

7.749884

 

HKD

7.787223

United States dollar ($)

$

1.000000

$

1.000000

Earnings Per Share

Basic earnings per common share (“EPS”) is computed by dividing net income attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted EPS is computed in the same manner as basic EPS, except the number of shares includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued.

As the holders of preferred stock of the Company are entitled to share equally with the holders of common stock, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Company as may be declared by the board of directors, the preferred stock is treated as a participating security. When calculating the basic earnings per common share, the two-class method is used to allocate earnings to common stock and participating security as required by FASB ASC Topic 260, “Earnings Per Share”. As of September 30, 2020 and 2019, the Company did not have any potentially dilutive instrument.

Fair Value of Financial Instruments

Fair value accounting establishes a framework for measuring fair value and expands disclosure about fair value measurements. Fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

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The following fair value hierarchy tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:

September 30, 2020

Fair Value

Carrying

    

Level 1

    

Level 2

    

Level 3

    

Value

Assets

Total time deposits

    

$

46,890,005

$

$

$

46,890,005

Marketable securities :

Mutual funds

 

1,214,712

 

 

 

1,214,712

Long-term investments:

 

 

 

 

Government bonds held for available-for-sale

 

 

104,165

 

 

104,165

REITs

1,352,533

1,352,533

Total assets measured at fair value

$

49,457,250

$

104,165

$

$

49,561,415

December 31, 2019

Fair Value

Carrying

    

Level 1

    

Level 2

    

Level 3

    

Value

Assets

Total cash equivalents and time deposits

    

$

40,194,850

$

$

$

40,194,850

Marketable securities :

Mutual funds

 

290,153

 

 

 

290,153

Long-term investments:

 

 

 

 

Government bonds held for available -for -sale

 

 

101,203

 

 

101,203

REITs

1,308,711

1,308,711

Total assets measured at fair value

$

41,793,714

$

101,203

$

$

41,894,917

The carrying amounts of current financial assets and liabilities in the consolidated balance sheets for cash equivalents and time deposits approximate fair value due to the short-term duration of those instruments.

During the nine months ended September 30, 2020, there were no assets or liabilities that were transferred between any of the levels.

Marketable securities and long-term investments in REITs – The fair values of mutual funds and REITs were valued based on quoted market prices in active markets.

Government bonds – The fair value of government bonds is valued based on theoretical bond price in the Taipei Exchange.  

According to Taiwan Regulations Governing Deposit of Bond and Acquirement of Insurance by Insurance Agents, Insurance Brokers and Insurance Surveyors (“RGDBAI”) Article 3 and 4, Law Broker is required to maintain a minimum of NTD 3,000,000 ($103,616 and $100,156 as of September 30, 2020 and December 31, 2019, respectively) restricted balance in a separate account or government bonds issued by the central government in order to maintain its insurance license. The government bonds will mature on March 17, 2021 and the amortized cost of the bonds is $103,742 (NTD 3,003,650) and $100,479 (NTD 3,009,674) as of September 30, 2020 and December 31, 2019, respectively. The Company will purchase a similar investment after the maturity of the bonds to maintain the insurance license.

Concentration of Risk

The Company maintains cash with banks in the USA, People’s Republic of China (“PRC" or "China”), Hong Kong, and Taiwan. Should any bank holding cash become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash with that bank; however, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. In Taiwan, a depositor has up to NTD3,000,000 insured by Central Deposit Insurance Corporation (“CDIC”). In China, a depositor has up to RMB500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”). In Hong Kong, a depositor has up to HKD500,000 insured by Hong Kong Deposit Protection Board (“DPB”). In the United States, the standard insurance amount is $250,000 per depositor in a bank insured by the Federal Deposit Insurance Corporation (“FDIC”).

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Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, time deposits, restricted cash, register capital deposits and accounts receivable. As of September 30, 2020 and December 31, 2019, approximately $2,483,000 and $2,293,000 of the Company’s cash and cash equivalents, time deposits, restricted cash equivalents and register capital deposits held by financial institutions, was insured, and the remaining balance of approximately $60,540,000 and $50,108,000, was not insured. With respect to accounts receivable, the Company generally does not require collateral and does not have an allowance for doubtful accounts.

For the three months ended September 30, 2020 and 2019, the Company’s revenues from sale of insurance policies underwritten by these companies were:

Three Months Ended September 30, 

2020

2019

 

% of Total

% of Total

 

    

Amount

    

Revenue

    

Amount

    

Revenue

 

Taiwan Life Insurance Co., Ltd.

$

8,435,924

 

25

%  

$

6,048,897

26

%

TransGlobe Life Insurance Inc.

8,160,190

 

25

%  

2,952,262

13

%

Farglory Life Insurance Co., Ltd.

 

4,157,250

 

13

%  

 

3,662,473

16

%

For the nine months ended September 30, 2020 and 2019, the Company’s revenues from sale of insurance policies underwritten by these companies were:

Nine Months Ended September 30, 

2020

2019

% of Total

% of Total

 

    

Amount

    

Revenue

    

Amount

    

Revenue

 

TransGlobe Life Insurance Inc.

$

20,012,602

 

22

%  

$

7,927,576

12

%

Taiwan Life Insurance Co., Ltd.

 

19,656,521

 

22

%  

 

13,589,908

21

%

Farglory Life Insurance Co., Ltd.

 

11,120,320

 

12

%  

 

12,347,817

19

%

As of September 30, 2020 and December 31, 2019, the Company’s accounts receivable from these companies were:

September 30, 2020

December 31, 2019

 

% of Total

% of Total

 

Accounts

Accounts

 

    

Amount

    

Receivable

    

Amount

    

Receivable

TransGlobe Life Insurance Inc.

$

3,668,147

 

24

%  

$

4,239,621

 

19

%

Taiwan Life Insurance Co., Ltd

 

2,938,229

 

19

%  

 

4,012,914

 

18

%

Farglory Life Insurance Co., Ltd.

 

2,111,619

 

14

%  

 

2,664,140

 

12

%

AIA International Limited Taiwan Branch

1,472,303

10

%  

2,447,051

11

%

Shin Kong Life Insurance Co., Ltd.

 

743,251

 

5

%  

 

3,586,795

 

16

%

The Company’s operations are in the PRC, Hong Kong and Taiwan. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, foreign currency exchange and legal environments in the PRC, Hong Kong and Taiwan, and by the state of each economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, Hong Kong and Taiwan, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

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Stock-Based Compensation

The Company accounts for equity-based compensation cost in accordance with ASC 718, Compensation-Stock Compensation after adoption of ASC 2018-07, which requires the measurement and recognition of compensation expense related to the fair value of equity-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all share-based compensation payments granted to employees and nonemployees, net of estimated forfeitures, over the employees requisite service period or the non-employee performance period based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported.

Income Taxes

The Company records income tax expense using the asset-and-liability method of accounting for deferred income taxes. Under this method, deferred taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that the deferred tax assets will not be realized.

When tax returns are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of operations and other comprehensive income (loss).

New Accounting Pronouncements and Other Guidance

Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, (FASB ASC Topic 326), Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments which amends the current accounting guidance and requires the use of the new forward-looking “expected loss” model, rather than the “incurred loss” model, which requires all expected losses to be determined based on historical experience, current conditions and reasonable and supportable forecasts. This guidance amends the accounting for credit losses for most financial assets and certain other instruments including trade and other receivables, held-to-maturity debt securities, loans and other instruments.

In November 2019, the FASB issued ASU No. 2019-10 to postpone the effective date of ASU No. 2016-13 for public business entities eligible to be smaller reporting companies defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company believes the adoption of ASU No. 2016-13 will not have a material impact on its financial position and results of operations.

Income Tax

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which is intended to simplify various aspects related to accounting for income taxes. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. The standard will be adopted upon the effective date for us beginning January 1, 2021. We are currently evaluating the effects of the standard on our consolidated financial statements and related disclosures.

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Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions in which the reference LIBOR or another reference rate are expected to be discontinued as a result of the Reference Rate Reform. The standard is effective for all entities. The standard may be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022. We are currently evaluating the effects of the standard on our consolidated financial statements and related disclosures.

The management does not believe that other than disclosed above, accounting pronouncements the recently issued but not yet adopted will have a material impact on its financial position, results of operations or cash flows.

NOTE 3 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS

Cash, cash equivalents and restricted cash equivalents consisted of the following as of September 30, 2020 and December 31, 2019:

    

September 30, 2020

    

December 31, 2019

Cash and cash equivalents:

Cash on hand and in banks

$

13,571,935

$

11,151,816

Time deposits - with original maturities less than three months (see Note 4)

 

 

1,463,192

 

13,571,935

 

12,615,008

Restricted cash – noncurrent

 

63,779

 

43,492

Total cash, cash equivalents and restricted cash shown in the statements of cash flows

$

13,635,714

$

12,658,500

Noncurrent restricted cash includes a mandatory deposit in the bank in conformity with Provisions of the Supervision and Administration of Specialized Insurance Agencies in PRC, which is not allowed to be withdrawn without the permission of the regulatory commission, and a trust account held for Law Broker's officer’s bonus plan.

NOTE 4 – TIME DEPOSITS

    

September 30, 2020

    

December 31, 2019

Total time deposits

$

46,890,005

$

40,194,850

Less: Time deposits – with original maturities less than three months (see Note 3)

 

 

(1,463,192)

Time deposits – original maturities over three months but less than one year

$

46,890,005

$

38,731,658

Time Deposits Pledged as Collateral

The Company had a total of $14,786,148 and $11,920,632 restricted time deposits, respectively, as of September 30, 2020 and December 31, 2019. A total of time deposits $34,539 (NTD 1 million) was pledged as collateral for the Company’s credit card as of September 30, 2020. In addition, the Company had time deposits of $14,751,609 and $11,920,632 pledged as collateral for short-term loans, respectively, as of September 30, 2020 and December 31, 2019. See Note 5.

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NOTE 5 – SHORT-TERM LOANS

The Company’s short-term loans consisted of the following as of September 30, 2020 and December 31, 2019:

    

September 30, 2020

    

December 31, 2019

Credit facility, O-Bank

$

4,000,000

$

2,600,000

Credit facility, CUB

5,526,184

Credit facility, KGI

2,100,000

1,500,000

Credit facility, E. Sun

 

1,000,000

 

Credit facility, FEIB

 

840,000

 

2,500,000

Credit facility, CTBC

 

 

1,500,000

Total short-term loans

$

13,466,184

$

8,100,000

The Company entered into the following credit agreements:

O-Bank Co., Ltd. (“O-Bank”)

CUII has a revolving credit facility in amount of $4,000,000 with O-Bank, which matures on October 22, 2020. Borrowings under the revolving credit facility bear interest at the TAIFX3 rate plus a margin of 0.5%. As of September 30, 2020 and December 31, 2019, the outstanding balance of the revolving credit facility were $4,000,000 with an interest rate of 1.18% and $2,600,000 with a weighted average interest rate of 2.83%, respectively. As of September 30, 2020 and December 31, 2019, the borrowings are secured by a total amount of $4,766,333 (NTD 138 million) and $3,038,079 (NTD 91 million) of time deposits.

Law Broker entered into a credit agreement with O-Bank, which matures on October 22, 2020, and the agreement provides for a $3.3 million (NTD 100 million) revolving credit facility. Borrowings under this agreement bear interest at the TAIFX3 rate plus a margin of 0.75%. As of September 30, 2020 and December 31, 2019, the outstanding balance under this credit agreement was nil.

Cathay United Bank Company Ltd. ("CUB")

In April 2020, AHFL Taiwan Branch entered into a line of credit agreement in the amount of approximately $8,5 million (NTD 250 million) with Cathay United Bank Company Limited ("CUB"), which matures on April 14, 2021, and borrowings under the revolving credit facility bear interest at the higher of CUB's adjustable rates for loans plus a margin of 0.41% or the 1 month TAIBOR rate plus a margin of 0.8%. As of September 30, 2020, the outstanding balance of the revolving credit facility was $5,526,184 with an interest rate of 1.20% and secured by a total amount of $5,526,184 (NTD 160 million) of time deposits.

KGI Commercial Bank Co., Ltd. ("KGI")

CUII was approved for a line of credit agreement with KGI, which matures on October 2, 2020, pursuant to which CUII has a revolving credit facility of $1,600,000. Borrowings under the agreement bear interest at the LIBOR rate plus a margin of 0.9%. As of September 30, 2020 and December 31, 2019, the Company had the outstanding borrowing of $2,100,000 with an interest rate of 1.58% and $1,500,000 with a weighted interest rate of 3.06%, respectively. The borrowings are secured by a total amount of $2,357,415 (RMB 7.6 million and NTD 36 million) and $2,295,061 (RMB 7.6 million and NTD 36 million) of time deposits.

Law Broker entered into another credit agreement with KGI providing for a $1.6 million (NTD 50 million), and the agreement matured on October 2, 2020. The borrowing is secured by a total amount of $1,786,660 (RMB 12 million) of time deposits as of December 31, 2019. As of September 30, 2020 and December 31, 2019, there was no outstanding loan under this credit agreement.

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E. Sun Bank ("E. Sun")

On June 3, 2020, CUII was approved for a line of credit agreement in the amount of $1,000,000 with E. Sun, pursuant to which CUII has a revolving credit facility of $1,000,000. Borrowings under the agreement bear interest at the LIBOR rate plus a margin of 1.14%. As of September 30, 2020, the Company had the outstanding borrowing of $1,000,000 with an interest rate of 1.16%. The borrowing is secured by a total amount of $1,003,348 of time deposits.

Far Eastern International Bank (“FEIB”)

CUII entered into a line of credit agreement with FEIB, which shall mature on January 8, 2021, and borrowings under the revolving credit facility bear interest at the higher of LIBOR or TAIFX3 rate plus a margin of 0.85%. The outstanding balance of the revolving credit facility were $840,000 and $2,500,000 as of September 30, 2020 and December 31, 2019. The interest rate for the outstanding balance as of September 30, 2020 and December 31, 2019 were 1.83% and 3.05%, respectively. As of September 30, 2020 and December 31, 2019, the borrowing is secured by a total amount of $1,098,329 (NTD 31.8 million) and $3,064,787 (NTD 91.8 million) of time deposits.

Law Broker entered into a credit agreement with FEIB providing for a $2.6 million (NTD 80 million) revolving credit facility, which shall mature January 8, 2021. As of September 30, 2020 and December 31, 2019, there was no outstanding loan under this credit agreement.

CTBC Bank Co., Ltd. (“CTBC”)

CUII has a revolving credit facility in an amount of $1,500,000 with CTBC, which matures on August 31, 2020, and borrowings under the revolving credit facility bear interest at the CTBC’s cost of funds plus a margin of 1%. The outstanding balance of the revolving credit facility was nil and $1,500,000 with an interest rate of 3.20% as of September 30, 2020 and December 31, 2019, respectively. As of December 31, 2019, the borrowing was secured by the total amount of $1,736,045 (NTD 52 million) of time deposits. Law Broker is the guarantor of the credit facility.

Law Broker entered into a credit agreement with CTBC providing for a $3.3 million (NTD 100 million) revolving credit facility, which matured on August 31, 2020. As of September 30, 2020 and December 31, 2019, the outstanding loan under this credit agreement was nil.

Total interest expenses for short-term loans incurred were $33,443 and $64,273, respectively, for the three months ended September 30, 2020 and 2019, and were $153,703 and $144,416 for the nine months ended September 30, 2020 and 2019.

NOTE 6 – COMMISSIONS PAYABLE TO SALES PROFESSIONALS

Commissions payable to sales professionals consisted of the following as of September 30, 2020 and December 31, 2019:

    

September 30, 2020

    

December 31, 2019

Taiwan

$

10,130,726

$

12,123,149

PRC

 

335,479

 

422,581

Hong Kong

 

 

Total commissions payable to sales professionals

$

10,466,205

$

12,545,730

Commissions payable to sales professionals are usually settled within twelve months.

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NOTE 7 – OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following as of September 30, 2020 and December 31, 2019:

    

September 30, 2020

    

December 31, 2019

Accrued bonus

$

3,602,880

$

4,961,323

Accrued business tax and tax withholdings

1,452,087

1,262,570

Payroll payable and other benefits

 

880,457

 

1,317,367

Accrued tax penalties

185,318

Other accrued liabilities

 

1,185,415

 

2,333,949

Total other current liabilities

$

7,306,157

$

9,875,209

Accrued Bonus

The Company’s foreign subsidiaries have various bonus plans, which provide cash awards to employees based upon their performance, and had accrued bonus of $2,406,183 and $4,057,515, respectively, related to cash awards to employees as of September 30, 2020 and December 31, 2019. The Company has other compensation plans solely provided by Law Broker to its officers. The compensation plans eligible to Law Broker’s officers include a surplus bonus based on a percentage of income after tax and other performance bonuses such as retention and non-competition. The bonus expenses incurred by Law Broker’s officers under the compensation plans were $157,267 and $437,519, respectively, for the three and nine months ended September 30, 2020, and $302,598 and $501,672 for the three and nine months ended September 30, 2019.

As of September 30, 2020 and December 31, 2019, the Company had accrued bonus of $1,196,697 and $903,808 payable within next 12 months, and noncurrent accrued bonus of $576,191 and $471,466, respectively, related to the compensation plans for Law Broker’s officers. See Note 14 for additional information of appointment and engagement agreements with Law Broker’s officers.

Other Accrued Liabilities

As of September 30, 2020, and December 31, 2019, the Company had other accrued liabilities of $1,185,415 and $2,333,949, respectively. Other accrued liabilities consisted of accrued operating expenses for professional fees, utilities, software maintenance, and recruitment.

NOTE 8 – OTHER LIABILITIES

 

The Company’s other liabilities consisted of the following as of September 30, 2020 and December 31, 2019: 

    

September 30, 2020

    

December 31, 2019

Accrued bonus - noncurrent (Note 7)

$

576,191

$

471,466

Due to previous shareholders of AHFL

 

518,080

 

500,782

Net defined benefit liability

 

271,418

 

208,230

Total other liabilities

$

1,365,689

$

1,180,478

Due to Previous Shareholders of AHFL

Due to previous shareholders of AHFL is the entire remaining balance payable of the 2012 acquisition cost. On March 27, 2019, the Company and the selling shareholders of AHFL entered into a sixth amendment to the acquisition agreement, pursuant to which, the Company will make the cash payment in the amount of NTD15 million on or prior to March 31, 2021. The Company is in negotiation with the previous shareholders of AHFL to extend the repayment date. As of September 30, 2020 and December 31, 2019, the amount due to previous shareholders of AHFL were $518,080 and $500,782, respectively. The change in amounts was due to foreign currency translation.

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NOTE 9 – REVENUE

The Company’s revenue is derived from insurance agency and brokerage services. The Company, through its subsidiaries and variable interest entities, sells insurance products provided by insurance companies to individuals, and is compensated in the form of commissions from the respective insurance companies, according to the terms of each service agreement made by and between the Company and the insurance companies. The sale of an insurance product by the Company is considered complete when initial insurance premium is paid by an individual and the insurance policy is approved by the respective insurance company. When a policy is effective, the insurance company is obligated to pay the agreed-upon commission to the Company under the terms of its service agreement with the Company and such commission is recognized as revenue.

The Company considers the contracts with insurance companies contain one performance obligation and consideration should be recorded when performance obligation is satisfied at point in time. The amount of revenue to be recognized when the insurance policy is effective includes first year commission and other contingent commission that a significant reversal of revenue would not occur in the subsequent periods. When other contingent commission that could not be determined if a significant reversal of revenue would occur, the Company recognizes the commission after receiving insurance companies’ notice.

For the three months ended September 30, 2020 and 2019, the Company recorded revenue of $33,235,952 and $23,266,852, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded revenue of $91,200,916 and $64,449,994, respectively. Disaggregation information of revenue is disclosed in Note 15.

Contract Balance

Contract assets are the Company’s conditional rights to consideration for completed performance obligation and are in relation to the performance bonus to be rewarded based on the annual performance. The Company recognizes the contingent commission as a contract asset when the performance obligation is fulfilled, and the Company has not had the unconditional rights to the payment. Contract liabilities include payments received in advance of performance under the contract and are realized when the associated performance obligation is satisfied.

    

September 30, 2020

    

December 31, 2019

Accounts receivable

$

15,309,244

$

22,541,558

Contract assets – current

3,593,536

Contract liabilities – current

1,609,155

1,781,975

Contract liabilities – noncurrent

271,375

1,049,258

Contract Liabilities – AIATW

On June 10, 2013, AHFL entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”), the purpose of which is to promote life insurance products provided by AIATW within Taiwan by insurance agencies or brokerage companies affiliated with AHFL or CUIS. The original term of the Alliance Agreement was from June 1, 2013 to May 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW paid AHFL an execution fee of approximately $8,326,700 (NTD250,000,000, including the tax of NTD11,904,762, the “Execution Fee”), which is to be recorded as revenue upon fulfilling sales targets and the 13-month persistency ratio, as defined, over the next five years. The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.

On September 30, 2014, AHFL entered into a Strategic Alliance Supplemental Agreement (the “First Amendment to the Alliance Agreement”) with AIATW. In the First Amendment to the Alliance Agreement, the performance targets and the provision about refunding the Execution Fee on a pro rata basis when the performance targets are not met were revised.

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On January 6, 2016, AHFL entered into an Amendment No. 2 to the Alliance Agreement (the “Second Amendment to the Alliance Agreement”) with AIATW to further revise certain provisions in the Strategic Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW. To the extent permitted by applicable laws and regulations, AHFL shall assist and encourage any insurance agency company or insurance brokerage company duly approved by the competent government authorities of Taiwan (the “Appointed Broker/Agent”), to cooperate with AIATW for the promotion of life insurance products of AIATW. Pursuant to the Second Amendment to the Alliance Agreement, the expiration date of the Strategic Alliance Agreement was extended from May 31, 2018 to December 31, 2021, and the effect of the Alliance Agreement during the period from October 1, 2014 to December 31, 2015 was suspended. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Alliance Agreement, some of which are as follows: (i) expanding the scope of services to be provided by AHFL to AIATW to include, without limitation, assessment and advice on suitability of cooperative partners, advice on product strategies suitable for promotion channel development, advice on promotion/sales channel improvement, advice on promotion channel marketing and strategic planning, and promotion channel talent training; and (ii) removing certain provisions related to performance milestones and refund of Execution Fees. On March 15, 2016, AHFL issued a promise letter (the “2016 Letter”) to AIATW that AHFL is required to (i) fulfill sales targets and (ii) the 13-month persistency ratio.

On June 14, 2017, with AIATW’s consent, the 2016 Letter was revoked in order to conform with the latest terms and conditions regarding the cooperation between AHFL and AIATW as set forth in an Amendment No. 3 to the Alliance Agreement (the “Third Amendment to the Alliance Agreement”). Pursuant to the Third Amendment to the Alliance Agreement, both AHFL and AIATW agreed to adjust certain terms and conditions set forth this amendment, some of which included (i) except the first contract year (April 15th, 2013 to September 30th, 2014), the sales target of the alliance between the parties shall be changed to (a) value of new business (“VONB”) and (b) the 13-month persistency ratio; and (ii) AIATW will calculate and recognize the VONB and 13-month persistency ratio each contract year and inform the Company the result; and (iii) the Company agreed to return the basic business promotion fees to AIATW within thirty (30) days of receipt of the notice sent by AIATW if the Company fails to meet the targets set forth in the Third Amendment to the Alliance Agreement, AIATW reserved the right to offset such amount against the amount payable by it to the Company; and (iv) upon the termination of the Alliance Agreement and its amendments pursuant to the Section 8.2 of the Alliance Agreement, both parties agreed to calculate the amount to be returned or repaid, as applicable, based on the past and current contract years. The Company shall return the basic business execution fees at NTD50 million for the first contract year, NTD35 million for the second contract year, and NTD33 million for each contract year thereafter within one month after the termination.

The following table presents the amounts recognized as revenue and refund for each contract year:

Contract

Revenue

Revenue VAT 

Refund 

Refund VAT 

Year

    

Period

    

Execution Fees

    

 Amount

    

Amount

    

Amount

    

Amount

First

04/15/2013 - 09/30/2014

NTD

50,000,000

NTD

27,137,958

(1)

NTD

1,356,898

NTD

20,481,090

(1)

NTD

1,024,054

Second

01/01/2016 - 12/31/2016

NTD

35,000,000

NTD

12,855,000

(2)

NTD

642,750

NTD

20,478,333

(2)

NTD

1,023,917

Third

01/01/2017 - 12/31/2017

NTD

33,000,000

NTD

12,628,201

(3)

NTD

631,410

NTD

18,800,370

(3)

NTD

940,019

Fourth

01/01/2018 - 12/31/2018

NTD

33,000,000

NTD

11,228,600

(4)

NTD

561,429

NTD

20,199,971

(4)

NTD

1,010,000

Fifth

01/01/2019 - 12/31/2019

NTD

33,000,000

NTD

9,481,371

(5)

NTD

474,069

NTD

21,947,200

(5)

NTD

1,097,360

Sixth

01/01/2020 - 12/31/2020

NTD

33,000,000

NTD

11,213,344

(6)

NTD

560,667

NTD

20,215,227

(6)

NTD

1,010,762

Seventh

01/01/2021 - 12/31/2021

NTD

33,000,000

NTD

NTD

NTD

NTD

TOTAL

  

NTD

250,000,000

NTD

84,544,474

NTD

4,227,223

NTD

122,122,191

NTD

6,106,112

1)The revenue recognition for the first contract year is based on the annual first year premium (“AFYP”) set in Alliance Agreement, which is different from other contract years. From the second contract year to the seventh contract year, the revenue calculation is based on VONB. The Company recognized the first contract year’s revenue amount of $892,742 (NTD 27,137,958), net of Value-Added Tax (“VAT ") in 2017 due to uncertainty resolved after Amendment 3 went effective. Besides, on December 3, 2015 and February 23, 2016, the Company refunded the amounts of $160,573 (NTD4,761,905), net of VAT, and $530,056 (NTD15,719,185), net of VAT, to AIATW, respectively, due to the portion of performance sales targets not met during the first contract year based on original agreement and earlier amendments.

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2)For the year ended December 31, 2016, the Company recognized the second contract year’s revenue amount of $422,883 (NTD 12,855,000), net of VAT, and refunded the amount of $690,537 (NTD 20,478,333), net of VAT, due to uncertainty resolved after Amendment 3 went effective.

3)For the year ended December 31, 2017, the Company recognized the third contract year’s revenue amount of $415,423 (NTD12,628,201), net of VAT, and refund amount of $633,955 (NTD18,800,370), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency.

4)For the year ended December 31, 2018, the Company recognized the fourth contract year’s revenue amount of $372,650 (NTD11,228,600), net of VAT, and refund amount of $670,389 (NTD 20,199,971), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency.

5)For the year ended December 31, 2019, the Company recognized the fifth contract year's revenue amount of $314,953 (NTD9,481,371), net of VAT, and refund the amount of $729,045 (NTD 21,947,200), net of VAT, for the same contract period based on the calculation of VONB and 13-month persistency.

6)The Company estimated VONB and 13-month persistency ratio for the year ending December 31, 2020 and calculated the revenue amount to be $395,488 (NTD 11,774,011) for the year. The amount will be reassessed every quarter until receiving AIATW’s notice.

The Company recognized revenue of $94,493 (NTD 2,813,139), net of VAT, and $73,691(NTD 2,281,470), net of VAT for the three months ended September 30, 2020 and 2019, and $282,491 (NTD 8,410,008) and $234,852 (NTD 7,271,032) , net of VAT, for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020 and December 31, 2019, the Company had non-current portion of contract liabilities of $271,375 and $1,049,258, respectively, and current contract liabilities of $1,609,155 and $1,781,975, respectively, related to the Alliance Agreement.

NOTE 10 –LEASE

The Company adopted ASC 842 as of January 1, 2019 using a modified retrospective transition with no adjustment to its comparative periods in the year of transition. The Company elected the practical expedients, which allow the Company not to reassess prior conclusions with respect to lease identification, lease classification and initial direct costs under ASC 842. The Company did not elect the hindsight practical expedient to determine the lease term or in assessing the likelihood that a lease purchase option will be exercised. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets of $4.0 million and corresponding operating lease liabilities of $3.7 million as of January 1, 2019 on the consolidated balance sheet.

The Company has operating leases for its offices with lease terms ranging from one to six years. We determine if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides us the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, we consider it to be, or contain, a lease. We record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments. The lease term used in the calculation of right-of-use assets and lease liabilities renewal and termination options that are reasonably certain to be exercised. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. Our leases do not provide an implicit borrowing rate, and we estimate the Company’s incremental borrowing rate to discount the lease payments based on information available at lease commencement.

The Company recorded operating lease cost of $910,073 and $2,562,384 for the three and nine months ended September 30, 2020, and $701,341 and $2,076,084 for the three and nine months ended September 30, 2019, respectively.

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Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As of September 30, 2020, operating lease right-of-use assets and lease liabilities were as follows:

    

September 30, 2020

    

December 31, 2019

Right-of-use assets under operating leases

$

5,791,689

$

5,522,665

Operating lease liabilities – current

 

2,740,054

 

2,242,034

Operating lease liabilities – noncurrent

 

3,008,155

 

3,048,632

Lease Term and Discount Rate

    

September 30, 2020

    

December 31, 2019

Weighted average remaining lease term

 

  

 

  

 

Operating lease

 

2.64

years

2.91

years

Weighted average discount rate

 

  

 

  

 

Operating lease

 

3.04

%  

2.85

%  

Supplemental Cash Flow Information Related to Leases

    

September 30, 2020

    

December 31, 2019

Cash paid for amounts included in the measurement of lease liabilities

 

  

  

Operating cash flows related to operating leases

$

2,497,196

$

2,655,644

The minimum future lease payments as of September 30, 2020 are as follows:

    

Amount

2020 (reminder of year)

$

792,888

2021

 

2,642,057

2022

 

1,387,905

2023

 

677,494

2024

 

442,299

Thereafter

 

47,115

Total minimum lease payments

5,989,758

Less: Interest

 

(241,549)

Present value of future minimum lease payments

$

5,748,209

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NOTE 11 – NON-CONTROLLING INTERESTS

Non-controlling interests consisted of the following as of September 30, 2020 and December 31, 2019:

% of Non-

Other

controlling

December 31, 

Contribution

Net Income

Comprehensive

September 30, 

Name of Entity

    

Interest

    

2019

    

/Acquisition

    

(Loss)

    

Income

    

2020

Law Enterprise

 

34.05

%  

$

(204,964)

$

$

(232,274)

$

16,642

$

(420,596)

Law Broker

 

34.05

%  

 

19,536,104

 

 

3,610,495

 

748,243

 

23,894,842

Uniwill

50.00

%

1,547,229

(993,938)

20

553,311

Rays

10.00

%

1,019

(3,328)

(2,309)

PFAL

 

49.00

%  

 

351,278

 

 

59,244

 

881

 

411,403

MKI

 

49.00

%  

 

283

 

 

(1,016)

 

 

(733)

PA Taiwan

 

49.00

%  

 

(167,531)

 

 

5,931

 

211

 

(161,389)

PTC Nanjing

 

49.00

%  

 

(2,644)

 

 

1,446

 

1,198

 

Total

$

19,512,526

$

1,548,248

$

2,446,560

$

767,195

$

24,274,529

% of Non-

Other

Controlling

December 31, 

Net Income

Comprehensive

December 31, 

Name of Entity

    

Interests

    

2018

    

(Loss)

    

Income (Loss)

    

Dividends

    

2019

Law Enterprise

 

34.05

%  

$

(72,557)

$

(147,948)

$

15,541

$

$

(204,964)

Law Broker

 

34.05

%  

 

16,149,662

 

2,985,723

400,719

 

19,536,104

PFAL

 

49.00

%  

 

436,742

 

7,086

1,265

(93,815)

 

351,278

MKI

 

49.00

%  

 

(2,630)

 

2,913

 

283

PA Taiwan

 

49.00

%  

 

(157,762)

 

(9,694)

(75)

 

(167,531)

PTC Nanjing

 

49.00

%  

 

(2,411)

 

(139)

(94)

 

(2,644)

Total

$

16,351,044

$

2,837,941

$

417,356

$

(93,815)

$

19,512,526

Uniwill issued a total of 9,608 preferred shares to Cyun-Jhan and Jian-Zao for cash pursuant to the JV Agreement entered on November 15, 2019 after the performance goals of first stage were achieved on February 10, 2020 (the “Grant Date”). The preferred stocks issued have voting rights at 1 share to 1,000 voting rights in shareholder’s meeting, and rights of participating in the daily operating of Uniwill and to receive 50% of earnings of the operating subsidiary. In addition, the holders of the preferred stocks are eligible to convert the preferred stock to common stock of Uniwill at a ratio of 1 preferred share to 1,000 common shares upon the achievement of the performance goals of stage two set forth in the JV Agreement.

Based on ASC 718, the Company determined that the fair market value of 9,608 shares of convertible preferred stock was $1,547,229 on the Grant Date valuated by an independent third-party valuation firm using the probability-based recognition approach. Nil and $1,547,229 compensation cost was recognized after cash surrendered for the three and nine months ended September 30, 2020 as a result.

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NOTE 12 – INCOME TAX

The following table reconciles the Company’s statutory tax rates to effective tax rates for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30, 

2020

2019

US statutory rate

 

21

%  

21

%

Tax rate difference

 

(1)

%  

(1)

%

Income tax on undistributed earnings

 

5

%  

4

%

Change in valuation allowance

 

%  

5

%

Utilization of deferred tax assets not previously recognized

%  

(3)

%  

Withholding taxes

 

5

%  

%

Provision for uncertain tax position

 

(5)

%  

%

True up of prior year income tax

 

(1)

%  

2

%

Other

 

1

%  

%

Effective tax rate

 

25

%  

28

%

Nine Months Ended September 30, 

2020

2019

US statutory rate

 

21

%  

21

%

Tax rate difference

 

(1)

%  

(1)

%

Income tax on undistributed earnings

 

6

%  

4

%

Change in valuation allowance

 

5

%  

3

%

Non-deductible and non-taxable items

 

4

%  

%

Utilization of deferred tax not recognized in prior year

 

%  

(1)

%

Withholding taxes

 

3

%  

%

True up of prior year income tax

 

(3)

%  

%

Other

1

%  

%  

Effective tax rate

 

36

%  

26

%

The Company’s income tax expense is mainly generated by its subsidiaries in Taiwan. The Company’s subsidiaries in Taiwan are subject to the statutory tax rate on income reported in the statutory financial statements after appropriate adjustments at 20% and 5% of the tax on any undistributed earnings according to the Income Tax Law of Taiwan. As of September 30, 2020 and December 31, 2019, the Company had current tax payable of $2,484,895 and $2,230,793 for Taiwan income tax, respectively.

The Company had previously estimated and recorded an uncertain tax position related to withholding tax matters. During the third quarter of 2020, the Company received an assessment letter from National Taxation Bureau of Taiwan, which requires the Company to remit a supplementary tax payment of $281,605 for such matters, and the amount was fully paid in September 2020. For the three and nine months ended September 30, 2020, the Company recognized interest and penalties of nil and approximately $178,000, in general and administrative expenses.

WFOE and the Company’s Consolidated Affiliated Entities (“CAE”) in PRC are governed by the Income Tax Law of PRC concerning private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustments. One of our CAE in Jiangsu province was levied at 10% of total revenue instead of net income according to the requirement of local tax authorities prior to May 2019 and currently is subject to tax at 25% on income reported in the statutory financial statements after appropriate adjustment. WFOE and CAE had no income tax expenses for the three and nine months ended September 30, 2020 and 2019 due to the net operating losses generated in the previous years.

The Company’s subsidiaries in Hong Kong are governed by the Inland Revenue Ordinance Tax Law of Hong Kong and are generally subject to a profit tax at the rate of 8.25% on the estimated assessable profits. As of September 30, 2020 and December 31, 2019, the Company had current tax payable of nil and $56,993 for Hong Kong income tax, respectively.

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The Company is subject to the statutory rate of 21% in the U.S. federal jurisdiction. The Company had no income tax expense for the three and nine months ended September 30, 2020 and 2019 due to the loss positions. For the three and nine months ended September 30, 2020 and 2019, the Company did not recognize any GILTI tax as no GILTI tax obligation existed. The Company recognized a one-time transition tax of $1,199,195 in the year of 2018 based on the Company’s total post-1986 earnings and profits (“E&P”) that it previously deferred from U.S. income tax. As of September 30, 2020, and December 31, 2019, the Company had current tax payable of $98,757 and $101,518 and noncurrent tax payable of $719,515 and $815,451 associated with the one-time transition tax.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), P.L. 116-136, was passed into law, amending portions of certain relevant US tax laws. The CARES Act includes a number of federal income tax law changes, including, but not limited to: 1) permitting net operating loss carrybacks to offset 100% of taxable income for taxable years beginning before 2021, 2) accelerating alternative minimum tax credit refunds, 3) temporarily increasing the allowable business interest deduction from 30% to 50% of adjusted taxable income, and 4) providing a technical correction for depreciation related to qualified improvement property. The Company does not believe that the CARES Act will have a material impact on the Company's consolidated financial statements.

NOTE 13 – RELATED PARTY TRANSACTIONS

Due to Related Parties

The following summarizes the Company’s loans payable to related parties as of September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

Due to Mr. Mao (CEO and Principal shareholder of the Company)

$

102,922

$

373,183

Due to Ms. Lu (A shareholder of Anhou)

 

75,381

 

85,074

Others

 

12,630

 

4,602

Total

$

190,933

$

462,859

Due to Mr. Mao

Amounts due to Mr. Mao were associated with funding provided by Mr. Mao for the formation of our subsidiaries in China in 2011. As of September 30, 2020 and December 31, 2019, due to Mr. Mao in the respective amounts of $102,922 and $373,183 was non-interesting bearing and payable on demand.

Due to Ms. Lu

Due to Ms. Lu were borrowings from Ms. Lu to support Anhou’s business operation. As of September 30, 2020 and December 31, 2019, due to Ms. Lu in the respective amounts of $75,381 and $85,074 was non-interesting bearing and payable on demand.

NOTE 14– COMMITMENTS AND CONTINGENCIES

Operating Leases

See future minimum annual lease payments in Note 10.

Time Deposits Pledged as Collateral

See time deposits pledged as collateral in Note 4 and 5.

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Legal Proceedings

On December 20, 2018, the Company and one of the Company’s former employees, agreed to settle fraud charges brought by the SEC relating to a scheme to manipulate the Company’s trading volume for the purpose of obtaining a listing on Nasdaq. Neither the Company nor the former employee realized financial gain from the scheme. Both the Company and the former employee agreed to the entry of a final judgment entered on January 18, 2019 that enjoins them from violating the charged provisions of the federal securities laws, orders the Company to comply with its undertaking to retain an independent compliance monitor for a period of not less than one year. The SEC did not seek a monetary penalty against the Company and there is no financial impact to the Company.  

On April 10, 2020, the Company submitted a written certification (the “Certification”) to the SEC of its compliance with the undertaking indicated by the Final Judgment entered into on January 18, 2019 in front of the United States District Court for the Southern District of New York (SEC v. China United Ins. Serv., Inc., No. 18 Civ. 12055, Consent of Defendant China United Insurance Service, Inc. (ECF No. 3-1) (S.D.N.Y Dec. 20, 2018)) requiring the Company to retain an independent compliance monitor (“Independent Monitor”) for a period of not less than one year. The Independent Monitor was mandated to review and evaluate the Company’s commitment to and implementation of a revised compliance program and to submit a final report to the SEC with respect to these matters. The Company reviewed the Independent Monitor’s final report submitted to the SEC on December 23, 2019 and confirmed in its Certification that, to the best knowledge of the Company, the factual content of the final report was true and accurate as of the date of such report.

Appointment Agreement

On December 21, 2018, Law Broker entered into an appointment agreement with Shu-Fen, Lee (“Ms. Lee”), pursuant to which, she serves as the president of Law Broker from December 21, 2018 to December 20, 2021. Ms. Lee’s primary responsibilities include 1) overall business planning, 2) implementation of resolution of the shareholders’ meeting or the board of directors, 3) the appointment and dismissal of the Law Broker’s employees and sales professionals, except for internal auditors, 4) financial management and application, 5) being the representative of Law Broker, 6) other matters assigned by the board of directors. According to the agreement, Ms. Lee’s compensation plan include: 1) base salary, 2) managerial allowance, 3) surplus bonus based on 1.25% of Law Broker’s income after tax, and 4) annual year-end bonus. For the three and nine months ended September 30, 2020, the Company has recorded the compensation expense of $86,240 and $164,095 under the appointment agreement, respectively. For the three and nine months ended September 30, 2019, the Company has recorded the compensation expense of $89,408 and $125,954 under the appointment agreement, respectively.

Engagement Agreement

On May 10, 2016, Law Broker entered into an engagement agreement with Hui-Hsien Chao ("Ms. Chao"), pursuant to which, she serves as the general manager of Law Broker from December 29, 2015 to December 28, 2018. The engagement agreement with Ms. Chao was renewed in 2019 and her service period has extended to December 20, 2021. Ms. Chao's primary responsibilities are to assist Law Broker in operating and managing insurance agency business. According to the engagement agreement, Ms. Chao's Bonus plans include: 1) execution, 2) long-term service fees, 3) pension and 4) non-competition. The payment of such bonuses will only occur upon satisfaction of certain condition and subject to the terms in the engagement agreement. Ms. Chao acts as the general manager or equivalent position of Law Broker for a term of at least three years. For the three and nine months ended September 30, 2020, the Company has recorded the compensation expense of $189,333 and $273,424 under the engagement agreement, respectively. For the three and nine months ended September 30, 2019, the Company has recorded the compensation expense of $213,190 and $375,718 under the engagement agreement, respectively.

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NOTE 15 – SEGMENT REPORTING

The geographical distributions of the Company's financial information for the three months ended September 30, 2020 and 2019 were as follows:

Three Months Ended September 30, 

Geographical Areas

    

2020

    

2019

Revenue

Taiwan

$

31,677,340

$

21,053,131

PRC

 

1,801,064

 

1,965,552

Hong Kong

 

124,879

 

248,152

Elimination adjustment

 

(367,331)

 

17

Total revenue

$

33,235,952

$

23,266,852

Income from operations

 

 

Taiwan

$

3,983,680

$

3,181,981

PRC

 

156,417

 

45,213

Hong Kong

 

72,425

 

179,428

Elimination adjustment

 

1,123,267

 

34,188

Total income from operations

$

5,335,789

$

3,440,810

Net income

 

 

Taiwan

$

3,743,338

$

2,180,558

PRC

 

191,636

 

62,290

Hong Kong

 

87,896

 

151,941

Elimination adjustment

 

41,033

 

4,792

Total net income

$

4,063,903

$

2,399,581

The geographical distributions of the Company’s financial information for the nine months ended September 30, 2020 and 2019 were as follows:

Nine Months Ended September 30, 

Geographical Areas

    

2020

    

2019

Revenue

Taiwan

$

87,096,588

$

57,036,548

PRC

 

4,978,500

 

6,749,851

Hong Kong

 

244,065

 

671,061

Elimination adjustment

 

(1,118,237)

 

(7,466)

Total revenue

$

91,200,916

$

64,449,994

Income from operations

 

 

Taiwan

$

6,051,545

$

7,112,388

PRC

 

126,864

 

325,018

Hong Kong

 

104,817

 

426,774

Elimination adjustment

 

1,257,593

 

104,363

Total income from operations

$

7,540,819

7,968,543

Net income

 

 

Taiwan

$

4,874,683

$

5,666,549

PRC

 

155,885

 

329,141

Hong Kong

 

120,907

 

364,074

Elimination adjustment

 

83,911

 

11,099

Total net income

$

5,235,386

$

6,370,863

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The geographical distribution of the Company’s financial information as of September 30, 2020 and December 31, 2019 were as follows:

Geographical Areas

    

September 30, 2020

    

December 31, 2019

Long-lived assets

Taiwan

$

2,076,095

$

1,280,728

PRC

 

101,162

 

124,443

Hong Kong

 

1,794

 

602

Elimination adjustment

 

(3,007)

 

(2,907)

Total long-lived assets

$

2,176,044

$

1,402,866

Reportable assets

 

 

Taiwan

$

161,018,794

$

144,663,045

PRC

 

12,863,362

 

12,349,634

Hong Kong

 

892,496

 

800,746

Elimination adjustment

 

(76,446,594)

 

(68,571,003)

Total reportable assets

$

98,328,058

$

89,242,422

Capital investment

 

 

Taiwan

$

1,239,610

$

602,442

PRC

 

9,175

 

57,569

Hong Kong

 

1,576

 

Total capital investments

$

1,250,361

$

660,011

NOTE 16 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date these condensed consolidated financial statements were issued and determine that there were no subsequent events or transactions that require recognition or disclosures in the condensed consolidated financial statements.

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Table of Contents

ITEM 2. 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 condensed consolidated financial statements and notes thereto included in Item 1 of this report. 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, in Taiwan and People’s Republic of China (“PRC”). The Company also provides reinsurance brokerage services and insurance consulting services in Hong 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 in Taiwan and PRC, respectively.

(1)

Life Insurance Products

Total net revenue from Taiwan life insurance products accounted for 89.9% and 84.8% of total net revenue for the three months ended September 30, 2020 and 2019, respectively. Total net revenue from PRC life insurance products accounted for 4.5% and 7.5% of total net revenue for the three months ended September 30, 2020 and 2019, respectively.

Total net revenue from Taiwan life insurance products accounted for 89.7% and 82.3% of total net revenue for the nine months ended September 30, 2020 and 2019, respectively. Total net revenue from PRC life insurance products accounted for 4.9% and 9.7% of total net revenue for the nine months ended September 30, 2020 and 2019, 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 the insured adopts a periodic payment schedule, a life insurance policy can generate periodic payments 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 generate commission and fee incomes 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 sales in PRC and Taiwan, we have focused significant resources on developing our capability to distribute individual life insurance products with periodic payment schedules ever since the incorporation of Anhou and Law Broker. We expect that sales of life insurance products will continuously be our primary source of revenue in the next several years.

(2)

Property and Casualty Insurance Products

Total net revenue from Taiwan property and casualty insurance products accounted for 4.3% and 5.4% of total net revenue for the three months ended September 30, 2020 and 2019, respectively. Total net revenue from Taiwan property and casualty insurance products accounted for 4.6% and 5.8% of total net revenue for the nine months ended September 30, 2020 and 2019, respectively.

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Table of Contents

In January 2020, the World Health Organization declared an outbreak of the coronavirus (COVID-19) to be a Public Health Emergency of International Concern, subsequently declared COVID-19 a global pandemic, and recommended containment and mitigation measures worldwide on March 11, 2020. We had experienced some adverse impacts on our business in the PRC Segment, 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. Even though the operations in the PRC segment fully resumed in the second quarter of 2020, the pandemic has created global economic uncertainties and led to negative impact on the financial markets. The extent of the COVID-19 impact to the Company will depend on numerous factors and developments related to COVID-19. 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. Our significant accounting policies are described in Note 2 of “Summary of Significant Accounting Policies” to the Financial Statements for the Nine Months Ended September 30, 2020, included within our Periodic Report on Form 10-Q. Following is a discussion of the accounting policies that we believe involve the most difficult, subjective or complex judgments and estimates.

Commissions Payable to Sales Professionals

As part of the process of preparing our financial statements, we are required to estimate commissions payable to sales professionals. The estimation basis of the majority of commissions payable is dependent on our sales force’s achievement of the sales targets identified by our clients. Examples of estimated commissions payable include brokerage commission bonus, such as bonus payable to our sales agents, and incentive program rewards, such as the estimated expenditures to fund the reward programs. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.

Revenue Recognition

The Company’s revenue is derived from insurance agency and brokerage services. The Company, through its subsidiaries and variable interest entities, sells insurance products provided by insurance companies to individuals, and is compensated in the form of commissions from the respective insurance companies, according to the terms of each service agreement made by and between the Company and the insurance companies.

We recognize revenue when control over services provided by the Company is transferred to the respective insurance company, whereby the transfer of control is considered complete when a policy becomes effective. When a policy is effective, the insurance company is obligated to pay the agreed-upon commission to the Company under the terms of its service agreement with the Company and such commission is recognized as revenue. Variable or contingent consideration is recognized when we conclude that is it probable that a significant reversal of revenue will not probably occur in subsequent periods.

Leases

We adopted the new lease standard as of January 1, 2019 using a modified retrospective transition with no adjustment to its comparative periods in the year of transition. The Company has operating leases for its offices. We determine if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides us the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, we consider it to be, or contain, a lease. For leases with an initial term terms greater than 12 months, we record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments. The lease term used in the calculation of right-of-use assets and lease liabilities renewal and termination options that are reasonably certain to be exercised. Our leases do not provide an implicit borrowing rate, and we estimate the Company’s incremental borrowing rate to discount the lease payments based on information available at lease commencement.

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Table of Contents

Stock-Based Compensation

We estimate the fair value of share-based awards to nonemployees on the date of grant using the Black-Scholes options pricing model, which requires a number of assumptions, of which the most significant are expected volatility and the expected option term. Compensation costs for awards granted to non-employees were nil and $1.6 million for the three and nine months ended September 30, 2020 and nil for the three and nine months ended September 30, 2019.

Overview of the three months ended September 30, 2020 and 2019

The following table shows the results of operations for the three months ended September 30, 2020 and 2019:

 

Three Months Ended September 30, 

2020

2019

(Amount in USD)

    

(Unaudited)

    

(Unaudited)

    

Change

    

Percent

 

Revenue

$

33,235,952

$

23,266,852

$

9,969,100

 

42.8

%

Cost of revenue

 

21,269,044

 

14,374,811

 

6,894,233

 

48.0

%

Gross profit

 

11,966,908

 

8,892,041

 

3,074,867

 

34.6

%

Gross profit margin

 

36.0

%  

 

38.2

%  

 

(2.2)

%  

(5.8)

%

Operating expenses:

 

 

 

 

Selling

 

926,004

 

744,429

 

181,575

 

24.4

%

General and administrative

 

5,705,115

 

4,706,802

 

998,313

 

21.2

%

Total operating expenses

 

6,631,119

 

5,451,231

 

1,179,888

 

21.6

%

Income from operations

 

5,335,789

 

3,440,810

 

1,894,979

 

55.1

%

Other income (expenses):

 

 

 

 

Interest income

 

100,266

 

138,408

 

(38,142)

 

(27.6)

%

Interest expenses

 

(33,443)

 

(64,372)

 

30,929

 

(48.0)

%

Dividend income

 

2,368

 

(720)

 

3,088

 

(428.9)

%

Other – net

 

23,648

 

(180,560)

 

204,208

 

(113.1)

%

Total other income (expenses), net

 

92,839

 

(107,244)

 

200,083

 

(186.6)

%

Income before income taxes

 

5,428,628

 

3,333,566

 

2,095,062

 

62.8

%

Income tax expense

 

(1,364,725)

 

(933,985)

 

(430,740)

 

46.1

%

Net income

 

4,063,903

 

2,399,581

 

1,664,322

 

69.4

%

Less: net income attributable to the noncontrolling interests

 

(1,277,587)

 

(1,071,427)

 

(206,160)

 

19.2

%

Net income attributable to the Company’s shareholders

$

2,786,316

$

1,328,154

$

1,458,162

 

109.8

%

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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 in among Taiwan, PRC and Hong 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 ended September 30, 2020 and 2019, the revenue generated respectively from Taiwan, PRC and Hong Kong is as follows:

Three Months Ended September 30, 

Geographic Areas

    

2020

    

2019

    

Change

    

Percent

 

Revenue

 

  

 

  

 

  

 

  

Taiwan segment

$

31,310,008

$

21,053,148

$

10,256,860

 

48.7

%

Percentage of revenue

 

94.2

%  

 

90.5

%  

 

 

PRC segment

 

1,801,065

 

1,965,552

 

(164,487)

 

(8.4)

%

Percentage of revenue

 

5.4

%  

 

8.4

%  

 

 

Hong Kong segment

 

124,879

 

248,152

 

(123,273)

 

(49.7)

%

Percentage of revenue

 

0.4

%  

 

1.1

%  

 

 

Total revenue

$

33,235,952

$

23,266,852

$

9,969,100

 

42.8

%

Overall revenue from our Taiwan segment increased by $10.3 million from $21.1 million (or 48.7%) for the three months ended September 30, 2019 to $31.3 million for the three months ended September 30, 2020.

Our revenue growth in Taiwan Segment continues to be affected by our acquisition of Uniwill and a reduction of the interest rate of insurance liability reserves. The positioning of Uniwill is to target those high-net-worth individual customers with strategies to sell investment-type insurance policies. As a result, Uniwill was able to contribute $6.4 million of the increased revenue during the three months ended September 30, 2020. The reduction in the interest rate of insurance liability reserves, effective from July 1, 2020, had boosted sales in insurance policies since we estimated that insurance premiums would increase about 10% to 30% after the rate reduction, and individual customers would lock in the policies before the fee increases. We continue to benefit from the reduction of the interest rate because a number of insurance policies previously locked in became effective during the three months ended September 30, 2020.

Overall revenue from our PRC segment decreased by $0.2 million (or 8.4%) to $1.8 million for the three months ended September 30, 2020 from $2.0 million for the three months ended September 30, 2019. The decrease was due to falling demand in insurance products as a result of a slow recovery in the PRC after being affected by COVID-19 in the PRC.

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. Overall revenue from our Hong Kong segment decreased by $0.1 million (or 49.7%) from $0.2 million for the three months ended September 30, 2019 to $0.1 million for the three ended September 30, 2020. The decrease was because some of the insurance policies reinsured by our subsidiary in Hong Kong had expired and there was no new insurance products under reinsurance arrangements for the three months ended September 30, 2020.

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 three months ended September 30, 2020 increased by $6.9 million (or 48.0%), to $21.2 million compared to $14.4 million for the three months ended September 30, 2019. This increase was primarily due to our increasing revenues from the first-year commissions and our commission policy, which provides more incentives to our sales professionals in order to improve the achievement rate for the first-year commissions. The growth in the revenue resulted in increases in our commission costs due to the high achievement rates of the sales targets.

Consequently, the cost of revenue increased more than the proportional increase of revenue, causing a decline in the gross profit margin from 38.2% for the three months ended September 30, 2019 to 36.0% for the three months ended September 30, 2020.

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Table of Contents

Selling expenses

Selling expenses were mainly incurred by Law Broker, in connection with online marketing and advertising. The selling expense for the three months ended September 30, 2020 increased by $0.2 million (or 24.4%), to $0.9 million, compared to $0.7 million for the three months ended September 30, 2019. The increase was related to certain business conferences held to motivate our sales professionals during this quarter. In addition, with the acquisition of Uniwill, the Company incurred more expenses for the Uniwill’s branding for the three months ended September 30, 2020, leading to an increase in our selling expenses compared to the same period of 2019.

General and administrative expenses

The general and administrative (“G&A”) expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and professional service fees to the auditor and our attorneys.

For the three months ended September 30, 2020, G&A expenses were $5.7 million, an increase of $1.0 million (or 21.2%), compared with $4.7 million for the three months ended September 30, 2019. Increases in G&A expense were attributed to the increases in performance bonus to certain employees and officers. In addition, we had incurred more general expenses as a result of the acquisition and expansion of Uniwill’s operations.

Other income (expenses)

Other income (expense) mainly consisted of interest income, interest expenses, gain or loss on valuation of financial assets and on foreign exchange. Net other income for the three months ended September 30, 2020 was $0.1 million, an increase of $0.2 million, compared with the net other expense of 0.1 million for the three months ended September 30, 2019. The increases in net other income for the three months ended September 30, 2020 was due to more unrealized gains on the valuation of marketable securities recognized and less interest expense incurred during this quarter.

Income tax expense

For the three months ended September 30, 2020, income tax expense was $1.4 million, reflecting an increase of 0.4 million (or 46.1%), compared with the income tax expense $0.9 million for the three months ended September 30, 2019. The increase was mainly due to the more income taxes and taxes on undistributed earning accrued because of more revenues generated in the Taiwan Segment during the three months ended September 30, 2020.

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Table of Contents

Overview of the nine months ended September 30, 2020 and 2019

The following table shows the results of operations for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30, 

2020

2019

(Amount in USD)

    

(Unaudited)

    

(Unaudited)

    

Change

    

Percent

 

Revenue

$

91,200,916

$

64,449,994

$

26,750,922

 

41.5

%

Cost of revenue

 

63,261,959

 

41,805,241

 

21,456,718

 

51.3

%

Gross profit

 

27,938,957

 

22,644,753

 

5,294,204

 

23.4

%

Gross profit margin

 

30.6

%  

 

35.1

%  

 

(4.5)

%  

(12.8)

%

Operating expenses:

 

 

 

 

Selling

 

1,783,692

 

1,741,372

 

42,320

 

2.4

%

General and administrative

 

18,614,446

 

12,934,838

 

5,679,608

 

43.9

%

Total operating expenses

 

20,398,138

 

14,676,210

 

5,721,928

 

39.0

%

Income from operations

 

7,540,819

 

7,968,543

 

(427,724)

 

(5.4)

%

Other income (expenses):

 

 

 

 

Interest income

 

325,168

 

356,896

 

(31,728)

 

(8.9)

%

Interest expenses

 

(153,703)

 

(144,515)

 

(9,188)

 

6.4

%

Dividend income

 

321,603

 

309,903

 

11,700

 

3.8

%

Other – net

 

94,796

 

134,122

 

(39,326)

 

(29.3)

%

Total other income, net

 

587,864

 

656,406

 

(68,542)

 

(10.4)

%

Income before income taxes

 

8,128,683

 

8,624,949

 

(496,266)

 

(5.8)

%

Income tax expense

 

(2,893,297)

 

(2,254,086)

 

(639,211)

 

28.4

%

Net income

 

5,235,386

 

6,370,863

 

(1,135,477)

 

(17.8)

%

Less: net income attributable to the noncontrolling interests

 

(2,446,560)

 

(2,557,603)

 

111,043

 

(4.3)

%

Net income attributable to the Company’s shareholders

$

2,788,826

$

3,813,260

$

(1,024,434)

 

(26.9)

%

Revenue

For the nine months ended September 30, 2020 and 2019, the revenues generated respectively from Taiwan, PRC and Hong Kong are as follows:

Nine Months Ended September 30, 

Geographic Areas

    

2020

    

2019

    

Change

    

Percent

 

Revenue

 

  

 

  

 

  

 

  

Taiwan segment

$

85,978,351

$

57,029,082

$

28,949,269

 

50.8

%

Percentage of revenue

 

94.3

%  

 

88.5

%  

 

 

PRC segment

 

4,978,500

 

6,749,851

 

(1,771,351)

 

(26.2)

%

Percentage of revenue

 

5.4

%  

 

10.5

%  

 

 

Hong Kong segment

 

244,065

 

671,061

 

(426,996)

 

(63.6)

%

Percentage of revenue

 

0.3

%  

 

1.0

%  

 

 

Total revenue

$

91,200,916

$

64,449,994

$

26,750,922

 

41.5

%

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Table of Contents

Overall revenue from our Taiwan segment increased by $28.9 million from $57.0 million (or 50.8%) for the nine months ended September 30, 2019 to $86.0 million for the nine months ended September 30, 2020. The increase was due to the combined effect of the acquisition of Uniwill and an interest rate reduction in insurance liability reserves of life and saving insurances. The positioning of Uniwill is to target those high-net-worth individual customers with strategies to sell investment-type insurance policies. As a result, Uniwill was able to contribute a significant portion of the increased revenue during the nine months ended September 30, 2020. An announcement made by Financial Supervisory Commission Taiwan in November 2019 reducing the interest rate of life and saving insurance liability reserves had continued boosting the customers’ demand in insurance policies. From July 1, 2020, the interest rate of insurance liability reserves was further reduced by 0.25%, which led to an increase in sales because we estimated that insurance premiums would increase about 10% to 30% after the rate reduction.

Overall revenue from our PRC segment decreased by $1.8 million (or 26.2%) to $5.0 million for the nine months ended September 30, 2020 from $6.7 million for the nine months ended September 30, 2019. Decrease in revenue for the PRC segment was due to the adverse impact on the outbreak of COVID-19 in the PRC that restricted to a significant extent our sales agents’ in-person selling activities. In addition, a slow economic recovery after being affected by COVID-19 led to falling demand in insurance products.

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. Overall revenue from our Hong Kong segment decreased by $0.4 million (or 63.6%) from $0.7 million for the nine months ended September 30, 2019 to $0.2 million for the nine months ended September 30, 2020 as a result of the declining demand in travel insurance products, which led to decreases in our revenue earned from reinsurance arrangements. In addition, certain insurance policies reinsured by our subsidiary in Hong Kong had expired, and there was no new insurance products under reinsurance arrangements for the nine months ended September 30, 2020.

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 September 30, 2020 increased by $21.5 million (or 51.3%), to $63.3 million compared to $41.8 million for the nine months ended September 30, 2019. This increase was primarily due to our increasing revenues from the first-year commissions and our commission policy, which provides more incentives to our sales professionals to improve the achievement rate for the first-year commissions. The growth in the revenue resulted in the increase in commission costs due to the high achievement rates of the sales targets. In addition, higher costs were incurred due to more sales on investment-type insurance policies, which provide higher commission to sales professionals.

Consequently, the cost of revenue increased more than the proportional increase of revenue, causing a decline in the gross profit margin from 35.1% for the nine months ended September 30, 2019 to 30.6% for the nine months ended September 30, 2020.

Selling expenses

Selling expenses were mainly incurred by Law Broker, in connection with online marketing and advertising. The selling expense for the nine months ended September 30, 2020 was $1.8 million, a slightly increase of 2.4%, compared with the selling expense of $1.7 million for the nine months ended September 30, 2019. With the acquisition of Uniwill, the Company incurred more expenses for Uniwill’s branding for the nine months ended September 30, 2020, which led to an increase in our selling expense compared to the same period of 2019.

General and administrative expenses

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 nine months ended September 30, 2020, G&A expenses were $18.6 million, reflecting an increase of $5.7 million (or 43.9%), compared with $12.9 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, the Company recognized compensation costs of $1.6 million as result of preferred shares granted and issued by Uniwill under the Joint Venture Agreement.

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In addition, our revenue growth led to increases in performance bonus to employees and offices and the sales taxes. Compared with the same period of 2019, we incurred more professional service fees to outside counsel and SEC-appointed monitor for the Company’s governance and compliance for the nine months ended September 30, 2020. We also incurred more general expenses due to business expansions of Uniwill and accrued penalty and interest expenses related to a tax matter in the Taiwan Segment during the nine months ended September 30, 2020, whereas the Company did not have such expenses in the same period of 2019.

Other income (expenses)

Other income (expense) mainly consisted of interest income, interest expenses, gain or loss on valuation of financial assets and on foreign exchange. Net other income for the nine months ended September 30, 2020 was $0.6 million, reflecting a decrease of $0.1 million (or 10.4%), compared with $0.7 million for the nine months ended September 30, 2019. The decreases in net other income for the nine months ended September 30, 2020 was due to the increase in interest expense from additional bank borrowings and losses on disposals of equipment.

Income tax expense

For the nine months ended September 30, 2020, income tax expense was $2.9 million, reflecting an increase of $0.6 million (or  28.4%), compared with the income tax expense of $2.3 million for the nine months ended September 30, 2019. The increase was mainly due to a supplementary tax payment of $0.3 million related to withholding tax matters and more income taxes and taxes on undistributed earning accrued because of more revenues generated in the Taiwan Segment during the nine months ended September 30, 2020.

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 months ended September 30, 2020 and 2019:

    

Nine Months Ended September 30, 

 

    

2020

    

2019

    

Change

    

Percent

 

Net cash provided by operating activities

$

4,428,996

3,757,161

671,835

 

17.9

%

Net cash used in investing activities

 

(8,646,611)

 

(10,554,055)

 

1,907,444

 

(18.1)

%

Net cash provided by financing activities

 

4,938,811

 

2,114,202

 

2,824,609

 

133.6

%

Operating activities

Net cash provided by operating activities during the nine months ended September 30, 2020 was $4.4 million in comparison with net cash of $3.8 million provided by operating activities during the nine months ended September 30, 2019. With continuous growth in business performance for the nine months ended September 30, 2020, we had more cash inflows from the operating activities.

Investing activities

Net cash used in investing activities was $8.7 million during the nine months ended September 30, 2020 in comparison with net cash of $10.6 million used in investing activities for the nine months ended September 30, 2019. Consistent with prior periods, the Company continued investing its excess cash in time deposits, leading to cash outflows from investing activities. In addition, we incurred more capital expenditures for business expansions of Uniwill during the nine months ended September 30, 2020.

Financing activities

Net cash provided by financing activities was $4.9 million during the nine months ended September 30, 2020 in comparison with net cash of $2.1 million provided by financing activities during the same period of 2019. The cash inflows from the financing activities was mainly due to additional borrowings from commercial banks during the nine months ended September 30, 2020.

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Contractual Obligations

There have been no significant changes to the Company’s contractual obligations as disclosed in the Company’s 2019 Annual Report filed on Form 10-K.

Off Balance Sheet Arrangements

The Company had no off balance sheet arrangements as of September 30, 2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit of possible controls and procedures.

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2020. This conclusion was based on the material weaknesses in our internal control over financial reporting described in Part II, Item 9A, “Controls and Procedures” of our 2019 Form 10-K. The material weaknesses have not been remediated as of September 30, 2020. However, we have made improvements regarding disclosure controls and procedures, such as employing additional resources with the appropriate expertise to assume assigned responsibility for initiating and monitoring entity-level controls at group level in compliance with Internal Control-Integrated Framework (2013) and to design, implement and assess the structures, authorities and responsibilities to establish accountability for internal controls of the Company.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. If not remediated, the material weaknesses in our internal control over financial reporting described in the 2019 Form 10-K could result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended September 30, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system

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of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results. From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

ITEM 1A. RISK FACTORS.

As a smaller reporting company, we are not required to make disclosure under this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None during this reporting period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None during this reporting period.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit

 

 

Number

   

Description of Exhibit

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1*

 

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

 

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

   

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    

China United Insurance Service, Inc.

Date: November 9, 2020

By:

/s/ Yi Hsiao Mao

Name:

Yi Hsiao Mao

Its:

Chief Executive Officer

(Principal Executive Officer)

Date: November 9, 2020

By:

/s/ Mei-Kuan Yeh

Name:

Mei-Kuan Yeh

Its:

Chief Financial Officer

(Principal Financial and Accounting Officer)

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